<SUBMISSION>
<ACCESSION-NUMBER>0001169232-02-001887
<TYPE>8-K
<PUBLIC-DOCUMENT-COUNT>4
<PERIOD>20020930
<ITEMS>5
<ITEMS>7
<FILING-DATE>20021001
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>BLUEFLY INC
<CIK>0001030896
<ASSIGNED-SIC>5961
<IRS-NUMBER>133612110
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>8-K
<ACT>34
<FILE-NUMBER>333-22895
<FILM-NUMBER>02778653
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>42 WEST 39TH ST
<CITY>NEW YORK
<STATE>NY
<ZIP>10018
<PHONE>2129448000
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>42 WEST 39TH ST
<CITY>NEW YORK
<STATE>NY
<ZIP>10018
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>PIVOT RULES INC
<DATE-CHANGED>19970305
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>8-K
<SEQUENCE>1
<FILENAME>d52091_8k.txt
<DESCRIPTION>CURRENT REPORT
<TEXT>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT

   Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

      Date of Report (Date of earliest event reported): September 30, 2002

                                  Bluefly, Inc.
             (Exact name of registrant as specified in its charter)

Delaware                             001-14498            13-3612110
--------                             ---------            ----------
(State or other jurisdiction   (Commission File Number)   (IRS Employer
of incorporation)                                         Identification Number)

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

       Registrant's telephone number, including area code: (212) 944-8000

     ----------------------------------------------------------------------
         (Former name or former address, if changed since last report.)


<PAGE>

Item 5.  Other Events.

         On September 30, 2002, Bluefly, Inc. (the "Company") announced that it
had issued and sold $1 million of Series C Convertible Preferred Stock, $.01 par
value (the "Series C Preferred Stock"), and $2 million of convertible demand
promissory notes (the "Notes") to affiliates of Soros Private Equity Partners.

         The text of the press release relating to such investment is attached
hereto as Exhibit 99.1, the Series C Preferred Stock and Note Purchase Agreement
entered into in connection with such transaction is attached hereto as Exhibit
99.2 and the Certificate of Designations relating to the Series C Preferred
Stock is attached hereto as Exhibit 99.3. Each of such Exhibits is incorporated
herein by reference.

Item 7.  Financial Information and Exhibits.

(c)      Exhibits

99.1     Press release issued by the Company on September 30, 2002.

99.2     Series C Preferred Stock and Note Purchase Agreement, dated as of
         September 27, 2002, by and among the Company and the Investors listed
         on Schedule 1 thereto.

99.3     Certificate of Powers, Designations, Preferences and Rights of Series
         C Convertible Preferred Stock of the Company.

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.


                                        BLUEFLY, INC.
                                        (Registrant)


Date:    October 1, 2002                By: /s/ Patrick C. Barry
                                          -------------------------
                                        Name:     Patrick C. Barry
                                        Title:    Chief Operating Officer and
                                                  Chief Financial Officer


<PAGE>

                                INDEX TO EXHIBITS

Exhibit No.

99.1     Press release issued by the Company on September 30, 2002.

99.2     Series C Preferred Stock and Note Purchase Agreement, dated as of
         September 27, 2002, by and among the Company and the Investors listed
         on Schedule 1 thereto.

99.3     Certificate of Powers, Designations, Preferences and Rights of Series
         C Convertible Preferred Stock of the Company.


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>3
<FILENAME>d52091_99-1.txt
<DESCRIPTION>PRESS RELEASE
<TEXT>
                                                                    Exhibit 99.1

FOR IMMEDIATE RELEASE
                          Investor Contacts:           Press Contacts:
                          Patrick Barry                Cathy Halgas Nevins
                          CFO, Bluefly, Inc.           Dir P.R., Bluefly, Inc.
                          212- 944-8000 ext. 239       212-652-8761
                          pat@bluefly.com              cathy.nevins@bluefly.com

                    SOROS MAKES ADDITIONAL BLUEFLY INVESTMENT

     New York, NY - Sept. 30, 2002 -- Bluefly, Inc. (NASDAQ SmallCap: BFLY), a
     leading Internet retailer of designer brands at discount prices
     (www.bluefly.com), announced today that affiliates of Soros Private Equity
     Partners had invested an additional $3.0 million in the company. As a
     result of the financing, Soros' stake in Bluefly increased from
     approximately 83% to approximately 87% (excluding the effect of any
     conversion of debt purchased by Soros in this round) of the company's
     outstanding equity.

     Under the terms of the deal, Bluefly issued $1,000,000 of Series C
     Convertible Preferred Stock, as well as $2 million of demand convertible
     promissory notes that bear interest at a rate of 3%. per annum and have a
     maturity date of March 26, 2003. The promissory notes are convertible into
     Series C Convertible Preferred Stock, at the holder's option, and the
     Series C Convertible Preferred Stock is convertible into Common Stock, at
     the holder's option, at the rate of $0.93 per share.

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

     The securities sold in the private placement have not been registered under
     the Securities Act of 1933, as amended (the "Securities Act"), and may not
     be offered or sold in the United States unless registered under the
     Securities Act or an applicable exemption from registration is available.
     This press release does not constitute an offer to sell or the solicitation
     of an offer to buy, nor shall there be any sale of these securities in any
     state in which such offer, solicitation or sale would be unlawful prior to
     the registration or qualification under the securities laws of any such
     state.

     About Bluefly, Inc.

     Bluefly operates the world's first full service online store for designer
     fashion, offering products from more than 350 designers at discounts of up
     to 75%. With 24/7 access, a 90-day money back guarantee, and technology
     that displays real-time inventory, Bluefly makes off-price shopping easy
     and convenient. Bluefly is headquartered at 42 West 39th Street in New York
     City, in the heart of the Fashion District. For more information, please
     call 212/944-8000 or visit www.bluefly.com.

This press release may include statements that constitute "forward-looking"
statements, usually containing the words "believe", "project", "expect", or
similar expressions. These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
The risks and uncertainties are detailed from time to time in reports filed by
the company with the Securities and Exchange Commission, including Forms 8-A,
8-K, 10-Q, and 10-K. These risks and uncertainties include, but are not limited
to, the following: the Company's recent losses and anticipated future losses;
the Company's limited working capital, need for additional capital and potential
inability to raise such capital; security interests on the Company's assets that
have been granted to third parties; the Company's inability to accurately
forecast revenue; adverse trends in the retail apparel market; risks of
litigation for sale of unauthentic or damaged goods and litigation risks related
to sales in foreign countries; consumer acceptance of the Internet as a medium
for purchasing apparel; the risk that favorable trends in sales, repeat customer
sales, gross profit, gross margin and reduced selling, marketing and fulfillment
expenses and reductions in operating losses will not continue; risks that the
Company will be unable to reduce the levels of losses; potential adverse effects
on gross margin resulting from mark


<PAGE>

downs and allowances; the competitive nature of the business and the potential
for competitors with greater resources to enter such business; the dependence on
third parties and certain relationships for certain services, including the
Company's dependence on United States Postal Service and U.P.S. (and the risks
of a mail slowdown due to terrorist activity) and the Company's dependence on
its third-party web hosting and fulfillment centers; the capital intensive
nature of such business (taking into account the need for advertising to promote
such business); the successful hiring and retaining of personnel; the dependence
on continued growth of online commerce; rapid technological change; online
commerce security risks; the startup nature of the Internet business;
governmental regulation and legal uncertainties; management of potential growth;
and unexpected changes in fashion trends.

                                       ###


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>4
<FILENAME>d52091_99-2.txt
<DESCRIPTION>SERIES C PREFERRED STOCK
<TEXT>
                                                                    EXHIBIT 99.2

              SERIES C PREFERRED STOCK AND NOTE PURCHASE AGREEMENT

         THIS SERIES C PREFERRED STOCK AND NOTE PURCHASE AGREEMENT, dated as of
September 27, 2002 (this "Agreement"), is entered into by and between BLUEFLY,
INC., a Delaware corporation (the "Company"), and the investors listed on
Schedule 1 hereto (each, an "Investor" and, collectively, the "Investors").

                                    RECITALS

         WHEREAS, the Investors desire to purchase from the Company, and the
Company desires to issue and sell to the Investors, (a) one thousand (1,000)
shares (the "Shares") of Series C Convertible Preferred Stock, par value $.01
per share (the "Series C Preferred Stock"), of the Company and (b) convertible
demand promissory notes in the aggregate principal amount of two million dollars
($2,000,000), in the form attached hereto as Exhibit A (the "Notes," and,
together with the Shares, the "Securities"), on the terms, and subject to the
conditions, contained herein.

                                    AGREEMENT

         NOW, THEREFORE, in consideration for the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, agree as follows:

                                   ARTICLE I
                         PURCHASE AND SALE OF SECURITIES

     SECTION 1.1 Shares. Subject to the terms and conditions hereof, the Company
hereby issues and sells to the Investors, and each Investor hereby purchases
from the Company, the number of Shares set forth opposite such Investor's name
in Schedule 1, for a purchase price of one thousand dollars ($1,000) per share,
resulting in an aggregate purchase price for all Shares sold pursuant to the
terms hereof of One Million Dollars ($1,000,000).

     SECTION 1.2 Notes. Subject to the terms and conditions hereof, the Company
hereby issues and sells to the Investors, and each Investor hereby purchases
from the Company, a Note in the aggregate principal amount set forth opposite
such Investor's name in Schedule 1. The purchase price for each Note shall be
equal to its aggregate principal amount.

                                   ARTICLE II
                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company represents and warrants to the Investors as follows:


<PAGE>

     SECTION 2.1 Organization, etc. The Company and its Subsidiary (as defined
in Section 2.4(b)) have each been duly formed, and are each validly existing as
a corporation in good standing under the laws of their respective States of
incorporation, and are each qualified to do business as a foreign corporation in
each jurisdiction in which the failure to be so qualified could reasonably be
expected to have a material adverse effect on the assets, liabilities, condition
(financial or other), business or results of operations of the Company and its
Subsidiary taken as a whole (a "Material Adverse Effect"). The Company and its
Subsidiary each have the requisite corporate power and authority to own, lease
and operate their respective properties and to conduct their respective
businesses as presently conducted. The Company has the requisite corporate power
and authority to enter into, execute, deliver and perform all of its duties and
obligations under this Agreement and to consummate the transactions contemplated
hereby.

