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<DESCRIPTION>ANNUAL REPORT FOR THE YEAR ENDING 12/31/2001
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                     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, 2001

[ ]     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 [X]

As of March 22, 2002, there were 9,205,331 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
$15,550,000.

<PAGE>

                                     PART I
Item 1.  Description of Business

General

Bluefly, Inc. is a leading Internet retailer of designer fashion brands at
outlet store prices. We sell over 400 brands of designer apparel, fashion
accessories and home products at discounts that typically range between 30% and
75% off comparable retail prices. In the 12 months of calendar year 2001, we
offered over 62,000 different types of items for sale in categories such as
men's, women's and children's clothing and accessories as well as house and home
accessories. Since its inception, www.bluefly.com has served over 285,000
customer accounts and shipped to over 21 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. 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. The Web site was publicly
launched 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 website. 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.

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

On March 27, 2002, we entered into a Standby Commitment Agreement (the "Soros
Standby Agreement") with 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 as "Soros"). Under the Soros Standby Agreement, Soros has agreed to
provide us with up to four million dollars ($4,000,000) of additional financing
on a standby basis (the "Standby Commitment Amount") at any time prior to
January 1, 2003; provided, however, that we may draw down on the Standby
Commitment Amount only at such time that our total cash balances are less than
$1,000,000. 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 financings made shall be on terms that are consistent with those in the
market at the time the draw is made for similar investments by investors similar
to Soros in companies similar to us. Subject to certain limitations the 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 27, 2002. In
exchange for this commitment, but not as a substitute for additional
consideration that Soros would receive if and when any financing is made
pursuant to the Soros Standby Agreement, we issued to Soros a warrant to
purchase 100,000 shares of our Common Stock, par value $0.01 per share ("Common
Stock"), at an exercise price of $1.68 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 until March 27, 2007. In connection with the issuance of this
warrant, Soros agreed that the issuance of this warrant shall not trigger the
anti-dilution provision of Section 5.8.6 of our Certificate of Incorporation.
See, "Risk Factors - "Certain Events Could Result in Significant Dilution of
Your Ownership of our Common Stock."

On March 22, 2002, 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 this amendment (the "Rosenthal Amendment"), we
extended the Rosenthal Financing Agreement until March 30, 2003, reduced the
annual fee we pay Rosenthal for the Loan Facility from $20,000 to $10,000,
agreed to a decrease from $2.5 million to $1.5 million in the face amount of the
standby letter of credit that Soros is maintaining (the "Soros Guarantee") to
help secure the Loan Facility, and limited the maximum amount available under
the Loan Facility to an amount equal to the Soros Guarantee plus the lowest of
(x) $1 million, (y) 20% of the book value of our inventory and (z) the full
liquidation value of our inventory. In addition, pursuant to the Rosenthal
Amendment, we adjusted the threshold amount that entitles Rosenthal to take
control of certain of our cash accounts for a period of time to be 90% of the
maximum amount available under the Loan Facility instead of 90% of the Soros
Guarantee as had been provided previously.


                                       2
<PAGE>

As of March 22, 2002, the maximum amount available under the Loan Facility was
approximately $2.5 million, of which $2.2 million was outstanding as of such
date. See, "Risk Factors - "We Have Granted A Lien On Substantially All Of Our
Assets" and "We May Not Generate Sufficient Cash Flow To Pay Our Indebtedness
Under The Rosenthal Financing Agreement."

As partial consideration for the Rosenthal Amendment, we extended from March 30,
2006 to March 30, 2007 the termination date of the warrant we issued to
Rosenthal on March 30, 2001 to purchase 50,000 shares of our Common Stock at an
exercise price of $2.34 per share.

On March 22, 2002, in connection with the Rosenthal Amendment, we amended the
Reimbursement Agreement (the "Reimbursement Agreement") pursuant to which Soros
agreed to guarantee a portion of the Loan Facility to reduce the total amount of
standby letters of credit that Soros is obligated to issue to secure the Loan
Facility to $1.5 million from $4 million. We are obligated to reimburse Soros
for any amounts it pays to Rosenthal pursuant to the Reimbursement Agreement.
Our obligation to Rosenthal is secured by a lien on substantially all of our
assets and we have granted Soros a subordinated lien on substantially all of our
assets, including our cash balances, in order to secure our reimbursement
obligations. In exchange for Soros' agreement to maintain the Soros Guarantee
until August 15, 2003, we issued to Soros a warrant to purchase 60,000 shares of
our Common Stock at an exercise price of $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 until March 30, 2007. In connection with the issuance of
this warrant, Soros agreed that the issuance of this warrant shall not trigger
the anti-dilution provision of Section 5.8.6 of our Certificate of
Incorporation.

Based on current plans and assumptions relating to our operations as well as
proceeds from prior financings together with the Soros Standby Agreement, the
Loan Facility, existing resources and cash generated from operations, we believe
that we have sufficient resources to satisfy our cash requirements through the
end of 2002. 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 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 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 "Certain Events Could Result in Significant
Dilution of Your Ownership of our Common Stock."

On March 12, 2002, we entered into a Software License and Service Agreement with
Blue Martini Software, Inc ("Blue Martini"). Beginning in March 2002, with the
assistance of consultants from Blue Martini, we plan to develop an improved
version of our Web site based on Blue Martini Software. Once launched, we expect
that the upgraded Web site will provide us with better tools to create and
manage on-site marketing promotions, more robust analytical tools to measure the
performance of on-site promotions, greater site stability, and a more efficient
platform from which to scale our technology infrastructure should any future
growth in our business dictate such a need. We expect to launch the new Web site
during the third quarter of 2002. Of course, there can be no assurance that the
new Web site will be launched when scheduled, that such expectations will prove
to be correct or that any results will have a positive effect on our business.
See, "Risk Factor - The Development Of A New Web Site May Place A Significant
Strain On Our Management And Certain Key Personnel."

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: full price
department stores; catalogs; and 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, their typical discount to the consumer is
significantly lower than that of off-price stores). While catalogs offer
convenience and good


                                       3
<PAGE>

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 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 400 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.

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. To support these costs, 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 in their size. In addition, we believe that we are able to more
economically and efficiently 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 May 2001, Jupiter Media Metrix estimated that U.S. online retail
sales would increase from $34 billion in 2001 to $104 billion in 2005 and $130
billion by 2006.


                                       4
<PAGE>

In January 2002, Forrester Research, Inc. ("Forrester") estimated that online
purchases by U.S. consumers increased by 12% in 2001 to $47.6 billion. 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 September 2001 report by Forrester, U.S. online apparel sales
reached $5.6 billion in 2001 and are expected to reach over $17 billion in 2005.
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, (ii) the expansion of online
traffic from technology oriented users to users with mainstream demographics and
(iii) the development of sophisticated tools to search complex product
categories such as apparel. 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
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, Bergdorf Goodman 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 400
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


                                       5
<PAGE>

            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.
We strive to pick, pack and ship all of our orders within 48 hours of receipt of
the order. In December 2001, during our peak weeks of the holiday season,
approximately 99% of our orders were shipped within 24 hours of receipt of the
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, 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 fully DES 128-bit encrypted session.

In March 2002, we moved to another major Internet service provider to host
Bluefly.com and provide certain hardware and software as well as year-round
24-hour systems support. The server and network architecture is designed to
provide high speed, reliable access 24 hours a day, 365 days a year and allow
for rapid scaling of hardware and bandwidth to accommodate sudden increases in
site traffic. 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. Beginning in March 2002, with the assistance of consultants
from Blue Martini, we plan to develop an improved version of our Web site based
on Blue Martini Software. Once launched, we expect that the upgraded Web site
will provide us with better tools to create and manage on-site marketing
promotions, more robust analytical tools to measure the performance of on-site
promotions, greater site stability, and a more efficient platform from which to
scale our technology infrastructure should any future growth in our business
dictate such a need. We expect to launch the new Web site during the third
quarter of 2002. Of course, there can be no assurance that the new Web site will
be launched when scheduled, that such expectations will prove to be correct or
that they will have a positive effect on our business. See, "Risk Factor - The
Development 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


                                       6
<PAGE>

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. 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. 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. Although we are
not aware of any permits or licenses that are required in order for us to sell
apparel and fashion accessories on the Internet, permits or licenses may be
required from international, federal, state or local governmental authorities to
operate or to sell certain other products on the Internet in the future. No
assurances can be given that 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 15, 2002, we had 59 full-time employees and seven part-time
employees, as compared to 77 full-time and nine part-time employees as of March
31, 2001. None of our employees are represented by a labor union and we consider
our relations with our employees to be good.


                                       7
<PAGE>

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, 2001, we had an accumulated deficit of $63,968,000. We
incurred net losses from continuing operations of $25,006,000, $21,109,000 and
$13,257,000 for the years ended December 31, 2001, 2000 and 1999, 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 at least until the fourth quarter of 2002. Although
we expect to be profitable in the fourth quarter of 2002, we anticipate losses
in the first two quarters of 2003 and perhaps beyond. Our ability to become
profitable depends on our ability to generate and sustain substantially higher
net sales while maintaining reasonable expense levels, both of which are
uncertain. If we do achieve profitability, we cannot be certain that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future.

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.
In March 2002, we amended the Rosenthal Financing Agreement to reduce the
maximum amount available for borrowing under the facility. See "Recent
Developments." We anticipate, based on current plans and assumptions relating to
our operations, that the proceeds from prior financings together with the
Standby Commitment Agreement, the Loan Facility, existing resources and cash
generated from operations, should be sufficient to satisfy our cash requirements
through the end of fiscal 2002. 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 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 A Lien On Substantially All Of Our Assets. Under the terms of
the Rosenthal Financing Agreement, 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"). Pursuant to the Rosenthal Financing
Agreement, we gave a first priority lien to Rosenthal on substantially all of
our assets, including our cash balances. In connection with the Rosenthal
Financing Agreement, 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 are unable to meet certain obligations under the Rosenthal
Financing Agreement, 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 Rosenthal Financing Agreement and the Reimbursement Agreement. 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
Rosenthal Financing Agreement. Our ability to make payments under the Rosenthal
Financing Agreement 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


                                       8
<PAGE>

enable us to pay our indebtedness under the Rosenthal Financing Agreement
throughout the term of the agreement. A default under the Rosenthal Financing
Agreement also could result in a significant dilution of your ownership of our
common stock. See, "Risk Factors - We Have Granted A Lien 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 Rosenthal Financing Agreement. Our ability to comply with our
financial covenants under the Rosenthal Financing Agreement 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 Rosenthal Financing Agreement. A default under the
Rosenthal Financing Agreement also could result in a significant dilution of
your ownership of our common stock. See, "Risk Factors - We Have Granted A Lien
On Substantially All Of Our Assets" and "Certain Events Could Result In
Significant Dilution of Your Ownership of Our Common Stock."

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 cause our
net loss in a given quarter to be greater than expected 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.

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.


                                       9
<PAGE>

The Development Of A New Web Site May Place A Significant Strain On Our
Management And Certain Key Personnel. On March 12, 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 plan to develop
an improved version of our Web site based on Blue Martini Software. The
development of an upgraded Web site is a major undertaking and will consume
significant amounts of time and attention from certain members of the management
team and other key personnel. While we believe that this project is a wise
investment in our future, the return on this investment is not certain and the
time and attention required to develop 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
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, as well as delivery companies like UPS and the United States Postal
Service 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 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.

Certain Events Could Result In Significant Dilution Of Your Ownership Of Our
Common Stock. As of December 31, 2001, there were outstanding options to
purchase 4,343,203 shares of Common Stock issued under our 1997 and 2000 Stock
Option Plans, warrants to purchase 475,000 shares issued to Soros, and
additional warrants and options to purchase an aggregate of 160,500 shares of
Common Stock. This excludes the warrants issued to Soros in March 2002, in
connection with the Soros Standby Agreement and the Reimbursement Agreement.
See, "Recent Developments." 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.

To the extent that Rosenthal draws on any standby letter of credit issued by
Soros during the continuance of a default under the Rosenthal Financing
Agreement or that at any time the total amount outstanding under the Loan
Facility exceeds 90% of the maximum amount available under the Loan Facility, 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.

The 500,000 shares of Series A Preferred Stock outstanding are convertible into
an aggregate of 4,273,504 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). The 8,910,782 shares of Series B Preferred Stock
outstanding are convertible into an aggregate of 8,910,782 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). The Series B
Preferred Stock contains 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 $2.34 per
share of Common Stock, the number of shares of Common Stock to be issued upon
the conversion of the Series B Preferred Stock would be increased to a number
equal to the face amount of the Series B Preferred Stock (plus any accrued and
unpaid dividends) divided by the price at which such Common Stock or other new
securities are sold.

Under the Soros Standby Agreement, Soros has agreed to provide us with up to
four million dollars ($4,000,000) of additional financing on a standby basis at
any time prior to January 1, 2003; provided, however, that we may draw down on
the Standby Commitment Amount only at such time that our total cash balances are
less than $1,000,000.


                                       10
<PAGE>

Any and all financings made shall be on terms that are consistent with those in
the market at the time the draw is made for similar investments by investors
similar to Soros in companies similar to us. The terms of such financing are
likely to entail additional issuances of equity securities to Soros which will
result in further dilution to your ownership of Common Stock and which may
trigger the anti-dilution provisions under the Series B Preferred Stock referred
to above.

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 online 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;

      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. The Company acquired
approximately 5.3% and 15.3% of its inventory from one supplier in 2001 and
2000, respectively. 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


                                       11
<PAGE>

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 Are New To The Industry And 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 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 sites who purchase products, or through some combination
thereof. We must also achieve a high level of repeat purchasers and gross
profit. 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; or

      o     the number of repeat purchasers.

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


                                       12
<PAGE>

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,
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.


                                       13
<PAGE>

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 Internet shopping. 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, with expiration dates ranging from July 2002 to November
2003. We maintain a $1,200,000 key person life insurance policy on our 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 in addition to the upgraded
Web site we intend to launch based on Blue Martini Software, 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 could also incur substantial costs in
asserting our intellectual property or proprietary rights.

We Cannot Guarantee The Protection Of Our Intellectual Property. Our
intellectual property is critical to our success, and we rely on trademark,
copyright, 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 and
service marks in the United States and abroad. Effective trademark, copyright
and trade secret protection may


                                       14
<PAGE>

not be available in every country in which our products will be available. We
intend to effect appropriate registrations internationally and domestically as
we expand our operations. 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.

Unauthorized 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. 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. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. 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 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 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 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 27, 2002, through its holdings
of Common Stock, as well as Preferred Stock and warrants convertible into Common
Stock, Soros beneficially owned, in the aggregate, approximately 78% of our


                                       15
<PAGE>

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 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
Soros Standby Agreement is likely to result in additional issuances of equity
securities to Soros that will increase Soros' ownership of Common Stock. See,
"Risk Factors - Certain Events Could Result In Significant Dilution of Your
Ownership Of Common Stock."

Change Of Control Covenant And Liquidation Preference of Series A Preferred
Stock And Series B Preferred Stock. We have agreed with Soros, that for so long
as any shares of Series A Preferred Stock or Series B 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 Series A Preferred Stock and Series B Preferred Stock to receive
from the acquiror an amount in cash equal to the respective aggregate
liquidation preferences of the Series A Preferred Stock and Series B Preferred
Stock. The Series A liquidation preference is equal to the greater of (i)
$10,000,000 (plus any accrued and unpaid dividends) and (ii) the amount that the
holder of the share would receive if it were to convert into shares of Common
Stock immediately prior to liquidation. The Series B liquidation preference is
equal to the greater of (i) $30,000,000 (plus any accrued and unpaid dividends)
and (ii) the amount that the holder of the share would receive if it were to
convert into 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 15,500,000 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 2001 were approximately $407,000.

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 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

None.


                                       16
<PAGE>

                                     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 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

                Fiscal 2000                     High              Low
                -----------                    ------            -----
                First Quarter                  $15.98            $7.50
                Second Quarter                 $ 9.50            $1.78
                Third Quarter                  $ 4.75            $1.84
                Fourth Quarter                 $ 2.94            $0.44

Holders

As of March 15, 2002, there were approximately 106 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.

Recent Sale Of Unregistered Securities

In exchange for the Soros Standby Agreement (but not as a substitute for
additional consideration that Soros would receive if and when any financing is
made pursuant to the Soros Standby Agreement) we issued to Soros a warrant to
purchase 100,000 shares of our Common Stock at an exercise price of $1.68 per
share, exercisable at any time until March 27, 2007. See, "Recent Developments."

In exchange for Soros' agreement to maintain the Soros Guarantee until August
15, 2003, we issued to Soros a warrant to purchase 60,000 shares of our Common
Stock at an exercise price of $1.66 per share, exercisable at any time until
March 30, 2007. See, "Recent Developments."

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.



                                       17
<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,
                                                                            -----------------------
                                                       2001          2000            1999            1998           1997
                                                       ----          ----            ----            ----           ----
<S>                                                  <C>            <C>             <C>            <C>            <C>
Statement of Operations Data:

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

Selling, marketing and fulfillment expenses           13,765         18,797         10,794          1,118              -
General and administrative expenses                    5,098          5,296          3,450          1,166            819
Internet business start up costs                           -              -              -            332              -
                                                     -------        -------         ------         ------         ------
         Total operating expenses                     18,863         24,093         14,244          2,616            819

Operating loss from continuing operations            (11,867)       (20,599)       (13,689)        (2,670)          (819)
Interest (expense)/other income                      (13,139)          (510)           430            142            123
         Loss from continuing operations             (25,006)       (21,109)       (13,257)        (2,478)          (469)
         Net loss                                    (25,006)       (21,109)       (13,194)        (3,656)          (381)
Basic and diluted (loss) per share:                   $(3.41)        $(4.45)        $(2.82)        $(1.32)        $(0.18)
         Continuing Operations                        $(3.41)        $(4.45)        $(2.83)        $(0.89)        $(0.22)

Basic and diluted weighted average shares
outstanding available to common stockholders       8,185,065      4,924,906      4,802,249      2,770,869      2,149,315

<CAPTION>

   Balance Sheet Data:
                                                                            As of December 31,
                                                               2001         2000         1999         1998
                                                               ----         ----         ----         ----
<S>                                                         <C>          <C>          <C>           <C>
   Cash                                                     $ 5,419      $ 5,350      $ 7,934       $2,830
   Inventories, net                                           6,388        7,294        7,020          429
   Other current assets                                       1,726        1,704        1,080          624
   Total assets                                              14,881       15,868       17,109        7,212
   Current liabilities                                        6,297        6,131        6,523          756
   Short-term convertible notes payable, net                      -       19,698            -            -
   Note Payable to shareholder                                  182            -            -            -
   Redeemable preferred stock                                     -       11,088       10,286            -
   Shareholders' equity (deficit)                             8,402      (21,049)         300        6,392
</TABLE>


                                       18
<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

Bluefly, Inc. is a leading Internet retailer of designer fashions and home
accessories at outlet store prices. We sell over 400 brands of designer apparel,
accessories and home products at discounts up to 75% off retail prices. 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 31% to $22,950,000 for the year ended December 31, 2001
from $17,512,000 for the year ended December 31, 2000. In the fourth quarter of
2001, our net sales increased by approximately 37% to $7,906,000 from $5,761,000
in the fourth quarter of 2000. In addition, our net loss for the fourth quarter
of 2001 decreased to $1,379,000 from $5,360,000 in the fourth quarter of 2000.
This decrease was due to an increase in gross profit and a decrease in both
selling, marketing and fulfillment expenses and general and administrative
expenses as a percentage of revenue.

We have incurred net losses of $25,006,000, for the year ended December 31, 2001
as compared to $21,109,000 for the year ended December 31, 2000. This increase
in net loss is primarily the result of a one-time, non-cash charge of
$13,007,000 related to the conversion of debt and redeemable preferred equity
into permanent equity. At December 31, 2001 we had an accumulated deficit of
$63,968,000. The net losses and accumulated deficit resulted primarily from the
costs associated with developing and marketing our 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 at least until the fourth quarter
of 2002. Although we expect to be profitable in the fourth quarter of 2002, we
anticipate losses in the first two quarters of 2003 and perhaps beyond. 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

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 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.


                                       19
<PAGE>

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,
which would adversely affect our operating results.

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.

Results Of Operations

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

<TABLE>
<CAPTION>
                                                                  2001                   2000                 1999
                                                                  ----                   ----                 ----

                                                                   As a % of              As a % of              As a % of
                                                                   Net Sales              Net Sales              Net Sales
<S>                                                       <C>         <C>        <C>         <C>         <C>        <C>
   Net sales                                              $ 22,950    100.0 %    $ 17,512    100.0 %     $ 5,109    100.0 %
   Cost of sales                                            15,954      69.5%      14,018     80.0 %       4,554      89.1%
                                                            ------                 ------                  -----
            Gross profit                                     6,996      30.5%       3,494     20.0 %         555      10.9%

   Selling, marketing and fulfillment expenses              13,765      59.9%      18,797     107.3%      10,794     211.3%
   General and administrative expenses                       5,098      22.2%       5,296      30.2%       3,450      67.5%
                                                             -----                  -----                  -----
            Total operating expenses                        18,863      82.1%      24,093     137.5%      14,244     278.8%

   Operating loss from continuing operations              (11,867)    (51.7)%    (20,599)   (117.6)%    (13,689)   (267.9)%
   Interest (expense) other income                        (13,139)    (57.3)%       (510)     (2.9)%        432        8.4%
                                                          --------                 -----                  -----
            Loss from continuing operations               (25,006)   (108.9)%    (21,109)   (120.5)%    (13,257)   (259.4)%
            Income from discontinued operations               -         -            -         -             63        1.2%
                                                          --------               -------                -------
            Net loss                                     $(25,006)   (108.9)%   $(21,109)   (120.5)%   $(13,194)   (258.3)%
</TABLE>

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>
                                                                                      2001              2000          1999
                                                                                      ----              ----          ----

<S>                                                                                <C>               <C>            <C>
Average Order Size (including shipping & handling)                                 $143.71           $111.03        $97.38
Average Order Size Per New Customer (including shipping & handling)                $127.41           $ 98.77        $88.84
Average Order Size Per Repeat Customer  (including shipping & handling)            $156.85           $128.67       $118.24

Registered Users                                                                 1,125,291           863,263       336,000
Registered Users Added During the Year                                             262,028           527,263       309,952
Total Customers                                                                    287,637           185,240        54,881


                                       20
<PAGE>

Customers Added during the Year                                                    102,397           130,359        51,514
Revenue from Repeat Customers as a % of total Revenue                                  60%               48%           35%
Customer Acquisition Costs                                                          $39.32            $71.18       $131.75
</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.

In June 2001, we announced a streamlined operating plan designed to aid us in
achieving profitability by the fourth quarter of 2002, improve efficiency and
reduce our need for additional capital. As part of the plan, we eliminated
approximately 32 jobs, or, approximately 34% of our workforce, as well as
reduced marketing and other operating expenses. In connection with the plan we
recorded a pre-tax charge of approximately $272,000. Of this amount,
approximately $145,000 is included in selling, marketing and fulfillment costs
and $127,000 is included in general and administrative expenses.

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, is
related primarily to an increase in the return rate. The increase in average
order size is 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 is 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 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, 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%)
    Operating                            3,939,000                  4,050,000                   (3%)
    Technology                           3,733,000                  3,455,000                    8%
    Creative Services                    1,235,000                  1,114,000                   11%
                                         ---------                  ---------

                                      $ 13,765,000               $ 18,797,000                  (27%)
</TABLE>

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 52% is largely related to a shift in our customer acquisition
strategy. Consistent with


                                       21
<PAGE>

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 include all costs related to inventory management,
fulfillment, customer service, and credit card processing. 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 a
new third party provider.

Technology expenses consist primarily of Web site hosting and staff related
costs. 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.

Creative Services expenses include expenses related to our photo studio, image
processing, and Web site design. In 2001, this amount 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 a new third party provider in August and September 2000.

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, 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.

For The Year Ended December 31, 2000 Compared To The Year Ended December 31,
1999

Net sales: Gross sales for the year ended December 31, 2000 increased by
approximately 254% to $25,006,000, compared to $7,073,000, for the year ended
December 31, 1999. For the year ended December 31, 2000, we recorded a provision
for returns and credit card chargebacks and other discounts of $7,494,000, or
approximately 30% of gross sales. For the year ended December 31,


                                       22
<PAGE>

1999, the provision for returns and credit card chargebacks and other discounts
was $1,964,000, or approximately 27.8% of gross sales. The increase in the
provision is related to an increase in the 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, 2000 were $17,512,000. This represents an increase of over 242%
compared to net sales for the year ended December 31, 1999, in which net sales
totaled $5,109,000.

Cost of sales: Cost of sales for the year ended December 31, 2000 totaled
$14,018,000, resulting in gross margin of approximately 20%. Cost of sales for
the year ended December 31, 1999 were $4,554,000, resulting in gross margin of
10.9%. We believe that the increase in gross margin resulted primarily from our
limiting the amount of free shipping that we offered our customers during fiscal
2000 as compared to 1999, and from improved product margins.

Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 74% in 2000 compared to 1999. Selling,
marketing and fulfillment expenses were comprised of the following:

<TABLE>
<CAPTION>
                                 Year Ended             Year Ended            Percentage Difference
                                 ----------             ----------            ---------------------
                              December 31, 2000       December 31, 1999        increase (decrease)
                              -----------------       -----------------        -------------------
<S>                              <C>                     <C>                           <C>
    Marketing                    $10,178,000             $7,406,000                    37%
    Operating                      4,050,000              1,380,000                   193%
    Technology                     3,455,000              1,399,000                   147%
    Creative Services              1,114,000                609,000                    83%
                                   ---------              --------

                                $ 18,797,000           $ 10,794,000                    74%
</TABLE>


The increase in marketing expenses of 37% was largely related to an increase in
online and print advertising targeted to increase our customer base. As a result
of this shift, we were able to increase the number of customers that we acquired
to 130,359 in 2000 from 51,514 in 1999. Accordingly, our customer acquisition
costs for the year ended December 31, 2000 decreased by approximately 46% to
$71.18 per customer from $131.75 per customer for the year ended December 31,
1999.

Operating expenses increased in 2000 by approximately 193% compared to 1999. The
increased fulfillment costs were largely attributable to the increased sales
volume and our need to maintain two fulfillment centers during the months of
August and September when we were transitioning our operations.

For the year ended December 31, 2000, technology expenses increased by 147% over
the previous year. The increase in Web site hosting costs resulted from our
efforts to improve the speed of our Web site and effectively handle growth in
traffic to the Web site.

For the year ended December 31, 2000, creative services expenses include
expenses related to our photo studio, image processing, and Site design. In
2000, this amount increased by approximately 83% primarily due to an increase in
headcount.

As a percentage of net sales, our selling, marketing and fulfillment expenses,
decreased from 211.3% in 1999 to 107.3% in 2000.

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, 2000 were $5,296,000 as compared to $3,450,000 for the year ended
December 31, 1999. The increase in general and administrative expenses was
largely the result of an increase in the number of our employees, and their
related benefits as well as increased professional fees. In addition, in July
2000 we increased our office space by leasing an additional floor. We increased
the number of our employees across all departments. The number of employees
categorized as general and administrative for the year ended December 31, 2000
was 28, compared to 18 for the year ended December 31, 1999.


                                       23
<PAGE>

As a percentage of net sales, general and administrative expenses decreased from
67.5% in 1999 to 30.2% in 2000.

Interest expense and other income, net: Interest expense and other income, net,
for the year ended December 31, 2000 totaled $510,000. This amount consisted of
interest expense of $676,000, related to the interest on the notes payable that
were issued during fiscal 2000. It is presented net of interest income of
$166,000, which represents interest earned on our cash balances. For the year
ended December 31, 1999, interest income totaled $430,000 and related primarily
to the interest earned on the cash balance during the year.

Liquidity And Capital Resources

General

At December 31, 2001, the Company had approximately $5.4 million, of liquid
assets, entirely in the form of cash and cash equivalents, and working capital
of approximately $7.2 million. In addition, as of December 31, 2001, the Company
had approximately $2.2 million of borrowings committed under the Loan Facility,
leaving approximately $1.6 million of availability. In March 2002, we amended
the Loan Facility. As of March 22, 2002, the maximum amount available under the
Loan Facility was approximately $2.5 million, of which $2.2 was outstanding as
of such date. See, "Liquidity and Capital Resources - Loan Facility."

We fund our operations through cash on hand, operating cash flow and the Loan
Facility. In addition, during 2001, we converted $20 million of debt owed to
Soros into Series B Preferred Stock and sold an additional $10 million of Common
Stock to Soros and certain public shareholders. See "Certain Relationships and
Related Transactions."

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 the Company having at least $1.5 million of tangible net worth and
$3.5 million of working capital. 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.

Loan Facility

Pursuant to the Rosenthal Financing Agreement, as amended, 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 maximum amount available
under the Loan Facility is an amount equal to the amount of Soros Guarantee plus
the lowest of (x) $1 million, (y) 20% of the book value of our inventory and (z)
the full liquidation value of our inventory. However, the maximum availability
under the Loan Facility can never exceed $10 million. Under the Loan Facility,
we are required to have at least $1,500,000 of tangible net worth and $3,500,000
of working capital. 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%. As of December 31, 2001, maximum
availability under the Loan Facility was approximately $3.8 million, of which
$2.2 million was outstanding. As of March 22, 2002, maximum availability under
the Loan Facility was approximately $2.5 million, of which $2.2 million was
outstanding as of such date.

We also pay Rosenthal (a) an annual facility fee equal to a certain percentage
of the maximum inventory facility available under the Loan Facility and (b)
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 or guarantee plus,
a certain percentage of the face amount of such letters of credit or guarantees
for each thirty (30) days or a portion thereof that such letters of credit or
guarantees are 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


                                       24
<PAGE>

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 our Common Stock
at an exercise price of $2.34 exercisable, as amended, for six years from the
date of issuance.

In connection with the Loan Facility, we entered into a Reimbursement Agreement
with Soros pursuant to which Soros issued a standby letter of credit at closing
in the amount of $2.5 million in favor of Rosenthal to guarantee a portion of
the Company's obligations under the Rosenthal Financing Agreement, 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.
In connection with the recent amendment of the Rosenthal Financing Agreement,
the face amount of the standby letter of credit issued by Soros was reduced from
$2.5 to $1.5 million, Soros' obligation to issue at our request another standby
letter of credit for up to an additional $1.5 million was terminated and Soros
agreed to maintain the $1.5 million standby letter of credit until August 15,
2003. In consideration for the issuance of the original $2.5 million standby
letter of credit, we issued to Soros a warrant to purchase 100,000 shares of our
Common Stock at an exercise price equal to $0.88, 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 August 15, 2003, we issued to Soros
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 price of our
Common Stock on the date of issuance), exercisable at any time prior to March
30, 2007.

Subject to certain conditions, if we default on any of our obligations under the
Rosenthal Financing Agreement, 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 Rosenthal Financing Agreement 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 Rosenthal Financing Agreement, Soros has the right to purchase all of
our obligations from Rosenthal at any time during the term of the Rosenthal
Financing Agreement. 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.

Standby Commitment

On March 27, 2002, we entered into the Standby Commitment Agreement with Soros.
Under the Soros Standby Agreement, Soros has agreed to provide us with up to
four million dollars ($4,000,000) of additional financing on a standby basis at
any time prior to January 1, 2003; provided, however, that we may draw down on
the Standby Commitment Amount only at such time that our total cash balances are
less than $1,000,000. 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 financings made shall be on terms that are consistent with those
in the market at the time the draw is made for similar investments by investors
similar to Soros in companies similar to us. Subject to certain limitations the
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 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 is made pursuant to the Soros
Standby Agreement, we issued to Soros a warrant to purchase 100,000 shares of
our Common Stock at an exercise price of $1.68 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 until March 27, 2007. In connection with the issuance of
this warrant, Soros agreed that the issuance of this warrant shall not trigger
the anti-dilution provision of Section 5.8.6 of our Certificate of
Incorporation. See, "Risk Factors - "Certain Events Could Result in Significant
Dilution of Your Ownership of our Common Stock."

Commitments And Long Term Obligations

As of December 31, 2001, we had the following commitments and long term
obligations:


                                       25
<PAGE>

<TABLE>
<CAPTION>
                                 2002          2003         2004         2005         2006     Thereafter      Total

<S>                           <C>            <C>           <C>         <C>          <C>         <C>         <C>
Marketing and Advertising     $  612,000           --           --           --           --           --   $  612,000
Operating Leases              $1,132,000      486,000      437,000      443,000      449,000    1,267,000   $4,214,000
Employment Contracts          $  998,000      495,000       28,000           --           --           --   $1,521,000
Note payable to shareholder   $       --           --           --      182,000           --           --   $  182,000
                              ----------      -------      -------      -------      -------    ---------   ----------
     Grand total              $2,742,000      981,000      465,000      625,000      449,000    1,267,000   $6,529,000
</TABLE>

In March of 2002, we moved our web hosting services to a major Internet service
provider to host Bluefly.com and provide certain hardware and software as well
as year-round 24-hour systems support. Under this new agreement we are committed
to pay $68,500, $82,200, $82,200 and $13,700 for fiscal years 2002, 2003, 2004
and 2005, respectively.

On March 12, 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 plan to develop an upgraded version of our Web site based on
Blue Martini Software. Under this agreement we are committed to pay $295,000
during fiscal 2002. Once launched, we expect that the new Web site will provide
us with better tools to create and manage on-site marketing promotions, more
robust analytical tools to measure the performance of on-site promotions,
greater site stability, and a more efficient platform from which to scale our
technology infrastructure should any future growth in our business dictate such
a need. We expect to launch the new Web site during the third quarter of 2002.
Of course, there can be no assurance that the new Web site will be launched when
scheduled, that such expectations will prove to be correct or that they will
have a positive effect on our business. See, "Risk Factor - The Development Of A
New Web Site May Place A Significant Strain On Our Management And Certain Key
Personnel."

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 Rosenthal Financing Agreement and the
Standby Commitment Agreement together with existing resources and cash generated
from operations, should be sufficient to satisfy our cash requirements through
the end of fiscal 2002. 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

Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission (the "Commission"), requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note 2 of the notes to the consolidated
financial statements includes a summary of the significant accounting policies
and methods used in the preparation of our consolidated financial statements.
For a brief discussion of the more significant accounting policies and methods
used by us, please see, "Significant Accounting Policies."


                                       26
<PAGE>

In addition, Financial Reporting Release No. 61 was recently released by the
Commission, and requires all companies to include a discussion addressing, among
other things, liquidity, off balance sheet arrangements, contractual obligations
and commercial commitments. For a discussion of these issues, please read
"Liquidity and Capital Resources."

In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
Of Long-Lived Assets." This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" and certain provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). The provisions of SFAS No. 144 are effective for
fiscal years beginning after December 15, 2001. We do not anticipate that the
adoption of SFAS No. 144 will have a material impact on our consolidated
financial statements.

In June 2001, the FASB issued Statement No. 143 ("SFAS No. 143"), "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No. 143 shall
be effective for financial statements issued for fiscal years beginning after
June 15, 2002. Earlier application is encouraged. Initial application of this
Statement shall be as of the beginning of an entity's fiscal year. We do not
anticipate that the adoption of SFAS No. 143 will have a material impact on our
consolidated financial statements.

In July 2001, the FASB issued SFAS No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and indefinite lived intangible
assets will no longer be amortized, but rather will be tested for impairment
within six months of adoption and at least annually thereafter effective for
years beginning after December 15, 2001. In addition, the amortization period of
intangible assets with finite lives will no longer be limited. We do not
anticipate that the adoption of SFAS No. 142 will have a material impact on our
consolidated financial statements.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 ("SFAS No. 141"),"Business Combinations". SFAS No. 141 requires all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method. In addition, SFAS No. 141 establishes criteria for the recognition and
measurement of intangible assets separately from goodwill. SFAS No. 141 may
require the Company to reclassify the carrying amounts of certain intangible
assets into or out of goodwill, based upon certain criteria. We do not
anticipate that the adoption of SFAS No. 141 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.


