**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-Q**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934For
                the quarterly period ended November 3, 2007oro
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934For
                the transition period from _________ to
                __________





Commission
      File Number: 0-25716





FINLAY
      ENTERPRISES, INC.





(Exact
      name of registrant as specified in its charter)





Delaware
            
            13-3492802(State or other jurisdiction of
            
            (I.R.S. Employerincorporation or organization)
            
            Identification No.)





529 Fifth Avenue, New York, NY
            
            10017(Address of principal executive offices)
            
            (Zip Code)




(212)
      808-2800





(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes
                x
            No
                o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.





Large
                accelerated
            Accelerated
            Non-acceleratedfiler
                o
            filer
                x
            filer
                o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yes
                o
            No
                x








As
      of
      December 7, 2007, there were 9,252,564 shares of common stock, par value $.01
      per share, of the registrant outstanding.










**FINLAY
      ENTERPRISES, INC.**





**FORM
      10-Q**





**QUARTERLY
      PERIOD ENDED NOVEMBER 3, 2007**





**INDEX**





**PAGE(S)****PART
                I - FINANCIAL INFORMATION**Item
                1.
            Consolidated
                Financial Statements (Unaudited)Consolidated
                Statements of Operations for the thirteen weeks ended November 3,
                2007 and
                October 28, 2006
            2Consolidated
                Statements of Operations for the thirty-nine weeks ended November
                3, 2007
                and October 28, 2006
            3Consolidated
                Balance Sheets as of November 3, 2007 and February 3, 2007
            4Consolidated
                Statements of Changes in Stockholders’ Equity and Comprehensive Income
                (Loss) for the thirty-nine weeks ended November 3, 2007
            5Consolidated
                Statements of Cash Flows for the thirty-nine weeks ended November
                3, 2007
                and October 28, 2006
            6Notes
                to Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            20Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            34Item
                4.
            Controls
                and Procedures
            34**PART
                II - OTHER INFORMATION**Item
                1A.
            Risk
                Factors
            36Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            36Item
                6.
            Exhibits
            37**SIGNATURES**
            
            38







**PART
      I – FINANCIAL INFORMATION**


**Item
      1.** **Consolidated
      Financial Statements**





**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(in
      thousands, except share and per share data)**


**(unaudited)**





**Thirteen Weeks Ended****November 3,**
              **2007**
            
            **October 28,**
              **2006**Sales
            
            $
            141,918
            
            $
            136,377Cost
                of sales
            
            
            77,946
            
            
            73,145Gross
                margin
            
            
            63,972
            
            
            63,232Selling,
                general and administrative expenses
            
            
            69,133
            
            
            67,490Depreciation
                and amortization
            
            
            3,611
            
            
            3,630Loss
                from operations
            
            
            (8,772
            )
            
            (7,888
            )Interest
                expense, net
            
            
            6,763
            
            
            6,025Loss
                from continuing operations before income taxes
            
            
            (15,535
            )
            
            (13,913
            )Benefit
                for income taxes
            
            
            (8,014
            )
            
            (5,496
            )Loss
                from continuing operations
            
            
            (7,521
            )
            
            (8,417
            )Discontinued
                operations, net of tax
            
            
            -
            
            
            511Net
                loss
            
            $
            (7,521
            )
            $
            (7,906
            )Net
                loss per share applicable to common shares –Basic
                and Diluted:Loss
                from continuing operations
            
            $
            (0.82
            )
            $
            (0.93
            )Discontinued
                operations, net of tax
            
            $
            -
            
            $
            0.05Net
                loss
            
            $
            (0.82
            )
            $
            (0.88
            )Weighted
                average shares outstanding –Basic
                and Diluted
            
