Financial terms were not disclosed, but ESPN reported the deal is worth $24.5 million
Bly, 25, was widely regarded as the best cornerback available on the open market and the Lions wasted little time in signing the player that spent his first four years with the St. Louis Rams.
Bly reportedly rejected a a four-year, $12 million offer from the Rams prior to becoming an unrestricted free agent.
Detroit, which has gone a combined 5-27 the last two seasons, ranked 29th in the league in pass defense in 2002 and was looking for help in the secondary after cornerback Todd Lyght retired.
A 1999 second-round pick, Bly is coming off his best season. He started 16 games in 2002 at right cornerback, collecting 79 tackles, two interceptions, one sack, two forced fumbles and a fumble recovery.
New Lions coach Steve Mariucci has plenty of familiarity with Bly from his days in the NFC West when he was coach of the San Francisco 49ers.