                                       27
<PAGE>

Item 8.  Financial Statements

(a)  Index to the Financial Statements

       Report of Independent Accountants                                     F-2

       Consolidated Balance Sheets as of December 31, 2001 and 2000          F-3

       Consolidated Statements of Operations for the three years
                 ended December 31, 2001, 2000 and 1999                      F-4

       Consolidated Statements of Changes in Shareholders' Equity (Deficit)
                 and Redeemable Preferred Stock for the three years
                 ended December 31, 2001, 2000 and 1999                      F-5

       Consolidated Statements of Cash Flows for the three years
                 ended December 31, 2001, 2000 and 1999                      F-6

       Notes to Consolidated Financial Statements                            F-8

<PAGE>

                        Report of Independent Accountants


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

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Bluefly, Inc. and its subsidiary at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 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 27, 2002


                                       F-2
<PAGE>


<TABLE>
<CAPTION>

Bluefly, Inc.
Consolidated Balance Sheets
As of December 31, 2001 and 2000
Dollars Rounded to the Nearest Thousand
------------------------------------------------------------------------------------------------------------------

                                                                                          2001               2000
<S>                                                                                  <C>             <C>
Assets

Current assets:
      Cash and cash equivalents                                                      $  5,419,000    $  5,350,000
      Inventories, net                                                                  6,388,000       7,294,000
      Accounts receivable                                                               1,252,000         767,000
      Prepaid expenses and other current assets                                           474,000         937,000
                                                                                     ------------    ------------
               Total current assets                                                    13,533,000      14,348,000

Property and equipment, net                                                             1,155,000       1,326,000
Other assets                                                                              193,000         194,000
                                                                                     ------------    ------------
               Total assets                                                          $ 14,881,000    $ 15,868,000
                                                                                     ============    ============

Liabilities and Shareholders' Equity (Deficit)

Current liabilities:
      Accounts payable                                                               $  3,338,000    $  3,593,000
      Accrued expenses and other current liabilities                                    2,268,000       2,395,000
      Deferred revenue                                                                    691,000         143,000
      Convertible notes payable, net of unamortized discount                                   --      19,698,000
                                                                                     ------------    ------------
               Total current liabilities                                                6,297,000      25,829,000
                                                                                     ------------    ------------


Note payable to shareholder                                                               182,000              --

Redeemable Convertible Series A Preferred Stock - $.01 par value; 2,000,000
      shares authorized, 0 and 500,000 shares issued and outstanding
      as of December 31, 2001 and December 31, 2000                                            --      11,088,000
      (liquidation preference: $20 per share plus accrued dividends)

Commitments and contingencies (Note 7)

Shareholders' equity (deficit):
      Series A Preferred Stock - $.01 par value; 500,000 shares authorized and
        500,000 and 0 shares issued and outstanding as of December 31, 2001, and
        2000, respectively (liquidation preference: $10 million plus accrued
        dividends)                                                                          5,000              --
      Series B Preferred Stock - $.01 par value; 9,000,000 shares authorized
        and 8,910,782 and 0 shares issued and outstanding as of December 31, 2001,
        and 2000, respectively (liquidation preference: $30 million plus accrued
        dividends)                                                                         89,000              --
      Common Stock - $.01 par value; 40,000,000 shares authorized, 9,205,331
        and 4,924,906 shares issued and outstanding as of December 31, 2001
        and 2000, respectively                                                             92,000          49,000
      Additional paid-in capital                                                       72,184,000      17,242,000
      Accumulated deficit                                                             (63,968,000)    (38,340,000)
                                                                                     ------------    ------------
               Total shareholders' equity (deficit)                                     8,402,000     (21,049,000)
                                                                                     ------------    ------------
               Total liabilities and shareholders' equity (deficit)                  $ 14,881,000    $ 15,868,000
                                                                                     ============    ============
</TABLE>


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


                                       F-3
<PAGE>

<TABLE>
<CAPTION>

Consolidated Statements of Operations
For the years ended December 31, 2001, 2000 and 1999
Dollars Rounded to the Nearest Thousand
-----------------------------------------------------------------------------------------------------------------

                                                                         2001           2000              1999
<S>                                                                 <C>             <C>             <C>
Net sales                                                           $ 22,950,000    $ 17,512,000    $  5,109,000
Cost of sales                                                         15,954,000      14,018,000       4,554,000
                                                                    ------------    ------------    ------------

             Gross profit                                              6,996,000       3,494,000         555,000

Selling, marketing and fulfillment expenses                           13,765,000      18,797,000      10,794,000
General and administrative expenses                                    5,098,000       5,296,000       3,450,000
                                                                    ------------    ------------    ------------

             Total operating expenses                                 18,863,000      24,093,000      14,244,000
                                                                    ------------    ------------    ------------

             Operating loss from continuing operations               (11,867,000)    (20,599,000)    (13,689,000)

Interest (expense) and other income, net of interest income of
    $240,000 and $166,000 in 2001 and 2000, and interest expense
    of $0 in 1999                                                    (13,139,000)       (510,000)        430,000
                                                                    ------------    ------------    ------------

             Loss from continuing operations before income taxes     (25,006,000)    (21,109,000)    (13,259,000)
Income tax benefit                                                            --              --           2,000
                                                                    ------------    ------------    ------------

             Loss from continuing operations                         (25,006,000)    (21,109,000)    (13,257,000)
                                                                    ------------    ------------    ------------

Discontinued operations -
    Income from operations, net of income tax provision of $0                 --              --          63,000
                                                                    ------------    ------------    ------------

             Net loss                                               $(25,006,000)   $(21,109,000)   $(13,194,000)
                                                                    ============    ============    ============

             Preferred stock dividends                                (2,926,000)       (802,000)       (343,000)
                                                                    ------------    ------------    ------------

             Net loss available to common shareholders              $(27,932,000)   $(21,911,000)   $(13,537,000)
                                                                    ============    ============    ============
Basic and diluted (loss) income per common share:
    Continuing operations                                           $      (3.41)   $      (4.45)   $      (2.83)
    Discontinued operations                                                   --              --             .01
                                                                    ------------    ------------    ------------
             Basic and diluted loss per share                       $      (3.41)   $      (4.45)   $      (2.82)
                                                                    ============    ============    ============

Weighted average number of shares outstanding used in calculating
    basic and diluted (loss) per common share                          8,185,065       4,924,906       4,802,249
                                                                    ============    ============    ============
</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 (Deficit) and Redeemable Preferred Stock
For the years ended December 31, 2001, 2000 and 1999
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, 1999                                  -         $     -              -    $     -               -     $     -

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

Accrued dividends on Series A Preferred Stock               -         343,000              -          -               -           -

Exercise of warrants and stock options                      -               -              -          -               -           -

Issuance of stock options to consultants                    -               -              -          -               -           -

Net loss                                                    -               -              -          -               -           -
                                                     --------    ------------        -------     ------       ---------     -------

Balance at December 31, 1999                          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
    Preferred Stock Series A                         (500,000)    (11,088,000)       500,000      5,000               -           -

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

Net loss                                                    -               -              -          -               -
                                                     --------    ------------        -------     ------       ---------     -------

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

<CAPTION>
                                                               Common Stock
                                                              $.01 Par Value
                                                            -------------------                                      Total
                                                            Number of              Additional      Accumulated    Shareholders'
                                                              Shares    Amount   Paid-in Capital    Deficit      Equity (Deficit)

<S>                                                         <C>         <C>       <C>             <C>             <C>
Balance at January 1, 1999                                  3,433,255   $34,000   $ 10,395,000    $ (4,037,000)   $  6,392,000

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

Accrued dividends on Series A Preferred Stock                       -         -       (343,000)              -        (343,000)

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

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

Net loss                                                            -         -              -     (13,194,000)    (13,194,000)
                                                            ---------   -------   ------------    ------------    ------------

Balance at December 31, 1999                                4,924,906    49,000     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                                4,924,906    49,000     17,242,000     (38,340,000)    (21,049,000)
                                                            ---------   -------   ------------    ------------    ------------

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

Conversion of debt to Preferred Stock Series B                      -         -     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           4,280,425    43,000      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 investor                                    -         -         74,000               -          74,000

Net loss                                                            -         -              -     (25,006,000)    (25,006,000)
                                                            ---------   -------   ------------    ------------    ------------

Balance at December 31, 2001                                9,205,331   $92,000   $ 72,184,000    $(63,968,000)    $ 8,402,000
                                                            ---------   -------   ------------    ------------    ------------
</TABLE>


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

                                      F-5
<PAGE>

<TABLE>
<CAPTION>

Consolidated Statements of Cash Flows
For the years ended December 31, 2001, 2000 and 1999
Dollars Rounded to the Nearest Thousand
------------------------------------------------------------------------------------------------------------------

                                                                       2001             2000            1999
<S>                                                                <C>             <C>             <C>
Cash flows from operating activities:
    Loss from continuing operations                                $(25,006,000)   $(21,109,000)   $(13,257,000)
    Adjustments to reconcile loss from continuing operations
      to net cash used in operating activities:
        Depreciation and amortization                                   719,000         766,000         130,000
        Issuance of warrants for services rendered                       31,000               -               -
        Beneficial conversion - interest expense                     13,007,000               -               -
        Provision for returns                                           296,000         265,000         820,000
        Common stock issued for services                                      -               -           7,000
        Deferred income taxes                                                 -               -          50,000
        Non cash compensation                                                 -               -          49,000
        Changes in operating assets and liabilities:
           (Increase) decrease in:
             Inventories                                                906,000        (274,000)     (6,591,000)
             Accounts receivable                                       (393,000)       (480,000)       (353,000)
             Other current assets                                       252,000         (53,000)       (365,000)
             Prepaid expenses                                            84,000         (90,000)        211,000
             Other assets                                               (18,000)        (75,000)        (23,000)
           (Decrease) increase in:
             Accounts payable                                           597,000        (857,000)      3,846,000
             Accrued expenses                                          (423,000)         55,000       1,101,000
             Deferred revenue                                           548,000         144,000               -
             Deferred tax liability                                           -               -         (64,000)
                                                                   ------------    ------------    ------------

             Net cash used in operating
               activities - continuing operations                    (9,400,000)    (21,708,000)    (14,439,000)
                                                                   ------------    ------------    ------------

    Income from discontinued operations                                       -               -          63,000
    Adjustments to reconcile income from discontinued operations
      to net cash provided by (used in) operating activities:
        Changes in operating assets and liabilities:
           (Increase) decrease in:
             Inventories                                                      -               -         187,000
           Increase (decrease) in:
             Income taxes receivable                                          -               -         195,000
                                                                   ------------    ------------    ------------

             Net cash provided by  operating
               activities - discontinued operations                           -               -         445,000
                                                                   ------------    ------------    ------------

             Net cash used in operating activities                   (9,400,000)    (21,708,000)    (13,994,000)
                                                                   ------------    ------------    ------------

Cash flows from investing activities - continuing operations:
    Purchase of property and equipment                                 (378,000)       (876,000)       (670,000)
    Funds deposited with factor                                               -               -       2,264,000
                                                                   ------------    ------------    ------------

             Net cash provided by (used in) investing
               activities - continuing operations                      (378,000)       (876,000)      1,594,000
                                                                   ------------    ------------    ------------
             Net cash provided by (used in) investing activities       (378,000)       (876,000)      1,594,000
                                                                   ------------    ------------    ------------
</TABLE>


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

                                      F-6
<PAGE>

<TABLE>
<CAPTION>

Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2001, 2000 and 1999
Dollars Rounded to the Nearest Thousand
----------------------------------------------------------------------------------------------------------------------------

                                                                                       2001             2000            1999
<S>                                                                                <C>           <C>             <C>
Cash flows from financing activities - continuing operations:
    Net proceeds from rights offering                                              $ 9,665,000   $          -    $         -
    Net proceeds from note payable to shareholder                                      182,000              -              -
    Net proceeds from issuance of Preferred Stock                                            -              -      9,943,000
    Net proceeds from warrant redemption and unit purchase options                           -              -      7,130,000
    Net proceeds from convertible notes payable                                              -     20,000,000        260,000
                                                                                   -----------   ------------    -----------
             Net cash provided by financing activities -
               continuing operations                                                 9,847,000     20,000,000     17,333,000
                                                                                   -----------   ------------    -----------

Cash flows from financing activities - discontinued operations:
    Net change in due to/from factor                                                         -              -        171,000
                                                                                   -----------   ------------    -----------

             Net cash provided by (used in) financing
               activities - discontinued operations                                          -              -        171,000
                                                                                   -----------   ------------    -----------

             Net cash provided by financing activities                               9,847,000     20,000,000     17,504,000
                                                                                   -----------   ------------    -----------

Net increase (decrease) in cash and cash equivalents                                    69,000     (2,584,000)     5,104,000

Cash and cash equivalents - beginning of year                                        5,350,000      7,934,000      2,830,000
                                                                                   -----------   ------------    -----------

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

Supplemental disclosure of cash flow information:
    Cash paid during the year for:
      Interest                                                                     $    14,000   $          -    $         -
                                                                                   ===========   ============    ===========
      Income taxes                                                                 $         -   $     25,000    $    17,000
                                                                                   ===========   ============    ===========
    Non-cash investing and financing activites:
      Issuance of warrants to shareholder                                          $    74,000   $    467,000    $         -
                                                                                   ===========   ============    ===========
      Warrant issued to factor                                                     $    45,000   $          -    $         -
                                                                                   ===========   ============    ===========
      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-7
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

1.       The Company

         The Company is a leading Internet retailer of designer fashion at
         outlet store prices. The Company's Web store ("Bluefly.com" or "Web
         Site"), which launched in September 1998, sells over 400 brands of
         designer apparel, accessories and home products at discounts that
         typically range between 30% and 75% off comparable retail prices.

         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 Soros Standby Agreement, the Loan
         Facility (both defined below) and cash generated from operations will
         be sufficient to enable the Company to meet its planned expenditures
         through December 31, 2002. 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 No. 00-10, "Accounting
         for Shipping and Handling Fees and Costs" ("EITF No. 00-10"). Revenue
         is recognized when goods are received by the customer, which occurs
         after credit card authorization. Net sales include product revenue and
         revenue received for shipping and handling, less reductions for
         estimated returns, uncollectible accounts and sales discounts.

         Deferred revenue, which consists primarily of goods shipped to
         customers but not yet received and customer credits, totaled
         approximately $691,000 and $143,000 as of December 31, 2001 and 2000,
         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 competitive nature of the business
         and the potential for competitors with greater resources to enter such
         business; the Company's limited operating history and need for
         additional financing; consumer acceptance of the Internet as a medium
         for purchasing apparel; rapid technological change of online commerce
         and the potential for security risks; governmental regulation and legal
         uncertainties, as well as other risks and uncertainties. In the event
         that the Company does not successfully implement its business plan,
         certain assets may not be recoverable.


                                      F-8
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

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

         Cash and Cash Equivalents

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

         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 bad debt 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.

         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.

         Property and Equipment

         Property and equipment are stated at 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.

         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.

         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 2001,


                                      F-9
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

         2000 and 1999, because the exercise price of employee stock options
         equals or exceeds the market price of the underlying stock on the date
         of grant.

         Net Loss Per Share

         The Company calculated net loss per share in accordance with SFAS No.
         128, "Earnings Per Share." Basic earnings (loss) per share excludes
         dilution and is computed by dividing earnings (loss) available to
         common shareholders by the weighted average number of common shares
         outstanding for the period.

         Diluted earnings (loss) per share is computed by dividing earnings
         (loss) available to common shareholders by the weighted average number
         of common shares outstanding for the period, adjusted to reflect
         potentially dilutive securities. Due to the loss from continuing
         operations, options, warrants and unit purchase options to purchase
         4,978,703 shares of Common Stock and Preferred Stock convertible into
         13,184,236 of Common Stock shares were not included in the computation
         of diluted earnings per share because the result of the exercise of
         such inclusion would be antidilutive.

         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, which is generally no
         more than one month. Marketing expenses (excluding marketing salaries)
         for the years ended December 31, 2001, 2000 and 1999 amounted to
         approximately $4,026,000, $9,278,000 and $6,787,000, respectively.

         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, 2001,
         2000 and 1999, fulfillment expenses totaled $2,290,000, $2,286,000 and
         $557,000, 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.

         Concentration

         The Company acquired approximately 5.3% and 15.3%, respectively, for
         the years ended December 31, 2001, and 2000 of its inventory from one
         supplier.

         Recent Accounting Pronouncements

         In October 2001, FASB issued Statement No. 144 ("SFAS No. 144"),
         "Accounting for the Impairment or Disposal of Long-Lived Assets." This
         statement supersedes FASB Statement No. 121, "Accounting for the
         Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
         Of" and certain provisions of APB Opinion No. 30, "Reporting the
         Results of Operations - Reporting the Effects of Disposal of a Segment
         of a Business, and Extraordinary, Unusual and Infrequently Occurring
         Events and Transactions," for the disposal of a segment of a business
         (as previously defined in that Opinion). The provisions of SFAS No. 144
         are effective for fiscal years beginning after December 15, 2001. The


                                      F-10
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

         Company does not anticipate that the adoption of SFAS No. 144 will have
         a material impact on the consolidated financial statements.

         In June 2001, the FASB issued Statement No. 143 ("SFAS No. 143"),
         "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
         financial accounting and reporting for obligations associated with the
         retirement of tangible long-lived assets and the associated asset
         retirement costs. SFAS No. 143 shall be effective for financial
         statements issued for fiscal years beginning after June 15, 2002.
         Earlier application is encouraged. Initial application of this
         Statement shall be as of the beginning of an entity's fiscal year. The
         Company does not anticipate that the adoption of SFAS No. 143 will have
         a material impact on the consolidated financial statements.

         In July 2001, the FASB issued SFAS No. 142 ("SFAS No. 142"), "Goodwill
         and Other Intangible Assets". Under SFAS No. 142, goodwill and
         indefinitely lived intangible assets will no longer be amortized, but
         rather will be tested for impairment within six months of adoption and
         at least annually thereafter effective for years beginning after
         December 15, 2001. In addition, the amortization period of intangible
         assets with finite lives will no longer be limited. The Company does
         not anticipate that the adoption of SFAS No. 142 will have a material
         impact on the consolidated financial statements.

         In June 2001, the FASB issued SFAS No. 141 ("SFAS No. 141"), "Business
         Combinations". SFAS No. 141 requires all business combinations
         initiated after June 30, 2001 be accounted for under the purchase
         method. In addition, SFAS No. 141 establishes criteria for the
         recognition and measurement of intangible assets separately from
         goodwill. SFAS No. 141 may require the Company to reclassify the
         carrying amounts of certain intangible assets into or out of goodwill,
         based upon certain criteria. The Company does not anticipate that the
         adoption of SFAS No. 141 will have a material impact on the
         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, 2001 and 2000, property and equipment for continuing
         operations consist of the following:

                                                       2001             2000

         Leasehold improvements                    $  535,000       $  501,000
         Office equipment                             418,000          388,000
         Computer equipment and software            1,566,000        1,254,000
                                                   ----------       ----------
                                                    2,519,000        2,143,000
             Less accumulated depreciation          1,364,000          817,000
                                                   ----------       ----------

                                                   $1,155,000       $1,326,000
                                                   ==========       ==========

         Depreciation and amortization of property and equipment was
         approximately $547,000, $587,000 and $130,000, for the years ended
         December 31, 2001, 2000 and 1999, respectively.



                                      F-11
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

4.       Prepaid Expenses and Other Current Assets

         As of December 31, 2001 and 2000, prepaid expenses and other current
         assets consist of the following:

                                                    2001         2000

         Deferred financing costs                $ 50,000      $368,000
         Prepaid expenses                         219,000       303,000
         Other current assets                     205,000       172,000
         Other receivables                              -        94,000
                                                 --------      --------
                                                 $474,000      $937,000
                                                 ========      ========

5.       Accrued Expenses and Other Current Liabilities

         As of December 31, 2001 and 2000, accrued expenses and other current
         liabilities consist of the following:

                                                  2001           2000

         Provision for returns                $1,430,000     $1,134,000
         Accrued expenses                        167,000        531,000
         Salary and bonus accrual                599,000        374,000
         Accrued media expenses                   72,000        356,000
                                              ----------     ----------
                                              $2,268,000     $2,395,000
                                              ==========     ==========

6.       Income Taxes

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

                                          Continuing Operations
                                  ----------------------------------
                                    2001         2000          1999

         Current
           Federal                $     -      $     -       $(2,000)
           State                        -            -             -
                                  -------      -------       -------
                                        -            -        (2,000)
                                  -------      -------       -------
         Deferred
           Federal                      -            -             -
           State                        -            -             -
                                  -------      -------       -------
                                        -            -             -
                                  -------      -------       -------
                                  $     -      $     -       $(2,000)
                                  =======      =======       =======


                                      F-12
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>

                                                                2001            2000
<S>                                                        <C>             <C>
         Deferred tax assets
             Net operating losses                          $ 24,433,000    $ 14,224,000
             Foreign tax credits                                      -          13,000
             Depreciation and amortization                      381,000         292,000
             Accounts receivable and inventory reserves         240,000         219,000
             Accrued bonuses                                    196,000          46,000
             Other                                                4,000           4,000
                                                           ------------    ------------
                                                             25,254,000      14,798,000
                 Valuation Allowance                        (25,254,000)    (14,798,000)
                                                           ------------    ------------

                      Net deferred tax asset (liability)   $          -    $           -
                                                           ============    ============
</TABLE>

         In addition, the Company has approximately $61,227,000 of net operating
         loss carryforwards which have expiration dates through 2021. 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>
                                                                   2001             2000             1999

<S>                                                               <C>              <C>              <C>
         Statutory federal income tax rate                        (35.00) %        (34.00) %        (34.00) %
         State taxes, net of federal tax benefit                   (5.41)           (5.24)           (5.40)
         Other                                                      0.05             0.08             0.20
         Valuation allowance on deferred tax asset                 40.36            39.16            39.18
                                                                ---------        ---------        ---------

         Effective tax rate                                            -  %             -  %         (0.02) %
                                                                ---------        ---------        ---------
</TABLE>

7.       Commitments and Contingencies

         Employment Contracts
         The Company has entered into certain employment contracts, which expire
         through December 31, 2004. As of December 31, 2001, the Company's
         aggregate commitment for future base salary under these employment
         contracts is:

         2002                                        $ 998,000
         2003                                          495,000
         2004                                           28,000
                                                    ----------

                    Total                           $1,521,000
                                                    ==========


                                      F-13
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

         Operating Leases

         The Company leases equipment and space under various leases which
         expire at various dates beginning in 2002 and running through 2010.
         Rent expense aggregated approximately $407,000, $345,000 and $156,000
         for the years ended December 31, 2001, 2000 and 1999, respectively. As
         of December 31, 2001, future minimum payments, excluding utilities, are
         as follows:

         2002                                                      $1,132,000
         2003                                                         486,000
         2004                                                         437,000
         2005                                                         443,000
         2006                                                         449,000
         Thereafter                                                 1,267,000
                                                                   ----------

                    Total                                          $4,214,000
                                                                   ==========

         In March of 2002, the Company moved its web hosting services to a major
         Internet service provider to host Bluefly.com and provide certain
         hardware and software as well as year-round 24-hour systems support.
         Under this new agreement the Company is committed to pay $68,500,
         $82,200, $82,200 and $13,700 for fiscal years 2002, 2003, 2004 and 2005
         respectively.

         Marketing and Technology Commitments

         As of December 31, 2001, the Company has advertising and marketing
         commitments in connection with its online relationships of
         approximately $612,000 through December 31, 2002.

         In March 2002, the Company entered into a software license and services
         agreement with a third party to develop an upgraded version of its Web
         Site. In connection with the agreement the Company has committed to
         spend $295,000 through December 31, 2002.

         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 (Deficit) and Redeemable Equity

         Authorized Shares

         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") and 15,500,000 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 ("Common
         Stock").

         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 "Original Series A Preferred Stock") for an
         aggregate purchase price of $10 million. The Original


                                      F-14
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

         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.

         As of December 31, 2000, the Original Series A Preferred Stock had been
         characterized as an instrument subject to optional redemption upon a
         change in control of the Company, and accordingly was classified as
         redeemable equity and not included in shareholders' equity. Subsequent
         to year end and 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 those provisions that prevented it from being
         included in permanent equity (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,
         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 Amended
         Series A Preferred Stock has a liquidation preference equal to the
         greater of (i) its face value plus accrued dividends ($11,945,000) 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,


                                      F-15
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

         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.

         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 one-to-one 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
         ($31,504,000) 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 registration rights with respect to the
         Common Stock issuable upon conversion of the Series B Preferred Stock.

         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 $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
         Standby Commitment, 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. Immediately after the closing of the Rights
         Offering, Soros beneficially owned approximately 78% of the outstanding
         Common Stock.

         The accompanying consolidated financial statements reflect the
         conversion of the Amended 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 both the Amended 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 the Amended 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.


                                      F-16
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

         Soros Warrants

         In March 2000, the Company obtained a commitment from affiliates of
         Soros to provide, at the Company's option, up to $15 million of
         financing at any time during 2000 on terms reflecting market rates for
         such financings at the time such financing is provided (the "Soros
         Commitment"). During 2000, Soros provided the Company with the
         aggregate principal amount of $15 million in convertible debt financing
         pursuant to the Soros Commitment, 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.

         Unit Purchase Options and Warrants

         In May 1997, the Company sold to the underwriter of the Company's
         Initial Public Offering ("IPO"), for an aggregate purchase price of
         $100, 150,000 Unit Purchase Options ("UPO's"). Each UPO entitles the
         holder thereof to purchase one Unit. The UPO's are exercisable
         initially at a price of $8.00 per Unit during the four-year period
         commencing on May 15, 1998. As of December 31, 2001, there were 11,500
         UPO's outstanding.

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

         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
         5,400,000.


                                      F-17
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

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

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

<S>                         <C>                                          <C>                     <C>
         Balance at January 1, 1999                                      259,975                 3.27
                                                                      ==========
         Options granted                                                 958,050                11.90
         Options canceled                                                (40,000)               12.04
         Options exercised                                               (68,875)                4.12
                                                                      ----------

         Balance at December 31, 1999                                  1,109,150                10.35
                                                                      ==========
         Options granted                                               3,746,362                 2.98
         Options canceled                                               (104,627)                7.21
         Options exercised                                                     -                    -
                                                                      ==========

         Balance at December 31, 2000                                  4,750,885                 4.61
         Options granted                                                 321,750                 1.72
         Options canceled                                               (729,432)                5.26
         Options exercised                                                     -                    -
                                                                      ==========

         Balance at December 31, 2001                                  4,343,203                 4.28

         Eligible for exercise at December 31, 1999                      169,763                 7.15
                                                                      ==========
         Eligible for exercise at December 31, 2000                      644,457                 7.23
                                                                      ==========
         Eligible for exercise at December 31, 2001                    2,069,120                 4.78
                                                                      ==========
</TABLE>

         The stock options are exercisable in different periods commencing in
         1998 through 2011. Additional information with respect to the
         outstanding options as of December 31, 2001, 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>
         $0.86 - $2.94         2,601,928       8.65 Years       $    2.71      1,158,324      $    2.77
         $3.06 - $5.22         1,067,500       8.57 Years            3.16        502,043           3.25
         $8.34 - $9.66            98,250       7.64 Years            9.08         62,930           9.09
         $10.69 - $12.13         330,625       7.91 Years           11.05        176,557          11.04
         $12.34 - $16.60         244,900       7.29 Years           14.81        169,266          14.98
                              ----------                                      ----------
         $0.63 - $16.60        4,343,203       8.48 Years       $    4.28      2,069,120      $    4.78
</TABLE>


                                      F-18
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

         The Company does not recognize compensation expense for stock options
         granted to employees and directors at or above fair market value, as
         permitted by the accounting standards. The fair value of options
         granted during 2001, 2000 and 1999 was approximately $448,000, $7.8
         million and $8.6 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:

                                             Year ended December 31,
                                   ---------------------------------------------
                                          2001            2000         1999

         Risk-free interest rates     4.42 - 5.27%    5.16 -6.81%    4.80-6.55%
         Expected lives (in years)         6                6             6
         Dividend yield                    0%               0%            0%
         Expected volitility              119%             80%           62%

         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,
                                                             ------------------------------------------------
                                                                   2001              2000             1999
<S>                                                          <C>              <C>              <C>
         Basic and diluted net loss as reported              $   25,006,000   $   21,109,000   $   13,194,000
         Basic and diluted net loss per share, as reported   $         3.41   $         4.45   $         2.82
         Basic and diluted net loss, pro forma               $   25,074,000   $   22,611,000   $   14,009,000
         Basic and diluted net loss per share, pro forma     $         3.42   $         4.59   $         2.92
</TABLE>

         The Company has issued warrants to purchase Common Stock to a
         shareholder, a lender and other third parties in exchange for services
         provided. As of December 31, 2001, there are 612,500 warrants issued.
         These warrants expire beginning September 2005 through October 2010.
         The exercise price of these warrants range from $0.88 - $9.08.

         As of December 31, 2001, the Company has reserved an aggregate of
         18,162,989 shares of Common Stock for the conversion of Preferred
         Stock, the exercise of Stock Options, Warrants and UPO's.

9.       Note payable to Shareholder

         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.

10.      Financing Agreement

         On March 30, 2001, the Company entered into 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 maximum amount available under the Loan Facility is an
         amount equal to the lower of (i) the Soros Guarantee (defined below)
         plus the lower of (x) $2 million or (y) the lower of (1) 20% of the
         book value of the Company's inventory or (2) the full liquidation value
         of the Company's inventory or (ii) $10 million. The Company is required
         to have at least $1.5 million of


                                      F-19
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

         tangible net worth and $3.5 million of working capital. As of December
         31, 2001, the Company had approximately $3.8 million available under
         the Loan Facility. Of the total amount available under the Loan
         Facility as of December 31, 2001, approximately $2.2 million has been
         committed, leaving $1.6 million 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, 2001-
         5.75%). For the period ended December 31, 2001, interest expense and
         fees totaled approximately $26,000.

         In consideration for the Loan Facility, among other things, the Company
         granted to Rosenthal a first priority lien (the "Rosenthal Lien") on
         substantially all of its assets, including control of all of the
         Company's cash accounts upon an event of default and certain of its
         cash accounts in the event that the total amount of monies loaned the
         Company under the Loan Facility exceeds 90% of the undrawn amount of
         the Soros Guarantee for more than 10 days. 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 credited
         additional paid in capital for $45,000. This amount is being amortized
         over the life of the Loan Facility.

         In connection with the Loan Facility, the Company entered into a
         Reimbursement Agreement with Soros pursuant to which Soros agreed to
         issue a standby letter of credit at closing in the amount of $2.5
         million in favor of Rosenthal to guarantee a portion of the Company's
         obligations under the Financing Agreement. In addition, during the term
         of the Financing Agreement, at the Company's request, Soros will issue
         another Soros Guarantee for up to an additional $1.5 million. As used
         herein, the term "Soros Guarantee" means the total face amount of all
         standby letters of credit which Soros is maintaining in connection with
         the 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, 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 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 Financing Agreement, 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 such
         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 Financing Agreement or at any time
         that the total amount outstanding under the Loan Facility exceeds 90%
         of the Soros Guarantee, the Company 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
         Common Stock on the 10 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 Common Stock on the ten days preceding the latter of
         (a) ten days after the date of issuance and (b) September 15, 2001.


                                      F-20
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

         Under the Financing Agreement, Soros has the right to purchase all of
         the Company's obligations to Rosenthal under the Loan Facility from
         Rosenthal (the "Buyout Option") at any time during the term of the
         Financing Agreement. With respect to such Buyout Option, Soros has the
         right to request that Rosenthal make a draw under the Soros Guarantee
         as consideration for Soros' purchase of such obligations. The initial
         term of the Financing Agreement ends on March 30, 2002. The Financing
         Agreement provides for automatic one year renewals unless either party
         provides at least 30 day prior notice of its decision not to renew.

11.      Quarterly Results of Operations (Unaudited)

         Amounts in thousands, except per share data

                                               Quarter Ended
               2001          March 31       June 30   September 30  December 31
               ----          --------       -------   ------------  -----------

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          $    (3.57)     $ (0.52)     $ (0.33)     $ (0.22)
                            ==================================================
Loss per
common share-diluted        $    (3.57)     $ (0.52)     $ (0.33)     $ (0.22)
                            ==================================================

                                               Quarter Ended
               2000          March 31       June 30   September 30  December 31
               ----          --------       -------   ------------  -----------

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          $    (1.19)     $ (1.12)     $ (1.01)     $ (1.13)
                            ==================================================
Loss per
common share-diluted        $    (1.19)     $ (1.12)     $ (1.01)     $ (1.13)
                            ==================================================

                                               Quarter Ended
               1999          March 31       June 30   September 30  December 31
               ----          --------       -------   ------------  -----------

Net Revenues                $      336      $   795      $   896      $ 3,082
                            ==================================================
Gross Profit                $       51      $   171      $   126      $   207
                            ==================================================
Net Loss                    $   (1,172)     $(2,984)     $(3,349)     $(5,689)
                            ==================================================
(Loss) Earnings per
common share-basic:
  Continued Operations      $    (0.27)     $ (0.61)     $ (0.71)     $ (1.20)
                            ==================================================
  Discontinued Operations         0.01
                            --------------------------------------------------
                            $    (0.26)     $ (0.61)     $ (0.71)     $ (1.20)
                            ==================================================
(Loss) Earnings per
common share-diluted:
  Continued Operations      $    (0.27)     $ (0.61)     $ (0.71)     $ (1.20)
                            ==================================================
  Discontinued Operations         0.01
                            --------------------------------------------------
                            $    (0.26)     $ (0.61)     $ (0.71)     $ (1.20)
                            ==================================================


                                      F-21
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------

12.      Subsequent Events

         In March 2002, the Company entered into a Standby Commitment Agreement
         with Soros (the "Soros Standby Agreement"). Under the Soros Standby
         Agreement, Soros has agreed to provide the Company with up to four
         million dollars of additional financing (the "Standby Commitment
         Amount") at any time prior to January 1, 2003; provided, however, that
         the Company may draw down on the Standby Commitment Amount only at such
         time that its total cash balances are less than $1,000,000. Such
         financing can be made in one or more tranches as determined by the
         members of the Board of Directors who are not Soros designees, and any
         and all financings made shall be on terms that are consistent with
         those in the market at the time the draw is made for similar
         investments by investors similar to Soros in companies similar to
         Bluefly. Subject to certain limitations the 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 27, 2002.
         In exchange for this commitment, but not as a substitute for additional
         consideration that Soros would receive if and when any financing is
         made pursuant to the Soros 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 March 2002, the Company amended its Financing Agreement with
         Rosenthal. Under the terms of this amendment (the "Rosenthal
         Amendment"), the Company extended the Rosenthal Financing Agreement
         until March 30, 2003, reduced the annual fee it paid Rosenthal for the
         Loan Facility, allowed for a decrease from $2.5 million to $1.5 million
         in the face amount of the Soros Guarantee to help collateralize the
         Loan Facility, and limited the maximum amount available under the Loan
         Facility to an amount equal to the Soros Guarantee plus the lowest of
         (x) $1 million, (y) 20% of the book value of its inventory, and (z) the
         full liquidation value of its inventory. In addition, pursuant to the
         Rosenthal Amendment, the Company adjusted the threshold amount that
         entitles Rosenthal to take control of certain of its cash accounts for
         a period of time to 90% of the maximum amount available under the Loan
         Facility instead of 90% of the Soros Guarantee as had been provided
         previously. As of March 22, 2002, the maximum amount available under
         the Loan Facility was approximately $2.5 million, of which $2.2 million
         was outstanding as of such date.

         As partial consideration for the Rosenthal 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 is being amortized over the
         life of the Loan Facility.

         In March 2002, in connection with the Rosenthal Amendment, the Company
         amended the Reimbursement Agreement pursuant to which Soros agreed to
         guarantee a portion of the Loan Facility to reduce the total amount of
         standby letters of credit that Soros is obligated to issue to
         collateralize the Loan Facility to $1.5 million from $4 million. The
         Company is obligated to reimburse Soros for any amounts Soros pays to
         Rosenthal pursuant to the Reimbursement Agreement. The Company's
         obligation to Rosenthal is collateralized by a lien on substantially
         all of its assets and the Company has granted Soros a subordinated lien
         on substantially all of its assets, including its cash balances, in
         order to collateralize its reimbursement obligations. In exchange for
         Soros' agreement to maintain the Soros Guarantee until August 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 will value the warrant using the Black-Scholes option
         pricing model and credit additional paid in capital.

                                      F-22


<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

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

       Name                  Age    Position
       ----                  ---    ---------
       E. Kenneth Seiff      37     Chairman of the Board of Directors,
                                    Chief Executive Officer,
                                    President and Treasurer

       Patrick C. Barry      39     Chief Financial Officer and Chief
                                    Operating Officer

       Jonathan B. Morris    34     Executive Vice President and Secretary

       Robert G. Stevens     48     Executive Vice President and Director

       Josephine Esquivel    47     Director

       Mark H. Goldstein     40     Director*

       Martin Miller         70     Director

       Neal Moszkowski       36     Director

       David Wassong         31     Director

       Lorne Weil            55     Director

* Resigned in February 2002 to focus energies on other activities.

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

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

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

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

Josephine Esquivel was appointed as a director of the Company in June of 2001.
Ms. Esquivel was a senior apparel, textiles,


                                       28
<PAGE>

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.

Mark H. Goldstein served as a director of the Company from December 1999 to
February 2002. He is currently an Entrepreneur in Residence at New Enterprise
Associates (NEA). From August 1999 until January 2000, Mr. Goldstein served as
an Internet Executive at Softbank Holdings ("Softbank"), a venture capital fund
that specializes in investments in Internet companies, and from December 1999
until June 2001, he served as the Chief Executive Officer of Bluelight.com, a
joint venture of K-Mart and Softbank. From September 1997 to July 1999, Mr.
Goldstein served as the Chief Executive Officer of Impulse Buy Network, a
developer of direct marketing applications for the Internet that was acquired by
Inktomi Corporation in April 1999. From September 1995 to March 1997, Mr.
Goldstein served as Executive Vice President of Firefly Networks, a software
development subsidiary of Microsoft Corporation. In February 2002, Mr. Goldstein
resigned from his position as a Director of the Company to focus his energies on
other activities.

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

Neal Moszkowski has served as a director of the Company since August 1999 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 was appointed as a director of the Company in 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. Mr. Wassong is also a director
of iExplore, inc., NUSIGN Industries, Meteor Mobile Communications, IntraLinks,
Inc., IRSA Telecomunicaciones, N.V. and Europlex Cinemas.

Lorne Weil was appointed as a director of the Company, effective as of February
1, 2001. Mr Weil has served as Chief Executive Officer of Autotote Corporation,
a supplier of computerized gaming systems and related equipment, since April
1992 and as President of that Company since August 1997. Mr. Weil was President
of Lorne Weil, Inc., a firm providing strategic planning and corporate
development services to high technology industries, from 1979 to November 1992.
Mr. Weil is currently a director of Autotote Corporation, Fruit of the Loom,
Inc., General Growth Properties, Inc. and XESystems Inc., a subsidiary of Xerox
Corporation.

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

The Board of Directors has also established an Option Plan/Compensation
Committee ("Option Plan/Compensation Committee") consisting of Lorne Weil, Neal
Moszkowski and Martin Miller. The Option Plan/Compensation Committee administers
the Company's 1997 Stock Option Plan (the "1997 Plan") and the Company's 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 the Company's bonus plans.

In October 2001, the Board of Directors also established a Technology Committee
(the "Technology Committee") to approve any


                                       29
<PAGE>

plan, agreement, instrument or document it deems necessary, appropriate or
desirable to reduce the Company's technology expenses while preserving the
reliability and performance of the Company's technology infrastructure. The
Technology Committee consists of Neal Moszkowski and David Wassong.

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Corporation's directors and executive officers and persons
who beneficially own more than ten percent of the Common Stock (collectively,
the "Reporting Persons") to file with the 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 the Corporation's knowledge, based solely on a
review of copies of such reports furnished to the Corporation, the Corporation
believes that during the 2001 fiscal year all Reporting Persons complied with
all applicable Section 16(a) reporting requirements.

Item 11.  Executive Compensation

Compensation of Directors

The Company's 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 behalf of the Company. 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.

As compensation for his service as Chairman of the Option Plan/Compensation
Committee, Mr. Weil was granted, upon the commencement of his service as a
director, an option to purchase 50,000 shares of Common Stock Under the 1997
Plan.

Compensation of Executive Officers

The following table sets forth information concerning the compensation paid by
the Company during the fiscal years ended December 31, 2001, 2000 and 1999 to
the Company's Chief Executive Officer and the three other executive officers of
the Company who received a total compensation from the Company in excess of
$100,000 in the year 2001 (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                     2001   $267,308      $ 50,000   $  1,000               --
Chief Executive Officer, President   2000   $250,367      $ 25,000   $  1,000          980,000(1)(3)
       and Treasurer                 1999   $206,519      $ 25,491   $  1,000          100,000(1)(4)

Patrick C. Barry                     2001   $249,039(5)   $     --   $    590               --
Chief Financial Officer and Chief    2000   $200,433(5)   $     --   $    590          489,912(2)(3)
          Operating Officer          1999   $150,958      $ 25,491   $    590           99,900(2)(4)

Jonathan B. Morris                   2001   $249,039(5)   $     --   $    330               --


                                       30
<PAGE>

Executive Vice President             2000   $200,433(5)   $     --   $    330          490,000(2)(3)
                                     1999   $150,958      $ 25,491   $    330          100,000(2)(4)

Robert G. Stevens                    2001   $249,039(5)   $     --   $     --               --
Executive Vice President             2000   $168,000      $     --   $     --          490,000(2)(3)
                                     1999   $     --      $     --   $     --          105,750(2)
</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)   Represents options granted in January 1999 for the 1998 fiscal year and
      options granted in December 1999 for the 1999 fiscal year.
(5)   Includes amounts paid pursuant to retroactive salary adjustments.

Employment Agreements

The Company has entered into employment agreements with each of the Named
Executive Officers. Each such employment agreement provides for a base salary,
subject to increase by the Board of Directors, and an annual bonus to be
determined by the Board of Directors. Mr. Seiff's employment agreement provides
that, at the discretion of the Board of Directors, all or part of such bonus may
be paid through the issuance to Mr. Seiff of capital stock of the Company,
provided that at the request of Mr. Seiff, a portion of such bonus sufficient to
pay any income taxes arising from such bonus will be paid in cash rather than in
capital stock of the Company. Mr. Seiff's base salary under his employment
agreement is $275,000, and the base salaries of Messrs. Barry, Morris, and
Stevens under their respective employment agreements are currently $225,000. Mr.
Seiff's employment agreement expires in January 2003, Mr. Barry's employment
agreement expires in July 2002, Mr. Morris' employment agreement expires in July
2002, and Mr. Stevens' employment agreement expires in January 2003. Each such
employment agreement obligates the Company to make certain severance payments in
connection with a termination of such Named Executive Officer's employment,
other than for cause, not exceeding five months' salary, except as set forth
below. In the case of Mr. Seiff, the Company would be obligated to pay Mr. Seiff
an amount equal to the total amount due to him during the remaining term of the
contract. Mr. Seiff's employment agreement also provides for the immediate
vesting of any stock options held by him in the event that certain events
classified as a "Change In Control" occur.

Options Grants in Last Fiscal Year

During the fiscal year ended December 31, 2001 there were no grants of stock
options under the Plans to the Named Executives Officers.

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, 2001. None of the Named Executive Officers exercised any
 outstanding options during the fiscal year ended December 31, 2001.

<TABLE>
<CAPTION>
                                            Securities Underlying Unexercised          Value of Unexercised In-the-Money
                                              Options at December 31, 2001 (#)          Options at December 31, 2001 ($)
                                              ------------------------------            -------------------------------
           Name                             Exercisable         Unexercisable           Exercisable       Unexercisable
                                            -----------         -------------           -----------       -------------
<S>                                           <C>                  <C>                    <C>                <C>
           E. Kenneth Seiff                   510,924              594,076                $    0             $    0
           Patrick C. Barry                   303,424              341,488                $    0             $    0
           Jonathan B. Morris                 293,966              351,034                $    0             $    0
           Robert G. Stevens                  273,050              330,200                $    0             $    0
</TABLE>


                                       31
<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 15, 2002,
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                                                       1,155,354(3)(4)       11.72%
     Josephine Esquivel                                                           -                  *
     Mark H. Goldstein                                                         11,250(5)             *
     Martin Miller                                                             23,750(6)(7)          *
     Neal Moszkowski (8)                                                       11,250(9)             *
     David Wassong (8)                                                          3,750(10)            *
     Lorne Weil                                                                50,000(11)            *
     Robert G. Stevens                                                        379,790(12)          3.98%
     Patrick C. Barry                                                         413,526(13)          4.30%
     Jonathan B. Morris                                                       448,608(14)          4.66%
     Quantum Industrial Partners LDC                                       17,012,793(15)(18)     77.05%
     George Soros                                                          17,569,542(16)(18)     78.08%
     All directors and executive officers as a group (10 persons)           2,497,278(17)         22.43%
</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 650,197 shares of Common Stock issuable upon exercise of options
      granted under the Plan.
(5)   Includes 11,250 shares of Common Stock issuable upon exercise of options
      granted under the Plan. In February 2002, Mr. Goldstein resigned from his
      position as a Director of the Company to focus his energies on other
      activities.
(6)   Includes 20,750 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, 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 and QIP and none of such shares are included in the
      table above as being beneficially owned by them.
(9)   Includes 11,250 shares of Common Stock issuable upon exercise of options
      granted under the Plan.
(10)  Includes 3,750 shares of Common Stock issuable upon exercise of options
      granted under the Plan.
(11)  Includes 50,000 shares of Common Stock issuable upon exercise of options
      granted under the Plan.