            
            9,120,000
            
            
            9,027,462




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


2


**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(in
      thousands, except share and per share data)**


**(unaudited)**





**Thirty-Nine Weeks Ended****November 3,**
              **2007**
            
            **October 28,**
              **2006**Sales
            
            $
            452,793
            
            $
            430,036Cost
                of sales
            
            
            244,079
            
            
            225,962Gross
                margin
            
            
            208,714
            
            
            204,074Selling,
                general and administrative expenses
            
            
            217,186
            
            
            209,856Depreciation
                and amortization
            
            
            10,858
            
            
            10,878Loss
                from operations
            
            
            (19,330
            )
            
            (16,660
            )Interest
                expense, net
            
            
            19,253
            
            
            16,846Loss
                from continuing operations before income taxes
            
            
            (38,583
            )
            
            (33,506
            )Benefit
                for income taxes
            
            
            (14,854
            )
            
            (13,240
            )Loss
                from continuing operations
            
            
            (23,729
            )
            
            (20,266
            )Discontinued
                operations, net of tax
            
            
            236
            
            
            8,498Net
                loss
            
            $
            (23,493
            )
            $
            (11,768
            )Net
                loss per share applicable to common shares –Basic
                and Diluted:Loss
                from continuing operations
            
            $
            (2.61
            )
            $
            (2.25
            )Discontinued
                operations, net of tax
            
            $
            0.03
            
            $
            0.94Net
                loss
            
            $
            (2.58
            )
            $
            (1.31
            )Weighted
                average shares outstanding -Basic
                and Diluted
            
            
            9,088,943
            
            
            9,009,508




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


3


**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands, except share and per share data)**





**November 3,**
              **2007**
              **(unaudited)**
            
            **February 3,**
              **2007**
              **(audited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            2,905
            
            $
            2,415Accounts
                receivable
            
            
            25,422
            
            
            26,271Other
                receivables
            
            
            1,923
            
            
            2,314Merchandise
                inventories
            
            
            458,263
            
            
            430,479Prepaid
                expenses and other
            
            
            5,044
            
            
            4,356Total
                current assets
            
            
            493,557
            
            
            465,835Fixed
                assets:Building,
                equipment, fixtures and leasehold improvements
            
            
            104,600
            
            
            98,229Less –
                accumulated depreciation and amortization
            
            
            50,650
            
            
            43,236Fixed
                assets, net
            
            
            53,950
            
            
            54,993Deferred
                charges and other assets, net
            
            
            11,560
            
            
            13,517Goodwill
            
            
            3,009
            
            
            3,009Total
                assets
            
            $
            562,076
            
            $
            537,354**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Short-term
                borrowings
            
            $
            124,572
            
            $
            45,876Accounts
                payable – trade
            
            
            72,807
            
            
            85,053Accrued
                liabilities:Accrued
                salaries and benefits
            
            
            11,611
            
            
            16,940Accrued
                miscellaneous taxes
            
            
            6,940
            
            
            7,226Accrued
                interest
            
            
            7,349
            
            
            2,874Deferred
                income
            
            
            4,362
            
            
            5,206Deferred
                income taxes
            
            
            8,747
            
            
            13,322Other
            
            
            15,580
            
            
            16,394Income
                taxes payable
            
            
            1,255
            
            
            13,471Total
                current liabilities
            
            
            253,223
            
            
            206,362Long-term
                debt
            
            
            200,000
            
            
            200,000Deferred
                income taxes
            
            
            6,332
            
            
            7,827Other
                non-current liabilities
            
            
            2,567
            
            
            936Total
                liabilities
            
            
            462,122
            
            
            415,125Commitments
                and contingencies (Note 13)Stockholders’
                equity:Common
                  Stock, par value $.01 per share; authorized 25,000,000 shares;issued
                  11,507,058 and 11,348,017 shares at November 3, 2007 andFebruary
                  3, 2007, respectively
            
            
            115
            
            
            113Additional
                paid-in capital
            
            
            95,422
            
            
            92,999Retained
                earnings
            
            
            32,188
            
            
            56,704Less
                  treasury stock of 2,261,795 and 2,227,366 shares at November 3,
                  2007 and February 3, 2007, respectively, at
                  cost
            