     SECTION 2.2 Authorization. The execution, delivery and performance of this
Agreement and the issuance of the Securities have been duly authorized by all
necessary corporate action on the part of the Company, including, without
limitation, the due authorization by the affirmative votes of a majority of the
disinterested directors of the Company's Board of Directors.

     SECTION 2.3 Validity; Enforceability. This Agreement and the Notes have
each been duly executed and delivered by the Company, and constitute the legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with their respective terms, except as such enforceability may be
limited by, or subject to, any bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights
generally and subject to general principles of equity.

     SECTION 2.4 Capitalization.

          (a) As of the date hereof, the authorized capital stock of the Company
     consists of 40,000,000 shares of common stock, $0.01 par value per share
     (the "Common Stock"), and 25,000,000 shares of preferred stock, $0.01 par
     value per share, of which 500,000 shares have been designated Series A
     Convertible Preferred Stock, 9,000,000 shares have been designated Series B
     Convertible Preferred Stock, 2,100 shares have been designated Series 2002
     Convertible Preferred Stock and 3,500 shares have been designated Series C
     Convertible Preferred Stock. Without giving effect to the transactions
     contemplated by this Agreement, the issued and outstanding capital stock of
     the Company consists of (i) 10,391,904 shares of Common Stock, (ii) 500,000
     shares of Series A Convertible Preferred Stock, (iii) 8,910,782 shares of
     Series B Convertible Preferred Stock and (iv) 2,100 shares of Series 2002
     Convertible Preferred Stock. All such shares of the Company have been duly
     authorized and are fully paid and non-assessable. Except as set forth on
     Schedule 2.4 hereto or as otherwise contemplated by this Agreement, there
     are no outstanding options, warrants or other equity securities that are
     convertible into, or exercisable for, shares of the Company's capital
     stock.


                                       2
<PAGE>

          (b) The only Subsidiary of the Company is Clothesline Corporation. The
     Company owns all of the issued and outstanding capital stock of its
     Subsidiary, free and clear of all liens and encumbrances. All of such
     shares of capital stock are duly authorized, validly issued, fully paid and
     non-assessable, and were issued in compliance with the registration and
     qualification requirements of all applicable federal, state and foreign
     securities laws. There are no options, warrants, conversion privileges,
     subscription or purchase rights or other rights presently outstanding to
     purchase or otherwise acquire any authorized but unissued, unauthorized or
     treasury shares of capital stock or other securities of, or any proprietary
     interest in, the Company's Subsidiary, and there is no outstanding security
     of any kind convertible into or exchangeable for such shares or proprietary
     interest. "Subsidiary" means, with respect to the Company, a corporation or
     other entity of which 50% or more of the voting power of the outstanding
     voting equity securities or 50% or more of the outstanding economic equity
     interest is held, directly or indirectly, by the Company.

     SECTION 2.5 Governmental Consents. The execution and delivery by the
Company of this Agreement, and the performance by the Company of the
transactions contemplated hereby, do not and will not require the Company to
effectuate or obtain any registration with, consent or approval of, or notice to
any federal, state or other governmental authority or regulatory body, other
than periodic and other filings under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and listing applications and/or notifications to
The Nasdaq SmallCap Market and The Boston Stock Exchange with respect to the
issuance of the Shares and/or the shares of Common Stock issuable upon
conversion of the Shares. The parties hereto agree and acknowledge that, in
making the representations and warranties in the foregoing sentence of this
Section 2.5, the Company is relying on the representations and warranties made
by the Investors in Section 3.4.

     SECTION 2.6 No Violation. The execution and delivery of this Agreement and
the performance by the Company of the transactions contemplated hereby will not
(i) conflict with or result in a breach of any provision of the articles of
incorporation or by-laws of the Company, (ii) result in a default or breach of,
or, except for the approval of the holders of the Company's Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock and the Series 2002
Convertible Preferred Stock, require any consent, approval, authorization or
permit of, or filing or notification to, any person, company or entity under any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
loan, factoring arrangement, license, agreement, lease or other instrument or
obligation to which the Company or its Subsidiary is a party or by which the
Company or its Subsidiary or any of their respective assets may be bound or
(iii) violate any law, judgment, order, writ, injunction, decree, statute, rule
or regulation of any court, administrative agency, bureau, board, commission,
office, authority, department or other governmental entity applicable to the
Company or its Subsidiary, except, in the case of clause (ii) or (iii) above,
any such event that could not reasonably be expected to have a Material Adverse
Effect or materially impair the transactions contemplated hereby.


                                       3
<PAGE>

     SECTION 2.7 Issuances of Securities. The Securities have been validly
issued, and, upon payment therefor, will be fully paid and non-assessable. The
offering, issuance, sale and delivery of the Securities as contemplated by this
Agreement are exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933, as amended (the "Securities Act"), are being made
in compliance with all applicable federal and (except for any violation or
non-compliance that could not reasonably be expected to have a Material Adverse
Effect) state laws and regulations concerning the offer, issuance and sale of
securities, and are not being issued in violation of any preemptive or other
rights of any stockholder of the Company. The parties hereto agree and
acknowledge that, in making the representations and warranties in the foregoing
sentence of this Section 2.7, the Company is relying on the representations and
warranties made by the Investors in Section 3.4.

     SECTION 2.8 Absence of Certain Developments. Since December 31, 2001, there
has not been any: (i) material adverse change in the condition, financial or
otherwise, of the Company and its Subsidiary (taken as a whole) or in the
assets, liabilities, properties or business of the Company and its Subsidiary
(taken as a whole); (ii) declaration, setting aside or payment of any dividend
or other distribution with respect to, or any direct or indirect redemption or
acquisition of, any capital stock of the Company; (iii) waiver of any valuable
right of the Company or its Subsidiary or cancellation of any material debt or
claim held by the Company or its Subsidiary; (iv) material loss, destruction or
damage to any property of the Company or its Subsidiary, whether or not insured;
(v) acquisition or disposition of any material assets (or any contract or
arrangement therefor) or any other material transaction by the Company or its
Subsidiary otherwise than for fair value in the ordinary course of business
consistent with past practice; or (vi) other agreement or understanding, whether
in writing or otherwise, for the Company or its Subsidiary to take any action of
the type, or any action that would result in an event of the type, specified in
clauses (i) through (v).

     SECTION 2.9 Commission Filings. The Company has filed all required forms,
reports and other documents with the Securities and Exchange Commission (the
"Commission") for periods from and after January 1, 2001 (collectively, the
"Commission Filings"), each of which has complied in all material respects with
all applicable requirements of the Securities Act and/or the Exchange Act (as
applicable). The Company has heretofore made available to the Investors all of
the Commission Filings, including the Company's Annual Report on Form 10-K for
the year ended December 31, 2001 and the Company's Quarterly Reports on Form
10-Q for the quarterly periods ended March 31, 2002 and June 30, 2002. As of
their respective dates, the Commission Filings did not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited interim consolidated financial statements of the Company included or
incorporated by reference in such Commission Filings have been prepared in
accordance with generally accepted accounting principles, consistently applied
("GAAP") (except as may be indicated in the notes thereto or, in the case of the
unaudited consolidated statements, as permitted by Form 10-Q), complied as of
their respective dates in all material respects with applicable accounting
requirements and the published rules and


                                       4
<PAGE>

regulations of the Commission with respect thereto, and fairly present, in all
material respects, the consolidated financial position of the Company and its
Subsidiary as of the dates thereof and the results of operations for the periods
then ended (subject, in the case of any unaudited consolidated interim financial
statements, to the absence of footnotes required by GAAP and normal year-end
adjustments).

     SECTION 2.10 Brokers. Neither the Company, nor any of its officers,
directors or employees, has employed any broker or finder, or incurred any
liability for any brokerage fees, commissions, finder's or other similar fees or
expenses in connection with the transactions contemplated hereby.

                                  ARTICLE III
                 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS

         Each Investor represents and warrants to the Company, severally but not
jointly, as follows:

     SECTION 3.1 Organization, etc. Such Investor has been duly formed and is
validly existing and in good standing under the laws of its jurisdiction of
organization. Such Investor has the requisite organizational power and authority
to enter into, execute, deliver and perform all of its duties and obligations
under this Agreement and to consummate the transactions contemplated hereby.

     SECTION 3.2 Authority. The execution, delivery and performance of this
Agreement have been duly authorized by all necessary organizational or other
action on the part of such Investor.

     SECTION 3.3 Validity; Enforceability. This Agreement has been duly executed
and delivered by such Investor, and constitutes the legal, valid and binding
obligation of such Investor, enforceable against such Investor in accordance
with its terms, except as such enforceability may be limited by, or subject to,
any bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors' rights generally and subject to general principles
of equity.

     SECTION 3.4 Investment Representations.

          (a) Such Investor acknowledges that the offer and sale of the
     Securities to such Investor have not been registered under the Securities
     Act, or the securities laws of any state or regulatory body, are being
     offered and sold in reliance upon exemptions from the registration
     requirements of the Securities Act and such laws and may not be transferred
     or resold without registration under such laws unless an exemption is
     available. The certificates representing the Shares will be imprinted with
     a legend in substantially the following form:

          "THE OFFER AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
          HAVE NOT BEEN REGISTERED UNDER THE SECURITIES


                                       5
<PAGE>

          ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND SUCH
          SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED,
          HYPOTHECATED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO A
          REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS
          EFFECTIVE UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES
          LAWS UNLESS, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
          COMPANY, AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT
          AND STATE SECURITIES LAWS IS AVAILABLE."

          (b) Such Investor is acquiring the Securities for investment, and not
     with a view to the resale or distribution thereof, and is acquiring such
     securities for its own account.

          (c) Such Investor is an "accredited investor" (as that term is defined
     in Rule 501 of Regulation D promulgated under the Securities Act), is
     sophisticated in financial matters and is familiar with the business of the
     Company so that it is capable of evaluating the merits and risks of its
     investment in the Company and has the capacity to protect its own
     interests. Such Investor has had the opportunity to investigate on its own
     the Company's business, management and financial affairs and has had the
     opportunity to review the Company's operations and facilities and to ask
     questions and obtain whatever other information concerning the Company as
     such Investor has deemed relevant in making its investment decision.