                                       32
<PAGE>

(12)  Includes 346,851 shares of Common Stock issuable upon exercise of options
      granted under the Plan.
(13)  Includes 408,526 shares of Common Stock issuable upon exercise of options
      granted under the Plan.
(14)  Includes 425,745 shares of Common Stock issuable upon exercise of options
      granted under the Plan.
(15)  Represents: 3,806,923 shares of Common Stock issuable upon conversion of
      445,410 shares Series A Preferred Stock; 8,607,843 shares of Common Stock
      issuable upon conversions of 8,607,843 shares of Series B Preferred Stock;
      4,138,084 shares of Common Stock; 459,943 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"). Excludes
      warrants issued pursuant to the Soros Standby Agreement, and the amended
      Reimbursement Agreement in March 2002. 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, Inc., a Delaware corporation ("QIH Management"). George Soros,
      "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 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)  Represents 281,571 shares of Common Stock issuable on conversion of
      281,571 shares of Series B Preferred Stock; 124,700 shares of Common Stock
      issuable on conversion of 14,590 shares of Series A Preferred Stock;
      135,420 shares of Common Stock; 15,057 shares of Common Stock issuable
      upon exercise of warrants; (the "SFMDI Shares") held in the name of SFM
      Domestic Investments LLC, a Delaware limited liability company ("SFMDI"),
      and the QIP Shares referenced in Note 15 above. Excludes warrants issued
      pursuant to the Soros Standby Agreement, and the amended Reimbursement
      Agreement in March 2002. As sole managing member of SFMDI, Mr. Soros may
      also be deemed the beneficial owner of the SFMDI Shares. The principal
      address of SFMDI is at 888 Seventh Avenue, 33rd Floor, New York, New York
      10106. The foregoing information was derived, in part, from certain
      publicly available reports, statements and schedules filed with the
      Commission.
(17)  Includes 1,928,319 shares of Common Stock issuable upon exercise of
      options granted under the Plan.
(18)  See, "Risk Factors - Soros Owns a Majority of Our Stock" and "Change of
      Control Covenant and Liquidation Preference of Series A Preferred Stock
      And Series B Preferred 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
15, 2002, 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                                                        -                   -
     Martin Miller                                                            -                   -
     Neal Moszkowski (3)                                                      -                   -
     David Wassong (3)                                                        -                   -
     Lorne Weil                                                               -                   -
     Robert G. Stevens                                                        -                   -
</TABLE>


                                       33
<PAGE>

<TABLE>
<CAPTION>
                                                                        Number of Shares
     Name (1)                                                          Beneficially Owned    Percentage (2)
     --------                                                          ------------------    --------------
<S>                                                                      <C>                   <C>
     Patrick C. Barry                                                         -                   -
     Jonathan B. Morris                                                       -                   -
     Quantum Industrial Partners LDC                                      445,410(4)(6)          89.1%
     George Soros                                                         460,000(5)(6)          92.0%
     All directors and executive officers as a group (9 persons)              -                   -
</TABLE>

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

(1)   Except as otherwise indicated, the address of each of the individuals
      listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
      10018.
(2)   Beneficial ownership is determined in accordance with the rules of the
      Commission and generally includes voting or investment power with respect
      to securities. Shares of Common Stock issuable upon the exercise of
      options or warrants currently exercisable or exercisable within 60 days
      are deemed outstanding for computing the percentage ownership of the
      person holding such options or warrants but are not deemed outstanding for
      computing the percentage ownership of any other person.
(3)   Mr. Moszkowski's address is c/o Soros Private Equity Partners LLC, 888
      Seventh Avenue, 33rd Floor, New York, New York 10106. 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
      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 - "Soros Owns a Majority of Our Stock" and "Change of
      Control Covenant and Liquidation Preference of Series A Preferred Stock
      And Series B 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
15, 2002, 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                                                          -                    -
</TABLE>


                                       34
<PAGE>

<TABLE>
<CAPTION>
                                                                           Number of Shares
     Name (1)                                                             Beneficially Owned    Percentage (2)
     --------                                                             ------------------    --------------
<S>                                                                       <C>                   <C>
     Martin Miller                                                              -                    -
     Neal Moszkowski (3)                                                        -                    -
     David Wassong (3)                                                          -                    -
     Lorne Weil                                                                 -                    -
     Robert G. Stevens                                                          -                    -
     Patrick C. Barry                                                           -                    -
     Jonathan B. Morris                                                         -                    -
     Quantum Industrial Partners LDC                                       8,607,843(4)(6)         96.60%
     George Soros                                                          8,889,414(5)(6)         99.76%
     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 such options or warrants but are not deemed outstanding for
      computing the percentage ownership of any other person.
(3)   Mr. Moszkowski's address is c/o Soros Private Equity Partners LLC, 888
      Seventh Avenue, 33rd Floor, New York, New York 10106. 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 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 - "Soros Owns a Majority of Our Stock" and "Change of
      Control Covenant and Liquidation Preference of Series A Preferred Stock
      And Series B Preferred Stock."

Item 13.  Certain Relationships and Related Transactions

In March 2000, we obtained a commitment from Soros to provide, at our option, up
to $15 million of financing at any time during the year 2000 on terms reflecting
market rates for such financings at the time such financing was provided (the
"Soros Commitment"). As of December 31, 2000, Soros had provided us with the
aggregate principal amount of $15 million in convertible debt financing pursuant
to the Soros Commitment, in the form of notes that bore interest at the rate of
8% per


                                       35
<PAGE>

annum and were due in May 2001 (the "Soros Commitment Notes"). In connection
with the Soros Commitment and the Soros Commitment Notes, we granted Soros
warrants to purchase up to 375,000 shares of Common Stock at an exercise price
of $2.29 per share, exercisable at any time during the five years following
issuance (the "Soros Commitment Warrants"). The Soros Commitment Warrants have
been valued at $467,000, using the Black-Scholes option pricing model and,
accordingly, we recorded a credit to additional paid in capital and a debt
discount, that was amortized over the life of the debt.

In November 2000, we entered into additional agreements with Soros (the
"Additional Soros Financing"), pursuant to which Soros agreed to invest up to an
additional $15 million in us, subject to certain conditions. Under the terms of
the Additional Financing, (a) in November 2000, Soros invested an additional $5
million in the form of promissory notes (the "Additional Soros Notes"), (b) in
February 2001, following the receipt of shareholder approval of certain aspects
of the transaction, the Soros Commitment Notes and the Additional Soros Notes
converted into Series B Preferred Stock at the rate of $2.34 per share and the
conversion price of the Series A Preferred Stock was reduced to $2.34 per share,
(c) we offered to our public shareholders the right to purchase up to an
aggregate of $20 million of Common Stock at a price of $2.34 per share (the
"Rights Offering") and (d) Soros agreed to purchase a total dollar amount of
shares of Common Stock equal to the difference between $20 million and the
aggregate total dollar amount of shares of Common Stock purchased by public
shareholders in the Rights Offering, subject to a maximum $10 million commitment
on the part of Soros (the "Standby Commitment"). The Rights Offering expired in
March 2001. Public shareholders subscribed for 6,921 shares of Common Stock in
the Rights Offering for aggregate proceeds of $16,000, and, in accordance with
the Standby Commitment, Soros purchased an aggregate of 4,273,504 shares of
Common Stock for an aggregate of $10 million. See, "Risk Factors - Certain
Events Could Result In Significant Dilution Of Your Ownership Of Our Common
Stock" and "Soros Owns A Majority Of Our Stock."

In connection with the Loan Facility, on March 30, 2001, we entered into a
Reimbursement Agreement with Soros pursuant to which Soros agreed to issue a
standby letter of credit at closing in the amount of $2.5 million in favor of
Rosenthal to guarantee a portion of the Company's obligations under the
Rosenthal Financing Agreement. 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. In addition, during the term of the
Rosenthal Financing Agreement, at our request, Soros would issue another standby
letter of credit for up to an additional $1.5 million. In consideration for the
Soros Guarantee, we issued to Soros a warrant to purchase 100,000 shares of our
Common Stock at an exercise price equal to $0.88, exercisable at any time prior
to September 15, 2011.

On March 22, 2002, we amended the Reimbursement Agreement with Soros by reducing
the total amount of standby letters of credit that Soros is obligated to issue
to secure the Loan Facility to $1.5 million from $4 million. In exchange for
Soros' agreement to maintain the Soros Guarantee until August 15, 2003, on March
22, 2002, we issued to Soros a warrant to purchase 60,000 shares of our Common
Stock at an exercise price of $1.66 per share at any time until March 30, 2007.
In connection with the issuance of this warrant, Soros agreed that the issuance
of this warrant shall not trigger the anti-dilution provision of Section 5.8.6
of our Certificate of Incorporation. See, "Recent Developments."

Subject to certain conditions, if we default on any of our obligations under the
Rosenthal Financing Agreement, 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 such 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 Rosenthal Financing Agreement or at any time that the total
amount outstanding under the Loan Facility exceeds 90% of the maximum amount
available under the Loan Facility, 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 10 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 10 days preceding 10 days after
the date of issuance. See, "Risk Factors - We Have Granted A Lien On
Substantially All Of Our Assets," and "Certain Events Could Result In
Significant Dilution Of Your Ownership Of Our Common Stock" and "Soros Owns A
Majority Of Our Stock."

In December 2001, Soros loaned us an aggregate of $182,000 in order to pay
certain legal expenses of its counsel that we were required to pay pursuant to
our various investment agreements with Soros. The loan, which is evidenced by
promissory notes,


                                       36
<PAGE>

bears interest at the rate of 9% per year and is payable in December 2004.

On March 27, 2002, we entered into the Soros Standby Commitment Agreement with
Soros. Under the Soros Standby Agreement, Soros has agreed to provide us with up
to four million dollars ($4,000,000) of additional financing on a standby basis
at any time prior to January 1, 2003; provided, however, that we may draw down
on the Standby Commitment Amount only at such time that our total cash balances
are less than $1,000,000. 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 financings made shall be on terms that are consistent with those
in the market at the time the draw is made for similar investments by investors
similar to Soros in companies similar to us. Subject to certain limitations the
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 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 is made pursuant to the Soros
Standby Agreement, we issued to Soros a warrant to purchase 100,000 shares of
our Common Stock at an exercise price of $1.68 per share at any time until March
27, 2002. In connection with the issuance of this warrant, Soros agreed that the
issuance of this warrant shall not trigger the anti-dilution provision of
Section 5.8.6 of our Certificate of Incorporation. See, "Risk Factors - Certain
Events Could Result in Significant Dilution of Your Ownership of our Common
Stock."

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.  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(h)            Certificate of Incorporation of the Company.

3.2(h)            By-Laws of the Company.

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

10.2(d)           Amended and Restated 1997 Stock Option Plan.

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

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

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

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

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

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

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

10.10(d)          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.

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

10.12(e)          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.

10.13(e)          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.


                                       37
<PAGE>

10.14(f)          Bluefly, Inc. 2000 Stock Option Plan.

+10.15(f)         Service Agreement by and between the Company and Distribution
                  Associates, Inc., dated July 27, 2000.

10.16(f)          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.

10.17(f)          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.

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

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

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

10.21(h)          Warrant, dated March 30, 2001, issued to Rosenthal &
                  Rosenthal, Inc.

10.22(h)          Warrant, dated March 30, 2001, issued to Quantum Industrial
                  Partners LDC.

10.23(h)          Warrant, dated March 30, 2001, issued to SFM Domestic
                  Investments LLC.

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

10.25             Demand Promissory Note, dated as of December 15, 2001, issued
                  to Quantum Industrial Partners LDC.

10.26             Demand Promissory Note, dated as of December 15, 2001, issued
                  to SFM Domestic Investments LLC.

10.27             EBusiness Hosting Agreement, dated January 9, 2002 between the
                  Company and International Business Machines Corporation.

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

+10.29            Software License and Services Agreement, dated March 12, 2002,
                  by and among the Company and Blue Martini Software, Inc.

10.30             Amendment No. 1 to Financing Agreement, dated April 30, 2001,
                  between the Company and Rosenthal & Rosenthal, Inc.

10.31             Amendment No. 2 to Financing Agreement, dated February 14,
                  2002 between the Company and Rosenthal & Rosenthal, Inc.

10.32             Amendment No. 3 to Financing Agreement, dated March 22, 2002,
                  between the Company and Rosenthal & Rosenthal, Inc.

10.33             Amendment No. 1 to Reimbursment Agreement, dated March 22,
                  2002, between the Company and Quantum Industrial Partners LDC.

10.34             Amendment to warrant dated March 22, 2002, issued to Rosenthal
                  & Rosenthal, Inc.

10.35             Warrant No. 1 dated March 27, 2002, issued to Quantum
                  Industrial Partners LDC.

10.36             Warrant No. 2 dated March 27, 2002, issued to SFM Domestic
                  Investments LLC.

10.37             Warrant No. 3 dated March 30, 2002, issued to Quantum
                  Industrial Partners LDC.

10.38             Warrant No. 4 dated March 30, 2002, issued to SFM Domestic
                  Investments LLC.

21.1              Subsidiaries of the Registrant.

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


                                       38
<PAGE>

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

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

(d)     Reports on Form 8-K.

None.


                                       39
<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 27, 2002

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

<TABLE>
<CAPTION>
<S>     <C>

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

/s/ E. Kenneth Seiff
----------------------------------
E. Kenneth Seiff                                Chairman of the Board of Directors, Chief          March 27, 2002
                                                Executive Officer, President,
                                                and Treasurer (Principal Executive Officer)

/s/ Patrick C. Barry
----------------------------------
Patrick C. Barry                                Chief Financial Officer and Chief Operating        March 27, 2002
                                                Officer (Principal Accounting Officer)

/s/ Josephine R. Esquivel
----------------------------------
Josephine R. Esquivel                           Director                                           March 27, 2002

/s/ Martin Miller
----------------------------------
Martin Miller                                   Director                                           March 27 ,2002

/s/ Robert G. Stevens
----------------------------------
Robert G. Stevens                               Director                                           March 27, 2002

/s/ Neal Moszkowski
----------------------------------
Neal Moszkowski                                 Director                                           March 27, 2002

/s/ David Wassong
----------------------------------
David Wassong                                   Director                                           March 27, 2002

/s/ Lorne Weil
----------------------------------
Lorne Weil                                      Director                                           March 27, 2002
</TABLE>


                                       40

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.25
<SEQUENCE>3
<FILENAME>k20188ex10_25.txt
<DESCRIPTION>DEMAND PROMISSORY NOTE - QUANTUM INDUSTRIAL
<TEXT>
                                                                   Exhibit 10.25


         THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT
BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.


                                  BLUEFLY, INC.

                             DEMAND PROMISSORY NOTE


$176,230.60
New York, New York                                            December 15, 2001

         FOR VALUE RECEIVED, the undersigned, BLUEFLY, INC., a Delaware
corporation (the "Payor" or the "Company"), promises to pay to the order of
Quantum Industrial Partners LDC or its registered assign (the "Payee"), upon
demand the principal sum of one-hundred seventy-six thousand, two-hundred thirty
dollars and sixty cents ($176,230.60) and interest on the outstanding principal
balance as set forth herein.

         1. Interest Rate; Payment.

            (a) The outstanding principal balance of this Demand Promissory Note
(this "Note") shall bear interest at an annual rate equal to 9% per annum, with
interest accruing, from and including the date hereof, on a cumulative,
compounding basis. Interest shall be computed on the basis of a 365- or 366-day
year, as the case may be, and the actual number of days elapsed, and shall be
payable only upon repayment of the principal on any Repayment Date (as defined
below) in cash.

            (b) The outstanding balance of any amount owed under this Note which
is not paid when due shall bear interest at the rate of 2% per annum (the
"Default Interest") above the rate that would otherwise be in effect under this
Note with the Default Interest accruing, from and including such due date, on a
cumulative, compounding basis.

            (c) The outstanding principal and all accrued and unpaid interest
shall be paid in full no later than December 15, 2004 (the "Maturity Date"),
unless repaid earlier pursuant to the provisions of Section 2 (the date of any
payment pursuant to Section 2 and the Maturity Date, collectively referred to as
a "Repayment Date"). On a Repayment Date, the Payor shall pay the applicable
amount of principal and interest in lawful money of the United States of America
by wire or bank transfer of immediately available funds to an account designated
by the Payee in writing from time to time.

         2. Prepayment.
<PAGE>
                                                                               2


            (a) Mandatory Prepayment.

               (i) Upon the occurrence of an Event of Default (under Section
3(d) or (e)), the outstanding principal of and all accrued interest on this Note
shall be accelerated and shall automatically become immediately due and payable,
without presentment, demand, protest or notice of any kind, all of which are
expressly waived by the Payor, notwithstanding anything contained herein to the
contrary.

               (ii) The Payee shall, at its sole option, have the right to
require the Payor to pay the outstanding principal of and all accrued interest
on this Note upon the occurrence of any of the following events: (1) an Event of
Default under Section 3(a), (b), (c), (f), (g) or (h), (2) the Company entering
into an agreement to effectuate any sale or other disposition of all or
substantially all of its assets, in one transaction or in a series of
transactions, (3) the Company entering into an agreement to effectuate any
consolidation or merger into another entity, or (4) any sale of a majority of
the outstanding equity of the Company (or any other event that constitutes a
Change of Control (as defined below) of the Company), in one transaction or in a
series of transactions. Immediately upon the occurrence of either of the events
set forth in clauses (1), (2) or (3) above, or immediately upon obtaining
knowledge that any person has entered into an agreement to effectuate, the event
set forth in clause (4) above, the Company shall give written notice of such
event to the Payee. Change of Control means any Person or "group" (within the
meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") other than Payee and its Affiliates or any group that
includes Payee and/or its Affiliates, becoming the beneficial owner, directly or
indirectly, of outstanding shares of stock of the Company entitling such Person
or Persons to exercise 50% or more of the total votes entitled to be cast at a
regular or special meeting, or by action by written consent, of the stockholders
of the Company in the election of directors (the term "beneficial owner" shall
be determined in accordance with Rule 13d-3 of the Exchange Act).

               (iii) Any mandatory prepayment under this Section 2(a) shall
include payment of reasonable costs and expenses, if any, associated with such
prepayment.

            (b) Optional Prepayment. The Company may, at its option, without
premium or penalty, repay the unpaid principal amount of the Note, at any time
in whole or from time to time in part, together with interest accrued thereon to
the date of prepayment. Any such prepayment shall be applied first to the
payment of accrued interest and then to repayment of principal. Upon any partial
prepayment of the unpaid principal amount of this Note, the Holder shall make
notation on this Note of the portion of the principal so prepaid.

         3. Events of Default. An "Event of Default" shall occur if:

            (a) the Payor shall default in the payment of the principal of or
interest payable on this Note, when and as the same shall become due and
payable, whether at maturity or at a date fixed for prepayment or by
acceleration or otherwise and

<PAGE>
                                                                               3


such default with respect to the payment of interest shall continue unremedied
for two days;

            (b) the Payor shall fail to observe or perform any covenant or
agreement contained in this Note, and such failure shall continue for five
business days after Payor receives notice of such failure;

            (c) any representation, warranty, certification or statement made by
or on behalf of the Payor in this Note or in any certificate, writing or other
document delivered pursuant hereto shall prove to have been incorrect in any
material respect when made;

            (d) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (A) relief
in respect of Payor or of a substantial part of Payor's respective property or
assets, under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law (any such law, a "Bankruptcy Law"), (B) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for a substantial part of the property or assets of any Payor,
(C) the winding up or liquidation of any Payor; and such proceeding or petition
shall continue undismissed for 60 days, or an order or decree approving or
ordering any of the foregoing shall be entered;

            (e) the Payor shall (A) voluntarily commence any proceeding or file
any petition seeking relief under a Bankruptcy Law, (B) consent to the
institution of or the entry of an order for relief against it, or fail to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in clause (d), (C) apply for or consent to the appointment of
a receiver, trustee, custodian, sequestrator, conservator or similar official
for a substantial part of the property or assets of the Payor, (D) file an
answer admitting the material allegations of a petition filed against it in any
such proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing;

            (f) one or more judgments or orders for the payment of money in
excess of $250,000 in the aggregate shall be rendered against the Payor and such
judgment(s) or order(s) shall continue unsatisfied and unstayed for a period of
30 days;

            (g) the Payor shall default in the payment of any principal,
interest or premium, or any observance or performance of any covenants or
agreements, with respect to indebtedness (excluding trade payables and other
indebtedness entered into in the ordinary course of business) in excess of
$50,000 in the aggregate for borrowed money or any obligation which is the
substantive equivalent thereof and such default shall continue for more than the
period of grace, if any, or of any such Indebtedness or obligation shall be
declared due and payable prior to the stated maturity thereof;

<PAGE>
                                                                               4


            (h) any material provisions of this Note shall terminate or become
void or unenforceable or the Payor shall so assert in writing.

         4. Subordination.

            (a) Agreement of Subordination. The Payor covenants and agrees, and
the Payee likewise covenants and agrees, that (i) to the extent and in the
manner hereinafter set forth in this Section 4, the obligations of the Company
to pay the principal of and accrued interest on this Note (the "Obligations")
are hereby expressly made subordinate and junior in right of payment to the
prior payment in full of all amounts owing to, under the Financing Agreement,
dated March 30, 2001, as amended (the "Financing Agreement"), by and between the
Payor and Rosenthal & Rosenthal, Inc., a New York Corporation, whether
outstanding at the date hereof or hereinafter incurred (such Indebtedness being
hereinafter referred to as the "Senior Indebtedness"); (ii) the subordination is
solely for the benefit of any holders of Senior Indebtedness; and (iii) each
holder of Senior Indebtedness whether now outstanding or hereinafter created,
incurred, assumed or guaranteed shall be deemed to have extended or acquired
such Senior Indebtedness in reliance upon the covenants and provisions contained
herein.

            (b) Subordination Upon Certain Events. Upon the occurrence of any
Event of Default under Sections 3(d) or (e) of this Note:

               (i) Upon any payment or distribution of assets of the Payor to
creditors of the Company, holders of Senior Indebtedness shall be entitled to
receive indefeasible payment in full of all obligations with respect to the
Senior Indebtedness before the holder of this Note shall be entitled to receive
any payment in respect of the Obligations.

               (ii) Until all Senior Indebtedness is paid in full, any
distribution to which the Payee would be entitled but for this Section 4 shall
be made to holders of Senior Indebtedness, as their interests may appear, except
that the Payee may receive securities that are subordinate to the Senior
Indebtedness to at least the same extent as this Note.

               (iii) For purposes of this Section 4, a distribution may consist
of cash, securities or other property, by set-off or otherwise.

               (iv) Notwithstanding the foregoing provisions of this Section
4(b), if payment or delivery by the Company of cash, securities or other
property to the Payee is authorized by an order or decree giving effect, and
stating in such order or decree that effect is given, to the subordination of
this Note to the Senior Indebtedness, and made by a court of competent
jurisdiction in a proceeding under any applicable bankruptcy or reorganization
law, payment or delivery by the Company of such cash, securities or other
property shall be made to the Payee in accordance with such order or decree.

            (c) Limitation on Payment.
<PAGE>
                                                                               5


               (i) Upon receipt by the Company and the Payee of a Blockage
Notice (as defined below), then unless and until (A) all defaults in the payment
of any Senior Indebtedness (the "Senior Defaults") that gave rise to the
Blockage Notice shall have been remedied or effectively waived or shall have
ceased to exist or (B) the Senior Indebtedness in respect of which such Senior
Defaults shall have occurred shall have been paid in full or (C) a notice of
acceleration of the maturity of such Senior Indebtedness shall have been
transmitted to the Company in respect of such Senior Defaults, no direct or
indirect payment (in cash, property, securities or by set-off or otherwise) of
or on account of the principal of or interest on this Note or in respect of any
redemption, retirement, purchase or other acquisition of this Note shall be made
during any period prior to the expiration of the Blockage Period (as defined
below).

               (ii) For purposes of this Section 4, a "Blockage Notice" is a
notice of a Senior Default that in fact has occurred and is continuing, given to
the Company and the Payee by any holders of Senior Indebtedness then outstanding
(or their authorized agent); provided, however, that no such notice shall be
effective as a Blockage Notice if an effective Blockage Notice shall have been
given within 360 days prior thereto.

               (iii) For purposes of this Section 4, a "Blockage Period" with
respect to a Blockage Notice is the period commencing upon the Company's receipt
of such Blockage Notice and having the duration set forth in the particular
agreement establishing the Senior Indebtedness to which the Company is a party;
provided, that, such Blockage Period is no more than 90 days.

         Notwithstanding the foregoing, the Blockage Period shall be
inapplicable or cease to be effective if an Event of Default pursuant to Section
3(d) or (e) shall have occurred. In addition, any Blockage Period shall cease to
be effective if at any time during such period (i) substantial assets of the
Company are sold or otherwise disposed of outside of the ordinary course of
business for less than fair value or (ii) payment or any distribution of any
character, whether in cash, securities or other property of the Company shall be
made to or received by any creditor on any indebtedness which is on the same
level of priority with or junior and subordinate in right of payment to this
Note.

         Upon the expiration or termination of any Blockage Period, the Payee
shall be entitled to exercise any of its rights with respect to this Note other
than any right to accelerate the maturity date of this Note based upon the
occurrence of any Event of Default in respect thereto which has been cured or
otherwise remedied during the Blockage Period.

            (d) Payments and Distributions Received. If the Payee shall have
received any payment from or distribution of assets of the Company in respect of
Obligations in contravention of the terms of this Section 4 before all Senior
Indebtedness is paid in full, then and in such event such payment or
distribution shall be received and held in trust for and shall be paid over or
delivered to the holders of Senior Indebtedness to the extent necessary to pay
all such Senior Indebtedness in full.

<PAGE>
                                                                               6


            (e) Proofs of Claim. If, while any Senior Indebtedness is
outstanding, any Event of Default under Section 3(d) or (e) of this Note occurs,
the Payee shall duly and promptly take such action as any holder of Senior
Indebtedness may reasonably request to collect any payment with respect to this
Note for the account of the holders of the Senior Indebtedness and to file
appropriate claims or proofs of claim in respect of this Note. Upon the failure
of the Payee to take any such action, each holder of Senior Indebtedness is
hereby irrevocably authorized and empowered (in its own name or otherwise), but
shall have no obligation, to demand, sue for, collect and receive every payment
or distribution referred to in respect of this Note and to file claims and
proofs of claim and take such other action as it may deem necessary or advisable
for the exercise or enforcement of any of the rights or interests of the Holder
with respect to this Note.

            (f) Subrogation. After all amounts payable under or in respect of
Senior Indebtedness are paid in full in cash, the Payee shall be subrogated to
the rights of holders of Senior Indebtedness to receive payments or
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the Payee have been applied to the payment of Senior
Indebtedness. A distribution made under this Section 4 to a holder of Senior
Indebtedness which otherwise would have been made to the Payee is not, as
between the Company and the Payee, a payment by the Company on Senior
Indebtedness.

            (g) Relative Rights. This Section 4 defines the relative rights of
the Payee and the holders of Senior Indebtedness. Nothing in this Section 4
shall (i) impair, as between the Company and the Payee, the obligation of the
Company, which is absolute and unconditional, to pay principal of and interest
(including Default Interest) on this Note in accordance with its terms; (ii)
effect the relative rights of the Payee and creditors of the Company other than
holders of Senior Indebtedness; or (iii) prevent the Payee from exercising its
available remedies upon an Event of Default, subject to the rights, if any,
under this Section 4 of holders of Senior Indebtedness.

            (h) Subordination May Not Be Impaired by the Company. No right of
any holder of any Senior Indebtedness to enforce the subordination of the
Obligations evidenced by this Note shall be impaired by any failure by the
Company or such holder of Senior Indebtedness to act or by the failure of the
Company or such holder to comply with this Note. The provisions of this Section
4 shall continue to be effective or be reinstated, as the case may be, if at any
time any payment of any of the Senior Indebtedness is rescinded or must
otherwise be returned by any holder of Senior Indebtedness as a result of the
insolvency, bankruptcy or reorganization of the Company or otherwise, all as
though such payment had not been made.

            (i) Payments. A payment with respect to principal of or interest on
the Obligations shall include, without limitation, payment of principal of and
interest on this Note, and any payment on account of mandatory prepayment
provisions.

            (j) Section Not to Prevent Events of Default. The failure to make a
payment on account of principal of or interest on or other amounts constituting
the Obligations by reason of any provision of this Section 4 shall not be
construed as preventing the occurrence of an Event of Default under Section 3.

<PAGE>
                                                                               7


         5. Suits for Enforcement.

            (a) Upon the occurrence of any one or more Events of Default, the
holder of this Note may proceed to protect and enforce its rights by suit in
equity, action at law or by other appropriate proceeding in aid of the exercise
of any power granted in this Note, or may proceed to enforce the payment of this
Note, or to enforce any other legal or equitable right it may have as a holder
of this Note.

            (b) The holder of this Note may direct the time, method and place of
conducting any proceeding for any remedy available to itself.

            (c) In case of any Event of Default, the Payor will pay to the
holder of this Note such amounts as shall be sufficient to cover the reasonable
costs and expenses of such holder due to such Event of Default, including
without limitation, costs of collection and reasonable fees, disbursements and
other charges of counsel incurred in connection with any action in which the
holder prevails.

         6. Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopier, courier
service, overnight mail or personal delivery:

              (i)     if to Quantum Industrial Partners LDC:

                      Kaya Flamboyan 9,
                      Villemstad
                      Curacao
                      Netherlands-Antilles

                      with a copy to:

                      Soros Fund Management LLC
                      888 Seventh Avenue
                      New York, NY 10106
                      Telecopy:  (212) 664-0544
                      Attn: Richard Holahan, Esq.

                      and a copy to:

                      Paul, Weiss, Rifkind, Wharton & Garrison
                      1285 Avenue of the Americas
                      New York, New York 10019-6064
                      Telecopy:    (212) 757-3990
                      Attention:   Paul D. Ginsberg, Esq

              (ii)    if to the Company:

                      Bluefly, Inc.

<PAGE>
                                                                               8


                      42 West 39th Street, 9th Floor
                      New York, New York 10018
                      Telecopy:    (212) 354-3400
                      Attention:   Jon Morris

                      with a copy to:

                      Swidler Berlin Shereff Friedman, LLP
                      405 Lexington Avenue
                      New York, New York 10174
                      Telecopy:    (212) 891-9598
                      Attention:   Richard A. Goldberg, Esq.

         All such notices and communications shall be deemed to have been duly
given when delivered by hand, if personally delivered; when delivered by courier
or overnight mail, if delivered by commercial courier service or overnight mail;
five (5) business days after being deposited in the mail, postage prepaid, if
mailed; and when receipt is mechanically acknowledged, if telecopied.

         7. Successors and Assigns. This Note shall inure to the benefit of and
be binding upon the successors and permitted assigns of the parties hereto. The
Payor may not assign any of its rights under this Note without the prior written
consent of Payee. The Payee may assign all or a portion of their rights or
obligations under this Note to an Affiliate without the prior written consent of
the Payor.

         8. Amendment and Waiver.

            (a) No failure or delay on the part of the Payor or Payee in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Payor or
Payee at law, in equity or otherwise.

            (b) Any amendment, supplement or modification of or to any provision
of this Note, any waiver of any provision of this Note and any consent to any
departure by the Payor from the terms of any provision of this Note, shall be
effective (i) only if it is made or given in writing and signed by the Payor and
the Payee and (ii) only in the specific instance and for the specific purpose
for which made or given.

         9. Headings. The headings in this Note are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.

         10. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICTS OF LAW PRINCIPLES THEREOF.

<PAGE>
                                                                               9


         11. Costs and Expenses. The Payor hereby agrees to pay on demand all
reasonable out-of-pocket costs, fees, expenses, disbursements and other charges
(including but not limited to the fees, expenses, disbursements and other
charges of Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to the
Payee) of the Payee arising in connection with any consent or waiver granted or
requested hereunder or in connection herewith, and any renegotiation, amendment,
work-out or settlement of this Note or the indebtedness arising hereunder.

         12. Waiver of Jury Trial and Setoff. The Payor hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Note or any instrument or document delivered pursuant to
this Note, or the validity, protection, interpretation, collection or
enforcement thereof, or any other claim or dispute howsoever arising, between
any Payor and the Payee; and the Payor hereby waives the right to interpose any
setoff or counterclaim or cross-claim in connection with any such litigation,
irrespective of the nature of such setoff, counterclaim or cross-claim except to
the extent that the failure so to assert any such setoff, counterclaim or
cross-claim would permanently preclude the prosecution of the same.

         13. Consent to Jurisdiction. The Payor hereby irrevocably consents to
the nonexclusive jurisdiction of the courts of the State of New York and of any
federal court located in such State in connection with any action or proceeding
arising out of or relating to this Note or any document or instrument delivered
pursuant to this Agreement.

         14. Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provisions hereof shall not be in any way impaired,
unless the provisions held invalid, illegal or unenforceable shall substantially
impair the benefits of the remaining provisions hereof.

         15. Entire Agreement. This Note is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter hereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein. This Note
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.

         16. Further Assurances. The Payor shall execute such documents and
perform such further acts (including, without limitation, obtaining any
consents, exemptions, authorizations or other actions by, or giving any notices
to, or making any filings with, any governmental authority or any other Person)
as may be reasonably required or desirable to carry out or to perform the
provisions of this Note.

                                           BLUEFLY, INC.

                                           By: /s/ E. Kenneth Seiff
                                               ---------------------------------
                                           Name: E. Kenneth Seiff
                                           Title:  Chief Executive Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.26
<SEQUENCE>4
<FILENAME>k20188ex10_26.txt
<DESCRIPTION>DEMAND PROMISSORY NOTE - SFM DOMESTIC PART. LLC
<TEXT>
                                                                   Exhibit 10.26


         THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT
BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.


                                  BLUEFLY, INC.

                             DEMAND PROMISSORY NOTE

$5,769.40
New York, New York                                            December 15, 2001

         FOR VALUE RECEIVED, the undersigned, BLUEFLY, INC., a Delaware
corporation (the "Payor" or the "Company"), promises to pay to the order of SFM
Domestic Investments LLC or its registered assign (the "Payee"), upon demand the
principal sum of five-thousand, seven-hundred, sixty-nine dollars and forty
cents ($5,769.40) and interest on the outstanding principal balance as set forth
herein.

         1. Interest Rate; Payment.

            (a) The outstanding principal balance of this Demand Promissory Note
(this "Note") shall bear interest at an annual rate equal to 9% per annum, with
interest accruing, from and including the date hereof, on a cumulative,
compounding basis. Interest shall be computed on the basis of a 365- or 366-day
year, as the case may be, and the actual number of days elapsed, and shall be
payable only upon repayment of the principal on any Repayment Date (as defined
below) in cash.

            (b) The outstanding balance of any amount owed under this Note which
is not paid when due shall bear interest at the rate of 2% per annum (the
"Default Interest") above the rate that would otherwise be in effect under this
Note with the Default Interest accruing, from and including such due date, on a
cumulative, compounding basis.

            (c) The outstanding principal and all accrued and unpaid interest
shall be paid in full no later than December 15, 2004 (the "Maturity Date"),
unless repaid earlier pursuant to the provisions of Section 2 (the date of any
payment pursuant to Section 2 and the Maturity Date, collectively referred to as
a "Repayment Date"). On a Repayment Date, the Payor shall pay the applicable
amount of principal and interest in lawful money of the United States of America
by wire or bank transfer of immediately available funds to an account designated
by the Payee in writing from time to time.

         2. Prepayment.

<PAGE>
                                                                               2


            (a) Mandatory Prepayment.

               (i) Upon the occurrence of an Event of Default (under Section
3(d) or (e)), the outstanding principal of and all accrued interest on this Note
shall be accelerated and shall automatically become immediately due and payable,
without presentment, demand, protest or notice of any kind, all of which are
expressly waived by the Payor, notwithstanding anything contained herein to the
contrary.

               (ii) The Payee shall, at its sole option, have the right to
require the Payor to pay the outstanding principal of and all accrued interest
on this Note upon the occurrence of any of the following events: (1) an Event of
Default under Section 3(a), (b), (c), (f), (g) or (h), (2) the Company entering
into an agreement to effectuate any sale or other disposition of all or
substantially all of its assets, in one transaction or in a series of
transactions, (3) the Company entering into an agreement to effectuate any
consolidation or merger into another entity, or (4) any sale of a majority of
the outstanding equity of the Company (or any other event that constitutes a
Change of Control (as defined below) of the Company), in one transaction or in a
series of transactions. Immediately upon the occurrence of either of the events
set forth in clauses (1), (2) or (3) above, or immediately upon obtaining
knowledge that any person has entered into an agreement to effectuate, the event
set forth in clause (4) above, the Company shall give written notice of such
event to the Payee. Change of Control means any Person or "group" (within the
meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") other than Payee and its Affiliates or any group that
includes Payee and/or its Affiliates, becoming the beneficial owner, directly or
indirectly, of outstanding shares of stock of the Company entitling such Person
or Persons to exercise 50% or more of the total votes entitled to be cast at a
regular or special meeting, or by action by written consent, of the stockholders
of the Company in the election of directors (the term "beneficial owner" shall
be determined in accordance with Rule 13d-3 of the Exchange Act).

               (iii) Any mandatory prepayment under this Section 2(a) shall
include payment of reasonable costs and expenses, if any, associated with such
prepayment.

            (b) Optional Prepayment. The Company may, at its option, without
premium or penalty, repay the unpaid principal amount of the Note, at any time
in whole or from time to time in part, together with interest accrued thereon to
the date of prepayment. Any such prepayment shall be applied first to the
payment of accrued interest and then to repayment of principal. Upon any partial
prepayment of the unpaid principal amount of this Note, the Holder shall make
notation on this Note of the portion of the principal so prepaid.

         3. Events of Default. An "Event of Default" shall occur if:

            (a) the Payor shall default in the payment of the principal of or
interest payable on this Note, when and as the same shall become due and
payable, whether at maturity or at a date fixed for prepayment or by
acceleration or otherwise and

<PAGE>
                                                                               3


such default with respect to the payment of interest shall continue unremedied
for two days;

            (b) the Payor shall fail to observe or perform any covenant or
agreement contained in this Note, and such failure shall continue for five
business days after Payor receives notice of such failure;

            (c) any representation, warranty, certification or statement made by
or on behalf of the Payor in this Note or in any certificate, writing or other
document delivered pursuant hereto shall prove to have been incorrect in any
material respect when made;

            (d) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (A) relief
in respect of Payor or of a substantial part of Payor's respective property or
assets, under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law (any such law, a "Bankruptcy Law"), (B) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for a substantial part of the property or assets of any Payor,
(C) the winding up or liquidation of any Payor; and such proceeding or petition
shall continue undismissed for 60 days, or an order or decree approving or
ordering any of the foregoing shall be entered;

            (e) the Payor shall (A) voluntarily commence any proceeding or file
any petition seeking relief under a Bankruptcy Law, (B) consent to the
institution of or the entry of an order for relief against it, or fail to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in clause (d), (C) apply for or consent to the appointment of
a receiver, trustee, custodian, sequestrator, conservator or similar official
for a substantial part of the property or assets of the Payor, (D) file an
answer admitting the material allegations of a petition filed against it in any
such proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing;

            (f) one or more judgments or orders for the payment of money in
excess of $250,000 in the aggregate shall be rendered against the Payor and such
judgment(s) or order(s) shall continue unsatisfied and unstayed for a period of
30 days;

            (g) the Payor shall default in the payment of any principal,
interest or premium, or any observance or performance of any covenants or
agreements, with respect to indebtedness (excluding trade payables and other
indebtedness entered into in the ordinary course of business) in excess of
$50,000 in the aggregate for borrowed money or any obligation which is the
substantive equivalent thereof and such default shall continue for more than the
period of grace, if any, or of any such Indebtedness or obligation shall be
declared due and payable prior to the stated maturity thereof;

<PAGE>
                                                                               4


            (h) any material provisions of this Note shall terminate or become
void or unenforceable or the Payor shall so assert in writing.

         4. Subordination.

            (a) Agreement of Subordination. The Payor covenants and agrees, and
the Payee likewise covenants and agrees, that (i) to the extent and in the
manner hereinafter set forth in this Section 4, the obligations of the Company
to pay the principal of and accrued interest on this Note (the "Obligations")
are hereby expressly made subordinate and junior in right of payment to the
prior payment in full of all amounts owing to, under the Financing Agreement,
dated March 30, 2001, as amended (the "Financing Agreement"), by and between the
Payor and Rosenthal & Rosenthal, Inc., a New York Corporation, whether
outstanding at the date hereof or hereinafter incurred (such Indebtedness being
hereinafter referred to as the "Senior Indebtedness"); (ii) the subordination is
solely for the benefit of any holders of Senior Indebtedness; and (iii) each
holder of Senior Indebtedness whether now outstanding or hereinafter created,
incurred, assumed or guaranteed shall be deemed to have extended or acquired
such Senior Indebtedness in reliance upon the covenants and provisions contained
herein.

            (b) Subordination Upon Certain Events. Upon the occurrence of any
Event of Default under Sections 3(d) or (e) of this Note:

               (i) Upon any payment or distribution of assets of the Payor to
creditors of the Company, holders of Senior Indebtedness shall be entitled to
receive indefeasible payment in full of all obligations with respect to the
Senior Indebtedness before the holder of this Note shall be entitled to receive
any payment in respect of the Obligations.

               (ii) Until all Senior Indebtedness is paid in full, any
distribution to which the Payee would be entitled but for this Section 4 shall
be made to holders of Senior Indebtedness, as their interests may appear, except
that the Payee may receive securities that are subordinate to the Senior
Indebtedness to at least the same extent as this Note.

               (iii) For purposes of this Section 4, a distribution may consist
of cash, securities or other property, by set-off or otherwise.

               (iv) Notwithstanding the foregoing provisions of this Section
4(b), if payment or delivery by the Company of cash, securities or other
property to the Payee is authorized by an order or decree giving effect, and
stating in such order or decree that effect is given, to the subordination of
this Note to the Senior Indebtedness, and made by a court of competent
jurisdiction in a proceeding under any applicable bankruptcy or reorganization
law, payment or delivery by the Company of such cash, securities or other
property shall be made to the Payee in accordance with such order or decree.

            (c) Limitation on Payment.