            
            (27,771
            )
            
            (27,587
            )Total
                stockholders’ equity
            
            
            99,954
            
            
            122,229Total
                liabilities and stockholders’ equity
            
            $
            562,076
            
            $
            537,354




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





4





**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**


**AND
      COMPREHENSIVE INCOME (LOSS)**


**(in
      thousands, except share data)**


**Common Stock**
              
              **Additional**
              
              
              
              
              
              **Total****Number**
              
              
              
              **Paid-in**
              
              **Retained**
              
              **Treasury**
              
              **Stockholders’**
              
              **Comprehensive****of Shares**
              
              **Amount**
              
              **Capital**
              
              **Earnings**
              
              **Stock**
              
              **Equity**
              
              **Income (Loss)**Balance,
                  February 3, 2007
              
              
              9,120,651
              
              $
              113
              
              $
              92,999
              
              $
              56,704
              
              $
              (27,587
              )
              $
              122,229Effect
                  of adoption of FIN 48
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,023
              )
              
              -
              
              
              (1,023
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (23,493
              )
              
              -
              
              
              (23,493
              )
              $
              (23,493
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (23,493
              )Issuance
                  of common stock
              
              
              159,041
              
              
              2
              
              
              -
              
              
              -
              
              
              -
              
              
              2Award
                  of restricted stock units
              
              
              -
              
              
              -
              
              
              801
              
              
              -
              
              
              -
              
              
              801Amortization
                    of restricted stock compensation and restricted stock
                    units
              
              
              -
              
              
              -
              
              
              1,622
              
              
              -
              
              
              -
              
              
              1,622Purchase
                  of treasury stock
              
              
              (34,429
              )
              
              -
              
              
              -
              
              
              -
              
              
              (184
              )
              
              (184
              )Balance,
                  November 3, 2007 (unaudited)
              
              
              9,245,263
              
              $
              115
              
              $
              95,422
              
              $
              32,188
              
              $
              (27,771
              )
              $
              99,954




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


5


**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**


**(unaudited)**





**Thirty-Nine Weeks Ended****November 3,**
              **2007**
            
            **October 28,**
              **2006**OPERATING
                ACTIVITIESNet
                loss
            
            $
            (23,493
            )
            $
            (11,768
            )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                and amortization
            
            
            11,031
            
            
            14,378Loss
                on disposal of fixed assets
            
            
            236
            
            
            3,548Amortization
                of deferred financing costs
            
            
            724
            
            
            918Amortization
                  of restricted stock compensation and restricted stock
                  units
            
            
            1,622
            
            
            1,073Deferred
                income taxes
            
            
            (6,070
            )
            
            (1,926
            )Other,
                net
            
            
            (601
            )
            
            (149
            )Changes
                in operating assets and liabilities:Decrease
                in accounts and other receivables
            
            
            1,240
            
            
            1,678Increase
                in merchandise inventories
            
            
            (27,784
            )
            
            (32,012
            )Increase
                in prepaid expenses and other
            
            
            (688
            )
            
            (1,801
            )Decrease
                in accounts payable and accrued liabilities
            
            
            (31,142
            )
            
            (71,369
            )NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (74,925
            )
            
            (97,430
            )INVESTING
                ACTIVITIESPurchases
                of equipment, fixtures and leasehold improvements
            
            
            (9,022
            )
            
            (9,881
            )Deferred
                charges
            
            
            (64
            )
            
            -NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (9,086
            )
            
            (9,881
            )FINANCING
                ACTIVITIESProceeds
                from revolving credit facility
            
            
            462,309
            
            
            530,577Principal
                payments on revolving credit facility
            
            
            (383,613
            )
            
            (462,739
            )Capitalized
                financing costs
            
            
            (358
            )
            
            (99
            )Purchase
                of treasury stock
            
            
            (184
            )
            