          (d) Such Investor is in compliance with the Uniting and Strengthening
     America by Providing Appropriate Tools Required to Intercept and Obstruct
     Terrorism Act of 2001. Neither such Investor, nor any of its principal
     owners, partners, members, directors or officers is included on: (i) the
     Office of Foreign Assets Control list of foreign nations, organizations and
     individuals subject to economic and trade sanctions, based on U.S. foreign
     policy and national security goals; (ii) Executive Order 13224, which sets
     forth a list of individuals and groups with whom U.S. persons are
     prohibited from doing business because such persons have been identified as
     terrorists or persons who support terrorism or (iii) any other watch list
     issued by any governmental authority, including the Commission.

          (e) No representations or warranties have been made to such Investor
     by the Company or any director, officer, employee, agent or affiliate of
     the Company, other than the representations and warranties of the Company
     set forth herein, and the decision of such Investor to purchase the
     Securities is based on the information contained herein, the Commission
     Filings and such Investor's own independent investigation of the Company.

     SECTION 3.5 Governmental Consents. The execution and delivery by such
Investor of this Agreement, and the performance by such Investor of the
transactions contemplated hereby, do not and will not require such Investor to
effectuate or obtain any registration with, consent or approval


                                       6
<PAGE>

of, or notice to any federal state or other governmental authority or regulatory
body, except for the filing with the Commission of a Form 4 and an amendment to
such Investor's Schedule 13D under the Exchange Act with respect to its
acquisition of the Securities.

     SECTION 3.6 No Violation. The execution and delivery of this Agreement and
the performance by such Investor of the transactions contemplated hereby, will
not (i) conflict with or result in a breach of any provision of the articles of
incorporation, by-laws or similar organizational documents of such Investor or
(ii) violate any law, judgment, order, writ, injunction, decree, statute, rule
or regulation of any court, administrative agency, bureau, board, commission,
office, authority, department or other governmental entity applicable to such
Investor, except, in the case of clause (ii) above, any such violation that
could not reasonably be expected to materially impair the transactions
contemplated hereby.

     SECTION 3.7 Brokers. Neither such Investor, nor any of its officers,
directors or employees, has employed any broker or finder, or incurred any
liability for any brokerage fees, commissions, finder's or other similar fees or
expenses in connection with the transactions contemplated hereby.

                                   ARTICLE IV
                            SURVIVAL; INDEMNIFICATION

     SECTION 4.1 Survival. The representations and warranties contained in
Articles II and III hereof shall survive until the first anniversary of the date
hereof.

     SECTION 4.2 Indemnification. Each party (including its officers, directors,
employees, affiliates, agents, successors and assigns (each an "Indemnified
Party")) shall be indemnified and held harmless by the other parties hereto
(each an "Indemnifying Party") for any and all liabilities, losses, damages,
claims, costs and expenses, interest, awards, judgments and penalties
(including, without limitation, reasonable attorneys' fees and expenses)
actually suffered or incurred by them (collectively, "Losses"), arising out of
or resulting from the breach of any representation or warranty made by an
Indemnifying Party contained in this Agreement. Notwithstanding the foregoing,
the aggregate liability of any Investor under this Article IV shall in no event
exceed fifty percent (50%) of the purchase price paid by such Investor for the
Securities purchased by it and the aggregate liability of the Company under this
Article IV shall in no event exceed fifty percent (50%) of the purchase price
paid by the Investors for the Securities, except that the Company's liability
for a violation of any of the representations and warranties contained in the
first two sentences of Section 2.7 may exceed such limitation, but shall in no
event exceed one hundred percent (100%) of the purchase price paid by the
Investors for the Securities.

     SECTION 4.3 Indemnification Procedure. The obligations and liabilities of
the Indemnifying Party under this Article IV with respect to Losses arising from
claims of any third party that are subject to the indemnification provided for
in this Article IV ("Third Party Claims")


                                       7
<PAGE>

shall be governed by and contingent upon the following additional terms and
conditions: if an Indemnified Party shall receive notice of any Third Party
Claim, the Indemnified Party shall give the Indemnifying Party notice of such
Third Party Claim promptly after the receipt by the Indemnified Party of such
notice (which notice shall include the amount of the Loss, if known, and method
of computation thereof, and containing a reference to the provisions of this
Agreement in respect of which such right of indemnification is claimed or
arises); provided, however, that the failure to provide such notice shall not
release the Indemnifying Party from any of its obligations under this Article IV
except to the extent the Indemnifying Party is materially prejudiced by such
failure and shall not relieve the Indemnifying Party from any other obligation
or liability that it may have to any Indemnified Party otherwise than under this
Article IV. Upon written notice to the Indemnified Party within five (5) days of
the receipt of such notice, the Indemnifying Party shall be entitled to assume
and control the defense of such Third Party Claim at its or his expense and
through counsel of its or his choice (which counsel shall be reasonably
satisfactory to the Indemnified Party); provided, however, that, if there exists
or is reasonably likely to exist a conflict of interest that would make it
inappropriate in the reasonable judgment of counsel to the Indemnified Party for
the same counsel to represent both the Indemnified Party and the Indemnifying
Party, then the Indemnified Party shall be entitled to retain its or his own
counsel in each jurisdiction for which the Indemnified Party reasonably
determines counsel is required, at the expense of the Indemnifying Party. In the
event the Indemnifying Party exercises the right to undertake any such defense
against any such Third Party Claim as provided above, the Indemnified Party
shall cooperate with the Indemnifying Party in such defense and make available
to such Indemnifying Party, at the Indemnifying Party's expense, all witnesses,
pertinent records, materials and information in the Indemnified Party's
possession or under the Indemnified Party's control relating thereto as is
reasonably required by the Indemnifying Party. Similarly, in the event the
Indemnified Party is, directly or indirectly, conducting the defense against any
such Third Party Claim, the Indemnifying Party shall cooperate with the
Indemnified Party in such defense and make available to the Indemnified Party,
at the Indemnifying Party's expense, all such witnesses (including himself),
records, materials and information in the Indemnifying Party's possession or
under the Indemnifying Party's control relating thereto as is reasonably
required by the Indemnified Party. No such Third Party Claim may be settled by
the Indemnifying Party on behalf of the Indemnified Party without the prior
written consent of the Indemnified Party (which consent shall not be
unreasonably withheld); provided, however, in the event that the Indemnified
Party does not consent to any such settlement that would provide it with a full
release from indemnified Loss and would not require it to take, or refrain from
taking, any action, the Indemnifying Party's liability for indemnification shall
not exceed the amount of such proposed settlement. The Indemnified Party will
refrain from any act or omission that is inconsistent with the position taken by
the Indemnifying Party in the defense of a Third Party Claim unless the
Indemnified Party determines that such act or omission is reasonably necessary
to protect its own interest.


                                       8
<PAGE>

                                   ARTICLE V
                                  MISCELLANEOUS

     SECTION 5.1 Change of Control Provision. For so long as any of the Shares
are owned by the Investors or their affiliates, the Company will not agree to,
or take any action to approve or otherwise facilitate any, merger or
consolidation or Change of Control (including granting approvals required under
applicable anti-takeover statutes), unless provision has been made for the
holders of the Shares to receive from the acquiror or any other person or entity
(other than the Company) as a result of and in connection with the transaction
an amount in cash equal to the aggregate liquidation preference for the Shares
held by them, as set forth in the Certificate of Powers, Designations,
Preferences and Rights of the Series C Preferred Stock. The parties hereto agree
that irreparable damage would occur in the event that the provisions of this
Section 5.1 were not performed in accordance with their terms and the Investors
shall be entitled to specific performance of the terms of this Section 5.1 in
addition to any other remedies at law or in equity. For purposes of this Section
5.1: a "Change of Control" shall mean any of the following (i) any person or
"group" (within the meaning of Section 13(d)(3) of the Exchange Act) becoming
the beneficial owner, directly or indirectly, of outstanding shares of Capital
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 shareholders 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), (ii) a majority of the Board of Directors of
the Company shall consist of Persons other than Continuing Directors, (iii) a
recapitalization, reorganization, merger, consolidation or similar transaction,
in each case with respect to which all or substantially all the Persons who are
the respective beneficial owners, directly or indirectly, of the outstanding
shares of Capital Stock of the Company immediately prior to such
recapitalization, reorganization, merger, consolidation or similar transaction,
will own less than 50% of the combined voting power of the then outstanding
shares of Capital Stock of the Company resulting from such recapitalization,
reorganization, merger, consolidation or similar transaction, (iv) the sale or
other disposition of all or substantially all the assets of the Company in one
transaction or in a series of related transactions, (v) any transaction occurs
(other than one described in (iv) or (v))), the result of which is that the
Common Stock is not required to be registered under Section 12 of the Exchange
Act and in which the holders of Common Stock of the Company do not receive
common stock of the Person surviving such transaction which is required to be
registered under Section 12 of the Exchange Act, or (vi) immediately after any
merger, consolidation, recapitalization or similar transaction, a "group"
(within the meaning of Section 13(d)(3) of the Exchange Act), other than a group
that includes the Investors and/or their affiliates, shall be the beneficial
owners, directly or indirectly, of outstanding shares of Capital Stock of the
Company (or any Person surviving such transaction) entitling them collectively
to exercise 50% or more of the total voting power of shares of Capital Stock of
the Company (or the surviving Person in such transaction) and in connection with
or as a result of such transaction, the Company (or such surviving Person) shall
have incurred or issued additional indebtedness such that the total indebtedness
so incurred or issued equals at least 50% of the consideration payable in such
transaction; "Capital Stock" shall mean, with respect to the


                                       9
<PAGE>

Company, any and all shares, interests, participations, rights in, or other
equivalents (however designated and whether voting or non-voting) of, the
Company's capital stock; and "Person" shall mean any individual, firm,
corporation, partnership, limited liability company, trust, incorporated or
unincorporated association, joint venture, joint stock company, governmental
authority or other entity of any kind, and shall include any successor (by
merger or otherwise) of such entity; and "Continuing Directors" shall mean any
member of the Board of Directors on the date hereof and any other member of the
Board of Directors who shall be recommended or elected to succeed or become a
Continuing Director by a majority of the Continuing Directors who are then
members of the Board of Directors.