<PAGE>
                                                                               5


               (i) Upon receipt by the Company and the Payee of a Blockage
Notice (as defined below), then unless and until (A) all defaults in the payment
of any Senior Indebtedness (the "Senior Defaults") that gave rise to the
Blockage Notice shall have been remedied or effectively waived or shall have
ceased to exist or (B) the Senior Indebtedness in respect of which such Senior
Defaults shall have occurred shall have been paid in full or (C) a notice of
acceleration of the maturity of such Senior Indebtedness shall have been
transmitted to the Company in respect of such Senior Defaults, no direct or
indirect payment (in cash, property, securities or by set-off or otherwise) of
or on account of the principal of or interest on this Note or in respect of any
redemption, retirement, purchase or other acquisition of this Note shall be made
during any period prior to the expiration of the Blockage Period (as defined
below).

               (ii) For purposes of this Section 4, a "Blockage Notice" is a
notice of a Senior Default that in fact has occurred and is continuing, given to
the Company and the Payee by any holders of Senior Indebtedness then outstanding
(or their authorized agent); provided, however, that no such notice shall be
effective as a Blockage Notice if an effective Blockage Notice shall have been
given within 360 days prior thereto.

               (iii) For purposes of this Section 4, a "Blockage Period" with
respect to a Blockage Notice is the period commencing upon the Company's receipt
of such Blockage Notice and having the duration set forth in the particular
agreement establishing the Senior Indebtedness to which the Company is a party;
provided, that, such Blockage Period is no more than 90 days.

         Notwithstanding the foregoing, the Blockage Period shall be
inapplicable or cease to be effective if an Event of Default pursuant to Section
3(d) or (e) shall have occurred. In addition, any Blockage Period shall cease to
be effective if at any time during such period (i) substantial assets of the
Company are sold or otherwise disposed of outside of the ordinary course of
business for less than fair value or (ii) payment or any distribution of any
character, whether in cash, securities or other property of the Company shall be
made to or received by any creditor on any indebtedness which is on the same
level of priority with or junior and subordinate in right of payment to this
Note.

         Upon the expiration or termination of any Blockage Period, the Payee
shall be entitled to exercise any of its rights with respect to this Note other
than any right to accelerate the maturity date of this Note based upon the
occurrence of any Event of Default in respect thereto which has been cured or
otherwise remedied during the Blockage Period.

            (d) Payments and Distributions Received. If the Payee shall have
received any payment from or distribution of assets of the Company in respect of
Obligations in contravention of the terms of this Section 4 before all Senior
Indebtedness is paid in full, then and in such event such payment or
distribution shall be received and held in trust for and shall be paid over or
delivered to the holders of Senior Indebtedness to the extent necessary to pay
all such Senior Indebtedness in full.

<PAGE>
                                                                               6


            (e) Proofs of Claim. If, while any Senior Indebtedness is
outstanding, any Event of Default under Section 3(d) or (e) of this Note occurs,
the Payee shall duly and promptly take such action as any holder of Senior
Indebtedness may reasonably request to collect any payment with respect to this
Note for the account of the holders of the Senior Indebtedness and to file
appropriate claims or proofs of claim in respect of this Note. Upon the failure
of the Payee to take any such action, each holder of Senior Indebtedness is
hereby irrevocably authorized and empowered (in its own name or otherwise), but
shall have no obligation, to demand, sue for, collect and receive every payment
or distribution referred to in respect of this Note and to file claims and
proofs of claim and take such other action as it may deem necessary or advisable
for the exercise or enforcement of any of the rights or interests of the Holder
with respect to this Note.

            (f) Subrogation. After all amounts payable under or in respect of
Senior Indebtedness are paid in full in cash, the Payee shall be subrogated to
the rights of holders of Senior Indebtedness to receive payments or
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the Payee have been applied to the payment of Senior
Indebtedness. A distribution made under this Section 4 to a holder of Senior
Indebtedness which otherwise would have been made to the Payee is not, as
between the Company and the Payee, a payment by the Company on Senior
Indebtedness.

            (g) Relative Rights. This Section 4 defines the relative rights of
the Payee and the holders of Senior Indebtedness. Nothing in this Section 4
shall (i) impair, as between the Company and the Payee, the obligation of the
Company, which is absolute and unconditional, to pay principal of and interest
(including Default Interest) on this Note in accordance with its terms; (ii)
effect the relative rights of the Payee and creditors of the Company other than
holders of Senior Indebtedness; or (iii) prevent the Payee from exercising its
available remedies upon an Event of Default, subject to the rights, if any,
under this Section 4 of holders of Senior Indebtedness.

            (h) Subordination May Not Be Impaired by the Company. No right of
any holder of any Senior Indebtedness to enforce the subordination of the
Obligations evidenced by this Note shall be impaired by any failure by the
Company or such holder of Senior Indebtedness to act or by the failure of the
Company or such holder to comply with this Note. The provisions of this Section
4 shall continue to be effective or be reinstated, as the case may be, if at any
time any payment of any of the Senior Indebtedness is rescinded or must
otherwise be returned by any holder of Senior Indebtedness as a result of the
insolvency, bankruptcy or reorganization of the Company or otherwise, all as
though such payment had not been made.

            (i) Payments. A payment with respect to principal of or interest on
the Obligations shall include, without limitation, payment of principal of and
interest on this Note, and any payment on account of mandatory prepayment
provisions.

            (j) Section Not to Prevent Events of Default. The failure to make a
payment on account of principal of or interest on or other amounts constituting
the Obligations by reason of any provision of this Section 4 shall not be
construed as preventing the occurrence of an Event of Default under Section 3.

<PAGE>
                                                                               7


         5. Suits for Enforcement.

            (a) Upon the occurrence of any one or more Events of Default, the
holder of this Note may proceed to protect and enforce its rights by suit in
equity, action at law or by other appropriate proceeding in aid of the exercise
of any power granted in this Note, or may proceed to enforce the payment of this
Note, or to enforce any other legal or equitable right it may have as a holder
of this Note.

            (b) The holder of this Note may direct the time, method and place of
conducting any proceeding for any remedy available to itself.

            (c) In case of any Event of Default, the Payor will pay to the
holder of this Note such amounts as shall be sufficient to cover the reasonable
costs and expenses of such holder due to such Event of Default, including
without limitation, costs of collection and reasonable fees, disbursements and
other charges of counsel incurred in connection with any action in which the
holder prevails.

         6. Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopier, courier
service, overnight mail or personal delivery:

              (i)     if to SFM Domestic Investments LLC:

                      Soros Fund Management LLC
                      888 Seventh Avenue
                      New York, NY 10106
                      Telecopy:  (212) 664-0544
                      Attn: Richard Holahan, Esq.

                      and a copy to:

                      Paul, Weiss, Rifkind, Wharton & Garrison
                      1285 Avenue of the Americas
                      New York, New York 10019-6064
                      Telecopy:    (212) 757-3990
                      Attention:   James Dubin, Esq. and
                                   Paul D. Ginsberg, Esq.

              (ii)    if to the Company:

                      Bluefly, Inc.
                      42 West 39th Street, 9th Floor
                      New York, New York 10018
                      Telecopy:    (212) 354-3400
                      Attention:   Jon Morris

                      with a copy to:

<PAGE>
                                                                               8


                      Swidler Berlin Shereff Friedman, LLP
                      405 Lexington Avenue
                      New York, New York 10174
                      Telecopy:    (212) 891-9598
                      Attention:   Richard A. Goldberg, Esq.

         All such notices and communications shall be deemed to have been duly
given when delivered by hand, if personally delivered; when delivered by courier
or overnight mail, if delivered by commercial courier service or overnight mail;
five (5) business days after being deposited in the mail, postage prepaid, if
mailed; and when receipt is mechanically acknowledged, if telecopied.

         7. Successors and Assigns. This Note shall inure to the benefit of and
be binding upon the successors and permitted assigns of the parties hereto. The
Payor may not assign any of its rights under this Note without the prior written
consent of Payee. The Payee may assign all or a portion of their rights or
obligations under this Note to an Affiliate without the prior written consent of
the Payor.

         8. Amendment and Waiver.

            (a) No failure or delay on the part of the Payor or Payee in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Payor or
Payee at law, in equity or otherwise.

            (b) Any amendment, supplement or modification of or to any provision
of this Note, any waiver of any provision of this Note and any consent to any
departure by the Payor from the terms of any provision of this Note, shall be
effective (i) only if it is made or given in writing and signed by the Payor and
the Payee and (ii) only in the specific instance and for the specific purpose
for which made or given.

         9. Headings. The headings in this Note are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.

         10. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICTS OF LAW PRINCIPLES THEREOF.

         11. Costs and Expenses. The Payor hereby agrees to pay on demand all
reasonable out-of-pocket costs, fees, expenses, disbursements and other charges
(including but not limited to the fees, expenses, disbursements and other
charges of Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to the
Payee) of the Payee arising in connection with any consent or waiver granted or
requested hereunder or in connection herewith, and any renegotiation, amendment,
work-out or settlement of this Note or the indebtedness arising hereunder.

<PAGE>
                                                                               9


         12. Waiver of Jury Trial and Setoff. The Payor hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Note or any instrument or document delivered pursuant to
this Note, or the validity, protection, interpretation, collection or
enforcement thereof, or any other claim or dispute howsoever arising, between
any Payor and the Payee; and the Payor hereby waives the right to interpose any
setoff or counterclaim or cross-claim in connection with any such litigation,
irrespective of the nature of such setoff, counterclaim or cross-claim except to
the extent that the failure so to assert any such setoff, counterclaim or
cross-claim would permanently preclude the prosecution of the same.

         13. Consent to Jurisdiction. The Payor hereby irrevocably consents to
the nonexclusive jurisdiction of the courts of the State of New York and of any
federal court located in such State in connection with any action or proceeding
arising out of or relating to this Note or any document or instrument delivered
pursuant to this Agreement.

         14. Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provisions hereof shall not be in any way impaired,
unless the provisions held invalid, illegal or unenforceable shall substantially
impair the benefits of the remaining provisions hereof.

         15. Entire Agreement. This Note is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter hereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein. This Note
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.

         16. Further Assurances. The Payor shall execute such documents and
perform such further acts (including, without limitation, obtaining any
consents, exemptions, authorizations or other actions by, or giving any notices
to, or making any filings with, any governmental authority or any other Person)
as may be reasonably required or desirable to carry out or to perform the
provisions of this Note.

                                         BLUEFLY, INC.


                                         By: /s/ E. Kenneth Seiff
                                             ----------------------------------
                                         Name: E. Kenneth Seiff
                                         Title:  Chief Executive Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>5
<FILENAME>k20188ex10_27.txt
<DESCRIPTION>EBUSINESS HOSTING AGREEMENT
<TEXT>
                                                                   Exhibit 10.27


                          e-business Hosting Agreement

                                     between

                                  Bluefly, Inc.

                                       and

                   International Business Machines Corporation


                                        1
<PAGE>

                          e-business Hosting Agreement

Under this e-business Hosting Agreement ("Agreement") between International
Business Machines Corporation ("IBM") and Bluefly, Inc. ("Customer"), IBM will
provide Web hosting and related services ("Services") to Customer. The Agreement
includes these terms and conditions and the documents referenced herein ("Base
Terms"), e-business hosting services order forms accepted by IBM ("Order
Forms"), and the following attachments:

a.    Attachment A: Facilities Services;

b.    Service Option Attachment for Facilities Services; and

c.    all other applicable attachments referenced in the Order Forms for
      Services options selected by Customer ("Service Option Attachments").

In the event of a conflict between the Base Terms and an attachment, the Base
Terms will govern, except where an attachment or a provision contained therein
expressly states that it will govern over the Base Terms. The Base Terms and the
attachments always govern over any inconsistent provision in an Order Form.

--------------------------------------------------------------------------------
1.0   Definitions

a.    "Acceptable Use Policy" means the Acceptable Use Policy for IBM e-business
      Services, located on the Internet at http://www.ibm.com/services/
      e-business/aup.html, as of the Effective Date, and any subsequent
      modification in accordance with Section 13.2 below.

b.    "Affiliates" means entities that control, are controlled by, or are under
      common control with a party to this Agreement.

c.    "Base Components" means the hardware and software that IBM makes
      available, if any, as specified in Order Forms and associated Service
      Option Attachments.

d.    "Content" means information, software, and data that Customer provides,
      including, without limitation, any hypertext markup language files,
      scripts, programs, recordings, sound, music, graphics, images, applets or
      servlets that Customer or its Subcontractors or Services Recipients
      create, install, upload or transfer in or through the e-business Hosting
      Environment and/or Customer Components.

e.    "Content Administrator" means an employee or Subcontractor of Customer who
      is authorized by Customer to install, upload and/or maintain Content using
      a User Identification.

f.    "Customer Components" means the hardware, software and other products,
      data and Content that Customer provides, including those specified in
      Service Option Attachments.

g.    "e-business Hosting Environment" means the Base Components and the IBM
      provided Internet access bandwidth, collectively.

h.    "Enterprise" means any legal entity and the subsidiaries it owns by more
      than 50 percent. The term "Enterprise" applies only to the portion of the
      Enterprise physically located within the United States of America.

i.    "IBM e-business Hosting Center" means the facility used by IBM to provide
      the Services.

j.    "Internet" means the public worldwide network of TCP/IP-based networks.

k.    "Materials" means literary or other works of authorship (such as programs,
      program listings, programming tools, documentation, reports, drawings and
      similar works) that IBM may deliver to Customer. "Materials" does not
      include licensed program products available under their own license
      agreements or Base Components.

l.    "Required Consents" means any consents or approvals required to give IBM
      and its Subcontractors the right or license to access, use and/or modify
      in electronic form and in other forms, including derivative works, the
      Customer Components, without infringing the ownership or intellectual
      property rights of the providers, licensors, or owners of such Customer
      Components.

m.    "Service Option Ready Date" means the date that IBM has notified Customer
      that IBM has completed the implementation activities


                                       2
<PAGE>

      specified in an applicable Service Option Attachment.

n.    "Services Recipients" means any entities or individuals receiving or using
      the Services, or the results or products of the Services.

o.    "Service Option Attachment Start Date" means the day after the date of the
      last signature on an Order Form authorizing the Services under an
      applicable Service Option Attachment.

p.    "Subcontractor" means a contractor, vendor, agent, or consultant selected
      and retained by IBM or Customer, respectively.

q.    "TCP/IP" means Transmission Control Protocol/Internet Protocol.

r.    "User Identification" or "ID" means a string of characters that uniquely
      identifies a Content Administrator.

--------------------------------------------------------------------------------
2.0   IBM Services Responsibilities

IBM will perform the Services described in Attachment A and applicable Service
Option Attachments.

--------------------------------------------------------------------------------
3.0   Term and Termination

3.1   Term

This Agreement will be effective beginning on 12:01 a.m., Eastern Time, on the
day after the date of last signature to these Base Terms ("Effective Date") and
ending on the expiration and/or termination of all Service Option Attachments,
unless the Agreement is terminated earlier in accordance with the terms herein.
The term of each Service Option Attachment is as specified on the applicable
Order Form.

3.2   Renewal

Each Service Option Attachment will renew automatically for an additional term
equal in duration to the previous term of the applicable Service Option
Attachment unless either party notifies the other party in writing at least
ninety (90) days prior to the end of the then-current term for the applicable
Service Option Attachment that it has elected to terminate such Service Option
Attachment.

3.3   Termination for Cause

Customer or IBM may terminate this Agreement for material breach of this
Agreement by the other upon written notice containing the specific nature and
dates of the material breach. The breaching party will have thirty (30) days
from receipt of notice to cure such breach, except for nonpayment by Customer,
which must be cured within seven (7) business days from receipt of notice. If
such breach has not been timely cured, then the non-breaching party may
immediately terminate this Agreement upon written notice; provided, however, it
is understood that in the event IBM has so breached this Agreement IBM shall not
be entitled to recover the early termination charges described in Section 3.4(b)
below.

3.4   Termination for Convenience

Customer may terminate this Agreement (including all Service Option Attachments)
or any Service Option Attachment (with the exception of any Service Option
Attachment that is a prerequisite for the provision of Services under a
non-terminated Service Option Attachment) for convenience at the end of any
calendar month by:

a.    providing at least one month's prior written notice to IBM; and

b.    paying the applicable early termination charges, if any, specified in
      Attachment A and applicable Service Option Attachments.

In the event that Customer exercises its rights under this Section 3.4, IBM
shall continue to fulfill all of its duties and obligations following the notice
date and until the final termination date.

3.5   Effect of Termination

Upon the date of termination, all Customer payment obligations accrued hereunder
through the date of termination will become due and payable. The termination of
selected Service Option Attachments will not affect Customer's obligation to pay
charges under other Service Option Attachments.

--------------------------------------------------------------------------------
4.0   Charges and Payment

4.1   Charges

Charges for applicable Services will be specified in Service Option Attachments
and Order Forms. Charges can be specified as one-time, installment, recurring,
or usage. IBM will invoice such Charges when they begin or are due as set forth
in Service Option Attachments.

4.2   Payment

IBM invoices will specify the amount due. Payment is due upon receipt and
payable as specified in such invoice. Customer agrees to pay accordingly,
including any late payment fees. Payment will be made in United States dollars.

4.3   Taxes


                                       3
<PAGE>

Customer will pay or provide appropriate exemption documentation for all taxes,
duties, levies, and any other fees (except for taxes based upon IBM's net
income) related to the Services imposed by any governmental authorities. Charges
specified herein (including in an Order Form) are exclusive of any such taxes,
duties, levies or fees.

--------------------------------------------------------------------------------
5.0   Warranties and Disclaimers

5.1   IBM Representations and Warranties

IBM represents and warrants that:

a.    it will perform the Services using reasonable care and skill and in
      accordance with the applicable Service Option Attachments (which means the
      degree of knowledge, skill and judgment customarily exercised by members
      of the applicable profession with respect to work of a similar nature);
      and that it will provide Customer with competent, fully trained, fully
      qualified and responsible personnel to perform the Services; and

b.    it has the requisite corporate power and authority to execute, deliver and
      perform its obligations under this Agreement.

IBM covenants that it will comply with the laws applicable to IBM's business.

5.2   Exclusivity of Warranties

THE WARRANTIES IN SECTION 5.1 ARE THE EXCLUSIVE WARRANTIES FROM IBM. THEY
REPLACE ALL OTHER WARRANTIES, INCLUDING, WITHOUT LIMITATION, THE IMPLIED
WARRANTIES OF MERCHANTABILITY, SATISFACTORY QUALITY, AND FITNESS FOR A
PARTICULAR PURPOSE.

5.3   Security

a.    Customer acknowledges that IBM does not control the transfer of data over
      telecommunications facilities, including the Internet.

b.    Subject to the other disclaimers contained herein, IBM will implement the
      security features specified herein, including the IBM perform security
      obligations identified in Section 8.0 of the Facilities Services Service
      Option Attachment. However, IBM does not warrant secure operation of the
      Services or that it will be able to prevent third party disruptions of the
      e-business Hosting Environment or Customer Components.

c.    Customer acknowledges that IBM offers numerous security options, specified
      in Service Option Attachments. Customer is responsible for selecting on
      Order Forms the set of security options that it determines meet Customer's
      needs.

d.    Customer agrees that IBM shall have no liability for any provision of
      security-related services or advice that IBM may voluntarily provide
      outside the scope of selected Service Option Attachments.

5.4   Other Disclaimers

a.    IBM does not warrant uninterrupted or error-free operation of any Service
      or that IBM will correct all defects. open

b.    IBM does not make any representation or warranty as to the capacity,
      performance or scalability of the Services, e-business Hosting
      Environment, or Customer Components.

c.    IBM PROVIDES ALL MATERIALS AND ALL NON-IBM SERVICES, PRODUCTS, DATA,
      APPARATUS AND SOFTWARE "AS IS", WITHOUT WARRANTY OF ANY KIND, INCLUDING,
      WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY,
      SATISFACTORY QUALITY, AND FITNESS FOR A PARTICULAR PURPOSE. Non-IBM
      suppliers may provide their own warranties to you.

--------------------------------------------------------------------------------
6.0 Confidentiality

All information exchanged between the parties is non-confidential; provided,
however if either or both parties require the exchange of confidential
information, such information will be exchanged under the terms and conditions
of the Agreement for Exchange of Confidential Information executed by IBM on
August 3, 2001 (the "AECI") (it being further agreed as follows: (a) the AECI is
hereby modified so that any information that is disclosed by a party hereto that
a reasonable person would construe, based upon the nature of the information and
the circumstances surrounding the disclosure, as intended to be confidential
shalll be deemed to be confidential Information under the AECI and shall be
accorded all protections of the AECI and (b) after the date hereof the parties
hereto shall enter into a modification of the AECI whereby the provisions of (a)
immediately above are documented and (c) the parties shall also amend the AECI
so as to reflect the following agreement: in the event that a breach or
threatened breach of a party's obligations hereunder shall cause irreparable
harm wherein a remedy at law would


                                       4
<PAGE>

prove inadequate, the aggrieved party shall have the right to seek and obtain an
injunction so as to prevent any further disclosure of the confidential
Information. With respect to any confidential information contained in or
traveling through the e-business Hosting Environment or Customer Components, the
provisions of Sections 5, 9, and 10 herein will prevail to the extent of any
inconsistent provisions in the confidentiality agreement.

--------------------------------------------------------------------------------
7.0   Materials

a.    IBM will specify Materials to be delivered to Customer. IBM will identify
      them as being "Type I Materials," "Type II Materials," or otherwise as
      Customer and IBM agree in writing. If not specified, Materials will be
      considered Type II Materials.

b.    Type I Materials are those, created during the Service performance period,
      in which Customer will have all right, title, and interest (including
      ownership of copyright). IBM will retain one copy of the Materials.
      Customer grants to IBM:

      1.    an irrevocable, nonexclusive, worldwide, paid-up license to use,
            execute, reproduce, display, perform, distribute (internally and
            externally) copies of, and prepare derivative works based on Type I
            Materials; and
      2.    the right to authorize others to do any of the same.

c.    Type II Materials are those, created during the Service performance period
      or otherwise (such as those that preexist the Service), in which IBM or
      third parties have all right, title, and interest (including ownership of
      copyright). IBM will deliver one copy of the specified Materials to
      Customer. IBM grants Customer an irrevocable, nonexclusive, worldwide,
      paid-up license to use, execute, reproduce, display, perform, and
      distribute, within Customer's Enterprise only, copies of Type II
      Materials.

d.    The parties agree to reproduce the copyright notice and any other legend
      of ownership on any copies made under the licenses granted in this Section
      7.

--------------------------------------------------------------------------------
8.0   Indemnification

8.1   Indemnification by IBM

If a third party claims or threatens a claim that Materials or Base Components
IBM provides to Customer or uses in connection with the performance of the
Services infringe that party's patent, trademark, copyright, or trade secret,
then IBM will indemnify, defend and hold harmless the Customer, its Enterprise
and their respective employees, officers, agents and directors against that
claim or threatened claim at IBM's expense and pay all costs, damages, penalties
and reasonable attorneys' fees that a court finally awards in connection with
that claim (or which IBM agrees in any final settlement) provided that Customer:

a.    promptly notifies IBM in writing of the claim; and

b.    allows IBM to control, and cooperates with IBM in, the defense and any
      related settlement negotiations (it being understood and agreed that if
      Customer incurs any costs in connection with such cooperation, over and
      above nominal costs, IBM shall reimburse Customer therefor, such costs to
      potentially include, without limitation, the costs incurred by Customer in
      connection with depositions, responses to interrogatories, or testimony at
      trial or any similar proceeding, and travel costs in connection therewith;
      provided, however, such obligation of IBM as set forth in this
      parenthetical is conditioned upon Customer first obtaining IBM's consent
      to the incurring of such costs, such consent to be reasonably granted). If
      such a claim is made or appears likely to be made, Customer agrees to
      permit IBM to enable Customer to continue to use the Materials or Base
      Components, or to modify them, or replace them with non-infringing
      Materials or Base Components that are at least functionally equivalent. If
      IBM determines that none of these alternatives is reasonably available,
      Customer agrees to return the Materials or Base Components (if in
      Customer's possession) to IBM on IBM's written request. IBM will give
      Customer a credit equal to the amount Customer paid IBM for the applicable
      Materials or for use of the applicable Base Components up to a maximum of
      twelve (12) months of applicable charges. This is IBM's entire obligation
      to Customer with regard to any claim of infringement. Notwithstanding the
      foregoing, IBM is not responsible for third party claims based on:

      1.    anything Customer provides which is incorporated into the Materials;

      2.    Customer's modification of the Materials;


                                       5
<PAGE>

      3.    the combination, operation, or use of the Materials with any
            product, data, or apparatus that IBM did not provide; or

      4.    non-IBM hardware, software, or data, including those that may be in
            the Base Components.

8.2   Indemnification by Customer

a.    Customer will defend IBM and its Enterprise and their employees, officers,
      and directors against any third party claim (and pay all damages that a
      court of competent jurisdiction awards, or which Customer agrees in any
      final settlement to such third party and any reasonable attorneys' fees
      and expenses of defense incurred by IBM):

      1.    that Content or Customer's use of the Services violates Customer's
            obligation in Section 11.2(b);

      2.    that Customer Components infringe that party's patent or copyright;

      3.    that is brought by a Services Recipient and is related, directly or
            indirectly, to the Services; or

      4.    arising out of or related to a mechanics' lien Customer is required
            to cancel and discharge pursuant to this Agreement.

b.    For indemnification under this Section 8.2, IBM will:

      1.    promptly notify Customer in writing of the claim; and

      2.    allow Customer to control, and will cooperate with Customer in, the
            defense and any related settlement negotiations.

c.    Notwithstanding anything else to the contrary contained herein, Customer
      shall be relieved of its indemnification duty or obligation to the extent
      that IBM's bad faith, willful misconduct or gross negligence. breach of
      its contractual obligations hereunder is a cause of the damages suffered
      by the Services Recipient.

--------------------------------------------------------------------------------
9.0   Limitation of Liability

9.1   IBM's Limitation of Liability

Circumstances may arise where, because of a default on IBM's part or other
liability, Customer is entitled to recover damages from IBM. Regardless of the
basis on which Customer is entitled to claim damages from IBM (including
fundamental breach, negligence, misrepresentation, or other contract or tort
claim), IBM is liable for no more than:

a.    indemnification payments as provided in Section 8.1;

b.    damages for bodily injury (including death) and damage to real property
      and tangible personal property; and

c.    the amount of any other actual direct damages, up to the greater of
      $100,000 or the charges paid by Customer to IBM for the Services in the
      twelve (12) months immediately preceding the accrual of the first claim
      related to the Services. The foregoing limit also applies to any of IBM's
      Affiliates and Subcontractors. It is the cumulative maximum for which IBM
      and its Affiliates and Subcontractors are collectively responsible. Under
      no circumstances is IBM, its Affiliates or its Subcontractors liable for
      any of the following:

      1.    third party claims against Customer for damages (other than those
            expressly provided in Subsections 9.1(a) and 9.1(b)); or

      2.    loss of, or damage to, Customer's or any other entity's records or
            data.

9.2   Customer's Limitation of Liability

Circumstances may arise where, because of a default on Customer's part or other
liability, IBM is entitled to recover damages from Customer. Regardless of the
basis on which IBM is entitled to claim damages from Customer (including
fundamental breach, negligence, misrepresentation, or other contract or tort
claim), Customer is liable for no more than:

a.    Indemnification payments as provided in Section 8.2;

b.    damages for bodily injury (including death) and damage to real property
      and tangible personal property; and

(c) the amount of any other actual direct damages, up to the greater of $100,000
or the charges paid by Customer to IBM for the Services in the twelve (12)
months immediately preceding the accrual of the first claim related to the
Services. The foregoing limit also applies to any of Customer's Affiliates. It
is the cumulative maximum for which Customer and its Affiliates are collectively
responsible. Under no circumstances is Customer or its Affiliates liable for any
third party claims against IBM for damages (other than those


                                       6
<PAGE>

expressly provided in Subsections 9.2(a) and 9.2(b)).

--------------------------------------------------------------------------------
10.0  Disclaimer of Consequential Damages

a.    In no event will either party be liable to the other for special,
      incidental, or indirect damages or for any consequential damages
      (including lost profits or savings), even if they are informed of the
      possibility; provided that this Section 10 does not apply to Customer's
      failure to pay any amounts owing to IBM under this Agreement (including
      amounts owing for Services that would have been rendered but for
      Customer's breach of this Agreement).

--------------------------------------------------------------------------------
11.0  Other Customer Obligations

11.1  Services Support

Customer will comply with its responsibilities to support the Services as
specified in Attachment A and in applicable Service Option Attachments. Such
obligations are to be performed at no charge to IBM. IBM's obligations are
contingent on Customer meeting such support obligations.

11.2 Representations and Warranties

Customer represents and warrants that:

a.    it has the requisite corporate power and authority to execute, deliver and
      perform its obligations under this Agreement; Customer has no contractual
      or other obligation that (i) restricts or prohibits Customer's execution
      or performance of this Agreement, or (ii) Customer will breach in
      connection with the execution or performance of this Agreement; and

b.    its use of the Services and all Content will comply with the Acceptable
      Use Policy.

11.3  Suspected Violations

IBM reserves the right to investigate potential violations of the
representations and warranties in Subsection 11.2(b). If IBM reasonably
determines that a breach of any such warranty has occurred, then IBM may, in its
sole and reasonable discretion:

a.    restrict Customer's access to the Services;

b.    remove or require removal of any offending Content;

c.    terminate this Agreement for cause; and/or

d.    exercise other rights and remedies, at law or in equity.

Except in an emergency or as may otherwise be required by law, before
undertaking the activities in Subsection 11.3(a) or 11.3(b), IBM will attempt to
notify Customer by any reasonably practical means under the circumstances, such
as, without limitation, by telephone or e-mail.

Customer will promptly notify IBM of any event or circumstance related to this
Agreement, Customer's use of the Services, or Content of which Customer becomes
aware that could lead to a claim or demand against IBM, and Customer will
provide all relevant information relating to such event or circumstance to IBM
at IBM's request.

11.4  Required Consents

Customer will promptly obtain and upon request provide to IBM evidence of such
Required Consents necessary for IBM to provide the Services. IBM will be
relieved of its obligations to the extent that they are affected by Customer's
failure to obtain and provide promptly to IBM any Required Consents.

11.5  Capacity Planning

Customer is responsible for determining whether the Base Components, IBM
provided Internet access bandwidth, Customer Components and their combination
will meet Customer's capacity or performance needs. Customer is responsible for
planning for and requesting changes to the Base Components or IBM provided
Internet access bandwidth, as determined by Customer, including any additional
capacity required to support anticipated peaks in demand that may significantly
increase Web site hits, transaction volumes, or otherwise increase system
resource utilization.

11.6  Content and Digital Certificates

Customer is solely responsible for:

a.    all Content including, without limitation, its selection, licensing,
      accuracy, performance, maintenance, and support; and

b.    the selection, management and use of any public and private keys and
      digital certificates it may use with the Services.

--------------------------------------------------------------------------------
12.0  Base Components

12.1  License

IBM grants Customer a nonexclusive, revocable license to use the Base Components
solely in connection with the Services as provided under this Agreement.
Customer agrees not to download or otherwise copy, reverse assemble, reverse
compile, or otherwise translate the software


                                       7
<PAGE>

portions of the Base Components, other than to make one copy for backup
purposes.

12.2  Maintenance of Base Components

For Base Components provided hereunder, IBM will provide, at no additional cost
to Customer, maintenance as reasonably determined by IBM and upon notice to
Customer. Unless otherwise specified in an SOA, such maintenance excludes
upgrades to Base Components. Call back response times for Base Component
failures through issue resolution is designated in the relevant Service Option
Attachment.

12.3  No Sale or Lease of Goods

As between Customer and IBM, IBM retains all right, title and interest in the
Base Components. No goods are sold or leased by IBM under this Agreement. If
Customer desires to purchase or to lease goods from IBM, such purchase or lease
will be governed by a separate mutually acceptable written agreement between
Customer and IBM or an IBM Affiliate.

12.4  No Lease of Real Property

This Agreement is a services agreement and not a lease of any real property.

--------------------------------------------------------------------------------
13.0  Changes

13.1  Services

IBM, in its reasonable discretion, may change the terms and conditions of
Attachment A and/or Service Option Attachments, upon at least ninety (90) days
prior notice to Customer. IBM may change the prices of Service Option
Attachments after twelve (12) months following the applicable Service Option
Attachment Start Date upon at least ninety (90) days prior written notice to
Customer. Any such changes will not apply retroactively. If Customer disagrees
with any such changes, Customer may in its sole discretion terminate this
Agreement (or some or all of the affected Service Option Attachments) without
the payment of termination charges upon notice to IBM at least thirty (30) days
prior to the effective date of the applicable change.

13.2 Acceptable Use Policy

IBM, in its reasonable discretion, may modify the Acceptable Use Policy upon
thirty (30) days' notice to Customer.

13.3 Amendments

Except for changes pursuant to Sections 13.1 and 13.2, this Agreement may be
amended only by a writing signed by authorized representatives of both parties.

--------------------------------------------------------------------------------
14.0  General

14.1  Headings

The headings of the various sections of this Agreement have been inserted for
convenience only and shall not affect the interpretation of this Agreement.

14.2  Survival

Any of these terms and conditions which by their nature extend beyond the
Agreement termination or expiration remain in effect until fulfilled, including,
without limitation, Sections 3.5, 4, 5, 6, 7, 8, 9, 10, 11.2, 11.3, 11.6, 12.2,
12.3, and 14, and apply to both Customer's and IBM's respective successors and
assignees.

14.3  Choice of Law

This Agreement will be governed by the substantive laws of the State of New
York, without regard for its conflict of laws provisions.

14.4  Waiver of Jury Trial

The parties waive any right to a jury trial in any proceeding arising out of or
related to this Agreement.

14.5  Severability

If any provision of this Agreement shall be held by a court of competent
jurisdiction to be invalid, illegal, or unenforceable, the validity, legality,
and enforceability of the remaining provisions of this Agreement shall in no way
be affected or impaired thereby, so long as the remaining provisions of this
Agreement still express the original intent of the parties. If the original
intent of the parties can not be preserved, this Agreement shall either be
renegotiated or terminated.

14.6  Publicity and Trademarks

Neither party grants the other the right to use its or any of its Affiliates'
trademarks, trade names, or other designations in any promotion, publication, or
Web site without prior written consent. Except as may be required by law or as
may be required by IBM to perform the Services, neither party may disclose to
any third party the terms and conditions of this Agreement, without prior
written consent.

14.7  No Third-Party Beneficiaries

Except as expressly provided in Section 8, this Agreement does not create any
intended third party beneficiary rights.

14.8 Personnel

Each party is responsible for the supervision, direction, and control of its
respective personnel. IBM reserves the right to determine the assignment of its
personnel. IBM may subcontract portions of


                                       8
<PAGE>

the Services to Subcontractors and Affiliates selected by IBM.

14.9  No Agency

This Agreement does not create an agency, joint venture, or partnership between
the parties.

14.10 Assignment

Customer will not assign this Agreement or any of its rights hereunder without
the prior written consent of IBM, such consent not to be unreasonably withheld.
Notwithstanding the foregoing, Customer may assign this Agreement to a successor
organization by merger, consolidation or acquisition. Any attempted assignment
in violation of the foregoing will be void. In any permitted assignment,
Customer will remain liable for its obligations hereunder.

14.11 No Resale

Customer shall not resell the Services, in whole or in part.

14.12 Risk of Loss

Risk of loss for all Base Components shall at all times remain with IBM. Risk of
loss for all Customer Components shall at all times remain with Customer.

14.13 Force Majeure

Except for payment obligations hereunder, neither party is responsible to
fulfill its obligations to the extent due to causes beyond its control.

14.14 Actions Period

Neither party will bring a legal action related to this Agreement more than two
years after the cause of action accrued.

14.15 Waiver

The failure of one party to insist upon strict adherence to any term of this
Agreement on any occasion shall not be considered a waiver, nor shall it deprive
that party of the right to insist later on adherence thereto. Any waiver must be
in writing and signed by an authorized representative of the waiving party.

14.16 Freedom of Action

Each party is free to enter into similar agreements with others.

14.17 Limitation of Licenses

Each of us grants only the licenses expressly specified herein. No other
licenses or rights (including licenses or rights under patents) are granted.

14.18 Data Protection

You agree to allow International Business Machines Corporation and entities
within its Enterprise to store and use your contact information, including
names, phone numbers, and e-mail addresses, anywhere they do business. Such
information will be processed and used in connection with our business
relationship, and may be provided to contractors, Business Partners, and
assignees of IBM Corp. and entities within its Enterprise for uses consistent
with their collective business activities, including communicating with you (for
example, for processing orders, for promotions, and for marketing research). For
personal information processed by IBM on your behalf as part of the Services,
IBM will act in accordance with your instructions by following such processing
and security obligations as are contained in this Agreement. You also confirm
that you are solely responsible for ensuring that any processing and security
obligations comply with applicable data protection laws. Your contact
information shall not be considered personal information processed on your
behalf.

14.19 Geographic Scope

Although it is possible that Services Recipients outside of the United States of
America may access Customer's Web site, IBM's delivery of the Services will only
occur within the United States of America, and IBM's obligations hereunder are
valid only in the United States of America.

14.20 Notices

Any notices required or permitted hereunder will be effective upon receipt and
will be personally delivered; mailed via the postal service; sent by reliable
overnight courier; or transmitted by confirmed facsimile. Except for notices
under Section 11.3, all notices will be in writing and addressed to the
applicable party's designated representative at the address specified in this
Agreement. Except as to notices permitted or required under Sections 3 or 8, the
parties agree that electronic mail messages sent between them using security
procedures sufficient to reasonably authenticate them will be deemed writings.
In addition, IBM may provide notice under Section 13.2 by a posting to the Web
site identified in Section 1.0(a).


                                       9
<PAGE>

Customer and IBM agree that this Agreement, including the Base Terms and
applicable attachments and Order Forms, is the complete agreement between the
parties relating to the subject matter hereof. This Agreement replaces and
supersedes any other prior or contemporaneous agreements or communications
between the parties related to the subject matter hereof.

Agreed and Accepted:

Bluefly Inc.                                     International Business Machines
                                                 Corporation

By: /s/ Patrick C. Barry                         By: /s/ Maura Lynch Gray
  -----------------------------                     ----------------------------
  Customer Authorized Signature                        Authorized Signature

Patrick C. Barry         1/9/02                  Maura Lynch Gray        1/14/02
-------------------------------                  -------------------------------
Name (type or print)      Date                   Name (type or print)       Date

Chief Financial Officer and Chief
Operating Officer                                Business Unit Executive
---------------------------------                -------------------------------
Title                                            Title

Customer number:                                 Agreement number:
Customer address:
42 West 39th Street
9th Floor
NY,NY 10018

                                                 Engagement number:
                                                 IBM contract representative:
                                                 IBM Services identifier:  FL

After signing, please return a copy of this Agreement to the following address:

IBM Global Services
3109 W. Dr. M. L. King, Jr. Blvd.
Tampa, FL 33607
Attention:  Order Fulfillment Services


                                       10

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.28
<SEQUENCE>6
<FILENAME>k20188ex10_28.txt
<DESCRIPTION>STANDBY COMMITMENT AGREEMENT
<TEXT>
                                                                   Exhibit 10.28

                                                   March 27, 2002

Bluefly, Inc.
42 West 39th Street
9th Floor
New York, New York 10018
Attention:  Mr. Ken Seiff

                  Re:  Standby Commitment Agreement

Dear Mr. Seiff:

         Quantum Industrial Partners LDC, a Cayman Islands limited duration
company ("QIP"), and SFM Domestic Investments LLC, a Delaware limited liability
company ("SFMDI" and together with QIP, the "Purchasers") intending to be
legally bound, hereby irrevocably agree, jointly but not severally, that they
shall provide Bluefly, Inc., a Delaware corporation (the "Company"), up to an
aggregate of Four Million Dollars ($4,000,000) (the "Commitment Amount"). The
Commitment Amount may be drawn by the Company, at its option (as determined by
the disinterested members of the Board of Directors of the Company) at any time
prior to January 1, 2003 in one or more tranches; provided, however, that the
Company may draw down from the Standby Commitment Amount only at such time that
its total cash balances are less than $1,000,000; and provided, further, that
the Commitment Amount shall be reduced by the gross cash proceeds received by
the Company or any of its subsidiaries from the issuance after the date hereof
of any equity or convertible securities, excluding the issuance of equity or
convertible securities in connection with: (1) financing provided by the
Purchasers pursuant to this agreement, (2) any trade payables and other
financing arrangements entered into in the ordinary course of business, and (3)
any financing or credit accommodations received by the Company pursuant to the
Financing Agreement, dated March 30, 2001, between the Company and Rosenthal &
Rosenthal, Inc. (as amended, the "R&R Financing").

         Any and all draws against the Commitment Amount shall be made on terms
(including, without limitation, the nature of the securities to be issued by the
Company) that are consistent with those in the market at the time the draw is
made for similar investments by investors similar to the Purchasers in companies
similar to the Company. The Company shall notify the Purchasers in writing
within two business days of the receipt of any funds that would reduce the
Commitment Amount; provided that the Commitment Amount shall automatically be
reduced whether or not the Company provides such notice.

         The obligation of each Purchaser in respect of the Commitment Amount
shall be limited to the percentage set forth below opposite such Purchaser's
name.

                           Purchaser                          Percentage
                           ---------                          ----------
                           QIP                                96.83%
                           SFMDI                               3.17%

<PAGE>

         In consideration of each Purchaser's execution, delivery and
performance under this agreement, the Company shall deliver to each Purchaser a
duly executed warrant (a "Warrant") to purchase the number of shares of Common
Stock, par value $0.01, of the Company set forth opposite such Purchaser's name
below for a period of five (5) years. The Warrants shall be issued on the date
hereof at an exercise price equal to the twenty (20) day trailing average
closing sales price of the Common Stock on the date hereof, as reported by
NASDAQ, which is $1.68 per share.