            (187
            )Bank
                overdraft
            
            
            6,347
            
            
            14,269Stock
                options exercised
            
            
            -
            
            
            8NET
                CASH PROVIDED FROM FINANCING ACTIVITIES
            
            
            84,501
            
            
            81,829INCREASE
                (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            490
            
            
            (25,482
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            2,415
            
            
            28,191CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            2,905
            
            $
            2,709SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Interest
                paid
            
            $
            14,150
            
            $
            12,123Income
                taxes paid
            
            $
            3,091
            
            $
            10,321SUPPLEMENTAL
                DISCLOSURE OF NON-CASH ACTIVITIES:Award
                of vested participant restricted stock units
            
            $
            817
            
            $
            606Accrual
                for purchases of fixed assets
            
            $
            2,207
            
            $
            2,756




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




6




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1 - BASIS OF ACCOUNTING AND PRESENTATION**





The
      accompanying unaudited consolidated financial statements of Finlay Enterprises,
      Inc. (the “Company,” the “Registrant,” “we,” “us” and “our”), and our
      wholly-owned subsidiary, Finlay Fine Jewelry Corporation and its wholly-owned
      subsidiaries (“Finlay Jewelry”), have been prepared in accordance with
      accounting principles generally accepted in the United States of America for
      interim financial information. References to “Finlay” mean collectively, the
      Company and Finlay Jewelry. In the opinion of management, the accompanying
      unaudited consolidated financial statements contain all adjustments necessary
      to
      present fairly our financial position as of November 3, 2007, and our results
      of
      operations for the thirteen weeks and thirty-nine weeks ended November 3, 2007
      and October 28, 2006 and cash flows for the thirty-nine weeks ended November
      3,
      2007 and October 28, 2006. Due to the seasonal nature of our business, results
      for interim periods are not indicative of annual results. The unaudited
      consolidated financial statements have been prepared on a basis consistent
      with
      that of the audited consolidated financial statements as of February 3, 2007
      referred to below. Certain information and footnote disclosures normally
      included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America have been
      condensed or omitted pursuant to the rules and regulations of the Securities
      and
      Exchange Commission (the “Commission”).





These
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and notes thereto included in our Annual
      Report on Form 10-K for the fiscal year ended February 3, 2007 (“Form 10-K”)
      previously filed with the Commission.




As
      a
      result of the store closings in 2006 associated with the Federated Department
      Stores, Inc., now known as Macy’s, Inc. (“Macy’s”) and The May Department Stores
      Company (“May”) merger, the results of operations for the 194 departments that
      were either divested or phased into the Macy’s East or Macy’s West divisions
      have been segregated from those of continuing operations, net of tax, and
      classified as discontinued operations for the thirteen weeks and thirty-nine
      weeks ended October 28, 2006. Additionally, as a result of the decision by
      Belk,
      Inc. (“Belk”) not to renew Finlay Jewelry’s license agreement at the end of
      2006, the results of operations of the 75 Belk departments that closed in
      January 2007 have been segregated from those of continuing operations, net
      of
      tax, and classified as discontinued operations for the thirteen weeks and
      thirty-nine weeks ended October 28, 2006. Further, as a result of Belk’s
      acquisition of Parisian from Saks, Inc. (“Saks”) in October 2006, the 33
      Parisian departments closed in July 2007. The results of operations for these
      departments have also been reclassified as discontinued operations in the
      accompanying Consolidated Statements of Operations for the thirty-nine weeks
      ended November 3, 2007 and the thirteen weeks and thirty-nine weeks ended
      October 28, 2006. Unless otherwise indicated, the following discussion relates
      to our continuing operations. See Note 10 for additional information regarding
      discontinued operations.





Our
      fiscal year ends on the Saturday closest to January 31. References to 2007,
      2006
      and 2005 relate to the fiscal years ending February 2, 2008, February 3, 2007
      and January 28, 2006, respectively. Each of the fiscal years includes 52 weeks
      except 2006, which includes 53 weeks.