     SECTION 5.2 Registrable Securities. The shares of Common Stock issuable
upon the conversion of the Series C Convertible Preferred Stock, as well as any
shares of Common Stock that may be issued upon the conversion of the Series 2002
Convertible Preferred Stock or upon the exercise or conversion of any security
issued upon the conversion of the Series 2002 Convertible Preferred Stock
(collectively, the "New Registrable Securities"), shall be deemed "Registrable
Securities" under the terms of the Investment Agreement by and among the
Company, the Company's predecessor and the Investors, dated November 13, 2000
(the "Series B Investment Agreement") (subject to the provisions of Section
13.1(a) of the Series B Investment Agreement), and the parties hereto (who also
constitute all of the parties to the Series B Investment Agreement) hereby amend
the definition of "Registrable Securities" contained in the Series B Investment
Agreement so that such definition includes the New Registrable Securities, along
with any other securities already included within the definition thereof.

     SECTION 5.3 Stockholder Approval. The Company shall put forth proposals at
the Company's next annual or special meeting of stockholders seeking: (a)
approval of the conversion rights of the Series C Convertible Preferred Stock
and (b) an increase in the number of authorized shares of Common Stock to
92,000,000. The Company shall take all reasonable action to convene a meeting of
stockholders of the Company to be held on or before December 30, 2002 to approve
the foregoing matters.

     SECTION 5.4 Publicity. Except as may be required by applicable law or the
rules of any securities exchange or market on which securities of the Company
are traded, no party hereto shall issue a press release or public announcement
or otherwise make any disclosure concerning this Agreement and the transactions
contemplated hereby, without prior approval of the others; provided, however,
that nothing in this Agreement shall restrict the Company or any Investor from
disclosing such information (a) that is already publicly available, (b) that may
be required or appropriate in response to any summons or subpoena (provided that
the disclosing party will use commercially reasonable efforts to notify the
other parties in advance of such disclosure under this clause (b) so as to
permit the non-disclosing parties to seek a protective order or otherwise
contest such disclosure, and the disclosing party will use commercially
reasonable efforts to cooperate, at the expense of the non-disclosing parties,
in pursuing any such protective order) or (c) in


                                       10
<PAGE>

connection with any litigation involving disputes as to the parties' respective
rights and obligations hereunder.

     SECTION 5.5 Entire Agreement. This Agreement and any other agreement or
instrument to be delivered expressly pursuant to the terms hereof constitute the
entire Agreement between the parties hereto with respect to the subject matter
hereof and supersede all previous negotiations, commitments and writings with
respect to such subject matter.

     SECTION 5.6 Assignments; Parties in Interest. Neither this Agreement nor
any of the rights, interests or obligations hereunder may be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing herein, express or
implied, is intended to or shall confer upon any person not a party hereto any
right, benefit or remedy of any nature whatsoever under or by reason hereof,
except as otherwise provided herein.

     SECTION 5.7 Amendments. This Agreement may not be amended or modified
except by an instrument in writing signed by, or on behalf of, the parties
against whom such amendment or modification is sought to be enforced.

     SECTION 5.8 Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience of reference only and do not constitute a
part of and shall not be utilized in interpreting this Agreement.

     SECTION 5.9 Notices and Addresses. Any notice, demand, request, waiver, or
other communication under this Agreement shall be in writing and shall be deemed
to have been duly given on the date of service, if personally served or sent by
facsimile; on the business day after notice is delivered to a courier or mailed
by express mail, if sent by courier delivery service or express mail for next
day delivery; and on the fifth business day after mailing, if mailed to the
party to whom notice is to be given, by first class mail, registered, return
receipt requested, postage prepaid and addressed as follows:

To Company:                Bluefly, Inc.
                           42 West 39th Street, 9th Floor
                           New York, New York 10018
                           Fax:     (212) 840-1903
                           Attn:    Jonathan B. Morris

                           With a copy to:


                                       11
<PAGE>

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


To the Investors:          To the address set forth on Schedule 1.

     SECTION 5.10 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue in
full force and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.

     SECTION 5.11 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
regard to conflicts of law principles. The parties agree that the federal and
state courts located in New York, New York shall have exclusive jurisdiction
over any dispute involving this Agreement or the transactions contemplated
hereby, and each party hereby irrevocably submits to the jurisdiction of, and
waives any objection to the laying of venue in, such courts.

     SECTION 5.12 Counterparts; Facsimile Signatures. This Agreement may be
executed in one or more counterparts, all of which shall be considered one and
the same agreement and shall become effective when one or more counterparts have
been signed by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart. This Agreement
may be executed by facsimile, and a facsimile signature shall have the same
force and effect as an original signature on this Agreement.

     SECTION 5.13 Expenses. The Company shall reimburse the Investors for their
reasonable legal fees and expenses incurred in connection with the negotiation
of this Agreement and the transactions contemplated hereby. Except as provided
above, all costs and expenses, including, without limitation, fees and
disbursements of counsel, incurred in connection with the negotiation, execution
and delivery of this Agreement and its related documents shall be paid by the
party incurring such costs and expenses, whether or not the closing shall have
occurred.


                                       12
<PAGE>

     IN WITNESS WHEREOF, this Agreement has been duly executed on the date first
set forth above.

                         BLUEFLY, INC.

                         By:      /s/ Patrick C. Barry
                                  ------------------------------
                                  Name:    Patrick C. Barry
                                  Title:   Chief Financial Officer and
                                           Chief Operating Officer

                         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


                                       13
<PAGE>

                                   SCHEDULE 1

                    INVESTORS AND SHARE AND NOTE ALLOCATIONS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                             Aggregate Purchase      Aggregate Principal
Name and Address of Investor                        Shares Purchased         Price for Shares        Amount of Note
                                                                             Purchased
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                      <C>                     <C>
Quantum Industrial Partners LDC                     968.3                    $968,300                $1,936,600
Kaya Flamboyan 9
Villemstad
Curacao
Netherlands-Antilles

with a copy to:

Soros Fund Management LLC
888 Fifth Avenue
New York, New York 10106
Facsimile:  (212) 664-0544
Attn:  Richard Holahan, Esq.
--------------------------------------------------------------------------------------------------------------------------------
SFM Domestic Investments LLC                        31.7                     $31,700                 $63,400
c/o Soros Fund Management LLC
888 Fifth Avenue
New York, New York 10106
Facsimile:  (212) 664-0544
Attn:  Richard Holahan, Esq.
--------------------------------------------------------------------------------------------------------------------------------
                                   TOTAL            1,000                    $1,000,000              $2,000,000
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       14
<PAGE>

                                  SCHEDULE 2.4

                                 CAPITALIZATION

         As of the date hereof, but without giving effect to the transactions
contemplated by this Agreement, the following equity securities are outstanding
and convertible into, or exercisable for shares of Common Stock:

     1.   500,000 shares of Series A Convertible Preferred Stock (the "Series A
          Stock") are issued and outstanding. The Series A Stock is convertible
          into 4,273,504 shares of Common Stock.

     2.   8,910,782 shares of Series B Convertible Preferred Stock (the "Series
          B Stock") are issued and outstanding. The Series B Stock is
          convertible into 13,281,038 shares of Common Stock.

     3.   Warrants to purchase an aggregate of 1,069,144 shares of Common Stock
          are issued and outstanding.

     4.   Options issued to purchase 3,931,622 shares of Common Stock are issued
          and outstanding under the Company's 1997 Stock Option Plan, as
          amended, and 2000 Stock Option Plan, as amended.

     5.   2,100 shares of Series 2002 Convertible Preferred Stock (the "Series
          2002 Stock") are issued and outstanding. The Series 2002 Stock is
          convertible into Subsequent Round Securities (as defined in the
          Certificate of Designations relating to the Series 2002 Stock), and
          such Subsequent Round Securities may include Common Stock or
          securities convertible into Common Stock.


                                       15
<PAGE>

                                    EXHIBIT A

THE OFFER AND SALE OF THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS NOTE
AND ANY SECURITIES ISSUABLE UPON THE CONVERSION HEREOF 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. CERTIFICATES REPRESENTING
ANY SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE SHALL INCLUDE A LEGEND TO
SIMILAR EFFECT AS THE FOREGOING.



                                  BLUEFLY, INC.

                       CONVERTIBLE DEMAND PROMISSORY NOTE



         $[INSERT AMOUNT]

         New York, New York                                   September __, 2002



     FOR VALUE RECEIVED, the undersigned, BLUEFLY, INC., a Delaware corporation
(the "Payor" or the "Company"), promises to pay to the order of _____________ or
its registered assign (the "Payee"), upon demand the principal sum of
________________________________ ($__________) and interest on the outstanding
principal balance as set forth herein.

     1. Interest Rate; Payment.

     (a) The outstanding principal balance of this Convertible Demand Promissory
Note (this "Note") shall bear interest at an annual rate equal to 3% 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, subject to
Section 5, 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.


<PAGE>

     (c) The outstanding principal and all accrued and unpaid interest shall be
paid in full no later than March 26, 2003 (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") or unless converted into shares of Series C Preferred Stock
(as defined below) pursuant to Section 5 prior to the Maturity 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.

     (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" (as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) or "group" (as defined in
Rule 13d-5, promulgated under the Exchange Act) other than Payee and its
affiliates or any group that includes Payee and/or its affiliates, becoming the
beneficial owner (as determined by Rule 13d-3, promulgated under the Exchange
Act), 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.

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


                                       2
<PAGE>

     (b) Optional Prepayment. The Company may, at its option, without premium or
penalty, upon five (5) days' prior written notice to the Payee, repay the unpaid
principal amount of this 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. No notice of prepayment shall in any way prohibit
the Payee from converting this Note pursuant to Section 5.

     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 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,


                                       3
<PAGE>

(F) become unable, admit in writing its inabil-ity 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;

     (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,


                                       4
<PAGE>

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.

     (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);
provided, however, that in no event shall the foregoing prevent the Payee from
converting this Note into shares of Series C Preferred Stock.

     (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,


                                       5
<PAGE>

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.

     (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;


                                       6
<PAGE>

(ii) effect the relative rights of the Payee and creditors of the Company other
than holders of Senior Indebtedness; (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 or (iv) prevent the Payee
from exercising its conversion rights under Section 5.

     (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.