                           Purchaser                          Warrant Amount
                           ---------                          --------------
                           QIP                                96,830
                           SFMDI                               3,170

Each Warrant shall be in the form of Exhibit I attached hereto and shall be
delivered free and clear of any lien, claim, encumbrance, or security interest
of any kind or nature whatsoever. The parties agree that the anti-dilution
provision of Section 5.8.6 of the Certificate of Incorporation of the Company
shall not apply as a result of the issuance of each Warrant. The parties agree
that the shares of Common Stock for which the Warrants are exercisable are
deemed "Registrable Securities," as such term is defined in the Investment
Agreement (the "Investment Agreement") among the Company, Company's
predecessor-in-interest, QIP, and SFMDI dated as of November 13, 2000, and that
the holders of the Warrants shall be entitled to the registration rights set
forth therein with respect to such shares of Common Stock underlying the
Warrants.

         All notices, demands and other communications relating to this
agreement shall be made in the manner set forth in the Investment Agreement.
This agreement shall inure to the benefit of and be binding upon the successors
and permitted assigns of the parties hereto. Subject to applicable securities
laws, each of the Purchasers may assign any of its rights under this agreement
to any of its affiliates but no such assignment shall relieve any Purchaser from
its obligations hereunder. The Company may not assign any of its rights under
this agreement, except to a successor-in-interest to the Company, without the
written consent of all of the Purchasers.

         No failure or delay on the part of Company or the Purchasers in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such rights, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. Any amendment, supplement or modification of or to
any provision of this agreement, any waiver of any provision of this agreement,
or any consent to any departure by the Company or the Purchasers from the terms
of this agreement shall be effective only if it is made or given in writing and
signed by all of the parties hereto.

         This agreement shall be governed by and construed in accordance with
the internal laws of the State of New York, without regard to the principles of
conflicts of law thereof. This agreement together with the Warrants are intended
by the parties as a final expression of their agreement and intended to be a
complete and exclusive statement


                                       2
<PAGE>

of the agreement and understanding of the parties hereto in respect of the
subject matter contained herein and therein.

         If any one or more of the provisions contained herein, or the
application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.

         Each of the parties shall execute such documents and perform such
further acts as may be reasonably required or desirable to carry out or to
perform the provisions of this agreement. This agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.

         IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed and delivered by their respective officers hereunto duly authorized on
the date first written above.


                                            QUANTUM INDUSTRIAL PARTNERS LDC


                                            By: /s/  Richard D. Holahan, Jr.
                                                --------------------------------
                                                 Name:  Richard D. Holahan, Jr.
                                                 Title:  Attorney-in-fact


                                            SFM DOMESTIC INVESTMENTS LLC


                                            By: /s/  Richard D. Holahan, Jr.
                                                -------------------------------
                                                 Name:  Richard D. Holahan, Jr.
                                                 Title:  Attorney-in-fact


ACCEPTED AND AGREED:

BLUEFLY, INC.


By: /s/ E. Kenneth Seiff
    --------------------------------
     Name:  E. Kenneth Seiff
     Title:  Chief Executive Officer

<PAGE>

                                                                       EXHIBIT I

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED,
QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER SUCH ACT OR LAWS AND NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY
AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES.

                                                                WARRANT NO. [__]

                                     WARRANT

                       TO PURCHASE SHARES OF COMMON STOCK

                                       OF

                                  BLUEFLY, INC.


         THIS IS TO CERTIFY THAT [__________________] or its registered assigns
(the "Holder"), is the owner of the right to subscribe for and to purchase from
BLUEFLY, INC., a Delaware corporation (the "Company"), [___________________]
[(_____)] (the "Number Issuable"), fully paid, duly authorized and
non-assessable shares of Common Stock at a price per share equal to the Current
Market Price as of March 26, 2002 (the "Exercise Price"), at any time, in whole
or in part, on or after March 27, 2002 (the "Effective Date") through 5:00 PM
New York City time, on March 27, 2007 (the "Expiration Date") all on the terms
and subject to the conditions hereinafter set forth (the "Warrants").

         The Number Issuable and the Exercise Price are subject to further
adjustment from time to time pursuant to the provisions of Section 2 of this
Warrant Certificate.

         Capitalized terms used herein but not otherwise defined shall have the
meanings given to them in Section 12 hereof.

         Section 1. Exercise of Warrants.

                                       1
<PAGE>

         (a) Subject to the last paragraph of this Section 1, the Warrants
evidenced hereby may be exercised, in whole or in part, by the Holder hereof at
any time or from time to time, on or after the Effective Date and on or prior to
the Expiration Date upon delivery to the Company at the principal executive
office of the Company in the United States of America, of (A) this Warrant
Certificate, (B) a written notice stating that such Holder elects to exercise
the Warrants evidenced hereby in accordance with the provisions of this Section
1 and specifying the number of Warrants being exercised and the name or names in
which the Holder wishes the certificate or certificates for shares of Common
Stock to be issued and (C) payment of the Exercise Price for such Warrants,
which shall be payable by any one or any combination of the following: (i) cash;
(ii) certified or official bank check payable to the order of the Company; (iii)
by the surrender (which surrender shall be evidenced by cancellation of the
number of Warrants represented by any Warrant Certificate presented in
connection with a Cashless Exercise (as defined below)) of a Warrant or Warrants
(represented by one or more relevant Warrant Certificates), and without the
payment of the Exercise Price in cash, in return for the delivery to the
surrendering Holder of such number of shares of Common Stock equal to the number
of shares of the Common Stock for which such Warrant is exercisable as of the
date of exercise (if the Exercise Price were being paid in cash or certified or
official bank check) reduced by that number of shares of Common Stock equal to
the quotient obtained by dividing (x) the aggregate Exercise Price (assuming no
Cashless Exercise) to be paid by (y) the Market Price of one Share of Common
Stock on the Business Day which immediately precedes the day of exercise of the
Warrant; or (iv) by the delivery of shares of the Common Stock having a value
(as defined by the next sentence) equal to the aggregate Exercise Price to be
paid, that are either held by the Holder or are acquired in connection with such
exercise, and without payment of the Exercise Price in cash. Any share of Common
Stock delivered as payment for the Exercise Price in connection with an In-Kind
Exercise (as defined below) shall be deemed to have a value equal to the Market
Price of one Share of Common Stock on the Business Day that immediately precedes
the day of exercise of the Warrants. An exercise of a Warrant in accordance with
clause (iii) is herein referred to as a "Cashless Exercise" and an exercise of a
Warrant in accordance with clause (iv) is herein referred to as an "In-Kind
Exercise." The documentation and consideration, if any, delivered in accordance
with subsections (A), (B) and (C) are collectively referred to herein as the
"Warrant Exercise Documentation."

         (b) As promptly as practicable, and in any event within five (5)
Business Days after receipt of the Warrant Exercise Documentation, the Company
shall deliver or cause to be delivered (A) certificates representing the number
of validly issued, fully paid and nonassessable shares of Common Stock specified
in the Warrant Exercise Documentation, (B) if applicable, cash in lieu of any
fraction of a share, as hereinafter provided, and (C) if less than the full
number of Warrants evidenced hereby are being exercised or used in a Cashless
Exercise, a new Warrant Certificate or Certificates, of like tenor, for the
number of Warrants evidenced by this Warrant Certificate, less the number of
Warrants then being exercised and/or used in a Cashless Exercise. Such exercise
shall be deemed to have been made at the close of business on the date of
delivery of the Warrant Exercise Documentation so that the Person entitled to
receive shares of Common


                                       2
<PAGE>

Stock upon such exercise shall be treated for all purposes as having become the
record holder of such shares of Common Stock at such time.

         (c) The Company shall pay all expenses incurred by the Company in
connection with and taxes and other governmental charges (other than income
taxes of the Holder) that may be imposed in respect of, the issue or delivery of
any shares of Common Stock issuable upon the exercise of the Warrants evidenced
hereby. The Company shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Common Stock, as the case may be, in any name other
than that of the registered holder of the Warrant evidenced hereby.

         (d) In connection with the exercise of any Warrants evidenced hereby,
no fractions of shares of Common Stock shall be issued, but in lieu thereof the
Company shall pay a cash adjustment in respect of such fractional interest in an
amount equal to such fractional interest multiplied by the Market Price for one
Share of Common Stock on the Business Day which immediately precedes the day of
exercise. If more than one (1) such Warrant shall be exercised by the holder
thereof at the same time, the number of full shares of Common Stock issuable on
such exercise shall be computed on the basis of the total number of Warrants so
exercised.

         Section 2. Certain Adjustments.

            (a) The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
as follows:

               (i) Stock Dividends, Subdivision, Combination or Reclassification
of Common Stock. If at any time after the date of the issuance of this Warrant
the Company shall (i) pay a dividend on Common Stock in shares of its capital
stock, (ii) combine its outstanding shares of Common Stock into a smaller number
of shares, (iii) subdivide its outstanding shares of Common Stock as the case
may be, or (iv) issue by reclassification of its shares of Common Stock any
shares of capital stock of the Company, then, on the record date for such
dividend or the effective date of such subdivision or split-up, combination or
reclassification, as the case may be, the number and kind of shares to be
delivered upon exercise of this Warrant will be adjusted so that the Holder will
be entitled to receive the number and kind of shares of capital stock that such
Holder would have owned or been entitled to receive upon or by reason of such
event had this Warrant been exercised immediately prior thereto, and the
Exercise Price will be adjusted as provided below in paragraph 2(a)(v).

               (ii) Extraordinary Distributions. If at any time after the date
of issuance of this Warrant, the Company shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (A) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (B) dividends payable in shares of capital stock for


                                       3
<PAGE>

which adjustment is made under Section 2(a)(i), or rights, options or warrants
to subscribe for or purchase securities of the Company), then in each such case
the number of shares of Common Stock to be delivered to such Holder upon
exercise of this Warrant shall be increased so that the Holder thereafter shall
be entitled to receive the number of shares of Common Stock determined by
multiplying the number of shares such Holder would have been entitled to receive
immediately before such record date by a fraction, the denominator of which
shall be the Exercise Price on such record date minus the then fair market value
(as reasonably determined by the Board of Directors of the Company in good
faith) of the portion of the cash, evidences of indebtedness, securities or
other assets so distributed or of such rights or warrants applicable to one
share of the Common Stock (provided that such denominator shall in no event be
less than $.01) and the numerator of which shall be the Exercise Price.

               (iii) Reorganization, etc. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of either Common
Stock) or any sale, lease or other transfer of all or substantially all of the
assets of the Company to any other person (each, a "Reorganization Event"),
shall be effected in such a way that the holders of the Common Stock shall be
entitled to receive cash, stock, other securities or assets (whether such cash,
stock, other securities or assets are issued or distributed by the Company or
another Person) with respect to or in exchange for the Common Stock, then, upon
exercise of this Warrant, the Holder shall have the right to receive the kind
and amount of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of the Common Stock
that such holder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such Reorganization
Event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2(a). The Company
shall not enter into any of the transactions referred to in this Section
2(a)(iii) unless effective provision shall be made so as to give effect to the
provisions set forth in this Section 2(a)(iii).

               (iv) Carryover. Notwithstanding any other provision of this
Section 2(a), no adjustment shall be made to the number of shares of either
Common Stock to be delivered to the Holder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.

               (v) Exercise Price Adjustment. Whenever the Number Issuable upon
the exercise of the Warrant is adjusted as provided pursuant to this Section
2(a), the Exercise Price per share payable upon the exercise of this Warrant
shall be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a


                                       4
<PAGE>

fraction, of which the numerator shall be the Number Issuable upon the exercise
of the Warrant immediately prior to such adjustment, and of which the
denominator shall be the Number Issuable immediately thereafter; provided,
however, that the Exercise Price for each Share of the Common Stock shall in no
event be less than the par value of a share of such Common Stock.

            (b) Notice of Adjustment. Whenever the Number Issuable or the
Exercise Price is adjusted as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder, notice of such adjustment
or adjustments setting forth the Number Issuable and the Exercise Price after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.

         Section 3. No Redemption. The Company shall not have any right to
redeem any of the Warrants evidenced hereby.

         Section 4. Notice of Certain Events. In case at any time or from time
to time (i) the Company shall declare any dividend or any other distribution to
all holders of Common Stock, (ii) the Company shall authorize the granting to
the holders of Common Stock of rights or warrants to subscribe for or purchase
any additional shares of stock of any class or any other right, (iii) the
Company shall authorize the issuance or sale of any other shares or rights which
would result in an adjustment to the Number Issuable pursuant to Section
2(a)(i), (ii) or (iii), (iv) there shall be any capital reorganization or
reclassification of Common Stock of the Company or consolidation or merger of
the Company with or into another Person, or any sale or other disposition of all
or substantially all the assets of the Company, or (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the Company,
then, in any one or more of such cases the Company shall mail to the Holder at
such Holder's address as it appears on the transfer books of the Company, as
promptly as practicable but in any event at least 10 days prior to the date on
which the transactions contemplated in Section 2(a)(i), (ii) or (iii) a notice
stating (a) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants or, if a record is not to be taken,
the date as of which the holders of record of either Common Stock to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (b)
the date on which such reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up is expected to become
effective. Such notice also shall specify the date as of which it is expected
that the holders of record of the Common Stock shall be entitled to exchange the
Common Stock for shares of stock or other securities or property or cash
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up.

         Section 5. Certain Covenants. The Company covenants and agrees that all
shares of Capital Stock of the Company which may be issued upon the exercise of
the Warrants evidenced hereby will be duly authorized, validly issued and fully
paid and nonassessable. The Company shall at all times reserve and keep
available for issuance upon the exercise of the Warrants, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the exercise of all


                                       5
<PAGE>

outstanding Warrants, and shall take all action required to increase the
authorized number of shares of Common Stock if at any time there shall be
insufficient authorized but unissued shares of Common Stock to permit such
reservation or to permit the exercise of all outstanding Warrants.

         Section 6. Registered Holder. The persons in whose names this Warrant
Certificate is registered shall be deemed the owner hereof and of the Warrants
evidenced hereby for all purposes. The registered Holder of this Warrant
Certificate, in their capacity as such, shall not be entitled to any rights
whatsoever as a stockholder of the Company, except as herein provided.

         Section 7. Transfer of Warrants. Any transfer of the rights represented
by this Warrant Certificate shall be effected by the surrender of this Warrant
Certificate, along with the form of assignment attached hereto, properly
completed and executed by the registered Holder hereof, at the principal
executive office of the Company in the United States of America, together with
an appropriate investment letter and opinion of counsel, if deemed reasonably
necessary by counsel to the Company to assure compliance with applicable
securities laws. Thereupon, the Company shall issue in the name or names
specified by the registered Holder hereof and, in the event of a partial
transfer, in the name of the registered Holder hereof, a new Warrant Certificate
or Certificates evidencing the right to purchase such number of shares of Common
Stock as shall be equal to the number of shares of Common Stock then purchasable
hereunder.

         Section 8. Denominations. The Company covenants that it will, at its
expense, promptly upon surrender of this Warrant Certificate at the principal
executive office of the Company in the United States of America, execute and
deliver to the registered Holder hereof a new Warrant Certificate or
Certificates in denominations specified by such Holder for an aggregate number
of Warrants equal to the number of Warrants evidenced by this Warrant
Certificate.

         Section 9. Replacement of Warrants. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, upon
delivery of an indemnity reasonably satisfactory to the Company (in the case of
an insurance company or other institutional investor, its own unsecured
indemnity agreement shall be deemed to be reasonably satisfactory), or, in the
case of mutilation, upon surrender and cancellation thereof, the Company will
issue a new Warrant Certificate of like tenor for a number of Warrants equal to
the number of Warrants evidenced by this Warrant Certificate.

         Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED
BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.

         Section 11. Rights Inure to Registered Holder. The Warrants evidenced
by this Warrant Certificate will inure to the benefit of and be binding upon the
registered


                                       6
<PAGE>

Holder thereof and the Company and their respective successors and permitted
assigns. Nothing in this Warrant Certificate shall be construed to give to any
Person other than the Company and the registered Holder thereof any legal or
equitable right, remedy or claim under this Warrant Certificate, and this
Warrant Certificate shall be for the sole and exclusive benefit of the Company
and such registered Holder. Nothing in this Warrant Certificate shall be
construed to give the registered Holder hereof any rights as a Holder of shares
of either Common Stock until such time, if any, as the Warrants evidenced by
this Warrant Certificate are exercised in accordance with the provisions hereof.

         Section 12. Definitions. For the purposes of this Warrant Certificate,
the following terms shall have the meanings indicated below:

         "Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in the City of New York, New York are authorized or
required by law or executive order to close.

         "Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock (or equivalent ownership interests in a Person not a corporation)
whether now outstanding or hereafter issued, including, without limitation, any
rights, warrants or options to purchase such Person's capital stock.

         "Common Stock" shall mean the common stock of the Company.

         "Common Stock Equivalent" means any security or obligation which is by
its terms convertible into or exercisable for shares of Common Stock, including,
without limitation, any option, warrant or other subscription or purchase right
with respect to Common Stock.

         "Current Market Price" per share shall mean, as of the date of
determination, (a) the average of the daily Market Prices under clause (a), (b)
or (c) of the definition thereof, as applicable, of the Common Stock during the
immediately preceding twenty (20) trading days ending on such date, and (b) if
the Common Stock is not then listed or admitted to trading on any national
securities exchange or quoted in the over-the-counter market, then the Market
Price under clause (d) of the definition thereof on such date.

         "Market Price" shall mean, per share of Common Stock, on any date
specified herein: (a) if the Common Stock is listed on a national securities
exchange, the Closing Price per share of Common Stock on such date published in
The Wall Street Journal (National Edition) or, if no such closing price on such
date is published in The Wall Street Journal (National Edition), the average of
the closing bid and asked prices on such date, as officially reported on the
principal national securities exchange on which the Common Stock is then listed
or admitted to trading; or (b) if the Common Stock is not then listed or
admitted to trading on any national securities exchange, but is designated as a
national market system security, the last trading price of the Common Stock on
such date; or (c) if there shall have been no trading on such date or if the


                                       7
<PAGE>

Common Stock is not so designated, the average of the reported closing bid
and asked price of the Common Stock, on such date as shown by NASDAQ and
reported by any member firm of the NYSE selected by the Company; or (d) if none
of (a), (b) or (c) is applicable, a market price per share determined in good
faith by the Board of Directors of the Company, which shall be deemed to be
"Fair Market Value" unless holders of at least 15% of Common Stock issued or
issuable upon exercise of the Warrants request that the Company obtain an
opinion of a nationally recognized investment banking firm chosen by the Company
(who shall bear the expense) and reasonably acceptable to such requesting
holders of the Warrants, in which event the Fair Market Value shall be as
determined by such investment banking firm.

         "NASDAQ" means the National Market System of the National Association
of Securities Dealers, Inc. Automated Quotations System.

         "NYSE" shall mean the New York Stock Exchange, Inc.

         "Person" shall mean any individual, corporation, limited liability
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

         Section 13. Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, courier
services or personal delivery, (a) if to the Holder of a Warrant, at such
Holder's last known address appearing on the books of the Company; and (b) if to
the Company, at its principal executive office in the United States, or such
other address as shall have been furnished to the party given or making such
notice, demand or other communication. All such notices and communications shall
be deemed to have been duly given: (i) when delivered by hand, if personally
delivered; (ii) when delivered to a courier if delivered by commercial overnight
courier service; and (iii) five (5) Business Days after being deposited in the
mail, postage prepaid, if mailed.


                                       8
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of this 27th day of March, 2002.


                                   BLUEFLY, INC.


                                   By:
                                        --------------------------------------
                                        Name:
                                        Title:


                                       9
<PAGE>

                            [Form of Assignment Form]

         [To be executed upon assignment of Warrants] The undersigned hereby
assigns and transfers this Warrant Certificate to ___________________ whose
Social Security Number or Tax ID Number is _________________ and whose record
address is _____________________________________, and irrevocably appoints
________________ as agent to transfer this security on the books of the Company.
Such agent may substitute another to act for such agent.

                                   Signature:

                                   -------------------------------
                                   Signature Guarantee:

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


Date: ___________________________


                                       10

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.29
<SEQUENCE>7
<FILENAME>k20188ex10_29.txt
<DESCRIPTION>SOFTWARE LICENSE AND SERVICE AGREEMENT
<TEXT>
                                                                   Exhibit 10.29

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------

                     SOFTWARE LICENSE AND SERVICES AGREEMENT


      THIS SOFTWARE LICENSE AND SERVICES AGREEMENT and the Exhibits attached
hereto (collectively, the "Agreement") is entered into by and between BLUE
MARTINI SOFTWARE, INC., a Delaware corporation ("BLUE MARTINI"), and BLUEFLY
INC., a Delaware corporation ("COMPANY"), as of March 12, 2002 (the "Effective
Date"). In consideration of the mutual covenants and conditions contained
herein, the parties agree as follows:

1. DEFINITIONS. The following definitions apply throughout this Agreement:

      1.1 "Documentation" means Blue Martini's published user manuals relating
to the Software as of the Effective Date or as it relates to any Modification or
Major Release as of the date of delivery of each Modification or Major Release,
as applicable.

      1.2 "Error" means any failure of the Software to operate in conformance
with the Documentation in any material respect.

      1.3 "Maintenance" shall means the services provided by Blue Martini to the
Company as set forth in Section 7 and Exhibit B attached hereto.

      1.4 "Modification" means any revisions, enhancements, bug fixes, patches,
Error resolutions and all other changes to the Software required to insure that
the Software operates in conformance with the Documentation and Specifications.

      1.5 "Order" means the form forwarded by Blue Martini, substantially
equivalent to Exhibit A to this Agreement, to purchase a license to use Software
or to purchase Maintenance under this Agreement.

      1.6 "Production" means Company's use of the Software to manage content or
provide e-commerce functionality to Company's customers (or potential customers)
through a live Company website.

      1.7 "Professional Services Agreement" means the agreement attached hereto
as Exhibit C and all written statements of work signed by Company and related
thereto.

      1.8 "Software" means the software modules listed in Exhibit A and any
Major Releases, Modifications, interim releases, bug fixes and patches
applicable to such software modules.

      1.9 "Source Code" means the Software fully documented in its source code
(i.e., human readable) form; (ii) a compiler, similar computer program or any
other software which is necessary to convert the source code form into the
object code form of the Software; and (iii) runtime software necessary to
execute the source code form of the Software, including but not limited to
interpreters and templates. Also for the purposes of this Agreement,
"Commentary" shall include explanations, flow charts, schematics, algorithms,
subroutine descriptions, class and object descriptions, memory and overlay maps,
statements of principles of operations, architecture standards, data flow
descriptions, class, base-class and sub-class descriptions, data structures and
control logic of the software and any other documentation of the source code
form of the Software, all in sufficient detail to enable a trained programmer
through study of such materials to maintain and/or modify the software without
undue experimentation.

2. LICENSE GRANT. Subject to the terms and conditions of this Agreement, Blue
Martini hereby grants to Company (and its successors and assigns as permitted
herein) a perpetual, non-sublicensable, non-exclusive, non-transferable (except
as otherwise expressly set forth herein), royalty-free, worldwide,
enterprise-wide right and license to use, maintain, modify, enhance and create
derivative works from the Software (in object code form only and only in
accordance with the Documentation) and the Documentation for Company's business
use in accordance with the provisions of Section 3, and to make as many backup
(non-use other than for disaster testing and recovery purposes) copies as may be
necessary, provided that Company shall keep a record of each such backup copy
and the location of its storage, and shall provide any and all such records to
Blue Martini upon request. Company must reproduce and include any and all
copyright, proprietary and any other notices that appear on the original
Software and any media therefor on any copies made by Company. Company may
exercise its rights hereunder through third party subcontractors for the sole
purpose of assisting Company in its permitted use of the Software; provided,
however, that each such third party subcontractor must agree in a legally
binding writing, to which Blue Martini is a named third party beneficiary, to be
bound by terms and conditions at least as protective of and beneficial to Blue
Martini as those set forth herein.

3. RESTRICTIONS ON USE.

      3.1 Proprietary Rights. Company acknowledges that the Software, its
structure, organization and Source Code, and the Documentation are the property
and constitute valuable trade secrets of Blue Martini and its suppliers. Company
agrees not to: (a) decompile or disassemble the Software, separate the Software
into its component parts, or in any way attempt to reconstruct or discover any
source code or algorithms of the Software by any means whatsoever; (b) remove
any product identification, trademark, copyright, confidentiality, proprietary
or other notice contained on or within the Software; (c) modify or create any
derivative works from


                                       1
<PAGE>

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Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


the Software or any part thereof, except to the extent that the Software
provides for user-modifiable components (d) except as otherwise permitted
herein, sell, sublicense, lease, rent, loan, assign, convey or otherwise
transfer the Software or any component thereof; (e) otherwise copy or use the
Software for any purpose or in any manner not expressly permitted in this
Agreement; or (f) knowingly permit or encourage any third party to do any of the
foregoing. All assistance requested by Company for integration with existing or
proposed Company systems or software shall be provided by Blue Martini in
accordance with Section 7. All rights in and to the Software and Documentation
not expressly granted to Company in this Agreement are reserved by Blue Martini
and its suppliers.

      3.2 Restrictions. Company shall use the Software only on the operating
system specified in Exhibit A; provided, however, that a breach of this sentence
by Company shall not be considered a material breach. Company may designate no
more than twenty-five (25) named users to create reports using the Blue Martini
Reporter component of the Software (each a "Report Creator") by providing Blue
Martini written notice setting forth the names of the Company employees to be so
designated. Company may freely change the list of names identified as Report
Creators in the event any individual identified as a Report Creator either
changes role or responsibility within Company or leaves the employ of Company.
Only Report Creators shall be permitted to use the Blue Martini Reporter. Report
templates, queries and on-line analytic processing cubes created with the Blue
Martini Reporter may only be shared with other Report Creators; however,
resulting reports may be shared without limitation. Company may install only a
single copy of each of the following components of the Software for Production
purposes and may install one additional copy for purposes of staging,
development, and testing on each server used by Company in staging, development
and testing: Blue Martini Report Broker, Blue Martini Report Server, and Blue
Martini Work Flow Server (each part of the Blue Martini Tools Module) and Blue
Martini Data Mining Server (part of the Blue Martini Data Mining and
Visualization Module - if included). Company's right to use the Macromedia
components of the Software shall be limited to twenty-five (25) licenses of
UltraDev, one (1) license of Generator DE, and one (1) license of Flash. Company
shall not use in any manner other than in connection with the Software the Blue
Martini Enterprise Reporting, Blue Martini Data Warehouse, or any Macromedia
technology included with the Software. Company shall not access and shall have
no right to directly use the WebXpress components of the Software or any of
WebXpress' APIs. Company agrees that, notwithstanding anything to the contrary
elsewhere herein, any developments, wraps or connectors relating to the
WebXpress APIs that are developed pursuant to this Agreement shall be owned by
Blue Martini, as between the parties. In the event that Company elects to switch
from using the WebXpress component of the Software to using IBM's WebSphere
application server, Blue Martini will make such available to Company at Blue
Martini's cost. Unless Company is licensing the Blue Martini Mobile Wireless
Module hereunder, Company shall not use the Software to provide any wireless
functionality or to run through any wireless device; provided, however, that the
foregoing shall not in any way limit Company's right to have its users access
its website from any wireless device.

4. ORDERING AND DELIVERY. An Order will be binding on both parties when signed
by authorized representatives of Company. Each Order shall include the following
information: (a) the Software licensed or to which Support and Maintenance shall
apply, and (b) the applicable fees. No additional or different terms in any
purchase order or similar document shall modify the terms of this Agreement. For
purposes of this Agreement, initial delivery of the Software and Documentation
will be deemed to have occurred upon Blue Martini providing Company with a
password to access a web page from which Company may download the Software and
Documentation. The Software will be deemed accepted upon initial delivery,
subject to the warranties in Section 9.

5. LICENSE FEES AND PAYMENT. Company shall pay to Blue Martini the license fees
for the Software set forth in Exhibit A (the "License Fees"). All fees hereunder
exclude all applicable sales, use, value-added, property and other taxes,
including duties and similar mandatory payments, and Company will be responsible
for payment of all such taxes (other than taxes based on Blue Martini's net
income), and any related penalties and interest, arising from the payment of
such fees, the delivery or license of the Software, or the provision of any
services to Company. All amounts under this Agreement are in U.S. dollars and
payment must be made in such. Company will make all payments of amounts due
under this Agreement to Blue Martini free and clear of, and without reduction
for, any withholding taxes. If Company is legally required to make any such
withholding from any payment due to Blue Martini under this Agreement, the sum
payable by Company upon which such withholding is based shall be increased to
the extent necessary to ensure that, after such withholding, Blue Martini
receives an amount equal to the amount Blue Martini would have received in the
absence of such withholding. Company will provide Blue Martini with official
receipts issued by the appropriate taxing authority, or such other evidence as
Blue Martini may reasonably request, to establish that such taxes have been
paid. Blue Martini reserves the right to charge interest on any overdue amounts
at a rate of one and one-half percent (1.5%) per month or the maximum rate
permitted by applicable law, whichever is less, from the due date until paid
plus reasonable costs incurred in collection (including reasonable attorneys'
fees).

6. SOURCE CODE ESCROW; OWNERSHIP OF DERIVATIVE WORKS.


                                       2
<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


      6.1 Source Code Escrow. Blue Martini has deposited a copy of the Source
Code (the "Escrow Materials") with DSI Technology Escrow Services, Inc. ("Escrow
Agent"). Upon execution of this Agreement, Blue Martini will add Company as a
beneficiary of Blue Martini's master escrow agreement, a copy of which is
attached as Exhibit D (the "Escrow Agreement") with Escrow Agent. Once added as
a beneficiary, in the event of [***], then Company may, upon verification of
the occurrence of any of (i) through (vii) above under a procedure set forth in
the escrow agreement, obtain a copy of the Escrow Materials from the Escrow
Agent. Company agrees that Company shall bear any and all reasonable Escrow
Agent fees associated with this provision. As of the Effective Date, DSI's fee
for Company to become a beneficiary to the Escrow Agreement for one year is
$650. Blue Martini hereby grants to Company (and its successors and assigns as
permitted herein), subject to release of the Escrow Materials as set forth
herein, a perpetual, non-sublicensable, non-exclusive, non-transferable (except
as otherwise expressly set forth herein), royalty-free, worldwide,
enterprise-wide right and license to use, maintain, modify, enhance and create
derivative works from the Escrow Materials, solely for Company's internal use of
the Software. Company shall have no right to distribute or disclose the Escrow
Materials, and the Escrow Materials shall be Confidential Information under this
Agreement.

      6.2 .Derivative Works. Any and all derivative works to the Software which
are created pursuant to this Agreement shall be owned by Blue Martini, but
Company shall have the same rights and licenses to such derivative works as
Company has to the Software.

7. MAINTENANCE.

      7.1 Maintenance Terms. Maintenance provided by Blue Martini shall be
pursuant to Blue Martini's standard maintenance terms, a copy of which is
attached hereto as Exhibit B. Maintenance shall be provided solely to the
Maintenance site set forth in Exhibit A.

      7.2 Maintenance Fees and Payment. Company shall pay to Blue Martini the
Maintenance fee set forth in Exhibit A for Maintenance for fifteen (15) months
from the Effective Date. Additional periods of Maintenance shall be in one year
increments and shall be priced at [***] percent [***] of Blue Martini's
then-current standard license fee for the Software; provided, however, that in
no event shall Company's Maintenance fee relating to the licenses purchased by
Company on the Effective Date increase by more than ten percent (10%) from year
to year. Company's payment of Maintenance fees shall be due [***] days from the
date of invoice. In the event that Maintenance is discontinued or suspended, to
reinstate or renew Maintenance Company must first pay Blue Martini Maintenance
fees for the interim period during which Maintenance was discontinued or
suspended and Blue Martini may in its sole discretion elect not to accept such
renewal or reinstatement.

8. SERVICES. Services (other than support and maintenance services provided
pursuant to Exhibit B), if any, to be provided to Company by Blue Martini shall
be under the terms of Exhibit C attached hereto ("Services Exhibit").

9. WARRANTY.

      9.1 Limited Software Warranty. Blue Martini represent, warrants, and
covenants that: [***]

      9.2 Support and Maintenance Warranty. Blue Martini represents, warrants
and covenants that: [***]


                                       3
<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------

      9.3 Disclaimer. EXCEPT FOR THE LIMITED REPRESENTATIONS, WARRANTIES, AND
COVENANTS EXPRESSLY STATED HEREIN, THE SOFTWARE, DOCUMENTATION AND MAINTENANCE,
AS WELL AS ALL SERVICES, ARE PROVIDED "AS IS," AND BLUE MARTINI AND ITS
SUPPLIERS HEREBY EXPRESSLY DISCLAIM ANY AND ALL WARRANTIES OF ANY KIND OR
NATURE, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION THE
IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. EXCEPT FOR THE LIMITED REPRESENTATIONS, WARRANTIES AND
COVENENANTS EXPRESSLY STATED HEREIN, BLUE MARTINI AND ITS SUPPLIERS DO NOT
WARRANT OR REPRESENT THAT THE SOFTWARE, DOCUMENTATION OR MAINTENANCE WILL BE
FREE FROM BUGS OR THAT THEIR USE WILL BE UNINTERRUPTED OR ERROR-FREE, OR MAKE
ANY OTHER REPRESENTATIONS REGARDING THE USE, OR THE RESULTS OF THE USE, OF THE
SOFTWARE OR DOCUMENTATION IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY, OR
OTHERWISE. COMPANY ACKNOWLEDGES THAT BLUE MARTINI IS NOT RESPONSIBLE FOR AND
WILL HAVE NO LIABILITY FOR HARDWARE, SOFTWARE OR OTHER ITEMS OR ANY SERVICES
PROVIDED BY ANY PERSON OR ENTITY OTHER THAN BLUE MARTINI OR ITS EMPLOYEES,
AGENTS OR CONTRACTORS OR FOR NETWORK FAILURE. COMPANY FURTHER ACKNOWLEDGES THAT
IT HAS RELIED ON NO WARRANTIES OTHER THAN THE EXPRESS WARRANTIES SET FORTH IN
THIS AGREEMENT.

10. CONFIDENTIALITY. In the course of performing this Agreement, the parties may
disclose to each other Confidential Information. "Confidential Information"
shall mean any and all non-public technical and non-technical information
provided by either party to the other, including but not limited to (i) patent
and patent applications; (ii) trade secrets; and (iii) proprietary information
including, but not limited to, ideas, sketches, techniques, drawings, works of
authorship, models, inventions, know-how, processes, apparatuses, equipment,
algorithms, software programs, software source documents, and formulae related
to the current, future and proposed products and services of each of the
parties, and including, without limitation, their respective information
concerning research, experimental work, development, design details and
specifications, engineering, financial information, procurement requirements,
purchasing, manufacturing, customer lists, investors, employees, business and
contractual relationships, business forecasts, sales, merchandising, marketing
plans and information the disclosing party provides regarding third parties. All
Confidential Information shall remain the sole property of the disclosing party,
and the receiving party shall have no interest in or rights with respect thereto
except as expressly set forth in this Agreement. Each party agrees: (i) not to
use any Confidential Information of the other party for any purpose except in
the performance of its obligations under this Agreement or as otherwise
expressly permitted hereunder; (ii) to disclose such Confidential Information
only to employees (or third party subcontractors permitted under this Agreement)
who have a need to know such Confidential Information for purposes of this
Agreement and who are under a duty of confidentiality no less restrictive than
that set forth herein; (iii) to protect such Confidential Information from
unauthorized use, access or disclosure in the same manner that it protects its
own similar Confidential Information, but in no event with less care than a
reasonably prudent business would exercise and (iv) to promptly notify the other
party of any actual or potential unauthorized access to or use of Confidential
Information. The foregoing restrictions on disclosure shall not apply with
respect to any information which: (a) was or becomes generally known or publicly
available through no act or failure to act on the part of the receiving party;
(b) is known by the receiving party without restrictions on


                                       4
<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


disclosure at the time of receiving such information as evidenced by its
records; (c) is rightfully furnished to the receiving party without restrictions
on disclosure by a third party without a breach of such third party's
obligations of confidentiality; or (d) is required by law to be disclosed by the
receiving party, provided that the receiving party: (x) gives the disclosing
party prompt written notice of such requirement prior to such disclosure; (y)
provides assistance in obtaining an order protecting Confidential Information
from disclosure; and (z) discloses information only to the extent required by
law. Company further agrees not to disclose to any third party any performance
information (including, without limitation, benchmarks) relating to the Software
except as otherwise expressly contemplated herein. This Section 10 will survive
any termination of the Agreement for a period of three (3) years with respect to
non-technical information and in perpetuity with respect to technical
information, including the Software, the Documentation and any code.

11. BLUE MARTINI INDEMNITY. Blue Martini agrees to indemnify, defend and hold
harmless Company, its officers, directors, employees and agents from and against
all damages and costs (including reasonable attorneys' fees) finally awarded
against Company (or finally settled upon) and arising from or relating to:

(i) any claim brought against Company by a third party alleging that the
Software directly infringes any patent, copyright, trademark or other
intellectual property right or misappropriates any trade secret (recognized as
such under the Uniform Trade Secrets Act). The parties acknowledge and agree
that Blue Martini's obligations under this item (i) of this Section 11 are
conditioned upon Company providing Blue Martini: (a) prompt written notice of
the existence of such claim, suit, action or proceeding (each a "claim");
provided that a failure of the Company to promptly notify Blue Martini shall not
relieve Blue Martini of liability hereunder except to the extent that Blue
Martini's defenses to such claim are materially impaired by such failure to
promptly notify; (b) sole control over the defense or settlement of such claim,
it being agreed that Blue Martini shall not enter into any settlement imposing
any liability or obligation on Company without Company's prior written consent;
and (c) assistance at Blue Martini's request and sole expense, to the extent
reasonably necessary for the defense or settlement of such claim. If any claim
that Blue Martini is obligated to defend has occurred or, in Blue Martini's
opinion, is likely to occur, Blue Martini may, at its option and expense either
(1) obtain for Company the right to continue to use the applicable Software, (2)
replace or modify the Software so it becomes non-infringing, without materially
adversely affecting the Software's specified functionality, or (3) if (1) or (2)
are not readily available after using reasonable commercial efforts or, if
neither of the foregoing options is commercially reasonable, refund all fees
paid by Customer and terminate this Agreement; provided that termination
pursuant to this subsection 11(ii)(3) shall be deemed a termination by Company
for cause. Notwithstanding the foregoing, Blue Martini shall not indemnify,
defend or hold harmless Company for any claims solely based on: (a) any Company
or third party intellectual property or software incorporated in or combined
with the Software where in the absence of such incorporated or combined item,
there would not have been infringement, but excluding any third party software
or intellectual property incorporated into the Software at Blue Martini's
discretion; (b) Software which has been altered or modified by Company, by any
third party or by Blue Martini at the request of Company (where Blue Martini had
no discretion as to the implementation of modifications to the Software or
Documentation directed by Company), where in the absence of such alteration or
modification the Software would not be infringing; or (c) use of any version of
the Software with respect to which Blue Martini has made available a
non-infringing updated, revised or repaired subsequent version or other
applicable update, patch or fix;

(ii) the use of Blue Martini's premises by Company employees pursuant to this
Agreement; or

(iii) any claim of personal injury or tangible personal property damage
(excluding data) of whatsoever nature or kind arising, in whole or in part, out
of, as a result of, or in connection with the gross negligent or willful
misconduct of Blue Martini, its employees, subcontractors or agents.
Furthermore, Blue Martini agrees to maintain commercial general liability
insurance of at least $2.5 million, covering Blue Martini's obligations
contained herein on a claims-made basis with coverage for at least one year from
the date of completion of the services. The provisions of this Section 11 herein
shall survive for a period of one year following the earlier of (a) completion
of the Maintenance services or (b) termination of this Agreement.

12. COMPANY INDEMNITY. Company agrees to indemnify, defend and hold harmless
Blue Martini from and against all damages and costs (including reasonable
attorneys' fees) finally awarded against Blue Martini (or finally settled upon)
and arising from: (i) any claim of personal injury or tangible personal property
damage (excluding data) of whatsoever nature or kind arising, in whole or in
part, out of, as a result of, or in connection with the gross negligent or
willful misconduct of Company, its employees, subcontractors or agents; (ii) any
claim brought against Blue Martini by a third party alleging that the Company
Materials (as defined in Exhibit C) directly infringe any U.S. copyright or
trademark or misappropriate any trade secret (recognized as such under the
Uniform Trade Secrets Act) in existence as of the Effective Date; or (iii) any
claim brought against Blue Martini by a third party arising from or relating to
any modification of the Software by Company or any use of the Software other
than as permitted under this Agreement. The parties acknowledge and agree that
Company's obligations under this section are conditioned upon Blue Martini
providing Company: (1) prompt written notice of the existence of such claim,
suit, action or proceeding (each a "claim"); (2) sole control over


                                       5
<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


the defense or settlement of such claim; and (3) assistance at Company's request
to the extent reasonably necessary for the defense of such claim. The foregoing
sets forth Company's sole and exclusive obligation and Blue Martini's sole and
exclusive remedy for any claim of intellectual property infringement or
misappropriation relating to the Company Materials. Notwithstanding the
foregoing, Company shall not indemnify, defend or hold harmless Blue Martini for
any claims arising from: (a) any Blue Martini intellectual property or software
incorporated in or combined with the Company Materials where in the absence of
such incorporated or combined item, there would not have been infringement; (b)
Company Materials which have been altered or modified by Blue Martini (other
than in response to a request by Company), where in the absence of such
alteration or modification the Company Materials would not be infringing; (c)
use of an any version of the Company Materials for which Company has made
available an updated, revised or repaired subsequent version; or (d) the gross
negligence or willful misconduct of Blue Martini or any of its agents,
subcontractors or employees. Upon notice of any claim of infringement or upon
reasonable belief of the likelihood of such a claim, Company shall have the
right, at its option, to: (x) obtain the rights to continued use of the Company
Materials; (y) substitute other suitable, functionally-equivalent,
non-infringing materials; or (z) replace or modify the Company Materials or
their design so that they are no longer infringing. Furthermore, Company agrees
to maintain commercial general liability insurance of at least $2.5 million,
covering Company's obligations contained herein on a claims-made basis with
coverage for at least one year from the date of completion of the services. The
provisions of this Section 12 herein shall survive for a period of one year
following the earlier of (a) completion of the Maintenance services or (b)
termination of this Agreement.

13. Limitation of Liability. EXCEPT FOR ANY BREACH OF SECTION 9 OR WITH REGARD
TO ANY DUTY OR OBLIGATION REQUIRED PURSUANT TO SECTION 11 OR 12 OR WITH REGARD
TO ANY ACT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, AND TO THE EXTENT NOT
PROHIBITED BY APPLICABLE LAW, NEITHER PARTY HERETO NOR ITS SUPPLIERS SHALL BE
LIABLE FOR ANY LOSS OF USE OR GOODWILL, INTERRUPTION OF BUSINESS, LOSS OR
INACCURACY OF BUSINESS INFORMATION, LOST PROFITS, COST OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES, OR ANY INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY OR
CONSEQUENTIAL DAMAGES OF ANY KIND REGARDLESS OF THE FORM OF ACTION WHETHER IN
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT PRODUCT LIABILITY, OR OTHERWISE,
EVEN IF IT OR ITS SUPPLIERS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. EXCEPT FOR ANY BREACH OF SECTION 3.1 OR 9 OR WITH REGARD TO ANY DUTY OR
OBLIGATION REQUIRED PURSUANT TO SECTION 11 OR 12 OR WITH REGARD TO ANY FEE
PAYMENT OBLIGATIONS OR ACT OF GROSS NEGLIGENCE, BAD FAITH OR WILLFUL MISCONDUCT,
IN NO EVENT SHALL EITHER PARTY'S LIABILITY TO THE OTHER ARISING FROM OR RELATING
TO THIS AGREEMENT EXCEED THE AMOUNT OF LICENSE FEES RECEIVED BY BLUE MARTINI
UNDER THIS AGREEMENT. THE EXISTENCE OF ONE OR MORE CLAIMS WILL NOT ENLARGE THIS
LIMIT. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS SECTION IS AN ESSENTIAL
ELEMENT OF THE AGREEMENT AND THAT IN ITS ABSENCE, THE ECONOMIC TERMS OF THIS
AGREEMENT WOULD BE SUBSTANTIALLY DIFFERENT.

14. TERM AND TERMINATION.

      14.1 Term. This Agreement shall remain in effect unless and until
terminated as provided herein.

      14.2 Termination. Company may terminate this Agreement at any time for any
reason following thirty (30) days notice to Blue Martini. Either party may
terminate this Agreement if the other party fails to cure any breach of this
Agreement within thirty (30) days after receiving notice of the occurrence of
such breach (or immediately in the case of a material breach of a material term
within Section 3 or Section 9).

      14.3 Effects of Termination. Upon termination of this Agreement for any
reason, any amounts owed under this Agreement will be immediately due and
payable all rights and licenses granted under this Agreement will immediately
cease to exist, and Company must promptly discontinue all use of the Software
and Documentation. Upon termination Company shall erase all copies of the
Software and Documentation from Company's computers, return to Blue Martini or
destroy all copies of the Software and Documentation on tangible media in
Company's possession or control and certify in writing to Blue Martini that it
has fully complied with these requirements.

      14.4 Survival. Sections 1, 3, 5, 6, 9, 10, 11, 12, 13, 14 and 15 shall
survive any termination hereof.

15. GENERAL.

      15.1 Independent Contractors. The relationship of Blue Martini and Company
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to: (i) give either party the
power to direct and control the day-to-day activities of the other, (ii)
constitute the parties as partners, joint venturers, co-owners or otherwise as
participants in a joint or common undertaking, or (iii) allow either party to
create or assume any obligation on behalf of the other party for any purpose
whatsoever.

      15.2 Compliance with Laws. Each party will comply with all applicable
export and import control laws and regulations in its use of the Software and
will not export or re-export the Software without all required United States and
foreign government licenses.

      15.3 Press Release. Upon execution of this Agreement and as soon as
reasonably practical after the Company's first full week of Production, the
parties shall issue a mutually agreed press release regarding Company's
engagement of Blue Martini and use of the Software. Blue


                                       6
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confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


Martini may develop and, with the Company's prior written consent (such consent
not to be unreasonably withheld or delayed) publish a case study, highlighting
the main benefits provided by Blue Martini and the Software, when the first
Company site goes into Production. Blue Martini agrees not to publicly issue any
press release without Company's prior approval (which approval will not be
unreasonably withheld or delayed).

      15.4 Notices. Any notice required or permitted hereunder shall be in
writing and delivered in person or by means evidenced by a delivery receipt to
the address specified below and will be effective upon receipt. Either party may
change its contact information upon written notice to the other party.

      15.5 Assignment. This Agreement may not be assigned or transferred by
Company (in whole or in part and whether voluntarily, involuntarily, or by
operation of law) without the prior written consent of Blue Martini and any
attempt to do so shall be null and void and of no effect. Notwithstanding the
foregoing, Company may assign this Agreement to an entity that acquires or
succeeds to all or substantially all of Company's business and assets (a
"Successor") by providing thirty (30) days prior written notice to Blue Martini,
and provided that: (i) Blue Martini does not reasonably consider such Successor
a direct competitor; and (ii) such assignment is in writing and states that such
Successor is accepting all obligations of Company under this Agreement and
agrees to be bound by and discharge each of the Agreement's terms, conditions,
and obligations as if it were the original party hereto. Upon the first
assignment of this Agreement by the Company or acquisition, merger or change of
control involving the Company from the Effective Date (an "Assignment"), this
license shall automatically convert, at no additional cost to Company, into a
CPU-based license for an amount of CPUs equal to [***]times the average number
of CPUs on which Company was using the Software in Production for the six (6)
months prior to such Assignment(the "Licensed CPUs"). Each year after such
Assignment, the number of Licensed CPUs shall increase by [***] percent [***] at
no additional cost to Company. For so long as this Agreement remains in effect,
a Successor shall have the right to license additional CPUs (beyond the Licensed
CPUs) for a one-time fee equal to [***] of Blue Martini's then-current per-CPU
license fee.

      15.6 Governing Law. This Agreement shall be deemed to have been made and
performed in, and shall be construed pursuant to the laws of the State of New
York, excluding application of its conflict of laws principles. In the event
Blue Martini initiates any legal proceeding with regard to the interpretation or
enforcement of this Agreement, the parties hereby agree to submit to the
exclusive jurisdiction of the appropriate state and federal courts of the State
of New York. In the event that Company initiates any legal proceeding with
regard to the interpretation or enforcement of this Agreement, the parties
hereby agree to submit to the exclusive jurisdiction of the appropriate state
and federal courts of the State of California, County of San Francisco. Each
party irrevocably waives, to the maximum extent permitted by applicable law, any
objection that it may now or hereafter have to the laying of venue for any such
proceeding brought in such courts and any claims that any proceeding brought in
any such court has been brought in an inconvenient forum. If either party
retains counsel for the purpose of enforcing or preventing the breach or
threatened breach of any provision contained herein or otherwise retains counsel
to enforce any right or remedy it may have, then the prevailing party will be
entitled to be promptly reimbursed by the non-prevailing party for all
reasonable costs, fees and expenses, including reasonable attorneys' fees,
expended or so incurred by the prevailing party. The United Nations Convention
on Contracts for the International Sale of Goods is specifically disclaimed and
shall not apply to this Agreement.

      15.7 Remedies. Each party recognizes and agrees that there is no adequate
remedy at law for a threatened or actual breach of Section 3, Section 6, Section
10 or Section 15.3, that such a breach would irreparably harm the non-breaching
party and that such non-breaching party is entitled to seek equitable relief
(including an injunction) with respect to any such breach or potential breach,
in addition to any other remedies available at law.

      15.8 Waivers and Amendments. Any waiver of or amendment to the terms of
this Agreement shall be effective only if made in writing and signed by an
authorized and duly empowered representative of each of the parties hereto. No
failure to exercise, and no delay in exercising any right hereunder will operate
as a waiver thereof, nor will any single or partial exercise of any right
hereunder preclude further exercise of any right hereunder.

      15.9 Reference. Upon Blue Martini's reasonable request (or the reasonable
request of a third party directed to Company by Blue Martini), Company may act
as a reference for Blue Martini, including taking reference calls from
prospective Blue Martini customers to discuss the merits of the Software and to
share Company's experience working with Blue Martini.

      15.10 Severability. If any provision of this Agreement is found by a court
of competent jurisdiction to be unenforceable or invalid, that provision shall
be changed and interpreted to accomplish the objectives of such provision to the
greatest extent possible under applicable law and the remaining provisions shall
remain in full force and effect. Company agrees that Section 13 will remain in
effect notwithstanding the enforceability or unenforceability of any provision
of Section 9.

      15.11 Confidentiality of Agreement. Neither party will disclose any terms
of this Agreement, including prices or discounts, to anyone other than its
attorneys, accountants or other professional advisors or to any investor or
potential investor who agrees to maintain


                                       7
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confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


the confidentiality of such information. Notwithstanding the foregoing, either
party may make limited disclosure of the terms of this Agreement to the extent
required by law, provided that the disclosing party: (i) provides the
non-disclosing party reasonable prior notice of such disclosure, and (ii) uses
its best efforts to protect and limit the disclosure of such information to the
extent possible. Notwithstanding the foregoing, Company agrees that Blue Martini
may acknowledge Company as a Blue Martini customer.

      15.12 Construction. Section headings in this Agreement are for convenience
only and are not to be used in interpreting this Agreement. As used in this
Agreement, the word "including" means "including but not limited to". The
parties acknowledge and agree that no implied rights or licenses are conveyed by
this Agreement, that all rights are specific to the parties and do not extend to
their parents, subsidiaries or affiliates and that all rights in and to the
Software not expressly granted to Company in this Agreement are reserved by Blue
Martini and its suppliers.

      15.13 Promotion. Each party hereby grants to the other party a
nonexclusive, non-transferable, right and license to display such party's
trademarks and logo (subject to the terms and conditions of such party's
standard trademark usage guidelines) for purposes of reference and
acknowledgement.

      15.14 Counterparts. This Agreement may be executed in counterparts, each
of which will be considered an original, but all of which together will
constitute the same instrument. Execution and delivery of this Agreement may be
evidenced by facsimile transmission.

      15.15 Inspection Rights. Upon reasonable notice and under the
confidentiality terms of Section 10 Blue Martini shall have the right once per
year to reasonably inspect the Company's premises and relevant records to
determine compliance with this Agreement.

      15.16 Force Majeure. Any delay in the performance of any duties or
obligations of either party (except the payment of money owed) will not be
considered a breach of this Agreement if such delay is caused by a labor
dispute, market shortage of materials, fire, earthquake, flood or any other
event beyond the control of such party, provided that such party uses reasonable
efforts, under the circumstances, to resume performance as soon as reasonably
practicable.

      15.17 U.S. Government Rights. The Software is a "commercial item," as that
term is defined at 48 C.F.R. 2.101 (Oct. 1995), consisting of "commercial
computer software" and "commercial computer software documentation," as such
terms are used in 48 C.F.R. 12.212 (Sept. 1995). Consistent with 48 C.F.R.
12.212 and 48 C.F.R. 227.7202-1 through 227.7202-4 (June 1995) (or an equivalent
provision, e.g., in supplements of various U.S. government agencies, as
applicable), all U.S. Government users acquire the Software with only those
rights set forth herein.

      15.18 Section 365(n) of Internal Revenue Code. All rights and licenses
granted under or pursuant to this Agreement by Blue Martini to Company are, and
shall otherwise be deemed to be, for purposes of Section 365(n) of the United
States Bankruptcy Code (the "Code"), licenses to rights to "intellectual
property" as defined under the Code. The parties agree that Company, as licensee
of such rights under this Agreement, shall retain and may fully exercise all of
its rights and elections under the Code. The parties further agree that, in the
event of the commencement of bankruptcy proceeding by or against Blue Martini
under the Code, Company shall be entitled to retain all of its rights under this
Agreement.

      15.19 Parties Advised by Counsel. This Agreement has been negotiated
between parties who are sophisticated and knowledgeable in the matters contained
herein and who have been represented by legal counsel. The provisions of this
Agreement shall be interpreted in a reasonable manner to effect the intentions
of the parties and any rule of law (including Section 1654 of the California
Civil Code and any other authority of any jurisdiction of similar effect) which
would require interpretation of any ambiguities in this Agreement against the
drafting party is not applicable and is hereby waived.

      15.20 Entire Agreement. Both parties agree that this Agreement, along with
the Exhibits hereto, is the complete and exclusive statement of the mutual
understanding of the parties and supersedes and cancels all previous and
contemporaneous written and oral agreements and communications relating to the
subject matter of this Agreement.

      15.21 Remedies. The rights and remedies of each party as set forth in this
Agreement are not exclusive and are in addition to any other rights and remedies
available to it in law or in equity.


                                       8
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confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
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IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to enter into this Agreement, effective as of the Effective
Date.

BLUE MARTINI SOFTWARE, INC.                BLUEFLY, INC.

BY: /S/ ROBERT CELL                        BY:      /S/ JONATHAN MORRIS
    ----------------------------               -------------------------------

PRINT NAME    Robert Cell                  PRINT NAME:       Jonathan Morris
           ---------------------                       -----------------------

TITLE:   CFO                               TITLE:   EVP
       -------------------------                  ----------------------------


ADDRESS FOR NOTICE:                        ADDRESS FOR NOTICE:
Blue Martini Software, Inc.                Bluefly, Inc.
Attention: Legal Department                42 West 39 Street
2600 Campus Drive                          9th Floor
San Mateo, CA  94403                       New York, New York 10018
                                           Attention:  Pat Barry

TECHNICAL CONTACT                          TECHNICAL CONTACT

NAME:                                      NAME: MARTY KEAN
    ----------------------------                ------------------------------

TELEPHONE:                                 TELEPHONE: (212) 944-8000 EXT. 221
           ---------------------                     -------------------------

EMAIL:                                     EMAIL: MARTY@BLUEFLY.COM
      --------------------------                  ----------------------------


<PAGE>

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confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
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                                    EXHIBIT A
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------
                                SOFTWARE MODULES                                        LICENSE FEES
------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>

                                                                 Analysis Portal          Included
                                                                       Analytics
                                                                     Call Center
                                                             Campaign Management
                                                              Catalog Management
                                                                  Checkout (B2C)
                                                              Content Management
                                                          Customer Collaboration
                                                             Customer Management
                                                      Data Warehouse & Reporting
                                                                   Developer SDK
                                                                 Discovery Tools
                               English Language Interface for Enterprise Desktop
                                                                     Integration
                                                                 Personalization
                                                Pricing and Promotion Management
                                                              Product Management
                                                                            OLAP
                                                                        IT Tools
                                                                         Website
                                                                        Workflow
                                                Macromedia UltraDev (as bundled)
------------------------------------------------------------------------------------------------------------
                                                               TOTAL LICENSE FEE            [***]
------------------------------------------------------------------------------------------------------------
                                                   INITIAL MAINTENANCE PERIOD FEE           [***]
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
                       TOTAL SOFTWARE LICENSE AND INITIAL MAINTENANCE PERIOD FEE            [***]
------------------------------------------------------------------------------------------------------------
</TABLE>


DESIGNATED MAINTENANCE SITE:
NEW YORK, NY

OPERATING SYSTEM:
NT4; Solaris 7; Windows 2000; AIX

PAYMENT SCHEDULE:
Company shall pay to Blue Martini the amount set forth above as follows:

[***]on the Effective Date
[***]on or before ninety (90) days from the Effective Date

ADDITIONAL MODULE OPTIONS:
From the Effective Date through one year from the Effective Date, Company shall
have the right to add the following modules to the list of Software licensed
hereunder for the license fees set forth below:

[***]
[***]


<PAGE>

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confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


                                    EXHIBIT B

                               MAINTENANCE EXHIBIT

1. SCOPE OF COVERAGE. Upon payment of applicable fees, Blue Martini will provide
maintenance services pursuant to this Exhibit ("Maintenance") for (i) the
then-current Major Release of the Software, and (ii) prior Major Releases of the
Software for a period of twelve (12) months following the next Major Release of
the Software subsequent to such prior Major Release. As used herein, a "Major
Release" is any version of the Software that in Blue Martini's sole
determination provides substantial new features, additional functionality, or
makes use of different architecture.

2. MAINTENANCE SERVICES. Subject to the terms of this Exhibit and Company's
payment of all Maintenance fees, Blue Martini will provide the following:

      2.1. Severity Levels. Blue Martini will use commercially reasonable
efforts to acknowledge and address, as described below, reported and
reproducible material errors in the Software which prevent the Software from
performing substantially in accordance with the Documentation (each an "error or
issue"). Blue Martini recognizes three severity levels of Software errors or
issues:

         (a) Severity 1 - Major System Impact. The Software suffers an error or
issue which cannot be reasonably circumvented and which either (i) prevents
Company from being able to execute transactions through the Software or (ii)
otherwise so substantially impairs the performance of the Software as to
effectively render it unusable. Blue Martini will use commercially reasonable
efforts to acknowledge any such reported error or issue as promptly as possible
(but in no event longer than two (2) hours) and, if Company is using the
Software in Production, will work 24 hours a day, 7 days a week using
commercially reasonable efforts to promptly address and remedy such error or
issue.

         (b) Severity 2 - Moderate System Impact. The Software suffers an error
or issue (which is not of Severity 1) which cannot be reasonably circumvented
and which substantially impairs the use of one or more portions or features of
the Software required by Company to perform necessary business functions. Blue
Martini will acknowledge any such reported error or issue promptly, but in no
event longer than within four (4) hours and, if Company is using the Software in
Production, will use commercially reasonable efforts to address and remedy such
error with timeliness corresponding to the severity of the impact of such error
on Company's business operation, including but not limited to working
continually to address and remedy such error during Blue Martini's normal
Maintenance hours.

         (c) Severity 3 - Minor System Impact. The Software suffers an error or
issue (which is not of Severity 1 or Severity 2) which impairs the use of one or
more portions or features of the Software, but the reported error or issue can
be reasonably circumvented. Blue Martini will acknowledge any such reported
error or issue within one (1) business day and will work during Blue Martini's
normal Maintenance hours to provide the appropriate resolution.

         (d) Resolution. Except as otherwise expressly set forth herein, Blue
Martini will use commercially reasonable efforts to resolve each reported error
or issue with the Software by providing either: (i) a reasonable work around,
which may consist of specific administrative steps or alternative programming
calls; (ii) an object code patch to the Software; or (iii) a specific action
plan regarding how Blue Martini intends to address the reported error or issue
and an estimate on how long it may take to remedy or work around the error or
issue. Company acknowledges that in order to perform Maintenance, Blue Martini
may require access to and a copy of code in Company's possession (or that of
Company's system integrator or consultants) relating to the Software or which
may impact the performance of the Software. Company agrees to provide access,
assistance and information to Blue Martini as required to resolve errors or
issues with the Software.

      2.2 Available Updates. At no additional cost to Company, Blue Martini will
deliver to Company, as made commercially available by Blue Martini, bug fixes,
Maintenance updates and Major Releases for the Software ("Updates"), which will
thereafter be considered "Software" for all purposes except for Section 8.1 of
the Agreement. At its expense and as deemed appropriate by Blue Martini in its
sole discretion, Blue Martini will furnish Company with revised Documentation
(including release notes identifying each change) with each Update.

      2.3 Other Errors and Issues. If Company reports an error or issue with the
Software that is not of Severity 1, 2 or 3, Blue Martini shall use commercially
reasonable efforts to acknowledge such error or issue. If Company reports an
error or issue with the Software that is not of Severity 1, 2 or 3 and that is
scheduled by Blue Martini to be addressed in a later Update, Blue Martini may
address such error or issue in such Update. Company agrees to pay Blue Martini
at Blue Martini's standard rates for all effort expended towards resolution of
any error or issue which is later determined to result from any cause other than
an error or issue in the Software.

3. SUPPORT LINES.

      3.1 First Line Support. Company shall establish and maintain the
organization and processes to provide first line support directly to any of
Company's customers. Blue Martini shall have no obligation to


<PAGE>

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confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


provide any first line support to Company's customers. First line support shall
include: (a) a direct response to Company's customers with respect to problems
or inquiries concerning the performance, functionality or operation of the
Software; (b) a diagnosis of problems or performance deficiencies in the
Software; and (c) a resolution of problems or performance deficiencies in the
Software.

      3.2 Second Line Support. Blue Martini shall maintain the organization and
processes necessary to provide second line support for the Software to Company.
Such second line support shall be provided to Company only if, after reasonable
commercial effort, Company is unable to diagnose and/or resolve problems or
performance deficiencies in the Software. Second line support will be provided
to up to two (2) designated and trained representatives of Company. Blue Martini
shall have no obligation to provide second line support directly to any of
Company's customers. In order to assist Blue Martini in providing such second
line support, Company will provide Blue Martini with the ability to access
Company's website(s) which utilize the Software (including but not limited to
configuration information and error logs) and provide assistance to Blue Martini
in order to facilitate Blue Martini's use of remote administration tools
relating to the Software. Second line support will be provided primarily through
web-based support services and secondarily through telephone support
(650-356-4020). As of the Effective Date, Blue Martini's normal Maintenance
hours are from 8 a.m. to 6 p.m. Monday through Friday Pacific Standard Time.
When Company is in Production, Company may contact Blue Martini after hours, on
weekends and holidays at (650-356-4020) for Severity 1 errors and issues, as
defined above.

4. SERVICE LIMITATIONS. The Maintenance does not include, nor will Blue Martini
be obligated to provide, services required as a result of: (a) any modification,
reconfiguration or maintenance of the Software not performed or recommended by
Blue Martini; (b) any use of the Software on a system that does not meet Blue
Martini's minimum standards for such as set forth in the applicable
Documentation; (c) any third party hardware or software not supported or
embedded by Blue Martini; (d) any configuration of the Software (or hardware
configurations) other than as recommended by Blue Martini; or (e) any error
caused by Company's or any third party's negligence, abuse, misapplication, or
use of Software other than as expressly permitted under the Agreement.

5. TERM AND TERMINATION. This Maintenance Exhibit shall remain in effect for one
(1) year from the Effective Date. This Maintenance Exhibit shall automatically
renew for additional one (1) year periods, unless either party provides notice
of cancellation of Maintenance to the other party at least thirty (30) days
prior to the anniversary date of this Agreement. Company may terminate this
Exhibit B if Blue Martini materially breaches the terms of this Exhibit B and
such breach remains uncured for thirty (30) days after written notice. The
expiration or termination of this Exhibit shall not terminate or otherwise
affect the Agreement.


<PAGE>

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confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


                                    EXHIBIT C

                                SERVICES EXHIBIT

1. STATEMENT OF WORK. Blue Martini may render services, working individually or
with Company and/or third parties retained by Company, (the "Services") to
Company on a time and materials basis as may be agreed upon in a written
Statement of Work signed by both parties. If Services are to be provided on
Company premises, Company shall provide safe and adequate space, power, network
connections and other resources and assistance as requested by Blue Martini.

2. PROJECT ADMINISTRATION. The Technical Contact (as set forth in the Agreement)
for Company shall provide Blue Martini all assistance and guidance reasonably
requested by Blue Martini for the performance of the Services. Company
acknowledges that the timely performance of the Services is dependent both on
reasonable access to and assistance by Company, including the Company Technical
Contact. Blue Martini acknowledges that the success of Company's business shall
depend on Blue Martini's ability to provided the Services on a timely basis in
accordance with the dates specified by Company, and shall use all reasonable
efforts to complete all Services efficiently and on or ahead of schedule

3. COMPENSATION. Blue Martini shall be paid fees on a time and materials basis
in accordance with Statement of Work signed by both parties. Company shall also
reimburse Blue Martini for reasonable travel, lodging, meal and other expenses
reasonably incurred while providing the Services. Blue Martini shall provide
Company with accurate invoices detailing the consulting hours, fees and expense
reimbursements due Blue Martini. Company payment for Services and expenses shall
be due thirty (30) days from the date of invoice. The parties agree that Company
shall not be charged nor shall it be liable for any travel time incurred in
connection herewith.

4. THIRD PARTY SOFTWARE. Company acknowledges that in order for Blue Martini to
perform the Services, Company may need to obtain additional third party services
("Third Party Services") or third party software ("Third Party Software").
Company agrees that the rights and licenses with respect to Third Party Software
and Third Party Services shall be under terms set forth in the pertinent
purchase, license or services agreements between Company and the vendors of such
Third Party Software or Third Party Services. Company shall execute and comply
with appropriate purchase, license, or services agreements with respect to any
Third Party Software or Third Party Services. Any amounts payable to third party
vendors or service providers under such agreements are the sole responsibility
of Company and shall be paid directly by Company to such third party vendors or
service providers.

5. LICENSE TO COMPANY MATERIALS. Company acknowledges that in order to perform
the Services, Blue Martini may require access to and use of certain software or
other materials of Company or Company's suppliers (including access to code
relating to the Software or that may effect the performance of the Software)
("Company Materials"). Company grants to Blue Martini a royalty-free,
non-exclusive license to access and use the Company Materials (including through
subcontractors) as required for Blue Martini's performance of the Services
hereunder.

6. RIGHTS AND OWNERSHIP. To the extent that any modification, enhancement,
extension, interface or derivative work to the Software or any other deliverable
is produced through the Services, Company shall have the same rights in such
(both the source and object code form) as Company has in the Software. Company
acknowledges and agrees that other than the Third Party Software and the Company
Materials, Blue Martini owns all computer programs, utilities and intellectual
property which aid Blue Martini in performing the Services or which are produced
as a result of the Services.

7. Independent Contractors. Blue Martini agrees that it shall be considered an
independent contractor and that it shall not be deemed to be an employee of
Company. Blue Martini and its employees, agents and contractors performing
services hereunder shall not be entitled to any employee benefits of Company.


<PAGE>

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Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


                  Blue Martini Professional Services Statement of Work

                               PROJECT ASSIGNMENT

This Project Assignment is issued in accordance with, and shall be governed by,
the terms herein and the terms and conditions of the Software License and
Services Agreement entered into between the parties on March 12, 2002


--------------------------------------------------------------------------------
Client Code: BLUEFLY.COM                         Project Code:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Client Name: Bluefly.com                         Project Name: Bluefly.com
--------------------------------------------------------------------------------

Blue Martini Consulting Director:         Blue Martini Consulting Manager:
      Name: John Sullivan                       Name: Jennifer Lee
      Address: .                                Address:
      Phone:
      Fax:  (                                   Phone:
      E-mail:jlsulliv@bluemartini.com           Fax:
                                                E-mail

Bluefly, Inc.                             Customer "Bill to":
      Name: Jongnic Bontemps                    Same as Customer General Manager
      Title:
      Address: 42 West 39 Street
      New York, New York 10018

      Phone:  917-847-5995
      E-mail: jb@bluefly.com

License:

Bluefly, Inc. ("Bluefly.com") understands that in order to commence the work
contemplated in this Project Assignment, Bluefly.com and Blue Martini must have
negotiated and executed a separate Software License and Services Agreement.


Project Objective:

Blue Martini Consulting Services will provide general and technical consulting
services to Bluefly.com on a time and materials basis to assist with the
implementation of Blue Martini Software. This Statement of Work covers all work
performed by Blue Martini Professional Services until March 30 2003. Rates of
Blue Martini Professional Services resources will be at the rates described
below. The support provided herein will include but not be limited to the
following areas:

o     Oversight
o     Project management best practices, and reusable interfaces/customizations
o     CIS/merchandising advisory
o     Environment architecture advisory
o     Template design and development advisory
o     Customization design and development advisory

<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


o     Interface design and development advisory
o     Call center design and development advisory
o     General subject matter expertise

Members from Blue Martini Professional Services will be assigned in various
rolls to support Bluefly.com in its implementation of the Blue Martini system.
Blue Martini Professional services staff will be assigned to support Bluefly.com
in its implementation of the Blue Martini system for the Public Launch. The
involvement of these consultants will range from part time to full time.
Bluefly.com will direct the extent of the involvement that is necessary, and
Blue Martini agrees to devote such resources as Bluefly.com shall reasonably
direct. However, minimal time from the Blue Martini Consulting Director and at
least part time involvement from a Consulting Manager will be mandatory. The
primary goal of the Blue Martini Professional services personnel is the support
of Bluefly.com in the successful implementation of the Blue Martini system.

Blue Martini Software consultants will work on site at Bluefly.com specified
offices, and offsite as required and approved by Bluefly.com. Clients desiring
remote access support must provide necessary access. Some trips back to Blue
Martini Software headquarters in San Mateo might be necessary during the project
for further training and to work with Blue Martini engineering on project
issues. Time and materials for these visits will be billed to Bluefly.com if the
visit is on behalf of project issues and approval is granted by Bluefly.com.
Non-project specific trips and time will not be billed to Bluefly.com.
Notwithstanding anything else to the contrary contained herein, the parties
agree that Company shall not be charged nor shall it be liable for any travel
time incurred in connection herewith.

Mr. Jongnic Bontemps (JB) is the main Bluefly.com contact for project and
billing issues.

Mr. John Sullivan Consulting Director, is assigned as the Blue Martini
Consulting Director for Bluefly.com and is the main Blue Martini contact for
project and billing issues.

In Scope:
o     Project participation in design, development, readiness, and deployment
      phases of the project up to March 30, 2003
o     Phase 1 launch for Enterprise Desktop, Remote Desktop, Website, basic
      reporting and Call Center--target launch date [***].
o     Phase 2 campaign management mentoring, personalization, and advanced
      reporting - target launch date [***] .
o     As part of the project and upon availability, Blue Martini will provide
      Company with the following functionality relating to the Software: the
      ability to allow business users to create individual and personalized
      websites and a user interface which is designed for customer service
      representatives to plan promotional events and target a list of clients
      for that event, as well as track the results of phone calls and or emails
      to that client list. Such functionality will also include the ability to
      have such target lists of clients to be manually
      created/suggested/generated through the Blue Martini analytics engine.
      Company shall bear no cost for the development of such functionality, but
      will pay Blue Martini consistent with the terms herein for customization
      and implementation of such functionality during the course of the project.

Out of Scope:
o     Responsibility for any formal deliverables other than those agreed upon by
      Bluefly.com and Blue Martini Software during the course of the project.
o     Responsibility for managing or creating any product data, prices,
      promotions, and content (graphics, HTML, copy).

Project Requirements:

<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


o     Bluefly.com will provide knowledgeable personnel during the project who
      are familiar with the project requirements.
o     Bluefly.com will provide network/server administrator assistance when/if
      Blue Martini installs any software, and provide any needed network linkage
      to any existing databases.
o     Blue Martini Software resources will be provided desktop space, connection
      to the development environment and network, telephones, and analog lines
      for connection to the Blue Martini network while working on site.
o     Bluefly.com will provide a technical lead, two Java/JSP developers, one
      application integration developer, and as needed roles (creative, data
      loads, DBA and system admin).

Project Staffing for Blue Martini Resources:

Project staffing level will be determined by Bluefly.com. The staffing level is
elastic and may be changed by Bluefly.com based upon project requirements
without notice or penalty. Blue Martini Software will provide recommendations on
project staffing level. Staffing is on a Time & Material basis.

Bluefly.com is engaging Blue Martini Professional services roles and not
specific staff. However, specific staff once assigned to the project will not
change unless agreed to by Bluefly.com or due to illness or other extenuating
circumstances such as that person no longer works for Blue Martini. If staff are
removed from the project with Bluefly.com's agreement, those staff may be
staffed on other engagements and no longer be available to the Bluefly.com
project. There shall be no charge to Bluefly.com for any replacement personnel
while such replacement personnel acquires the necessary knowledge of the project
and the services necessary to perform at the level of the person that was
replaced. Blue Martini agrees that it shall promptly replace any person
performing any of the Services that Company in its sole discretion determines is
not acceptable with a person that Bluefly.com deems to be acceptable.

Roles and Responsibilities:

John Sullivan will serve as the Blue Martini Project Director, and will provide
guidance to the project based on other past and current Blue Martini consulting
projects, as well as general project experience. He will serve as the key point
of contact for project specific Blue Martini resource needs and to serve as the
first point of escalation beyond the Blue Martini on site project team.

Blue Martini has assigned Jennifer Lee as a project/engagement manager to serve
as the Blue Martini Project / Engagement Manager. She will offer Blue Martini
best practice design experience in the areas of Blue Martini system
merchandising functionality, site design, back end integration design, Blue
Martini project phase task planning (design, build, test, performance test, go
live support), and help provide general project reviews and observations using
previous Blue Martini project and general project experience. She will also
serve to facilitate Blue Martini Tech Support readiness, Blue Martini engineer
requirements gathering, Blue Martini release acceptance planning, Blue Martini
implementation issue escalation, and is responsible to Blue Martini for managing
onsite Blue Martini consultants.

Blue Martini will assign, at the Client's request, consultants and/or senior
consultants to assist the Bluefly.com team, to work on gap analysis,
architecture, CIS advisory, template development, customization, backend
integration design and development, mentoring, and as needed. These resources
can work on specific development tasks as assigned by the Bluefly.com project
management and the Blue Martini Consulting Manager. These resources can also
serve as a leveraged resources for other development team members on Blue
Martini technical issues regarding site development, most specifically questions
relating to the use of the Blue Martini system API's and template development.

Blue Martini may assign a part time Principal Consultant or consulting manager
to serve as the Solution Architect at the client's request, initially working on
gap analysis and architecture (for new development), complex development and
customization, backend integration design and development, mentoring, and

<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


then as needed. This resource should be considered the senior Blue Martini
technical resource on the project and used as such. A Principal Consultant or
Senior Consultant may also be assigned as an Environment Architect as well to
assist in issues related to Blue Martini setup, environment and performance.
These part time resources would be project & time specific and would be agreed
to between Blue Martini and Bluefly.com before such resources would be assigned.

From time to time, Blue Martini may provide additional strategic, part time
resources with specific expertise for specific, well-defined, reasons, tasks, or
advice, in 1 or 2 day efforts. These part time resources would be project & time
specific and would be agreed to between Blue Martini and Bluefly.com before such
resources would be assigned. Billing for quality assurance services will be at
the standard and prevailing hourly consulting rates outlined below.

To assist Client in fielding a quality e-commerce site, consistent with Client's
business objectives, Blue Martini has instituted three processes:

      i)    Architecture Review - Hosted by Blue Martini Architecture Review
            Committee (ARC) and comprised of Blue Martini senior engineers, led
            by Blue Martini project manager with participation by Client.
            Purpose is to understand and make recommendations regarding
            architectural approach, prior to the commencement of development
            activity. (There may be multiple ARCs) depending on the complexity
            and duration of the engagement.
      ii)   Project Assurance Review - Conducted on-site by Blue Martini
            consultant(s) to assist Client in assessment of "go-live" readiness,
            and preparation therefore.
      iii)  Code Review - Provided by Blue Martini Principal and Senior
            Consultants with intimate knowledge of Blue Martini "best practices"
            coding techniques. These consultants will closely examine Blue
            Martini, Client, and/or third-party developed code for efficiency
            and architectural soundness.

Project Organization:

The Blue Martini Software project team is organized as follows. All Blue Martini
Professional Services report to the Consulting Manager. The Consulting Manager
reports to the Consulting Director.

Consulting Rates:

All work will be on a Time & Material basis per the following rates. Rates are
not subject to change before: March 30, 2003. If the rates change, Blue Martini
will notify the client prior to the change.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Blue Martini Consulting Role    Hourly Rate    Effective Date                          Comments
-----------------------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>                <C>
Blue Martini Project Director      [***]             TBD                   Blue Martini Consulting Director.
       (John Sullivan)
   Blue Martini Consulting         [***]             TBD                    Blue Martini Consulting Manager
           Manager

        Jennifer Lee)
   Blue Martini Principal          [***]             TBD          Blue Martini Principal Consultant - Lead Technical
         Consultant                                                                    Resource.

            (TBD)

<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------

<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Blue Martini Consulting Role    Hourly Rate    Effective Date                          Comments
-----------------------------------------------------------------------------------------------------------------------
<S>                             <C>             <C>             <C>
     Blue Martini Senior           [***]             TBD             Blue Martini advisory, API, Template, Backend
         Consultant                                                   integration expert, architect, and mentor.

            (TBD)
   Blue Martini Consultant         [***]             TBD             Blue Martini advisory, API, Template, Backend
                                                                           integration resource, architect.
            (TBD)
    Blue Martini Trainer           [***]             TBD            Enterprise Desktop B2C training and Accelerated
                                                                 Development Workshop on site at Bluefly or near site
            (TBD)                                                          (not at Blue Martini's facility)
</TABLE>

Project Pricing and Expenses:

      Reasonable expenses for travel, hotel, transportation, meals, parking, and
      phone will be billed as actually incurred. Notwithstanding anything else
      to the contrary contained herein, any single expense in excess of three
      hundred dollars ($500) must be pre-approved in writing (or by email) by
      Bluefly.com or it shall not be deemed a reimbursable expense.

      Blue Martini will make every effort to assign local consultants to this
      project in order to reduce expense costs. Full-time equivalent out of town
      Blue Martini Consultants may work on a 5-4-3 basis (This means 5 days of
      work, 4 days on site and 3 nights at the client site).

Billing schedule:

      Billing is done monthly. Payment term is net 30.

      Fees for services for Professional Services and Expenses shall be due
      within thirty (30) days of the date the invoice is received by
      Bluefly.com. Blue Martini reserves the right to discontinue the provision
      of services under this Statement of Services in the event that Client
      fails to continue to make timely payment of fees and expenses due
      hereunder. A late fee of Prime plus 3% annualized will be assessed for
      payment beyond the net 30 terms.

                         Non-Solicitation of Employees:

During the term of this Agreement and for a period of one (1) year following
completion of work hereunder, neither party shall solicit employment of any
current or prior employee of the other.

                                   Signatures:

EACH PARTY ACKNOWLEDGES THAT IT HAS READ THIS STATEMENT OF WORK, UNDERSTANDS IT
AND AGREES TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, EACH PARTY AGREES
THAT, ALONG WITH THE APPLICABLE SOFTWARE LICENSE AND SERVICES AGREEMENT, THIS
STATEMENT OF WORK AND APPLICABLE CHANGE ORDERS ARE THE COMPLETE AND EXCLUSIVE
STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES RELATING TO THE SERVICES
DESCRIBED HEREIN, WHICH SUPERSEDES ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR
WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE
SUBJECT MATTER HEREOF.

THE SIGNATURE BELOW ACKNOWLEDGES THAT EACH PARTY HAS AUTHORIZED AND APPROVED
THIS ORDER IN ACCORDANCE WITH THE TERMS AND CONDITIONS SET FORTH

<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------


IN THE AGREEMENT. WHETHER OR NOT CUSTOMER ISSUES A PURCHASE ORDER, THIS
SIGNATURE IS CUSTOMER'S EXPRESS AUTHORIZATION AND COMMITMENT TO PAY BLUE MARTINI
SOFTWARE FOR THE PRODUCTS AND/OR SERVICES HEREIN IN ACCORDANCE WITH THE PAYMENT
SCHEDULE FOR THIS ORDER. IF NO PAYMENT TERMS HAVE BEEN SPECIFIED ELSEWHERE,
PAYMENTS ARE DUE NET 30 DAYS FROM INVOICE DATE. CUSTOMER AGREES THAT THESE TERMS
WILL CONTROL OVER ANY CONFLICTING TERMS ON ANY CUSTOMER PURCHASE ORDER.