     5. Conversion.

     (a) Right to Convert. Subject to the terms and conditions of this Section
5, the Payee shall have the right, at its option, at any time and from time to
time, to convert all or any portion of the principal amount of this Note and any
accrued and unpaid interest thereon (collectively, "Note Obligations") into a
number of fully paid and nonassessable shares of the Payor's Series C
Convertible Preferred Stock, $.01 par value per share (the "Series C Preferred
Stock"), equal to the quotient obtained by dividing the aggregate amount of the
Note Obligations to be so converted by the Series C Face Value (as defined in
the Certificate of Designations relating to the Series C Preferred Stock).

     (b) Procedure for Conversion. In order to convert all or any portion of the
Note Obligations, the Payee shall (i) surrender this Note, duly endorsed, at the
office of the Payor and (ii) simultaneously with such surrender, notify the
Payor in writing of its election to convert all or a portion of the Note
Obligations, which notice shall specify the amount of principal and interest
included in the Note Obligations to be so converted. The date on which the Note
is surrendered for conversion is referred to herein as the "Conversion Date." As
soon as practicable after the Conversion Date, the Payee shall be entitled to
receive a certificate or certificates, registered in such name or names as the
Payee may direct, representing the shares of Series C


                                       7
<PAGE>

Preferred Stock issuable upon conversion of the applicable Note Obligations,
along with a new promissory note, in the same form as this Note, reflecting any
Note Obligations that have not been so converted; provided that the Payee shall
be treated for all purposes as the record holder of such shares of Series C
Preferred Stock as of the Conversion Date. The issuance of shares of Series C
Preferred Stock upon conversion of any Note Obligations shall be made without
charge to the Payee for any issuance tax in respect thereof, provided that the
Payor shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the Payee.

     (c) Reservation of Shares. Payor shall reserve and keep available solely
for issuance upon the conversion of Note Obligations such number of shares of
Series C Preferred Stock as will from time to time be sufficient to permit the
conversion of all outstanding Note Obligations and such number of shares of
Common Stock as will from time to time be sufficient to permit the conversion of
all such shares of Series C Preferred Stock (collectively, the "Conversion
Securities"), and, if applicable, shall take all action to increase the
authorized number of shares of Series C Preferred Stock and/or Common Stock if
at any time there shall be insufficient authorized but unissued Series C
Preferred Stock and/or Common Stock to permit such reservation or permit the
conversion of all outstanding Note Obligations and/or Series C Preferred Stock
issuable upon conversion of such Note Obligations. The Payor covenants that all
Conversion Securities that shall be so issued shall be duly authorized, validly
issued, fully paid and non-assessable by the Payor, not subject to any
preemptive rights, and free from any taxes, liens and charges with respect to
the issue thereof. The Payor will take all such action as may be necessary to
ensure that all such Conversion Securities may be so issued without violation of
any applicable law or regulation, or any requirement of any national securities
exchange or quotation system upon which the Payor's Common Stock may be listed.

     6. 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.


                                       8
<PAGE>

     7. Notices. All notices, demands and other communications provided for or
permitted hereunder shall be made in accordance with the provisions of the
Series C Preferred Stock and Note Purchase Agreement, dated as of the date
hereof, by and among the Payor and the investors listed on Schedule 1 thereto.

     8. 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 or obligations 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.

     9. 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 modifica-tion 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.

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

     11. 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.

     12. 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.

     13. 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,


                                       9
<PAGE>

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.

     14. 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.

     15. Severability. If any one or more of the provisions contained herein, or
the application thereof in any circum-stance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforce-ability 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.

     16. 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.

     17. 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:  ________________________________
                                     Name:
                                     Title:


                                       10


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>5
<FILENAME>d52091_99-3.txt
<DESCRIPTION>CERTIFICATE OF POWER
<TEXT>
                                                                   EXHIBIT 99.3

                CERTIFICATE OF POWERS, DESIGNATIONS, PREFERENCES

                  AND RIGHTS OF SERIES C CONVERTIBLE PREFERRED

                             STOCK OF BLUEFLY, INC.

     BLUEFLY, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY
CERTIFY THAT:

     Pursuant to authority conferred upon the Board of Directors of the
Corporation (the "Board") by the Certificate of Incorporation of the Corporation
(the "Certificate of Incorporation"), and pursuant to the provisions of ss. 151
of the Delaware General Corporation Law (the "DGCL"), the Board, at a meeting
held on September 24, 2002, duly adopted the following resolution providing for
the voting powers, designations, preferences and rights, and the qualifications,
limitations and restrictions, of the Series C Convertible Preferred Stock.

     WHEREAS, the Certificate of Incorporation provides for two classes of
shares known as common stock, $0.01 par value per share (the "Common Stock"),
and preferred stock, $0.01 par value per share (the "Preferred Stock"); and

     WHEREAS, the Board is authorized by the Certificate of Incorporation to
provide for the issuance of the shares of Preferred Stock in one or more series,
and by filing a certificate pursuant to the DGCL, to establish from time to time
the number of shares to be included in any such series and to fix the voting
powers, designations, preferences and rights of the shares of any such series,
and the qualifications, limitations and restrictions thereof.

     NOW, THEREFORE, BE IT RESOLVED, that the Board deems it advisable to, and
hereby does, designate a Series C Convertible Preferred Stock and fixes and
determines the voting powers, designations, preferences and rights, and the
qualifications, limitations and restrictions relating to the Series C
Convertible Preferred Stock as follows:

1. Designation/Ranking. There shall hereby be created and established a series
of Preferred Stock, and the shares of such series of Preferred Stock shall be
designated "Series C Convertible Preferred Stock" (referred to herein as the
"Series C Convertible Preferred Stock"). The Series C Convertible Preferred
Stock shall rank pari passu with the Corporation's Series A Convertible
Preferred Stock, $.01 par value per share (the "Series A Convertible Preferred
Stock"), the Corporation's Series B Convertible Preferred Stock, $.01 par value
per share (the "Series B Convertible Preferred Stock"), and the Corporation's
Series 2002 Convertible Preferred Stock, $.01 par value per share (the "Series
2002 Convertible Preferred Stock," and, together with the Series A Convertible
Preferred Stock and the Series B Convertible Preferred Stock, the "Convertible
Preferred Stock") and senior to the Corporation's Common Stock and all other
Preferred Stock of the Corporation ranking junior to the Convertible Preferred
Stock, with respect to the payment of distributions on liquidation, dissolution
or winding up of the Corporation and with respect to the payment of dividends.


<PAGE>

2. Authorized Number. The number of shares constituting the Series C Convertible
Preferred Stock shall be three thousand, five hundred (3,500) shares.

3. Dividends.

     3.1 The holders of the Series C Convertible Preferred Stock shall be
entitled to receive, out of funds legally available for such purpose, dividends
which shall accrue at the rate of 8% per annum of the Series C Face Value (as
defined in Section 4.1 hereof) of such stock and shall compound annually,
payable only upon: (i) the conversion of the Series C Convertible Preferred
Stock pursuant to Section 6 hereof; (ii) Liquidation (as defined in Section 4.1
hereof) of the Corporation under Section 4 hereof; or (iii) a redemption of the
Series C Convertible Preferred Stock under Section 7 hereof. Except in
connection with a Series C Liquidation Payment (as defined in Section 4.1
hereof) made under Section 4 hereof or a redemption payment made under Section 7
hereof (which in each case shall require payment in cash), the Corporation, in
its sole discretion, may elect to pay such dividends in shares of Common Stock,
in which case such Common Stock dividends shall be equal to the number of shares
of Common Stock obtained by dividing the cash value of such dividend by the
Current Market Price (as defined in Section 6.4(iv) hereof) on the business day
prior to the date of payment.

     3.2 Dividends on each share of Series C Convertible Preferred Stock shall
be cumulative and shall accrue from the date of issuance of such share of Series
C Convertible Preferred Stock. The date on which the Corporation initially
issues any share of Series C Convertible Preferred Stock shall be its "Issue
Date," regardless of the number of times transfer of such shares is made on the
stock records maintained by or for the Corporation and regardless of the number
of certificates that may be issued to evidence such share.

     3.3 In addition to the right to receive dividends pursuant to Section 3.1
above, each holder of a share of Series C Convertible Preferred Stock shall have
the right, at any time after the Issue Date, if the Board of Directors of the
Corporation shall declare a dividend or make any other distribution (including,
without limitation, in cash or other property or assets, but excluding any stock
split effected as a stock dividend), to holders of shares of Common Stock, to
receive, out of funds legally available therefor, a dividend or distribution in
an amount equal to the amount of such dividend or distribution receivable by a
holder of the number of shares of Common Stock into which such share of Series C
Convertible Preferred Stock is convertible on the record date for such dividend
or distribution. Any such amount shall be paid to the holders of shares of
Series C Convertible Preferred Stock at the same time such dividend or
distribution is made to the holders of Common Stock.

4. Liquidation

     4.1 Upon any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary (a "Liquidation"), each holder shall be paid
for each share of Series C Convertible Preferred Stock held by it, before any
distribution or payment is made upon any stock ranking junior to the Series C
Convertible Preferred Stock, an amount equal to the greater of: (i) $1,000 per
share (the "Series C Face Value") plus, in the case of each share, an amount
equal to all accrued but unpaid dividends thereon, through the date payment
thereof is made and (ii) the amount that the holder of such share of Series C
Convertible Preferred Stock would


                                       2
<PAGE>

receive if it were to convert (without regard to any limitation or restriction
on conversion and without actually requiring such share to be so converted) such
share of Series C Convertible Preferred Stock into share(s) of Common Stock
immediately prior to such Liquidation. The holders of Series C Convertible
Preferred Stock shall not be entitled to any further payment. The amount payable
pursuant to the first sentence of this Section 4.1 with respect to one share of
Series C Convertible Preferred Stock is sometimes referred to as the "Series C
Liquidation Payment" (and, together with the Series A Liquidation Payment (as
defined in the Certificate of Incorporation), the Series B Liquidation Payment
(as defined in the Certificate of Incorporation) and any amounts payable upon a
Liquidation with respect to one share of Series 2002 Convertible Preferred
Stock, the "Liquidation Payment"), and the amounts so payable with respect to
all shares of Series C Convertible Preferred Stock are sometimes referred to as
the "Series C Liquidation Payments" (and, together with the Series A Liquidation
Payments (as defined in the Certificate of Incorporation), the Series B
Liquidation Payments (as defined in the Certificate of Incorporation) and the
amounts so payable with respect to all shares of Series 2002 Convertible
Preferred Stock, the "Liquidation Payments").