CUSTOMER MAY TERMINATE ANY PROFESSIONAL SERVICES STATEMENT OF WORK HEREUNDER AT
ANY TIME WITHOUT CHARGE BY PROVIDING BLUE MARTINI SOFTWARE WITH WRITTEN NOTICE
THIRTY (30) WORKING DAYS PRIOR TO TERMINATION. THIS NOTICE IS REQUIRED
REGARDLESS OF WHETHER WORK HAS STARTED OR NOT. IN THE EVENT THAT CUSTOMER
TERMINATES EITHER A PROFESSIONAL SERVICES STATEMENT OF WORK OR SERVICES TO BE
PERFORMED HEREUNDER WITH LESS THAN THIRTY (30) WORKING DAYS PRIOR WRITTEN
NOTICE, CUSTOMER SHALL REMAIN OBLIGATED TO PAY BLUE MARTINI SOFTWARE FOR THE
SERVICES PERFORMED, OR TO BE PERFORMED AS FOLLOWS:

CUSTOMER WILL BE ASSESSED TERMINATION CHARGES OF:
100% OF THE QUOTED FEE FOR BLUE MARTINI SOFTWARE CONSULTANTS FOR 10 WORKING DAYS
(OR REMAINDER OF PROJECT TIME IF LESS THAN 10 WORKING DAYS) IF 0-10 WORKING DAYS
NOTICE OF TERMINATION IS PROVIDED; 50% OF THE QUOTED FEE FOR BLUE MARTINI
SOFTWARE CONSULTANTS FOR 10 WORKING DAYS IF 11-20 WORKING DAYS NOTICE OF
TERMINATION IS PROVIDED; AND 25% OF THE QUOTED FEE FOR BLUE MARTINI SOFTWARE
CONSULTANTS FOR 10 WORKING DAYS IF 21-30 WORKING DAYS NOTICE OF TERMINATION IS
PROVIDED.

--------------------------------------------------------------------------------
ACCEPTED BY:  Bluefly, Inc.              ACCEPTED BY: Blue Martini Software Inc.
--------------------------------------------------------------------------------


Signed:  /s/ Jonathan Morris                   By:    /s/ Robert Cell
         --------------------------                   --------------------------
Name:    Jonathan Morris                       Name:  Robert  Cell
         --------------------------                   -------------------------

Title:   Executive Vice President              Title: CFO
         --------------------------                   --------------------------

Date:    March 12, 2002                        Date:  March 12, 2002
         --------------------------                   --------------------------


<PAGE>

--------------------------------------------------------------------------------
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------

                         APPENDIX A - Draft Project Team

<TABLE>
<CAPTION>

Draft Responsibly Matrix
----------------------------------------------------------------------------------------------------------------------
               Who                                                   Responsibility
----------------------------------------------------------------------------------------------------------------------
<S>                                <C>
BLUEFLY.COM                        Overall project management and oversight
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        Technical Leadership and Chief Architect for BLUEFLY.COM
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        Production support
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        Business readiness
----------------------------------------------------------------------------------------------------------------------
Blue Martini Consulting Director   Engagement Leader and Blue Martini Quality Assurance
----------------------------------------------------------------------------------------------------------------------
Blue Martini Consulting Mgr.       Technical Project Management, task mgmt of Blue Martini staff and Blue Martini
                                   on-site liaison
----------------------------------------------------------------------------------------------------------------------
Blue Martini Solution Architect    Solution Architecture, Overall technical guidance
----------------------------------------------------------------------------------------------------------------------
Blue Martini CIS Advisor           Enterprise Desktop expertise / Assortment and Attribute Design Expertise Advisory
----------------------------------------------------------------------------------------------------------------------
Blue Martini SME's                 Other Blue Martini SME's as required for templates, interfaces, other
----------------------------------------------------------------------------------------------------------------------
Blue Martini Trainer
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        Creative framework & visual design
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        Content Managers
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        Information design
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        Web UI
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM& BMS                   Template development
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM& BMS                   Interface design and development
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        System Administration / Blue Martini Release Management
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        DB Management / DBA
----------------------------------------------------------------------------------------------------------------------
BLUEFLY.COM                        User Experience and end-to-end Testing
----------------------------------------------------------------------------------------------------------------------
</TABLE>


Draft Blue Martini Consulting Team
--------------------------------------------------------------------------------
           Resource                                      Role
--------------------------------------------------------------------------------

John Sullivan                   Blue Martini Consulting Director
--------------------------------------------------------------------------------
TBD                             Blue Martini Consulting Manager
--------------------------------------------------------------------------------
TBD                             Senior Consultant - Templates/Business Actions
--------------------------------------------------------------------------------
TBD                             Senior Consultant - Templates/Business Actions
--------------------------------------------------------------------------------
TBD                             Senior Consultant - Interfaces
--------------------------------------------------------------------------------
TBD                             Consultant - Templates/Business Actions
--------------------------------------------------------------------------------
TBD                             Consultant - Call Center
--------------------------------------------------------------------------------
TBD                             Consultant - Interfaces
--------------------------------------------------------------------------------

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.30
<SEQUENCE>8
<FILENAME>k20188ex10_30.txt
<DESCRIPTION>AMENDMENT NO. 1 TO FINANCIAL AGREEMENT
<TEXT>
                                                                   Exhibit 10.30


                           Rosenthal & Rosenthal Inc.
                                     Factors
                        1370 Broadway, New York, NY 10018
                               Tel: (212) 356-1400
                               Fax: (212) 356-0900


                       AMENDMENT #1 TO FINANCING AGREEMENT


                                                                April 30, 2001

Bluefly, Inc.
42 West 39th Street
New York, NY  10018


Gentlemen,

         Reference is made to the Financing Agreement entered into between us
dated March 30, 2001 (the "Financing Agreement"). This will confirm that
effective as of March 30, 2001, the Financing Agreement is amended as follows:

1. The following shall be added as a definition in the definition section in its
proper alphabetical order: "Standby L/C Termination Notification" shall have the
meaning specified in Section 9.2 hereof."

2. The following shall be added as a new paragraph in Section 7.3 following the
first paragraph thereof: "Notwithstanding the foregoing, or any other provision
of this Agreement, Lender may make draws pursuant to the Standby Letter of
Credit of all unpaid Obligations and Borrower Payables commencing 165 days after
the receipt by Lender of a Standby L/C Termination Notification."

3. The period at the end of Section 9.2 is deleted and the following is
substituted in its place and stead: "(e) Lender shall not have received a
notification from The Chase Manhattan Bank that it has elected not to consider
the Standby Letter of Credit renewed for the one year period following the then
current expiration date thereof (the "Standby L/C Termination Notification");
and (f) Lender shall not have received a Quantum Notification (as defined in the
letter agreement between Subordinating Creditor and Lender dated April 30,
2001)."

4. The period at the end of the second sentence in Section 8.1 is deleted and
the following is substituted in its place and stead: "provided however,
notwithstanding the foregoing, this Agreement shall not, under any
circumstances, be extended beyond March 30, 2005."

<PAGE>

         Except as heretoabove specifically set forth, the Financing Agreement
shall continue unmodified.

                                                    Very truly yours,

                                                    ROSENTHAL & ROSENTHAL, INC.


                                                    /s/ J. Michael Stanley
                                                    ----------------------

                                                    J. Michael Stanley
                                                    Executive Vice President


Agreed:

BLUEFLY, INC.

By:  /s/ Jonathan Morris
------------------------
Name:  Jonathan Morris
Title: Executive Vice President

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.31
<SEQUENCE>9
<FILENAME>k20188ex10_31.txt
<DESCRIPTION>AMENDMENT NO. 2 TO FINANCIAL AGREEMENT
<TEXT>
                                                                   Exhibit 10.31


                           Rosenthal & Rosenthal Inc.
                                     Factors
                        1370 Broadway, New York, NY 10018
                               Tel: (212) 356-1400
                               Fax: (212) 356-0900


                                                               February 14, 2002


                       AMENDMENT #2 TO FINANCING AGREEMENT


BLUEFLY, INC.
42 West 39th Street
New York, NY  10018


         Reference is made to the Financing Agreement entered into between us
dated March 30, 2001, (the "Financing Agreement"). This will confirm that
effective as of February 14, 2002, the Financing Agreement is amended as
follows:

         The first sentence in Section 8.1 is deleted and the following is
         substituted in its place and stead:

         "This Agreement shall become effective on the Closing Date and shall
         continue in full force and effect for fourteen months from the Closing
         Date (the "Initial Term")."

         Except as hereinwith specifically set forth the Financing Agreement,
shall continue unmodified.


                                                  ROSENTHAL & ROSENTHAL, INC.


                                                  By: /s/ J. Michael Stanley
                                                      ----------------------
                                                      J. Michael Stanley
                                                      Executive Vice President


THE FOREGOING IS ACKNOWLEDGED
AND AGREED TO:
BLUEFLY, INC.

By:  /s/ Jonathan Morris
     -------------------
     Jonathan Morris
     Executive Vice President


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.32
<SEQUENCE>10
<FILENAME>k20188ex10_32.txt
<DESCRIPTION>AMENDMENT NO. 3 TO FINANCIAL AGREEMENT
<TEXT>
                                                                   Exhibit 10.32


                       AMENDMENT #3 TO FINANCING AGREEMENT


                                                              March 22, 2002

Bluefly, Inc.
42 West 39th Street
New York, NY 10018

Gentlemen:

         Reference is made to the Financing Agreement entered into between us
dated March 30, 2001 as amended (the "Financing Agreement"). This will confirm
that the Financing Agreement is hereby amended as follows:

         1.       The number "Two Million Dollars ($2,000,000)" in Section
                  1.30(ii)(C) is deleted and the number "One Million Dollars
                  ($1,000,000)" is substituted in its place and stead.

         2.       The number "$2,000,000" in Section 1.31 is deleted and the
                  number "$1,000,000" is substituted in its place and stead.

         3.       Subsection (b) of Section 3.2 is deleted and the following is
                  substituted in its place and stead:

                  "(b) the anniversary of the Closing Date during the Initial
Term and on (c) each anniversary of the Closing Date during any Subsequent Term
of this Agreement."

         4.       The words "undrawn Standby Letter of Credit" in the fifth,
                  ninth, seventeenth and twenty-sixth lines of Section 3.3 are
                  hereby deleted, and the words "Maximum Credit Facility" are
                  substituted in their place and stead.

         5.       The first sentence in Section 8.1 is deleted and the following
                  is substituted in its place and stead:

                  "This Agreement shall become effective on the Closing Date and
shall continue in full force and effect for twenty four months from the Closing
Date (the "Initial Term").

         Except as hereinabove specifically set forth, the Financing Agreement
shall continue unmodified.

                                                 Very truly yours,

                                                 ROSENTHAL & ROSENTHAL, INC.

                                                 /s/ J. Michael Stanley
                                                 ----------------------
                                                 J. Michael Stanley
                                                 Executive Vice President

Agreed:

BLUEFLY, INC.


By: /s/ E. Kenneth Seiff
    --------------------
Name:  E. Kenneth Seiff
Title: Chief Executive Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.33
<SEQUENCE>11
<FILENAME>k20188ex10_33.txt
<DESCRIPTION>AMENDMENT NO. 1 TO REIMBURSEMENT AGREEMENT
<TEXT>
                                                                   Exhibit 10.33

                     AMENDMENT #1 TO REIMBURSEMENT AGREEMENT

                                              March 22, 2002

Bluefly, Inc.
42 West 39 Street
New York, New York 10018

Gentlemen:

         Reference is made to the Reimbursement Agreement (the "Reimbursement
Agreement") dated as of March 30, 2001 between Bluefly, Inc., a Delaware
corporation, and Quantum Industrial Partners LDC, a Cayman Island limited
duration company. This will confirm that the Reimbursement Agreement is hereby
amended as follows:

         1. The dollar amount "$2,500,000" in the first sentence of Section 1 is
deleted and the dollar amount "$1,500,000" is substituted in its place and
stead.

         2. The second sentence in Section 1 is deleted in its entirety

         3. The following language is added to the end of Section 6 (a): "As
partial consideration for and a condition to its obtaining and maintaining the
Standby Letter of Credit from March 30, 2002 until March 30, 2003, the Soros
Entities shall each receive from Borrower a warrant substantially in the form
attached as Exhibit A hereto (provided, however, that the warrants issued
pursuant to this sentence shall have an exercise price equal to ONE DOLLAR AND
SIXTY-SIX CENTS ($1.66) and an expiration date of March 30, 2007 to purchase
that number of shares of the Common Stock obtained by multiplying SIXTY THOUSAND
(60,000) by such Soros Entity's Percentage Interest (as defined in Section 6(c)
below)."

         Except as hereinabove specifically set forth, the Reimbursement
Agreement shall continue unmodified.

                                            Very truly yours,

                                            QUANTUM INDUSTRIAL PARTNERS LDC


                                            By: /s/ Richard D. Holahan, Jr.
                                               ----------------------------
                                                 Name: Richard D. Holahan, Jr.
                                                Title: Attorney-in-fact
Agreed:

BLUEFLY, INC.

By: /s/ E. Kenneth Seiff
   ---------------------
    Name: E. Kenneth Seiff
    Title: Chief Executive Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.34
<SEQUENCE>12
<FILENAME>k20188ex10_34.txt
<DESCRIPTION>AMEND. TO WARRANT ISSUED TO ROSENTHAL & ROSENTHAL
<TEXT>
                                                                   Exhibit 10.34


                                                  March 22, 2002

Bluefly, Inc.
42 West 39th Street
New York, NY 10018

Gentlemen:

         Reference is made to the Warrant issued to us by you to purchase 50,000
shares of common stock of Bluefly, Inc. dated March 30, 2001 (the "Warrant").

         This will confirm that the Warrant is hereby amended as follows:

         1.       The third line of the Warrant which reads "expiring March 30,
                  2006" is deleted and the following is substituted in its place
                  and stead: "March 30, 2007."

         2.       The date "March ____, 2001" in the third line of the first
                  full paragraph of the Warrant is hereby deleted and the
                  following is substituted in its place and stead: "March 30,
                  2001."

         3.       The date "March ____, 2006" in the fourth line of the first
                  full paragraph of the Warrant is hereby deleted and the
                  following is substituted in its place and stead: "March 30,
                  2007."

         Except as hereinabove specifically set forth, the Warrant shall
continue unmodified.

                                              Very truly yours,

                                              ROSENTHAL & ROSENTHAL, INC.

                                              /s/ J. Michael Stanley
                                              ----------------------
                                              J. Michael Stanley
                                              Executive Vice President
Agreed:

BLUEFLY, INC.

By: /s/ E. Kenneth Seiff
    --------------------
Name: E. Kenneth Seiff
Title: Chief Executive Officer

Attest:
--------------------------------
Name:
Title:

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.35
<SEQUENCE>13
<FILENAME>k20188ex10_35.txt
<DESCRIPTION>WARRANT NO. 1 --  QUANTUM INDUSTRIAL PARTNERS
<TEXT>
                                                                   Exhibit 10.35


THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED,
QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER SUCH ACT OR LAWS AND NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY
AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES.

                                                                   WARRANT NO. 1

                                     WARRANT

                       TO PURCHASE SHARES OF COMMON STOCK

                                       OF

                                  BLUEFLY, INC.

         THIS IS TO CERTIFY THAT QUANTUM INDUSTRIAL PARTNERS LDC, or its
registered assigns (the "Holder"), is the owner of the right to subscribe for
and to purchase from BLUEFLY, INC., a Delaware corporation (the "Company"),
NINETY-SIX THOUSAND EIGHT HUNDRED THIRTY (96,830) (the "Number Issuable"), fully
paid, duly authorized and non-assessable shares of Common Stock at a price per
share equal to the Current Market Price as of March 26, 2002, which is ONE
DOLLAR AND SIXTY-EIGHT CENTS ($1.68), (the "Exercise Price"), at any time, in
whole or in part, on or after March 27, 2002 (the "Effective Date") through 5:00
PM New York City time, on March 27, 2007 (the "Expiration Date") all on the
terms and subject to the conditions hereinafter set forth (the "Warrants").

         The Number Issuable and the Exercise Price are subject to further
adjustment from time to time pursuant to the provisions of Section 2 of this
Warrant Certificate.

         Capitalized terms used herein but not otherwise defined shall have the
meanings given to them in Section 12 hereof.

         Section 1. Exercise of Warrants.

            (a) Subject to the last paragraph of this Section 1, the Warrants
evidenced hereby may be exercised, in whole or in part, by the Holder hereof at
any time

<PAGE>

or from time to time, on or after the Effective Date and on or prior to the
Expiration Date upon delivery to the Company at the principal executive office
of the Company in the United States of America, of (A) this Warrant Certificate,
(B) a written notice stating that such Holder elects to exercise the Warrants
evidenced hereby in accordance with the provisions of this Section 1 and
specifying the number of Warrants being exercised and the name or names in which
the Holder wishes the certificate or certificates for shares of Common Stock to
be issued and (C) payment of the Exercise Price for such Warrants, which shall
be payable by any one or any combination of the following: (i) cash; (ii)
certified or official bank check payable to the order of the Company; (iii) by
the surrender (which surrender shall be evidenced by cancellation of the number
of Warrants represented by any Warrant Certificate presented in connection with
a Cashless Exercise (as defined below)) of a Warrant or Warrants (represented by
one or more relevant Warrant Certificates), and without the payment of the
Exercise Price in cash, in return for the delivery to the surrendering Holder of
such number of shares of Common Stock equal to the number of shares of the
Common Stock for which such Warrant is exercisable as of the date of exercise
(if the Exercise Price were being paid in cash or certified or official bank
check) reduced by that number of shares of Common Stock equal to the quotient
obtained by dividing (x) the aggregate Exercise Price (assuming no Cashless
Exercise) to be paid by (y) the Market Price of one Share of Common Stock on the
Business Day which immediately precedes the day of exercise of the Warrant; or
(iv) by the delivery of shares of the Common Stock having a value (as defined by
the next sentence) equal to the aggregate Exercise Price to be paid, that are
either held by the Holder or are acquired in connection with such exercise, and
without payment of the Exercise Price in cash. Any share of Common Stock
delivered as payment for the Exercise Price in connection with an In-Kind
Exercise (as defined below) shall be deemed to have a value equal to the Market
Price of one Share of Common Stock on the Business Day that immediately precedes
the day of exercise of the Warrants. An exercise of a Warrant in accordance with
clause (iii) is herein referred to as a "Cashless Exercise" and an exercise of a
Warrant in accordance with clause (iv) is herein referred to as an "In-Kind
Exercise." The documentation and consideration, if any, delivered in accordance
with subsections (A), (B) and (C) are collectively referred to herein as the
"Warrant Exercise Documentation."

            (b) As promptly as practicable, and in any event within five (5)
Business Days after receipt of the Warrant Exercise Documentation, the Company
shall deliver or cause to be delivered (A) certificates representing the number
of validly issued, fully paid and nonassessable shares of Common Stock specified
in the Warrant Exercise Documentation, (B) if applicable, cash in lieu of any
fraction of a share, as hereinafter provided, and (C) if less than the full
number of Warrants evidenced hereby are being exercised or used in a Cashless
Exercise, a new Warrant Certificate or Certificates, of like tenor, for the
number of Warrants evidenced by this Warrant Certificate, less the number of
Warrants then being exercised and/or used in a Cashless Exercise. Such exercise
shall be deemed to have been made at the close of business on the date of
delivery of the Warrant Exercise Documentation so that the Person entitled to
receive shares of Common Stock upon such exercise shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
such time.


                                       2
<PAGE>

            (c) The Company shall pay all expenses incurred by the Company in
connection with and taxes and other governmental charges (other than income
taxes of the Holder) that may be imposed in respect of, the issue or delivery of
any shares of Common Stock issuable upon the exercise of the Warrants evidenced
hereby. The Company shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Common Stock, as the case may be, in any name other
than that of the registered holder of the Warrant evidenced hereby.

            (d) In connection with the exercise of any Warrants evidenced
hereby, no fractions of shares of Common Stock shall be issued, but in lieu
thereof the Company shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price for one Share of Common Stock on the Business Day which immediately
precedes the day of exercise. If more than one (1) such Warrant shall be
exercised by the holder thereof at the same time, the number of full shares of
Common Stock issuable on such exercise shall be computed on the basis of the
total number of Warrants so exercised.

         Section 2. Certain Adjustments.

            (a) The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
as follows:

               (i) Stock Dividends, Subdivision, Combination or Reclassification
of Common Stock. If at any time after the date of the issuance of this Warrant
the Company shall (i) pay a dividend on Common Stock in shares of its capital
stock, (ii) combine its outstanding shares of Common Stock into a smaller number
of shares, (iii) subdivide its outstanding shares of Common Stock as the case
may be, or (iv) issue by reclassification of its shares of Common Stock any
shares of capital stock of the Company, then, on the record date for such
dividend or the effective date of such subdivision or split-up, combination or
reclassification, as the case may be, the number and kind of shares to be
delivered upon exercise of this Warrant will be adjusted so that the Holder will
be entitled to receive the number and kind of shares of capital stock that such
Holder would have owned or been entitled to receive upon or by reason of such
event had this Warrant been exercised immediately prior thereto, and the
Exercise Price will be adjusted as provided below in paragraph 2(a)(v).

               (ii) Extraordinary Distributions. If at any time after the date
of issuance of this Warrant, the Company shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (A) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (B) dividends payable in shares of capital stock for which
adjustment is made under Section 2(a)(i), or rights, options or warrants to
subscribe for or purchase securities of the Company), then in each such case the
number of shares of Common Stock to be delivered to such Holder upon exercise of
this Warrant


                                       3
<PAGE>

shall be increased so that the Holder thereafter shall be entitled to receive
the number of shares of Common Stock determined by multiplying the number of
shares such Holder would have been entitled to receive immediately before such
record date by a fraction, the denominator of which shall be the Exercise Price
on such record date minus the then fair market value (as reasonably determined
by the Board of Directors of the Company in good faith) of the portion of the
cash, evidences of indebtedness, securities or other assets so distributed or of
such rights or warrants applicable to one share of the Common Stock (provided
that such denominator shall in no event be less than $.01) and the numerator of
which shall be the Exercise Price.

               (iii) Reorganization, etc. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of either Common
Stock) or any sale, lease or other transfer of all or substantially all of the
assets of the Company to any other person (each, a "Reorganization Event"),
shall be effected in such a way that the holders of the Common Stock shall be
entitled to receive cash, stock, other securities or assets (whether such cash,
stock, other securities or assets are issued or distributed by the Company or
another Person) with respect to or in exchange for the Common Stock, then, upon
exercise of this Warrant, the Holder shall have the right to receive the kind
and amount of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of the Common Stock
that such holder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such Reorganization
Event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2(a). The Company
shall not enter into any of the transactions referred to in this Section
2(a)(iii) unless effective provision shall be made so as to give effect to the
provisions set forth in this Section 2(a)(iii).

               (iv) Carryover. Notwithstanding any other provision of this
Section 2(a), no adjustment shall be made to the number of shares of either
Common Stock to be delivered to the Holder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.

               (v) Exercise Price Adjustment. Whenever the Number Issuable upon
the exercise of the Warrant is adjusted as provided pursuant to this Section
2(a), the Exercise Price per share payable upon the exercise of this Warrant
shall be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the Number Issuable
upon the exercise of the Warrant immediately prior to such adjustment, and of
which the denominator shall be the Number Issuable immediately thereafter;
provided, however, that the Exercise Price for


                                       4
<PAGE>

each Share of the Common Stock shall in no event be less than the par value of a
share of such Common Stock.

            (b) Notice of Adjustment. Whenever the Number Issuable or the
Exercise Price is adjusted as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder, notice of such adjustment
or adjustments setting forth the Number Issuable and the Exercise Price after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.

         Section 3. No Redemption. The Company shall not have any right to
redeem any of the Warrants evidenced hereby.

         Section 4. Notice of Certain Events. In case at any time or from time
to time (i) the Company shall declare any dividend or any other distribution to
all holders of Common Stock, (ii) the Company shall authorize the granting to
the holders of Common Stock of rights or warrants to subscribe for or purchase
any additional shares of stock of any class or any other right, (iii) the
Company shall authorize the issuance or sale of any other shares or rights which
would result in an adjustment to the Number Issuable pursuant to Section
2(a)(i), (ii) or (iii), (iv) there shall be any capital reorganization or
reclassification of Common Stock of the Company or consolidation or merger of
the Company with or into another Person, or any sale or other disposition of all
or substantially all the assets of the Company, or (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the Company,
then, in any one or more of such cases the Company shall mail to the Holder at
such Holder's address as it appears on the transfer books of the Company, as
promptly as practicable but in any event at least 10 days prior to the date on
which the transactions contemplated in Section 2(a)(i), (ii) or (iii) a notice
stating (a) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants or, if a record is not to be taken,
the date as of which the holders of record of either Common Stock to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (b)
the date on which such reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up is expected to become
effective. Such notice also shall specify the date as of which it is expected
that the holders of record of the Common Stock shall be entitled to exchange the
Common Stock for shares of stock or other securities or property or cash
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up.

         Section 5. Certain Covenants. The Company covenants and agrees that all
shares of Capital Stock of the Company which may be issued upon the exercise of
the Warrants evidenced hereby will be duly authorized, validly issued and fully
paid and nonassessable. The Company shall at all times reserve and keep
available for issuance upon the exercise of the Warrants, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the exercise of all outstanding Warrants, and shall take
all action required to increase the authorized number of shares of Common Stock
if at any time there shall be insufficient authorized but


                                       5
<PAGE>

unissued shares of Common Stock to permit such reservation or to permit the
exercise of all outstanding Warrants.

         Section 6. Registered Holder. The persons in whose names this Warrant
Certificate is registered shall be deemed the owner hereof and of the Warrants
evidenced hereby for all purposes. The registered Holder of this Warrant
Certificate, in their capacity as such, shall not be entitled to any rights
whatsoever as a stockholder of the Company, except as herein provided.

         Section 7. Transfer of Warrants. Any transfer of the rights represented
by this Warrant Certificate shall be effected by the surrender of this Warrant
Certificate, along with the form of assignment attached hereto, properly
completed and executed by the registered Holder hereof, at the principal
executive office of the Company in the United States of America, together with
an appropriate investment letter and opinion of counsel, if deemed reasonably
necessary by counsel to the Company to assure compliance with applicable
securities laws. Thereupon, the Company shall issue in the name or names
specified by the registered Holder hereof and, in the event of a partial
transfer, in the name of the registered Holder hereof, a new Warrant Certificate
or Certificates evidencing the right to purchase such number of shares of Common
Stock as shall be equal to the number of shares of Common Stock then purchasable
hereunder.

         Section 8. Denominations. The Company covenants that it will, at its
expense, promptly upon surrender of this Warrant Certificate at the principal
executive office of the Company in the United States of America, execute and
deliver to the registered Holder hereof a new Warrant Certificate or
Certificates in denominations specified by such Holder for an aggregate number
of Warrants equal to the number of Warrants evidenced by this Warrant
Certificate.

         Section 9. Replacement of Warrants. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, upon
delivery of an indemnity reasonably satisfactory to the Company (in the case of
an insurance company or other institutional investor, its own unsecured
indemnity agreement shall be deemed to be reasonably satisfactory), or, in the
case of mutilation, upon surrender and cancellation thereof, the Company will
issue a new Warrant Certificate of like tenor for a number of Warrants equal to
the number of Warrants evidenced by this Warrant Certificate.

         Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED
BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.

         Section 11. Rights Inure to Registered Holder. The Warrants evidenced
by this Warrant Certificate will inure to the benefit of and be binding upon the
registered Holder thereof and the Company and their respective successors and
permitted assigns. Nothing in this Warrant Certificate shall be construed to
give to any Person other than the


                                       6
<PAGE>

Company and the registered Holder thereof any legal or equitable right, remedy
or claim under this Warrant Certificate, and this Warrant Certificate shall be
for the sole and exclusive benefit of the Company and such registered Holder.
Nothing in this Warrant Certificate shall be construed to give the registered
Holder hereof any rights as a Holder of shares of either Common Stock until such
time, if any, as the Warrants evidenced by this Warrant Certificate are
exercised in accordance with the provisions hereof.

         Section 12. Definitions. For the purposes of this Warrant Certificate,
the following terms shall have the meanings indicated below:

         "Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in the City of New York, New York are authorized or
required by law or executive order to close.

         "Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock (or equivalent ownership interests in a Person not a corporation)
whether now outstanding or hereafter issued, including, without limitation, any
rights, warrants or options to purchase such Person's capital stock.

         "Common Stock" shall mean the common stock of the Company.

         "Common Stock Equivalent" means any security or obligation which is by
its terms convertible into or exercisable for shares of Common Stock, including,
without limitation, any option, warrant or other subscription or purchase right
with respect to Common Stock.

         "Current Market Price" per share shall mean, as of the date of
determination, (a) the average of the daily Market Prices under clause (a), (b)
or (c) of the definition thereof, as applicable, of the Common Stock during the
immediately preceding twenty (20) trading days ending on such date, and (b) if
the Common Stock is not then listed or admitted to trading on any national
securities exchange or quoted in the over-the-counter market, then the Market
Price under clause (d) of the definition thereof on such date.

         "Market Price" shall mean, per share of Common Stock, on any date
specified herein: (a) if the Common Stock is listed on a national securities
exchange, the Closing Price per share of Common Stock on such date published in
The Wall Street Journal (National Edition) or, if no such closing price on such
date is published in The Wall Street Journal (National Edition), the average of
the closing bid and asked prices on such date, as officially reported on the
principal national securities exchange on which the Common Stock is then listed
or admitted to trading; or (b) if the Common Stock is not then listed or
admitted to trading on any national securities exchange, but is designated as a
national market system security, the last trading price of the Common Stock on
such date; or (c) if there shall have been no trading on such date or if the
Common Stock is not so designated, the average of the reported closing bid and
asked price of the Common Stock, on such date as shown by NASDAQ and reported by
any


                                       7
<PAGE>

member firm of the NYSE selected by the Company; or (d) if none of (a), (b) or
(c) is applicable, a market price per share determined in good faith by the
Board of Directors of the Company, which shall be deemed to be "Fair Market
Value" unless holders of at least 15% of Common Stock issued or issuable upon
exercise of the Warrants request that the Company obtain an opinion of a
nationally recognized investment banking firm chosen by the Company (who shall
bear the expense) and reasonably acceptable to such requesting holders of the
Warrants, in which event the Fair Market Value shall be as determined by such
investment banking firm.

         "NASDAQ" means the National Market System of the National Association
of Securities Dealers, Inc. Automated Quotations System.

         "NYSE" shall mean the New York Stock Exchange, Inc.

         "Person" shall mean any individual, corporation, limited liability
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

         Section 13. Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, courier
services or personal delivery, (a) if to the Holder of a Warrant, at such
Holder's last known address appearing on the books of the Company; and (b) if to
the Company, at its principal executive office in the United States, or such
other address as shall have been furnished to the party given or making such
notice, demand or other communication. All such notices and communications shall
be deemed to have been duly given: (i) when delivered by hand, if personally
delivered; (ii) when delivered to a courier if delivered by commercial overnight
courier service; and (iii) five (5) Business Days after being deposited in the
mail, postage prepaid, if mailed.


                                       8
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of this 27th day of March, 2002.



                                        BLUEFLY, INC.


                                        By:  /s/ E. Kenneth Seiff
                                             --------------------
                                             Name: E. Kenneth Seiff
                                             Title: Chief Executive Officer


                                       9
<PAGE>

                            [Form of Assignment Form]

                  [To be executed upon assignment of Warrants]

         The undersigned hereby assigns and transfers this Warrant Certificate
to ___________________ whose Social Security Number or Tax ID Number is
_________________ and whose record address is
_____________________________________, and irrevocably appoints ________________
as agent to transfer this security on the books of the Company. Such agent may
substitute another to act for such agent.


                                           Signature:

                                           -------------------------------
                                           Signature Guarantee:


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

Date: ___________________________


                                       10

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.36
<SEQUENCE>14
<FILENAME>k20188ex10_36.txt
<DESCRIPTION>WARRANT NO. 2 -- SFM DOMESTIC INVESTMENTS LLC
<TEXT>
                                                                   Exhibit 10.36

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED,
QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER SUCH ACT OR LAWS AND NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY
AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES.

                                                                   WARRANT NO. 2

                                     WARRANT

                       TO PURCHASE SHARES OF COMMON STOCK

                                       OF

                                  BLUEFLY, INC.

         THIS IS TO CERTIFY THAT SFM DOMESTIC INVESTMENTS LLC, or its registered
assigns (the "Holder"), is the owner of the right to subscribe for and to
purchase from BLUEFLY, INC., a Delaware corporation (the "Company"), THREE
THOUSAND ONE HUNDRED SEVENTY (3,170) (the "Number Issuable"), fully paid, duly
authorized and non-assessable shares of Common Stock at a price per share equal
to the Current Market Price as of March 26, 2002, which is ONE DOLLAR AND
SIXTY-EIGHT CENTS ($1.68), (the "Exercise Price"), at any time, in whole or in
part, on or after March 27, 2002 (the "Effective Date") through 5:00 PM New York
City time, on March 27, 2007 (the "Expiration Date") all on the terms and
subject to the conditions hereinafter set forth (the "Warrants").

         The Number Issuable and the Exercise Price are subject to further
adjustment from time to time pursuant to the provisions of Section 2 of this
Warrant Certificate.

         Capitalized terms used herein but not otherwise defined shall have the
meanings given to them in Section 12 hereof.

         Section 1. Exercise of Warrants.

            (a) Subject to the last paragraph of this Section 1, the Warrants
evidenced hereby may be exercised, in whole or in part, by the Holder hereof at
any time

<PAGE>

or from time to time, on or after the Effective Date and on or prior to the
Expiration Date upon delivery to the Company at the principal executive office
of the Company in the United States of America, of (A) this Warrant Certificate,
(B) a written notice stating that such Holder elects to exercise the Warrants
evidenced hereby in accordance with the provisions of this Section 1 and
specifying the number of Warrants being exercised and the name or names in which
the Holder wishes the certificate or certificates for shares of Common Stock to
be issued and (C) payment of the Exercise Price for such Warrants, which shall
be payable by any one or any combination of the following: (i) cash; (ii)
certified or official bank check payable to the order of the Company; (iii) by
the surrender (which surrender shall be evidenced by cancellation of the number
of Warrants represented by any Warrant Certificate presented in connection with
a Cashless Exercise (as defined below)) of a Warrant or Warrants (represented by
one or more relevant Warrant Certificates), and without the payment of the
Exercise Price in cash, in return for the delivery to the surrendering Holder of
such number of shares of Common Stock equal to the number of shares of the
Common Stock for which such Warrant is exercisable as of the date of exercise
(if the Exercise Price were being paid in cash or certified or official bank
check) reduced by that number of shares of Common Stock equal to the quotient
obtained by dividing (x) the aggregate Exercise Price (assuming no Cashless
Exercise) to be paid by (y) the Market Price of one Share of Common Stock on the
Business Day which immediately precedes the day of exercise of the Warrant; or
(iv) by the delivery of shares of the Common Stock having a value (as defined by
the next sentence) equal to the aggregate Exercise Price to be paid, that are
either held by the Holder or are acquired in connection with such exercise, and
without payment of the Exercise Price in cash. Any share of Common Stock
delivered as payment for the Exercise Price in connection with an In-Kind
Exercise (as defined below) shall be deemed to have a value equal to the Market
Price of one Share of Common Stock on the Business Day that immediately precedes
the day of exercise of the Warrants. An exercise of a Warrant in accordance with
clause (iii) is herein referred to as a "Cashless Exercise" and an exercise of a
Warrant in accordance with clause (iv) is herein referred to as an "In-Kind
Exercise." The documentation and consideration, if any, delivered in accordance
with subsections (A), (B) and (C) are collectively referred to herein as the
"Warrant Exercise Documentation."

            (b) As promptly as practicable, and in any event within five (5)
Business Days after receipt of the Warrant Exercise Documentation, the Company
shall deliver or cause to be delivered (A) certificates representing the number
of validly issued, fully paid and nonassessable shares of Common Stock specified
in the Warrant Exercise Documentation, (B) if applicable, cash in lieu of any
fraction of a share, as hereinafter provided, and (C) if less than the full
number of Warrants evidenced hereby are being exercised or used in a Cashless
Exercise, a new Warrant Certificate or Certificates, of like tenor, for the
number of Warrants evidenced by this Warrant Certificate, less the number of
Warrants then being exercised and/or used in a Cashless Exercise. Such exercise
shall be deemed to have been made at the close of business on the date of
delivery of the Warrant Exercise Documentation so that the Person entitled to
receive shares of Common Stock upon such exercise shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
such time.


                                       2
<PAGE>

            (c) The Company shall pay all expenses incurred by the Company in
connection with and taxes and other governmental charges (other than income
taxes of the Holder) that may be imposed in respect of, the issue or delivery of
any shares of Common Stock issuable upon the exercise of the Warrants evidenced
hereby. The Company shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Common Stock, as the case may be, in any name other
than that of the registered holder of the Warrant evidenced hereby.

            (d) In connection with the exercise of any Warrants evidenced
hereby, no fractions of shares of Common Stock shall be issued, but in lieu
thereof the Company shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price for one Share of Common Stock on the Business Day which immediately
precedes the day of exercise. If more than one (1) such Warrant shall be
exercised by the holder thereof at the same time, the number of full shares of
Common Stock issuable on such exercise shall be computed on the basis of the
total number of Warrants so exercised.

         Section 2. Certain Adjustments.

            (a) The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
as follows:

               (i) Stock Dividends, Subdivision, Combination or Reclassification
of Common Stock. If at any time after the date of the issuance of this Warrant
the Company shall (i) pay a dividend on Common Stock in shares of its capital
stock, (ii) combine its outstanding shares of Common Stock into a smaller number
of shares, (iii) subdivide its outstanding shares of Common Stock as the case
may be, or (iv) issue by reclassification of its shares of Common Stock any
shares of capital stock of the Company, then, on the record date for such
dividend or the effective date of such subdivision or split-up, combination or
reclassification, as the case may be, the number and kind of shares to be
delivered upon exercise of this Warrant will be adjusted so that the Holder will
be entitled to receive the number and kind of shares of capital stock that such
Holder would have owned or been entitled to receive upon or by reason of such
event had this Warrant been exercised immediately prior thereto, and the
Exercise Price will be adjusted as provided below in paragraph 2(a)(v).

               (ii) Extraordinary Distributions. If at any time after the date
of issuance of this Warrant, the Company shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (A) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (B) dividends payable in shares of capital stock for which
adjustment is made under Section 2(a)(i), or rights, options or warrants to
subscribe for or purchase securities of the Company), then in each such case the
number of shares of Common Stock to be delivered to such Holder upon exercise of
this Warrant


                                       3
<PAGE>

shall be increased so that the Holder thereafter shall be entitled to receive
the number of shares of Common Stock determined by multiplying the number of
shares such Holder would have been entitled to receive immediately before such
record date by a fraction, the denominator of which shall be the Exercise Price
on such record date minus the then fair market value (as reasonably determined
by the Board of Directors of the Company in good faith) of the portion of the
cash, evidences of indebtedness, securities or other assets so distributed or of
such rights or warrants applicable to one share of the Common Stock (provided
that such denominator shall in no event be less than $.01) and the numerator of
which shall be the Exercise Price.

               (iii) Reorganization, etc. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of either Common
Stock) or any sale, lease or other transfer of all or substantially all of the
assets of the Company to any other person (each, a "Reorganization Event"),
shall be effected in such a way that the holders of the Common Stock shall be
entitled to receive cash, stock, other securities or assets (whether such cash,
stock, other securities or assets are issued or distributed by the Company or
another Person) with respect to or in exchange for the Common Stock, then, upon
exercise of this Warrant, the Holder shall have the right to receive the kind
and amount of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of the Common Stock
that such holder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such Reorganization
Event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2(a). The Company
shall not enter into any of the transactions referred to in this Section
2(a)(iii) unless effective provision shall be made so as to give effect to the
provisions set forth in this Section 2(a)(iii).

               (iv) Carryover. Notwithstanding any other provision of this
Section 2(a), no adjustment shall be made to the number of shares of either
Common Stock to be delivered to the Holder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.

               (v) Exercise Price Adjustment. Whenever the Number Issuable upon
the exercise of the Warrant is adjusted as provided pursuant to this Section
2(a), the Exercise Price per share payable upon the exercise of this Warrant
shall be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the Number Issuable
upon the exercise of the Warrant immediately prior to such adjustment, and of
which the denominator shall be the Number Issuable immediately thereafter;
provided, however, that the Exercise Price for


                                       4
<PAGE>

each Share of the Common Stock shall in no event be less than the par value of a
share of such Common Stock.

            (b) Notice of Adjustment. Whenever the Number Issuable or the
Exercise Price is adjusted as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder, notice of such adjustment
or adjustments setting forth the Number Issuable and the Exercise Price after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.

         Section 3. No Redemption. The Company shall not have any right to
redeem any of the Warrants evidenced hereby.

         Section 4. Notice of Certain Events. In case at any time or from time
to time (i) the Company shall declare any dividend or any other distribution to
all holders of Common Stock, (ii) the Company shall authorize the granting to
the holders of Common Stock of rights or warrants to subscribe for or purchase
any additional shares of stock of any class or any other right, (iii) the
Company shall authorize the issuance or sale of any other shares or rights which
would result in an adjustment to the Number Issuable pursuant to Section
2(a)(i), (ii) or (iii), (iv) there shall be any capital reorganization or
reclassification of Common Stock of the Company or consolidation or merger of
the Company with or into another Person, or any sale or other disposition of all
or substantially all the assets of the Company, or (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the Company,
then, in any one or more of such cases the Company shall mail to the Holder at
such Holder's address as it appears on the transfer books of the Company, as
promptly as practicable but in any event at least 10 days prior to the date on
which the transactions contemplated in Section 2(a)(i), (ii) or (iii) a notice
stating (a) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants or, if a record is not to be taken,
the date as of which the holders of record of either Common Stock to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (b)
the date on which such reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up is expected to become
effective. Such notice also shall specify the date as of which it is expected
that the holders of record of the Common Stock shall be entitled to exchange the
Common Stock for shares of stock or other securities or property or cash
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up.