     4.2 If upon such Liquidation, the assets to be distributed among the
holders of Convertible Preferred Stock shall be insufficient to permit payment
to the holders of Convertible Preferred Stock of the Liquidation Payments, then
the entire assets of the Corporation to be so distributed shall be distributed
ratably among the holders of Convertible Preferred Stock. Upon any such
Liquidation after the holders of Convertible Preferred Stock shall have been
paid in full the Liquidation Payments to which they shall be entitled, the
remaining net assets of the Corporation may be distributed to the holders of
securities ranking junior to the Convertible Preferred Stock.

     4.3 Written notice of such Liquidation stating a payment date, the amount
of the Series C Liquidation Payments and the place where said Series C
Liquidation Payments shall be payable, shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, not less than 10 days prior to the payment date stated therein, to the
holders of record of Series C Convertible Preferred Stock, such notice to be
addressed to each such holder at its address as shown by the records of the
Corporation.

     4.4 The Series C Convertible Preferred Stock shall, with respect to
distribution of assets and rights upon Liquidation, rank senior to each class or
series of capital stock of the Corporation hereafter created which does not
expressly provide that it ranks on parity with or is senior to the Series C
Convertible Preferred Stock with respect to distribution of assets and rights
upon the liquidation, dissolution or winding up of the Corporation.

5. Voting Rights.

     5.1 In addition to any other vote required by law, this Certificate or the
Certificate of Incorporation, so long as at least 40% of the shares of Series C
Convertible Preferred Stock issued on the Issue Date remain outstanding the
Corporation may take the following actions only with the approval of the holders
of a majority of the shares of Series C Convertible Preferred Stock voting
separately as a class:

           (i) liquidate the Corporation or acquire another business entity;


                                       3
<PAGE>

          (ii) create a joint venture, partnership or one or more non-wholly
               owned subsidiaries requiring an investment in cash or kind of
               more than $500,000;

         (iii) sell Corporation assets, which individually or in the aggregate
               exceed $2,000,000;

          (iv) incur indebtedness in excess of $1,000,000 or impose a lien
               against or encumber assets of the Corporation in excess of
               $1,000,000 (other than a financing secured by inventory or a
               financing required in connection with the optional redemption of
               the Series C Convertible Preferred Stock in accordance with
               Section 7 hereof);

          (v)  enter into or amend any contract not contemplated by an approved
               budget or in excess of $250,000 in any one year or $1 million
               over the life of the contract in the aggregate;

          (vi) issue or sell securities of the Corporation (excluding securities
               issuable upon exercise of options authorized for issuance under
               the stock option or employee incentive plans existing on the date
               of the filing of this Certificate with the Secretary of State of
               the State of Delaware or as a result of the conversion of the
               Convertible Preferred Stock or any notes and warrants of the
               Corporation outstanding as of the date of the filing of this
               Certificate with the Secretary of State of the State of
               Delaware);

         (vii) declare dividends, repurchase or redeem securities of the
               Corporation or debt, except to the extent such debt is due in
               accordance with its terms and except for dividends, repurchases
               or redemption applicable to the Convertible Preferred Stock or
               any notes of the Corporation outstanding as of the effective date
               of this Certificate;

        (viii) make capital expenditures in excess of 110% of capital
               expenditures set forth in the annual budget;

          (ix) grant registration rights or register securities under the
               Securities Act of 1933, as amended, except pursuant to any
               registration rights agreement of the Corporation outstanding as
               of the effective date of this Certificate or registrations on
               Form S-8 or similar forms;

          (x)  enter into any contract with an affiliate;

          (xi) amend the Corporation's Certificate of Incorporation or Bylaws;

         (xii) increase or decrease the number of members of the Corporation's
               Board of Directors or the voting rights of directors;

        (xiii) change the Corporation's independent public accountants;


                                       4
<PAGE>

         (xiv) approve the annual budget, and any changes to the business plan
               and five year budget and any successor thereto;

          (xv) adopt or amend employment contracts with Corporation officers and
               senior executive managers with authority equivalent to that of
               Executive Vice Presidents; or

         (xvi) amend or alter the Series C Preferred Stock and Note Purchase
               Agreement, dated as of the date hereof, by and among the
               Corporation and the initial holders of the Series C Convertible
               Preferred Stock (the "Series C Purchase Agreement").

     5.2 Notwithstanding anything set forth herein, with the exception of any
action duly approved by the holders of Series C Convertible Preferred Stock
pursuant to Section 5.1 above, at any time when any shares of Series C
Convertible Preferred Stock are outstanding, except where the vote or written
consent of the holders of a greater number of shares of the Corporation is
required by law, this Certificate or the Certificate of Incorporation, and in
addition to any other vote required by law, this Certificate or the Certificate
of Incorporation, without the approval of the holders of at least two-thirds (66
2/3%) of the then outstanding shares of Series C Convertible Preferred Stock,
given in writing or by vote at a meeting, consenting or voting (as the case may
be) separately as a series, the Corporation will not (i) effect any transaction
or other action that would adversely affect the rights, preferences, powers
(including voting powers) and privileges of the Series C Convertible Preferred
Stock or (ii) merge or consolidate with another person or entity, sell all or
substantially all of the assets of the Corporation or enter into a transaction
which results in or take any action which facilitates a Change of Control (as
defined in the Certificate of Incorporation).

     5.3 Holders of Series C Convertible Preferred Stock shall be entitled to
notice of any stockholders' meeting. Except as otherwise required by law, at any
annual or special meeting of the Corporation's stockholders, or in connection
with any written consent in lieu of any such meeting, the holders of each
outstanding share of Series C Convertible Preferred Stock shall be entitled to
cast, in respect of such share, the number of votes equal to the number of full
shares of Common Stock into which such share of Series C Convertible Preferred
Stock is then convertible (calculated by rounding any fractional share up to the
nearest whole number) on the date for determination of stockholders entitled to
vote at the meeting. Notwithstanding the foregoing, (a) holders of the Series C
Convertible Preferred Stock shall not be entitled to cast, in respect of such
shares, any votes with respect to the approval of the conversion rights of the
Series C Convertible Preferred Stock or the Series 2002 Convertible Preferred
Stock and (b) until such time as the Corporation's stockholders approve the
conversion rights of the Series C Convertible Preferred Stock, to the extent
such approval is required by the rules of the Nasdaq SmallCap Market or any
other national securities exchange or quotation system upon which the Common
Stock may be listed from time to time, the total number of votes cast with
respect to the then outstanding shares of Series C Convertible Preferred Stock
shall in no event exceed 2,077,341 (as such number may be adjusted to reflect
any stock split, stock dividend, reclassification or similar transaction
affecting the Common Stock), and to the extent that the total number of votes to
which the then outstanding shares of Series C Convertible Preferred Stock would
otherwise be entitled to cast is limited by the provisions of this clause (b),
the number of votes to which each


                                       5
<PAGE>

share of Series C Convertible Preferred Stock shall be entitled to cast shall be
determined on a pro rata basis. Except as set forth herein or otherwise required
by law, the Series C Convertible Preferred Stock and the Common Stock shall vote
together as a single class on each matter submitted to the stockholders, and not
by separate class or series.

6. Conversions. The holders of shares of Series C Convertible Preferred Stock
shall have the following conversion rights.

     6.1 Right to Convert. Subject to the terms and conditions of this Section
6.1, the holder of any share or shares of Series C Convertible Preferred Stock
shall have the right, at its option at any time and from time to time, to
convert any such shares (or fractions thereof) of Series C Convertible Preferred
Stock (except that upon any Liquidation, the right of conversion shall terminate
at the close of business on the business day immediately preceding the date
fixed for payment of the amount distributable on the Series C Convertible
Preferred Stock) into such number of fully paid and nonassessable shares of
Common Stock as is obtained by (x) multiplying the number of shares of Series C
Convertible Preferred Stock to be so converted by the Series C Face Value and
(y) dividing the result by the Series C Conversion Price (as defined below)
applicable to such share, determined as provided below, in effect on the date
the certificate is surrendered for conversion; plus, at the Company's option,
either a number of shares of Common Stock (valued at their Current Market Price
(as defined in Section 6.4(iv) hereof) on the business day prior to the date of
payment), or an amount in cash, as the case may be, equal to any accrued but
unpaid dividends on the shares of Series C Convertible Preferred Stock so
converted.

     The initial Series C Conversion Price per share for shares of Series C
Convertible Preferred Stock shall be $0.93 per share, as adjusted pursuant to
the further provisions of this Section 6 (such price as last adjusted, being
referred to as the "Series C Conversion Price"). Such rights of conversion shall
be exercised by the holder thereof by giving written notice that the holder
elects to convert a stated number of shares of Series C Convertible Preferred
Stock into Common Stock and by surrender of a certificate or certificates for
the shares to be so converted to the Corporation at its principal office (or
such other office or agency of the Corporation as the Corporation may designate
by notice in writing to the holders of the Series C Convertible Preferred Stock)
at any time during its usual business hours on the date set forth in such
notice, together with a statement of the name or names (with address) in which
the certificate or certificates for shares of Common Stock shall be issued.

     6.2 Issuance of Certificates; Time Conversion Effected. Promptly after the
surrender of the certificate or certificates for the shares of Series C
Convertible Preferred Stock to be converted as set forth above, the Corporation
shall issue and deliver, or cause to be issued and delivered, to the holders,
registered in such name or names as such holders may direct, a certificate or
certificates for the number of whole shares of Common Stock issuable upon the
conversion of such shares of Series C Convertible Preferred Stock.

     6.3 Fractional Shares; Partial Conversion. No fractional shares of Common
Stock shall be issued upon conversion of Series C Convertible Preferred Stock
into Common Stock. If any fractional share of Common Stock would, except for the
provisions of the first sentence of this Section 6.3, be delivered upon such
conversion, the Corporation, in lieu of delivering such


                                       6
<PAGE>

fractional share, shall pay to the holder surrendering the Series C Convertible
Preferred Stock for conversion an amount in cash equal to the current market
price of such fractional share as determined in good faith by the Board of
Directors of the Corporation.

     6.4 Anti-Dilution Adjustments. The Series C Conversion Price shall be
subject to adjustment as follows if any of the events listed below occur after
the Issue Date but, with respect to a share of Series C Convertible Preferred
Stock, prior to the conversion of such share of Series C Convertible Preferred
Stock into Common Stock.

          (i)  In case the Corporation shall (x) pay a dividend or make a
               distribution on its Common Stock in shares of its Common Stock,
               (y) subdivide or reclassify its outstanding Common Stock into a
               greater number of shares, or (z) combine or reclassify its
               outstanding Common Stock into a smaller number of shares, the
               Series C Conversion Price in effect immediately prior to such
               event shall be adjusted so that the holder of any share of the
               Series C Convertible Preferred Stock thereafter surrendered for
               conversion shall be entitled to receive the number of shares of
               Common Stock which it would have owned or have been entitled to
               receive after the happening of such event had the share of such
               Series C Convertible Preferred Stock been converted immediately
               prior to the happening of such event. An adjustment made pursuant
               to this paragraph shall become effective immediately after the
               record date in the case of a dividend or distribution and shall
               become effective on the effective date in the case of
               subdivision, combination or reclassification. If any dividend or
               distribution is not paid or made, the Series C Conversion Price
               then in effect shall be appropriately readjusted.

          (ii) In case the Corporation shall pay, issue or distribute to its
               holders of capital stock any shares of capital stock of the
               Corporation or evidences of indebtedness or cash or other assets
               (excluding (w) regular cash dividends payable out of earnings in
               the ordinary course and distributed ratably to the holders of
               Convertible Preferred Stock, (x) distributions paid from retained
               earnings of the Corporation and distributed ratably to the
               holders of Convertible Preferred Stock, (y) dividends or
               distributions referred to in clause (i) ---------- above and (z)
               dividends or distributions paid or made to holders of shares of
               Convertible Preferred Stock in the manner provided in Section 3
               above) or rights, options or warrants --------- to subscribe for
               or purchase any of its securities then, in each such case, the
               Series C Conversion Price shall be adjusted so that it shall
               equal the price determined by multiplying the Series C Conversion
               Price in effect immediately prior to the date of the distribution
               by a fraction the numerator of which shall be the Series C
               Conversion Price less the then fair market value (as determined
               by the Board of Directors, whose determination, if made in good
               faith, shall be conclusive) of the portion of the capital stock,
               cash or assets or evidences of indebtedness so distributed, or of
               the subscription rights, options or warrants so distributed or of
               such convertible or exchangeable securities,


                                       7
<PAGE>

               with respect to one share of Common Stock, and the denominator of
               which shall be the Series C Conversion Price in effect
               immediately prior to the date of the distribution. Such
               adjustment shall be made whenever any such distribution is made,
               and shall become effective retroactive to the record date for the
               determination of stockholders entitled to receive such
               distribution. If any such distribution is not made or if any or
               all of such rights, options or warrants expire or terminate
               without having been exercised, the Series C Conversion Price then
               in effect shall be appropriately readjusted.

         (iii) Whenever the Series C Conversion Price is adjusted as herein
               provided or as provided in Section 6.5(a), the Corporation shall
               promptly file with the conversion agent (or, if there is no
               conversion agent, the secretary of the Corporation) an officer's
               certificate setting forth such Series C Conversion Price after
               the adjustment and setting forth a brief statement of the facts
               requiring the adjustment, which certificate shall be conclusive
               evidence of the correctness of the adjustment. Promptly after
               delivery of the certificate, the Corporation shall prepare a
               notice of the adjustment of such Series C Conversion Price
               setting forth such Series C Conversion Price and the date on
               which the adjustment becomes effective and shall mail the notice
               of such adjustment of the Series C Conversion Price (together
               with a copy of the officer's certificate setting forth the facts
               requiring such adjustment) to the holder of each share of the
               Series C Convertible Preferred Stock at such holder's last
               address as shown on the stock books of the Corporation.

          (iv) For the purpose of any computation under any provision relating
               to the Series C Convertible Preferred Stock, the "Current Market
               Price" per share of Common Stock on any date shall be deemed to
               be the average of the daily closing prices per share of Common
               Stock for the 30 consecutive trading days immediately preceding
               such date. If on any such date the shares of Common Stock are not
               listed or admitted for trading on any national securities
               exchange or quoted by NASDAQ or a similar service, the Current
               Market Price for the Common Stock shall be the fair market value
               of the Common Stock on such date as determined in good faith by
               the Board of Directors of the Corporation.

6.5 Additional Adjustment.

     (a) In case the Corporation shall (i) sell or issue shares of its Common
Stock, (ii) issue rights, options or warrants to subscribe for or purchase
shares of Common Stock or (iii) issue or sell other rights for the purchase of
shares of Common Stock or securities convertible into or exchangeable into
shares of Common Stock, in the case of one or more of the events described in
the immediately preceding clauses (i), (ii) and (iii) (excluding those issuances
referred to in Section 6.5(b) hereof (collectively, the "Securities"), at a
price per share (the "New Issue Price") less than the Series C Conversion Price,
then in each such case the Series C Conversion Price in effect immediately prior
to the issuance of such Securities shall be adjusted


                                       8
<PAGE>

to equal the New Issue Price. The adjustment provided for in this Section 6.5(a)
shall be made successively whenever any Securities are issued (provided,
however, that no further adjustments in the Series C Conversion Price shall be
made upon the subsequent exercise, conversion or exchange, as applicable of such
Securities pursuant to the original terms of such Securities) and shall become
effective immediately after such issuance. In determining whether any Securities
entitle the holders of the Common Stock to subscribe for or purchase shares of
Common Stock at less than the Series C Conversion Price, and in determining the
New Issue Price of the shares of Common Stock so offered, there shall be taken
into account any consideration received by the Corporation for such Securities,
any consideration required to be paid upon the exercise, conversion or exchange,
as applicable, of such Securities and the value of all such consideration (if
other than cash) shall be determined in good faith by the Board of Directors of
the Corporation.

     (b) Notwithstanding the foregoing, the provisions of Section 6.5(a) shall
not apply to the issuance of: (x) any equity securities issued at then fair
market value pursuant to the Corporation's employee option or stock incentive
plans approved by the Board of Directors of the Corporation on or prior to the
date of the filing of this Certificate with the Secretary of State of the State
of Delaware, or (y) any equity securities issued at then fair market value as
consideration for services of non-employee third parties provided to the
Corporation (in an aggregate amount not to exceed 100,000 shares of Common Stock
in any fiscal year (as such number may be adjusted to reflect stock splits,
combinations and the like)).

     6.6 Reorganization, Recapitalization or Reclassification. If any capital
reorganization, recapitalization or reclassification of the capital stock of the
Corporation (other than a merger or consolidation of the Corporation in which
the Corporation is the surviving corporation and which does not result in a
reclassification or change of outstanding shares of Common Stock) or a merger or
consolidation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets (other than cash dividends
payable out of earnings or surplus in the ordinary course of business) with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization, recapitalization or reclassification, lawful and adequate
provisions shall be made whereby each holder of a share or shares of Series C
Convertible Preferred Stock shall thereupon have the right to receive upon
conversion of such share or shares of Series C Convertible Preferred Stock, upon
the basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore receivable upon the conversion of
such share or shares of Series C Convertible Preferred Stock, such shares of
stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of such Common Stock immediately theretofore receivable upon
such conversion had such reorganization or reclassification not taken place, and
in any such case appropriate provisions shall be made with respect to the rights
and interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Series C Conversion Price)
shall thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights.

6.7 Other Notice. In case at any time:


                                       9
<PAGE>

          (i)  the Corporation shall declare any dividend upon its Common Stock
               payable in cash or stock or make any other distribution to the
               holders of its Common Stock;

          (ii) the Corporation shall offer for subscription pro rata to the
               holders of its Common Stock any additional --- ---- shares of
               stock of any class or other rights;

         (iii) there shall be any capital reorganization or reclassification of
               the capital stock of the Corporation, or a consolidation or
               merger of the Corporation with or into another entity or
               entities, or a sale, lease, abandonment, transfer or other
               disposition of all or substantially all its assets; or

          (iv) there shall be a voluntary or involuntary dissolution or winding
               up of the Corporation;

     then, in any one or more of said cases, the Corporation shall give, by
delivery in person, certified or registered mail, return receipt requested,
telecopier or telex, addressed to each holder of any shares of Series C
Convertible Preferred Stock at the address of such holder as shown on the books
of the Corporation, (i) at least 10 days' prior written notice of the date on
which the books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger, disposition, dissolution or winding up and (ii) in the case of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution or winding up, at least 10 days' prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (i) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto and such notice in accordance with the foregoing clause (ii)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
disposition, dissolution or winding up, as the case may be.

     6.8 Limitation on Conversion Rights Pending Stockholder Approval; Stock to
be Reserved. Notwithstanding anything in this Certificate to the contrary: (a)
no share of Series C Convertible Preferred Stock may be converted into Common
Stock to the extent that, after giving effect to such conversion, the total
number of shares of Common Stock issued from and after the date of this
Certificate as a result of the conversion of shares of Series C Convertible
Preferred Stock would exceed 2,077,341 (as may be adjusted to reflect any stock
split, stock dividend, reclassification or other similar transaction), until
such time as the Corporation's stockholders approve the conversion rights
contained in this Section 6 to the extent such approval is required by the rules
of the Nasdaq SmallCap Market or any other national securities exchange or
quotation system upon which the Common Stock may be listed from time to time;
and (b) no share of Series C Convertible Preferred Stock may be converted into
Common Stock under any circumstances until such time as the Certificate of
Incorporation has been amended to increase the number of shares of Common Stock
authorized for issuance to 92,000,000 (the "Increase in Authorized Common
Stock"). The Corporation will, at all times after the Increase in Authorized
Common Stock, reserve and keep available out of its authorized shares of Common
Stock, solely


                                       10
<PAGE>

for the purpose of issuance upon the conversion of the Series C Convertible
Preferred Stock as herein provided, such number of shares of Common Stock as
shall then be issuable upon the conversion of all outstanding shares of Series C
Convertible Preferred Stock. The Corporation covenants that all shares of Common
Stock which shall be so issued shall be duly authorized, validly issued, fully
paid and nonassessable by the Corporation and free from all taxes, liens and
charges with respect to the issue thereof, and, without limiting the generality
of the foregoing, the Corporation covenants that it will from time to time take
all such action as may be requisite to assure that the par value per share of
the Common Stock is at all times equal to or less than the Series C Conversion
Price in effect at the time. The Corporation will take all such action as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or regulation, or of any requirement of
any national securities exchange or quotation system upon which the Common Stock
may be listed. The Corporation will not take any action which results in any
adjustment of the Series C Conversion Price if the total number of shares of
Common Stock issued and issuable after such action upon conversion of the Series
C Convertible Preferred Stock would exceed the total number of shares of Common
Stock then authorized by the Certificate of Incorporation.