         Section 5. Certain Covenants. The Company covenants and agrees that all
shares of Capital Stock of the Company which may be issued upon the exercise of
the Warrants evidenced hereby will be duly authorized, validly issued and fully
paid and nonassessable. The Company shall at all times reserve and keep
available for issuance upon the exercise of the Warrants, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the exercise of all outstanding Warrants, and shall take
all action required to increase the authorized number of shares of Common Stock
if at any time there shall be insufficient authorized but


                                       5
<PAGE>

unissued shares of Common Stock to permit such reservation or to permit the
exercise of all outstanding Warrants.

         Section 6. Registered Holder. The persons in whose names this Warrant
Certificate is registered shall be deemed the owner hereof and of the Warrants
evidenced hereby for all purposes. The registered Holder of this Warrant
Certificate, in their capacity as such, shall not be entitled to any rights
whatsoever as a stockholder of the Company, except as herein provided.

         Section 7. Transfer of Warrants. Any transfer of the rights represented
by this Warrant Certificate shall be effected by the surrender of this Warrant
Certificate, along with the form of assignment attached hereto, properly
completed and executed by the registered Holder hereof, at the principal
executive office of the Company in the United States of America, together with
an appropriate investment letter and opinion of counsel, if deemed reasonably
necessary by counsel to the Company to assure compliance with applicable
securities laws. Thereupon, the Company shall issue in the name or names
specified by the registered Holder hereof and, in the event of a partial
transfer, in the name of the registered Holder hereof, a new Warrant Certificate
or Certificates evidencing the right to purchase such number of shares of Common
Stock as shall be equal to the number of shares of Common Stock then purchasable
hereunder.

         Section 8. Denominations. The Company covenants that it will, at its
expense, promptly upon surrender of this Warrant Certificate at the principal
executive office of the Company in the United States of America, execute and
deliver to the registered Holder hereof a new Warrant Certificate or
Certificates in denominations specified by such Holder for an aggregate number
of Warrants equal to the number of Warrants evidenced by this Warrant
Certificate.

         Section 9. Replacement of Warrants. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, upon
delivery of an indemnity reasonably satisfactory to the Company (in the case of
an insurance company or other institutional investor, its own unsecured
indemnity agreement shall be deemed to be reasonably satisfactory), or, in the
case of mutilation, upon surrender and cancellation thereof, the Company will
issue a new Warrant Certificate of like tenor for a number of Warrants equal to
the number of Warrants evidenced by this Warrant Certificate.

         Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED
BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.

         Section 11. Rights Inure to Registered Holder. The Warrants evidenced
by this Warrant Certificate will inure to the benefit of and be binding upon the
registered Holder thereof and the Company and their respective successors and
permitted assigns. Nothing in this Warrant Certificate shall be construed to
give to any Person other than the


                                       6
<PAGE>

Company and the registered Holder thereof any legal or equitable right, remedy
or claim under this Warrant Certificate, and this Warrant Certificate shall be
for the sole and exclusive benefit of the Company and such registered Holder.
Nothing in this Warrant Certificate shall be construed to give the registered
Holder hereof any rights as a Holder of shares of either Common Stock until such
time, if any, as the Warrants evidenced by this Warrant Certificate are
exercised in accordance with the provisions hereof.

         Section 12. Definitions. For the purposes of this Warrant Certificate,
the following terms shall have the meanings indicated below:

         "Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in the City of New York, New York are authorized or
required by law or executive order to close.

         "Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock (or equivalent ownership interests in a Person not a corporation)
whether now outstanding or hereafter issued, including, without limitation, any
rights, warrants or options to purchase such Person's capital stock.

         "Common Stock" shall mean the common stock of the Company.

         "Common Stock Equivalent" means any security or obligation which is by
its terms convertible into or exercisable for shares of Common Stock, including,
without limitation, any option, warrant or other subscription or purchase right
with respect to Common Stock.

         "Current Market Price" per share shall mean, as of the date of
determination, (a) the average of the daily Market Prices under clause (a), (b)
or (c) of the definition thereof, as applicable, of the Common Stock during the
immediately preceding twenty (20) trading days ending on such date, and (b) if
the Common Stock is not then listed or admitted to trading on any national
securities exchange or quoted in the over-the-counter market, then the Market
Price under clause (d) of the definition thereof on such date.

         "Market Price" shall mean, per share of Common Stock, on any date
specified herein: (a) if the Common Stock is listed on a national securities
exchange, the Closing Price per share of Common Stock on such date published in
The Wall Street Journal (National Edition) or, if no such closing price on such
date is published in The Wall Street Journal (National Edition), the average of
the closing bid and asked prices on such date, as officially reported on the
principal national securities exchange on which the Common Stock is then listed
or admitted to trading; or (b) if the Common Stock is not then listed or
admitted to trading on any national securities exchange, but is designated as a
national market system security, the last trading price of the Common Stock on
such date; or (c) if there shall have been no trading on such date or if the
Common Stock is not so designated, the average of the reported closing bid and
asked price of the Common Stock, on such date as shown by NASDAQ and reported by
any


                                       7
<PAGE>

member firm of the NYSE selected by the Company; or (d) if none of (a), (b) or
(c) is applicable, a market price per share determined in good faith by the
Board of Directors of the Company, which shall be deemed to be "Fair Market
Value" unless holders of at least 15% of Common Stock issued or issuable upon
exercise of the Warrants request that the Company obtain an opinion of a
nationally recognized investment banking firm chosen by the Company (who shall
bear the expense) and reasonably acceptable to such requesting holders of the
Warrants, in which event the Fair Market Value shall be as determined by such
investment banking firm.

         "NASDAQ" means the National Market System of the National Association
of Securities Dealers, Inc. Automated Quotations System.

         "NYSE" shall mean the New York Stock Exchange, Inc.

         "Person" shall mean any individual, corporation, limited liability
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

         Section 13. Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, courier
services or personal delivery, (a) if to the Holder of a Warrant, at such
Holder's last known address appearing on the books of the Company; and (b) if to
the Company, at its principal executive office in the United States, or such
other address as shall have been furnished to the party given or making such
notice, demand or other communication. All such notices and communications shall
be deemed to have been duly given: (i) when delivered by hand, if personally
delivered; (ii) when delivered to a courier if delivered by commercial overnight
courier service; and (iii) five (5) Business Days after being deposited in the
mail, postage prepaid, if mailed.


                                       8
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of this 27th day of March, 2002.


                                           BLUEFLY, INC.


                                           By:  /s/ E. Kenneth Seiff
                                                --------------------
                                                Name: E. Kenneth Seiff
                                                Title: Chief Executive Officer


                                       9
<PAGE>

                            [Form of Assignment Form]

                  [To be executed upon assignment of Warrants]

         The undersigned hereby assigns and transfers this Warrant Certificate
to ___________________ whose Social Security Number or Tax ID Number is
_________________ and whose record address is
_____________________________________, and irrevocably appoints ________________
as agent to transfer this security on the books of the Company. Such agent may
substitute another to act for such agent.

                                            Signature:


                                            -------------------------------
                                            Signature Guarantee:


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


Date: ___________________________


                                       10

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.37
<SEQUENCE>15
<FILENAME>k20188ex10_37.txt
<DESCRIPTION>WARRANT NO. 3 -- QUANTUM INDUSTRIAL PARTNERS LDC
<TEXT>
                                                                   Exhibit 10.37

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED,
QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER SUCH ACT OR LAWS AND NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY
AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES.

                                                                   WARRANT NO. 3

                                     WARRANT

                       TO PURCHASE SHARES OF COMMON STOCK

                                       OF

                                  BLUEFLY, INC.

         THIS IS TO CERTIFY THAT QUANTUM INDUSTRIAL PARTNERS LDC, or its
registered assigns (the "Holder"), is the owner of the right to subscribe for
and to purchase from BLUEFLY, INC., a Delaware corporation (the "Company"),
FIFTY-EIGHT THOUSAND NINETY-EIGHT (58,098) (the "Number Issuable"), fully paid,
duly authorized and non-assessable shares of Common Stock at a price per share
equal to the Current Market Price as of March 21, 2002, which is ONE DOLLAR AND
SIXTY-SIX CENTS ($1.66), (the "Exercise Price"), at any time, in whole or in
part, on or after March 30, 2002 (the "Effective Date") through 5:00 PM New York
City time, on March 30, 2007 (the "Expiration Date") all on the terms and
subject to the conditions hereinafter set forth (the "Warrants").

         The Number Issuable and the Exercise Price are subject to further
adjustment from time to time pursuant to the provisions of Section 2 of this
Warrant Certificate.

         Capitalized terms used herein but not otherwise defined shall have the
meanings given to them in Section 12 hereof.

         Section 1. Exercise of Warrants.

            (a) Subject to the last paragraph of this Section 1, the Warrants
evidenced hereby may be exercised, in whole or in part, by the Holder hereof at
any time

<PAGE>

or from time to time, on or after the Effective Date and on or prior to the
Expiration Date upon delivery to the Company at the principal executive office
of the Company in the United States of America, of (A) this Warrant Certificate,
(B) a written notice stating that such Holder elects to exercise the Warrants
evidenced hereby in accordance with the provisions of this Section 1 and
specifying the number of Warrants being exercised and the name or names in which
the Holder wishes the certificate or certificates for shares of Common Stock to
be issued and (C) payment of the Exercise Price for such Warrants, which shall
be payable by any one or any combination of the following: (i) cash; (ii)
certified or official bank check payable to the order of the Company; (iii) by
the surrender (which surrender shall be evidenced by cancellation of the number
of Warrants represented by any Warrant Certificate presented in connection with
a Cashless Exercise (as defined below)) of a Warrant or Warrants (represented by
one or more relevant Warrant Certificates), and without the payment of the
Exercise Price in cash, in return for the delivery to the surrendering Holder of
such number of shares of Common Stock equal to the number of shares of the
Common Stock for which such Warrant is exercisable as of the date of exercise
(if the Exercise Price were being paid in cash or certified or official bank
check) reduced by that number of shares of Common Stock equal to the quotient
obtained by dividing (x) the aggregate Exercise Price (assuming no Cashless
Exercise) to be paid by (y) the Market Price of one Share of Common Stock on the
Business Day which immediately precedes the day of exercise of the Warrant; or
(iv) by the delivery of shares of the Common Stock having a value (as defined by
the next sentence) equal to the aggregate Exercise Price to be paid, that are
either held by the Holder or are acquired in connection with such exercise, and
without payment of the Exercise Price in cash. Any share of Common Stock
delivered as payment for the Exercise Price in connection with an In-Kind
Exercise (as defined below) shall be deemed to have a value equal to the Market
Price of one Share of Common Stock on the Business Day that immediately precedes
the day of exercise of the Warrants. An exercise of a Warrant in accordance with
clause (iii) is herein referred to as a "Cashless Exercise" and an exercise of a
Warrant in accordance with clause (iv) is herein referred to as an "In-Kind
Exercise." The documentation and consideration, if any, delivered in accordance
with subsections (A), (B) and (C) are collectively referred to herein as the
"Warrant Exercise Documentation."

            (b) As promptly as practicable, and in any event within five (5)
Business Days after receipt of the Warrant Exercise Documentation, the Company
shall deliver or cause to be delivered (A) certificates representing the number
of validly issued, fully paid and nonassessable shares of Common Stock specified
in the Warrant Exercise Documentation, (B) if applicable, cash in lieu of any
fraction of a share, as hereinafter provided, and (C) if less than the full
number of Warrants evidenced hereby are being exercised or used in a Cashless
Exercise, a new Warrant Certificate or Certificates, of like tenor, for the
number of Warrants evidenced by this Warrant Certificate, less the number of
Warrants then being exercised and/or used in a Cashless Exercise. Such exercise
shall be deemed to have been made at the close of business on the date of
delivery of the Warrant Exercise Documentation so that the Person entitled to
receive shares of Common Stock upon such exercise shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
such time.


                                       2
<PAGE>

            (c) The Company shall pay all expenses incurred by the Company in
connection with and taxes and other governmental charges (other than income
taxes of the Holder) that may be imposed in respect of, the issue or delivery of
any shares of Common Stock issuable upon the exercise of the Warrants evidenced
hereby. The Company shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Common Stock, as the case may be, in any name other
than that of the registered holder of the Warrant evidenced hereby.

            (d) In connection with the exercise of any Warrants evidenced
hereby, no fractions of shares of Common Stock shall be issued, but in lieu
thereof the Company shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price for one Share of Common Stock on the Business Day which immediately
precedes the day of exercise. If more than one (1) such Warrant shall be
exercised by the holder thereof at the same time, the number of full shares of
Common Stock issuable on such exercise shall be computed on the basis of the
total number of Warrants so exercised.

         Section 2. Certain Adjustments.

            (a) The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
as follows:

               (i) Stock Dividends, Subdivision, Combination or Reclassification
of Common Stock. If at any time after the date of the issuance of this Warrant
the Company shall (i) pay a dividend on Common Stock in shares of its capital
stock, (ii) combine its outstanding shares of Common Stock into a smaller number
of shares, (iii) subdivide its outstanding shares of Common Stock as the case
may be, or (iv) issue by reclassification of its shares of Common Stock any
shares of capital stock of the Company, then, on the record date for such
dividend or the effective date of such subdivision or split-up, combination or
reclassification, as the case may be, the number and kind of shares to be
delivered upon exercise of this Warrant will be adjusted so that the Holder will
be entitled to receive the number and kind of shares of capital stock that such
Holder would have owned or been entitled to receive upon or by reason of such
event had this Warrant been exercised immediately prior thereto, and the
Exercise Price will be adjusted as provided below in paragraph 2(a)(v).

               (ii) Extraordinary Distributions. If at any time after the date
of issuance of this Warrant, the Company shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (A) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (B) dividends payable in shares of capital stock for which
adjustment is made under Section 2(a)(i), or rights, options or warrants to
subscribe for or purchase securities of the Company), then in each such case the
number of shares of Common Stock to be delivered to such Holder upon exercise of
this Warrant


                                       3
<PAGE>

shall be increased so that the Holder thereafter shall be entitled to receive
the number of shares of Common Stock determined by multiplying the number of
shares such Holder would have been entitled to receive immediately before such
record date by a fraction, the denominator of which shall be the Exercise Price
on such record date minus the then fair market value (as reasonably determined
by the Board of Directors of the Company in good faith) of the portion of the
cash, evidences of indebtedness, securities or other assets so distributed or of
such rights or warrants applicable to one share of the Common Stock (provided
that such denominator shall in no event be less than $.01) and the numerator of
which shall be the Exercise Price.

               (iii) Reorganization, etc. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of either Common
Stock) or any sale, lease or other transfer of all or substantially all of the
assets of the Company to any other person (each, a "Reorganization Event"),
shall be effected in such a way that the holders of the Common Stock shall be
entitled to receive cash, stock, other securities or assets (whether such cash,
stock, other securities or assets are issued or distributed by the Company or
another Person) with respect to or in exchange for the Common Stock, then, upon
exercise of this Warrant, the Holder shall have the right to receive the kind
and amount of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of the Common Stock
that such holder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such Reorganization
Event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2(a). The Company
shall not enter into any of the transactions referred to in this Section
2(a)(iii) unless effective provision shall be made so as to give effect to the
provisions set forth in this Section 2(a)(iii).

               (iv) Carryover. Notwithstanding any other provision of this
Section 2(a), no adjustment shall be made to the number of shares of either
Common Stock to be delivered to the Holder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.

               (v) Exercise Price Adjustment. Whenever the Number Issuable upon
the exercise of the Warrant is adjusted as provided pursuant to this Section
2(a), the Exercise Price per share payable upon the exercise of this Warrant
shall be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the Number Issuable
upon the exercise of the Warrant immediately prior to such adjustment, and of
which the denominator shall be the Number Issuable immediately thereafter;
provided, however, that the Exercise Price for


                                       4
<PAGE>

each Share of the Common Stock shall in no event be less than the par value of a
share of such Common Stock.

            (b) Notice of Adjustment. Whenever the Number Issuable or the
Exercise Price is adjusted as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder, notice of such adjustment
or adjustments setting forth the Number Issuable and the Exercise Price after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.

         Section 3. No Redemption. The Company shall not have any right to
redeem any of the Warrants evidenced hereby.

         Section 4. Notice of Certain Events. In case at any time or from time
to time (i) the Company shall declare any dividend or any other distribution to
all holders of Common Stock, (ii) the Company shall authorize the granting to
the holders of Common Stock of rights or warrants to subscribe for or purchase
any additional shares of stock of any class or any other right, (iii) the
Company shall authorize the issuance or sale of any other shares or rights which
would result in an adjustment to the Number Issuable pursuant to Section
2(a)(i), (ii) or (iii), (iv) there shall be any capital reorganization or
reclassification of Common Stock of the Company or consolidation or merger of
the Company with or into another Person, or any sale or other disposition of all
or substantially all the assets of the Company, or (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the Company,
then, in any one or more of such cases the Company shall mail to the Holder at
such Holder's address as it appears on the transfer books of the Company, as
promptly as practicable but in any event at least 10 days prior to the date on
which the transactions contemplated in Section 2(a)(i), (ii) or (iii) a notice
stating (a) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants or, if a record is not to be taken,
the date as of which the holders of record of either Common Stock to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (b)
the date on which such reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up is expected to become
effective. Such notice also shall specify the date as of which it is expected
that the holders of record of the Common Stock shall be entitled to exchange the
Common Stock for shares of stock or other securities or property or cash
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up.

         Section 5. Certain Covenants. The Company covenants and agrees that all
shares of Capital Stock of the Company which may be issued upon the exercise of
the Warrants evidenced hereby will be duly authorized, validly issued and fully
paid and nonassessable. The Company shall at all times reserve and keep
available for issuance upon the exercise of the Warrants, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the exercise of all outstanding Warrants, and shall take
all action required to increase the authorized number of shares of Common Stock
if at any time there shall be insufficient authorized but


                                       5
<PAGE>

unissued shares of Common Stock to permit such reservation or to permit the
exercise of all outstanding Warrants.

         Section 6. Registered Holder. The persons in whose names this Warrant
Certificate is registered shall be deemed the owner hereof and of the Warrants
evidenced hereby for all purposes. The registered Holder of this Warrant
Certificate, in their capacity as such, shall not be entitled to any rights
whatsoever as a stockholder of the Company, except as herein provided.

         Section 7. Transfer of Warrants. Any transfer of the rights represented
by this Warrant Certificate shall be effected by the surrender of this Warrant
Certificate, along with the form of assignment attached hereto, properly
completed and executed by the registered Holder hereof, at the principal
executive office of the Company in the United States of America, together with
an appropriate investment letter and opinion of counsel, if deemed reasonably
necessary by counsel to the Company to assure compliance with applicable
securities laws. Thereupon, the Company shall issue in the name or names
specified by the registered Holder hereof and, in the event of a partial
transfer, in the name of the registered Holder hereof, a new Warrant Certificate
or Certificates evidencing the right to purchase such number of shares of Common
Stock as shall be equal to the number of shares of Common Stock then purchasable
hereunder.

         Section 8. Denominations. The Company covenants that it will, at its
expense, promptly upon surrender of this Warrant Certificate at the principal
executive office of the Company in the United States of America, execute and
deliver to the registered Holder hereof a new Warrant Certificate or
Certificates in denominations specified by such Holder for an aggregate number
of Warrants equal to the number of Warrants evidenced by this Warrant
Certificate.

         Section 9. Replacement of Warrants. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, upon
delivery of an indemnity reasonably satisfactory to the Company (in the case of
an insurance company or other institutional investor, its own unsecured
indemnity agreement shall be deemed to be reasonably satisfactory), or, in the
case of mutilation, upon surrender and cancellation thereof, the Company will
issue a new Warrant Certificate of like tenor for a number of Warrants equal to
the number of Warrants evidenced by this Warrant Certificate.

         Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED
BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.

         Section 11. Rights Inure to Registered Holder. The Warrants evidenced
by this Warrant Certificate will inure to the benefit of and be binding upon the
registered Holder thereof and the Company and their respective successors and
permitted assigns. Nothing in this Warrant Certificate shall be construed to
give to any Person other than the


                                       6
<PAGE>

Company and the registered Holder thereof any legal or equitable right, remedy
or claim under this Warrant Certificate, and this Warrant Certificate shall be
for the sole and exclusive benefit of the Company and such registered Holder.
Nothing in this Warrant Certificate shall be construed to give the registered
Holder hereof any rights as a Holder of shares of either Common Stock until such
time, if any, as the Warrants evidenced by this Warrant Certificate are
exercised in accordance with the provisions hereof.

         Section 12. Definitions. For the purposes of this Warrant Certificate,
the following terms shall have the meanings indicated below:

         "Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in the City of New York, New York are authorized or
required by law or executive order to close.

         "Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock (or equivalent ownership interests in a Person not a corporation)
whether now outstanding or hereafter issued, including, without limitation, any
rights, warrants or options to purchase such Person's capital stock.

         "Common Stock" shall mean the common stock of the Company.

         "Common Stock Equivalent" means any security or obligation which is by
its terms convertible into or exercisable for shares of Common Stock, including,
without limitation, any option, warrant or other subscription or purchase right
with respect to Common Stock.

         "Current Market Price" per share shall mean, as of the date of
determination, (a) the average of the daily Market Prices under clause (a), (b)
or (c) of the definition thereof, as applicable, of the Common Stock during the
immediately preceding twenty (20) trading days ending on such date, and (b) if
the Common Stock is not then listed or admitted to trading on any national
securities exchange or quoted in the over-the-counter market, then the Market
Price under clause (d) of the definition thereof on such date.

         "Market Price" shall mean, per share of Common Stock, on any date
specified herein: (a) if the Common Stock is listed on a national securities
exchange, the Closing Price per share of Common Stock on such date published in
The Wall Street Journal (National Edition) or, if no such closing price on such
date is published in The Wall Street Journal (National Edition), the average of
the closing bid and asked prices on such date, as officially reported on the
principal national securities exchange on which the Common Stock is then listed
or admitted to trading; or (b) if the Common Stock is not then listed or
admitted to trading on any national securities exchange, but is designated as a
national market system security, the last trading price of the Common Stock on
such date; or (c) if there shall have been no trading on such date or if the
Common Stock is not so designated, the average of the reported closing bid and
asked price of the Common Stock, on such date as shown by NASDAQ and reported by
any


                                       7
<PAGE>

member firm of the NYSE selected by the Company; or (d) if none of (a), (b) or
(c) is applicable, a market price per share determined in good faith by the
Board of Directors of the Company, which shall be deemed to be "Fair Market
Value" unless holders of at least 15% of Common Stock issued or issuable upon
exercise of the Warrants request that the Company obtain an opinion of a
nationally recognized investment banking firm chosen by the Company (who shall
bear the expense) and reasonably acceptable to such requesting holders of the
Warrants, in which event the Fair Market Value shall be as determined by such
investment banking firm.

         "NASDAQ" means the National Market System of the National Association
of Securities Dealers, Inc. Automated Quotations System.

         "NYSE" shall mean the New York Stock Exchange, Inc.

         "Person" shall mean any individual, corporation, limited liability
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

         Section 13. Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, courier
services or personal delivery, (a) if to the Holder of a Warrant, at such
Holder's last known address appearing on the books of the Company; and (b) if to
the Company, at its principal executive office in the United States, or such
other address as shall have been furnished to the party given or making such
notice, demand or other communication. All such notices and communications shall
be deemed to have been duly given: (i) when delivered by hand, if personally
delivered; (ii) when delivered to a courier if delivered by commercial overnight
courier service; and (iii) five (5) Business Days after being deposited in the
mail, postage prepaid, if mailed.


                                       8
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of this 22nd day of March, 2002.



                                           BLUEFLY, INC.

                                           By:  /s/ E. Kenneth Seiff
                                                --------------------
                                           Name: E. Kenneth Seiff
                                           Title: Chief Executive Officer


                                       9
<PAGE>

                            [Form of Assignment Form]

                  [To be executed upon assignment of Warrants]

         The undersigned hereby assigns and transfers this Warrant Certificate
to ___________________ whose Social Security Number or Tax ID Number is
_________________ and whose record address is
_____________________________________, and irrevocably appoints ________________
as agent to transfer this security on the books of the Company. Such agent may
substitute another to act for such agent.

                                           Signature:


                                           -------------------------------
                                           Signature Guarantee:


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


Date: ___________________________


                                       10

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.38
<SEQUENCE>16
<FILENAME>k20188ex10_38.txt
<DESCRIPTION>WARRANT NO. 4 -- SFM DOMESTIC INVESTMENTS LLC
<TEXT>
                                                                   Exhibit 10.38


THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED,
QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER SUCH ACT OR LAWS AND NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY
AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES.

                                                                   WARRANT NO. 4

                                     WARRANT

                       TO PURCHASE SHARES OF COMMON STOCK

                                       OF

                                  BLUEFLY, INC.

         THIS IS TO CERTIFY THAT SFM DOMESTIC INVESTMENTS LLC, or its registered
assigns (the "Holder"), is the owner of the right to subscribe for and to
purchase from BLUEFLY, INC., a Delaware corporation (the "Company"), ONE
THOUSAND NINE HUNDRED TWO (1,902) (the "Number Issuable"), fully paid, duly
authorized and non-assessable shares of Common Stock at a price per share equal
to the Current Market Price as of March 21, 2002, which is ONE DOLLAR AND
SIXTY-SIX CENTS ($1.66), (the "Exercise Price"), at any time, in whole or in
part, on or after March 30, 2002 (the "Effective Date") through 5:00 PM New York
City time, on March 30, 2007 (the "Expiration Date") all on the terms and
subject to the conditions hereinafter set forth (the "Warrants").

         The Number Issuable and the Exercise Price are subject to further
adjustment from time to time pursuant to the provisions of Section 2 of this
Warrant Certificate.

         Capitalized terms used herein but not otherwise defined shall have the
meanings given to them in Section 12 hereof.

         Section 1. Exercise of Warrants.

            (a) Subject to the last paragraph of this Section 1, the Warrants
evidenced hereby may be exercised, in whole or in part, by the Holder hereof at
any time

<PAGE>

or from time to time, on or after the Effective Date and on or prior to the
Expiration Date upon delivery to the Company at the principal executive office
of the Company in the United States of America, of (A) this Warrant Certificate,
(B) a written notice stating that such Holder elects to exercise the Warrants
evidenced hereby in accordance with the provisions of this Section 1 and
specifying the number of Warrants being exercised and the name or names in which
the Holder wishes the certificate or certificates for shares of Common Stock to
be issued and (C) payment of the Exercise Price for such Warrants, which shall
be payable by any one or any combination of the following: (i) cash; (ii)
certified or official bank check payable to the order of the Company; (iii) by
the surrender (which surrender shall be evidenced by cancellation of the number
of Warrants represented by any Warrant Certificate presented in connection with
a Cashless Exercise (as defined below)) of a Warrant or Warrants (represented by
one or more relevant Warrant Certificates), and without the payment of the
Exercise Price in cash, in return for the delivery to the surrendering Holder of
such number of shares of Common Stock equal to the number of shares of the
Common Stock for which such Warrant is exercisable as of the date of exercise
(if the Exercise Price were being paid in cash or certified or official bank
check) reduced by that number of shares of Common Stock equal to the quotient
obtained by dividing (x) the aggregate Exercise Price (assuming no Cashless
Exercise) to be paid by (y) the Market Price of one Share of Common Stock on the
Business Day which immediately precedes the day of exercise of the Warrant; or
(iv) by the delivery of shares of the Common Stock having a value (as defined by
the next sentence) equal to the aggregate Exercise Price to be paid, that are
either held by the Holder or are acquired in connection with such exercise, and
without payment of the Exercise Price in cash. Any share of Common Stock
delivered as payment for the Exercise Price in connection with an In-Kind
Exercise (as defined below) shall be deemed to have a value equal to the Market
Price of one Share of Common Stock on the Business Day that immediately precedes
the day of exercise of the Warrants. An exercise of a Warrant in accordance with
clause (iii) is herein referred to as a "Cashless Exercise" and an exercise of a
Warrant in accordance with clause (iv) is herein referred to as an "In-Kind
Exercise." The documentation and consideration, if any, delivered in accordance
with subsections (A), (B) and (C) are collectively referred to herein as the
"Warrant Exercise Documentation."

            (b) As promptly as practicable, and in any event within five (5)
Business Days after receipt of the Warrant Exercise Documentation, the Company
shall deliver or cause to be delivered (A) certificates representing the number
of validly issued, fully paid and nonassessable shares of Common Stock specified
in the Warrant Exercise Documentation, (B) if applicable, cash in lieu of any
fraction of a share, as hereinafter provided, and (C) if less than the full
number of Warrants evidenced hereby are being exercised or used in a Cashless
Exercise, a new Warrant Certificate or Certificates, of like tenor, for the
number of Warrants evidenced by this Warrant Certificate, less the number of
Warrants then being exercised and/or used in a Cashless Exercise. Such exercise
shall be deemed to have been made at the close of business on the date of
delivery of the Warrant Exercise Documentation so that the Person entitled to
receive shares of Common Stock upon such exercise shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
such time.


                                       2
<PAGE>

            (c) The Company shall pay all expenses incurred by the Company in
connection with and taxes and other governmental charges (other than income
taxes of the Holder) that may be imposed in respect of, the issue or delivery of
any shares of Common Stock issuable upon the exercise of the Warrants evidenced
hereby. The Company shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Common Stock, as the case may be, in any name other
than that of the registered holder of the Warrant evidenced hereby.

            (d) In connection with the exercise of any Warrants evidenced
hereby, no fractions of shares of Common Stock shall be issued, but in lieu
thereof the Company shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price for one Share of Common Stock on the Business Day which immediately
precedes the day of exercise. If more than one (1) such Warrant shall be
exercised by the holder thereof at the same time, the number of full shares of
Common Stock issuable on such exercise shall be computed on the basis of the
total number of Warrants so exercised.

Section 2.        Certain Adjustments.

            (a) The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
as follows:

               (i) Stock Dividends, Subdivision, Combination or Reclassification
of Common Stock. If at any time after the date of the issuance of this Warrant
the Company shall (i) pay a dividend on Common Stock in shares of its capital
stock, (ii) combine its outstanding shares of Common Stock into a smaller number
of shares, (iii) subdivide its outstanding shares of Common Stock as the case
may be, or (iv) issue by reclassification of its shares of Common Stock any
shares of capital stock of the Company, then, on the record date for such
dividend or the effective date of such subdivision or split-up, combination or
reclassification, as the case may be, the number and kind of shares to be
delivered upon exercise of this Warrant will be adjusted so that the Holder will
be entitled to receive the number and kind of shares of capital stock that such
Holder would have owned or been entitled to receive upon or by reason of such
event had this Warrant been exercised immediately prior thereto, and the
Exercise Price will be adjusted as provided below in paragraph 2(a)(v).

               (ii) Extraordinary Distributions. If at any time after the date
of issuance of this Warrant, the Company shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (A) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (B) dividends payable in shares of capital stock for which
adjustment is made under Section 2(a)(i), or rights, options or warrants to
subscribe for or purchase securities of the Company), then in each such case the
number of shares of Common Stock to be delivered to such Holder upon exercise of
this Warrant


                                       3
<PAGE>

shall be increased so that the Holder thereafter shall be entitled to receive
the number of shares of Common Stock determined by multiplying the number of
shares such Holder would have been entitled to receive immediately before such
record date by a fraction, the denominator of which shall be the Exercise Price
on such record date minus the then fair market value (as reasonably determined
by the Board of Directors of the Company in good faith) of the portion of the
cash, evidences of indebtedness, securities or other assets so distributed or of
such rights or warrants applicable to one share of the Common Stock (provided
that such denominator shall in no event be less than $.01) and the numerator of
which shall be the Exercise Price.

               (iii) Reorganization, etc. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of either Common
Stock) or any sale, lease or other transfer of all or substantially all of the
assets of the Company to any other person (each, a "Reorganization Event"),
shall be effected in such a way that the holders of the Common Stock shall be
entitled to receive cash, stock, other securities or assets (whether such cash,
stock, other securities or assets are issued or distributed by the Company or
another Person) with respect to or in exchange for the Common Stock, then, upon
exercise of this Warrant, the Holder shall have the right to receive the kind
and amount of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of the Common Stock
that such holder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such Reorganization
Event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2(a). The Company
shall not enter into any of the transactions referred to in this Section
2(a)(iii) unless effective provision shall be made so as to give effect to the
provisions set forth in this Section 2(a)(iii).

               (iv) Carryover. Notwithstanding any other provision of this
Section 2(a), no adjustment shall be made to the number of shares of either
Common Stock to be delivered to the Holder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.

               (v) Exercise Price Adjustment. Whenever the Number Issuable upon
the exercise of the Warrant is adjusted as provided pursuant to this Section
2(a), the Exercise Price per share payable upon the exercise of this Warrant
shall be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the Number Issuable
upon the exercise of the Warrant immediately prior to such adjustment, and of
which the denominator shall be the Number Issuable immediately thereafter;
provided, however, that the Exercise Price for


                                       4
<PAGE>

each Share of the Common Stock shall in no event be less than the par value of a
share of such Common Stock.

            (b) Notice of Adjustment. Whenever the Number Issuable or the
Exercise Price is adjusted as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder, notice of such adjustment
or adjustments setting forth the Number Issuable and the Exercise Price after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.

         Section 3. No Redemption. The Company shall not have any right to
redeem any of the Warrants evidenced hereby.

         Section 4. Notice of Certain Events. In case at any time or from time
to time (i) the Company shall declare any dividend or any other distribution to
all holders of Common Stock, (ii) the Company shall authorize the granting to
the holders of Common Stock of rights or warrants to subscribe for or purchase
any additional shares of stock of any class or any other right, (iii) the
Company shall authorize the issuance or sale of any other shares or rights which
would result in an adjustment to the Number Issuable pursuant to Section
2(a)(i), (ii) or (iii), (iv) there shall be any capital reorganization or
reclassification of Common Stock of the Company or consolidation or merger of
the Company with or into another Person, or any sale or other disposition of all
or substantially all the assets of the Company, or (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the Company,
then, in any one or more of such cases the Company shall mail to the Holder at
such Holder's address as it appears on the transfer books of the Company, as
promptly as practicable but in any event at least 10 days prior to the date on
which the transactions contemplated in Section 2(a)(i), (ii) or (iii) a notice
stating (a) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants or, if a record is not to be taken,
the date as of which the holders of record of either Common Stock to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (b)
the date on which such reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up is expected to become
effective. Such notice also shall specify the date as of which it is expected
that the holders of record of the Common Stock shall be entitled to exchange the
Common Stock for shares of stock or other securities or property or cash
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up.

         Section 5. Certain Covenants. The Company covenants and agrees that all
shares of Capital Stock of the Company which may be issued upon the exercise of
the Warrants evidenced hereby will be duly authorized, validly issued and fully
paid and nonassessable. The Company shall at all times reserve and keep
available for issuance upon the exercise of the Warrants, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the exercise of all outstanding Warrants, and shall take
all action required to increase the authorized number of shares of Common Stock
if at any time there shall be insufficient authorized but


                                       5
<PAGE>

unissued shares of Common Stock to permit such reservation or to permit the
exercise of all outstanding Warrants.

         Section 6. Registered Holder. The persons in whose names this Warrant
Certificate is registered shall be deemed the owner hereof and of the Warrants
evidenced hereby for all purposes. The registered Holder of this Warrant
Certificate, in their capacity as such, shall not be entitled to any rights
whatsoever as a stockholder of the Company, except as herein provided.

         Section 7. Transfer of Warrants. Any transfer of the rights represented
by this Warrant Certificate shall be effected by the surrender of this Warrant
Certificate, along with the form of assignment attached hereto, properly
completed and executed by the registered Holder hereof, at the principal
executive office of the Company in the United States of America, together with
an appropriate investment letter and opinion of counsel, if deemed reasonably
necessary by counsel to the Company to assure compliance with applicable
securities laws. Thereupon, the Company shall issue in the name or names
specified by the registered Holder hereof and, in the event of a partial
transfer, in the name of the registered Holder hereof, a new Warrant Certificate
or Certificates evidencing the right to purchase such number of shares of Common
Stock as shall be equal to the number of shares of Common Stock then purchasable
hereunder.

         Section 8. Denominations. The Company covenants that it will, at its
expense, promptly upon surrender of this Warrant Certificate at the principal
executive office of the Company in the United States of America, execute and
deliver to the registered Holder hereof a new Warrant Certificate or
Certificates in denominations specified by such Holder for an aggregate number
of Warrants equal to the number of Warrants evidenced by this Warrant
Certificate.

         Section 9. Replacement of Warrants. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, upon
delivery of an indemnity reasonably satisfactory to the Company (in the case of
an insurance company or other institutional investor, its own unsecured
indemnity agreement shall be deemed to be reasonably satisfactory), or, in the
case of mutilation, upon surrender and cancellation thereof, the Company will
issue a new Warrant Certificate of like tenor for a number of Warrants equal to
the number of Warrants evidenced by this Warrant Certificate.

         Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED
BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.

         Section 11. Rights Inure to Registered Holder. The Warrants evidenced
by this Warrant Certificate will inure to the benefit of and be binding upon the
registered Holder thereof and the Company and their respective successors and
permitted assigns. Nothing in this Warrant Certificate shall be construed to
give to any Person other than the


                                       6
<PAGE>

Company and the registered Holder thereof any legal or equitable right, remedy
or claim under this Warrant Certificate, and this Warrant Certificate shall be
for the sole and exclusive benefit of the Company and such registered Holder.
Nothing in this Warrant Certificate shall be construed to give the registered
Holder hereof any rights as a Holder of shares of either Common Stock until such
time, if any, as the Warrants evidenced by this Warrant Certificate are
exercised in accordance with the provisions hereof.

         Section 12. Definitions. For the purposes of this Warrant Certificate,
the following terms shall have the meanings indicated below:

         "Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in the City of New York, New York are authorized or
required by law or executive order to close.

         "Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock (or equivalent ownership interests in a Person not a corporation)
whether now outstanding or hereafter issued, including, without limitation, any
rights, warrants or options to purchase such Person's capital stock.

         "Common Stock" shall mean the common stock of the Company.

         "Common Stock Equivalent" means any security or obligation which is by
its terms convertible into or exercisable for shares of Common Stock, including,
without limitation, any option, warrant or other subscription or purchase right
with respect to Common Stock.

         "Current Market Price" per share shall mean, as of the date of
determination, (a) the average of the daily Market Prices under clause (a), (b)
or (c) of the definition thereof, as applicable, of the Common Stock during the
immediately preceding twenty (20) trading days ending on such date, and (b) if
the Common Stock is not then listed or admitted to trading on any national
securities exchange or quoted in the over-the-counter market, then the Market
Price under clause (d) of the definition thereof on such date.

         "Market Price" shall mean, per share of Common Stock, on any date
specified herein: (a) if the Common Stock is listed on a national securities
exchange, the Closing Price per share of Common Stock on such date published in
The Wall Street Journal (National Edition) or, if no such closing price on such
date is published in The Wall Street Journal (National Edition), the average of
the closing bid and asked prices on such date, as officially reported on the
principal national securities exchange on which the Common Stock is then listed
or admitted to trading; or (b) if the Common Stock is not then listed or
admitted to trading on any national securities exchange, but is designated as a
national market system security, the last trading price of the Common Stock on
such date; or (c) if there shall have been no trading on such date or if the
Common Stock is not so designated, the average of the reported closing bid and
asked price of the Common Stock, on such date as shown by NASDAQ and reported by
any


                                       7
<PAGE>

member firm of the NYSE selected by the Company; or (d) if none of (a), (b) or
(c) is applicable, a market price per share determined in good faith by the
Board of Directors of the Company, which shall be deemed to be "Fair Market
Value" unless holders of at least 15% of Common Stock issued or issuable upon
exercise of the Warrants request that the Company obtain an opinion of a
nationally recognized investment banking firm chosen by the Company (who shall
bear the expense) and reasonably acceptable to such requesting holders of the
Warrants, in which event the Fair Market Value shall be as determined by such
investment banking firm.

         "NASDAQ" means the National Market System of the National Association
of Securities Dealers, Inc. Automated Quotations System.

         "NYSE" shall mean the New York Stock Exchange, Inc.

         "Person" shall mean any individual, corporation, limited liability
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

         Section 13. Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, courier
services or personal delivery, (a) if to the Holder of a Warrant, at such
Holder's last known address appearing on the books of the Company; and (b) if to
the Company, at its principal executive office in the United States, or such
other address as shall have been furnished to the party given or making such
notice, demand or other communication. All such notices and communications shall
be deemed to have been duly given: (i) when delivered by hand, if personally
delivered; (ii) when delivered to a courier if delivered by commercial overnight
courier service; and (iii) five (5) Business Days after being deposited in the
mail, postage prepaid, if mailed.


                                       8
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of this 22nd day of March, 2002.


                                          BLUEFLY, INC.


                                          By:  /s/ E. Kenneth Seiff
                                               --------------------
                                               Name: E. Kenneth Seiff
                                               Title: Chief Executive Officer


                                       9
<PAGE>

                            [Form of Assignment Form]

                  [To be executed upon assignment of Warrants]

         The undersigned hereby assigns and transfers this Warrant Certificate
to ___________________ whose Social Security Number or Tax ID Number is
_________________ and whose record address is
_____________________________________, and irrevocably appoints ________________
as agent to transfer this security on the books of the Company. Such agent may
substitute another to act for such agent.

                                            Signature:


                                            -------------------------------
                                            Signature Guarantee:


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


Date: ___________________________


                                       10

</TEXT>
</DOCUMENT>
</SUBMISSION>