     6.9 Reissuance of Preferred Stock. Shares of Series C Convertible Preferred
Stock that have been issued and reacquired in any manner, including shares
purchased or redeemed or exchanged or converted, shall not be reissued as shares
of Series C Convertible Preferred Stock and shall (upon compliance with any
applicable provisions of the General Corporation Law of the State of Delaware)
have the status of authorized but unissued shares of Preferred Stock of the
Corporation undesignated as to series and may be designated or redesignated and
issued or reissued, as the case may be, as part of any series of Preferred Stock
of the Corporation other than Series C Convertible Preferred Stock.

     6.10 Issue Tax. The issuance of certificates for shares of Common Stock
upon conversion of Series C Convertible Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series C Convertible
Preferred Stock which is being converted.

     6.11 Closing of Books. The Corporation will at no time close its transfer
books against the transfer of any Series C Convertible Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series C Convertible Preferred Stock in any manner which interferes with the
timely conversion of such Series C Convertible Preferred Stock, except as may
otherwise be required to comply with applicable laws.

     6.12 Minimum Adjustment. No reduction of the Series C Conversion Price
shall be made if the amount of any such reduction would be an amount less than
$.025, but any such amount shall be carried forward and reduction with respect
thereof shall be made at the time of and together with any subsequent reduction
which, together with such amount and any other amount or amounts so carried
forward, shall aggregate $.025 or more.

7. Redemption. The Corporation may redeem (and shall redeem simultaneously with
a redemption of all of the Series A Convertible Preferred Stock and the Series B
Preferred Stock


                                       11
<PAGE>

pursuant to Section 5.9 of the Certificate of Incorporation) for cash all but
not less than all of the Series C Convertible Preferred Stock on not less than
30 days written notice to the holders thereof, during the periods and at the
prices set forth below, plus all accrued but unpaid dividends thereon; provided
that no such redemption shall be permitted unless (x) at such time there exists
an effective registration statement filed by the Corporation under the
Securities Act of 1933, as amended, registering the resale of the shares of
Common Stock to be received upon conversion of the Series C Convertible
Preferred Stock and the Corporation is obligated to maintain the effectiveness
thereof for at least 120 days after the proposed date or redemption and (y) if
the redemption of Series C Convertible Preferred Stock does not meet the
requirements of either Section 302(b)(2) or 302(b)(3) of the Internal Revenue
Code of 1986, as amended, then to avoid such treatment, the Corporation shall
offer to effect a redemption of Common Stock from the holders of Series C
Convertible Preferred Stock or their designees, to the extent necessary to meet
the requirements of either one of such Sections, at a purchase price equal to
the Current Market Price on the date notice of redemption is given pursuant to
this Section 7.

               Time Period                         Multiple of Conversion Price
               -----------                         ----------------------------
November 13, 2002 through November 13, 2004                      4x

November 13, 2004 through November 13, 2006                      4.5x

On or after November 13, 2006                                    5x

8. Adjustment of Face Value. In case the Corporation shall subdivide or
reclassify its outstanding Series C Convertible Preferred Stock into a greater
number of shares or combine or reclassify its outstanding Series C Convertible
Preferred Stock into a smaller number of shares, the Series C Face Value in
effect immediately prior to such event shall be adjusted to reflect such
increase or decrease. An adjustment made pursuant to this Section 8 shall become
effective on the effective date of subdivision, combination or reclassification.

9. Future Issuance of Shares; Preemptive Rights.

     9.1 Offering Notice. Except for (i) capital stock or options to purchase
capital stock of the Corporation which may be issued to employees, consultants
or directors of the Corporation pursuant to a stock incentive plan or other
employee benefit arrangement approved by the Board of Directors, (ii) a
subdivision of the outstanding shares of Common Stock into a larger number of
shares of Common Stock, (iii) capital stock issued as full or partial
consideration for a merger, acquisition, joint venture, strategic alliance,
license agreement or other similar non-financing transaction, (iv) capital stock
issued as full or partial consideration for services, (v) capital stock issued
in connection with a publicly registered offering, (vi) capital stock issued
upon exercise, conversion or exchange of any Preferred Stock, options or
warrants, or (vii) capital stock purchased by Quantum Industrial Partners LDC
and SFM Domestic Investments LLC or their affiliates in the public market or
from the Corporation, if the Corporation wishes to issue any shares of capital
stock or any other securities convertible into or exchangeable for capital stock
of the Corporation (collectively, "New Securities") to any Person (the "Subject
Purchaser"), then the Corporation shall send written notice (the "New Issuance
Notice") to the holders of the Series C Convertible Preferred Stock, which New
Issuance Notice shall state (x) the number of


                                       12
<PAGE>

New Securities proposed to be issued and (y) the proposed purchase price per
share of the New Securities that the Corporation is willing to accept (the
"Proposed Price").

     9.2 Preemptive Rights; Exercise.

     (a) For a period of ten (10) days after the giving of the New Issuance
Notice as provided in Section 9.1, each initial holder of the Series C
Convertible Preferred Stock or their permitted assigns pursuant to the Series C
Purchase Agreement (each, a "Preemptive Rightholder") shall have the right to
purchase up to its Proportionate Percentage (as hereinafter defined) of the New
Securities at a purchase price equal to the Proposed Price and upon the terms
and conditions set forth in the New Issuance Notice. Each Preemptive Rightholder
shall have the right to purchase up to that percentage of the New Securities
determined by dividing (a) a number equal to the number of shares of Common
Stock into which the shares of Series C Convertible Preferred Stock then owned
by such Preemptive Rightholder are convertible by (b) the total of (x) the
number of shares of Common Stock then outstanding and (y) the number of shares
of Common Stock into which all outstanding shares of Preferred Stock are
convertible (the "Proportionate Percentage").

     (b) The right of each Preemptive Rightholder to purchase the New Securities
under subsection (a) above shall be exercisable by delivering written notice of
its exercise, prior to the expiration of the 10-day period referred to in
subsection (a) above, to the Corporation, which notice shall state the amount of
New Securities that the Preemptive Rightholder elects to purchase as provided in
Section 9.2(a). The failure of a Preemptive Rightholder to respond within the
10-day period shall be deemed to be a waiver of the Preemptive Rightholder's
rights under Section 9.2(a); provided that each Preemptive Rightholder may waive
its, his or her rights under Section 9.2(a) prior to the expiration of the
10-day period by giving written notice to the Corporation.

     (c) If, following the expiration of the 10-day period referred to above,
not all of the New Securities have been subscribed for by the Preemptive
Rightholders, each Preemptive Rightholder shall have the option to increase that
number of New Securities it has elected to purchase pursuant to Section 9.2(a)
by a proportionate amount.

     9.3 Closing. The closing of the purchase of New Securities subscribed for
by the Preemptive Rightholders under this Section 9 shall be held at the same
time and place as the closing of the New Securities subscribed for by the
Subject Purchasers (the "Closing"). At the Closing, the Corporation shall
deliver certificates representing the New Securities, and the New Securities
shall be issued free and clear of all liens and the Corporation shall so
represent and warrant, and further represent and warrant that the New Securities
shall be, upon issuance of the New Securities to the Preemptive Rightholders and
after payment for the New Securities, duly authorized, validly issued, fully
paid and nonassessable by the Corporation. At the Closing, the Preemptive
Rightholders purchasing the New Securities shall deliver payment in full in
immediately available funds for the New Securities purchased by it, him or her.
At the Closing, all of the parties to the transaction shall execute any
additional documents that are otherwise necessary or appropriate.


                                       13
<PAGE>

     9.4 Sale to Subject Purchaser. The Corporation may sell to the Subject
Purchaser all of the New Securities not purchased by the Preemptive Rightholders
on terms and conditions that are no more favorable to the Subject Purchaser than
those set forth in the New Issuance Notice; provided, however, that the sale is
bona fide and made pursuant to a contract entered into within four (4) months of
the earlier to occur of (i) the waiver by the Preemptive Rightholders of their
option to purchase the New Securities as provided in Section 9.2 and (ii) the
expiration of the 10-day period referred to in Section 9.2. If such sale is not
consummated within such four (4) month period for any reason, then the
restrictions provided for in this Section 9 shall again become effective, and no
issuance and sale of New Securities may be made thereafter by the Corporation
without again offering the New Securities in accordance with this Section 9. The
closing of any issue and purchase contemplated by this Section 9.4 shall be held
at the time and place as the parties to the transaction may agree.

10. Transactions. In case of any merger or consolidation of the Corporation or
any capital reorganization, reclassification or other change of outstanding
shares of Common Stock (other than a change in par value, or from par value to
no par value, or from no par value to par value) (each, a "Transaction"), the
Corporation shall execute and deliver to each holder of Series C Convertible
Preferred Stock at least twenty (20) business days prior to effecting such
Transaction a certificate stating that the holder of each share of Series C
Convertible Preferred Stock shall have the right to receive in such Transaction,
in exchange for each share of Series C Convertible Preferred Stock, a security
identical to (and not less favorable than) the Series C Convertible Preferred
Stock, and provision shall be made therefor in the agreement, if any, relating
to such Transaction. Any certificate delivered pursuant to this Section 10 shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in Section 6 hereof. The provisions
of this Section 10 and any equivalent thereof in any such certificate similarly
shall apply to successive transactions.

                  [Remainder of page intentionally left blank.]


                                       14
<PAGE>


     IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Designations this 27th day of September, 2002.



                    BLUEFLY, INC.


                    By:/s/ Patrick C. Barry
                       --------------------
                    Name:  Patrick C. Barry
                    Title:  Chief Operating Officer and Chief Financial
                             Officer


                                       15

</TEXT>
</DOCUMENT>
</SUBMISSION>