**NOTE
      2 - SIGNIFICANT ACCOUNTING POLICIES**





***Consolidation:*** The
      accompanying consolidated financial statements include the accounts of the
      Company and our wholly-owned subsidiary, Finlay Jewelry. Intercompany accounts
      and transactions have been eliminated in consolidation.


7


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      2 - SIGNIFICANT ACCOUNTING POLICIES (continued)**





***Use
      of Estimates:*** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Significant estimates include merchandise
      inventories, vendor allowances, useful lives of finite-lived assets, accounting
      for acquisitions, goodwill, intangibles, self-insurance reserves, income taxes
      and other accruals. Actual results may differ from those estimates.





***Merchandise
      Inventories:*** Consolidated
      inventories are stated at the lower of cost or market determined by the last-in,
      first-out (“LIFO”) method using internally developed indices. Inventory is
      reduced for estimated obsolescence or unmarketable inventory equal to the
      difference between the cost of inventory and the estimated market value based
      upon assumptions about future demand and market conditions.





During
      the majority of 2006, and from time to time in past years, we entered into
      forward contracts based upon the anticipated sales of consigned gold
      merchandise. These contracts aided our efforts in hedging against the risk
      of
      gold price fluctuations, as the cost of gold for our consigned gold merchandise
      was not fixed until the merchandise was sold. For the thirteen weeks and
      thirty-nine weeks ended October 28, 2006, the gain/loss on open forward
      contracts was not material. During 2007, gold merchandise has been purchased
      rather than consigned and the gold price is fixed quarterly with our vendors.
      As
      such, we currently do not engage in any hedging activities.





***Vendor
      Allowances:*** We
      receive allowances from our vendors through a variety of programs and
      arrangements, including cooperative advertising. Vendor allowances are
      recognized as a reduction of **** cost
      of
      sales upon the sale of merchandise or selling, general and administrative
      expenses (“SG&A”) when the purpose for which the vendor funds were intended
      to be used has been fulfilled. Accordingly, a reduction in vendor allowances
      received would increase our cost of sales and/or SG&A.





Vendor
      allowances have been accounted for in accordance with Emerging Issues Task
      Force
      (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for
      Cash Consideration Received from a Vendor” (“EITF No. 02-16”). EITF No. 02-16
      addresses the accounting treatment for vendor allowances and provides that
      cash
      consideration received from a vendor should be presumed to be a reduction of
      the
      prices of the vendors’ product and should therefore be shown as a reduction in
      the purchase price of the merchandise. Further, these allowances should be
      recognized as a reduction in cost of sales when the related product is sold.
      To
      the extent that the cash consideration represents a reimbursement of a specific,
      incremental and identifiable cost, then those vendor allowances should be used
      to offset such costs.




***Hedging:*** Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for
      Derivative Instruments and Hedging Activities”, as amended, establishes
      accounting and reporting standards for derivative instruments, including certain
      derivative instruments embedded in other contracts, and for hedging activities.
      Under SFAS No. 133, all derivatives, whether designated in hedging relationships
      or not, are required to be recorded on the balance sheet at fair value. SFAS
      No.
      133 defines requirements for designation and documentation of hedging
      relationships, as well as ongoing effectiveness assessments, which must be
      met
      in order to qualify for hedge accounting. For a derivative that does not qualify
      as a hedge, changes in fair value would be recorded in earnings
      immediately.


8




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      2 - SIGNIFICANT ACCOUNTING POLICIES**  **(continued)**





During
      2006, and in past years, we had designated our derivative instruments,
      consisting of gold forward contracts, as cash flow hedges. For derivative
      instruments designated as cash flow hedges, the effective portion of the change
      in the fair value of the derivative was recorded in accumulated other
      comprehensive income, a separate component of stockholders’ equity, and was
      reclassified into cost of sales when the offsetting effects of the hedged
      transaction impacted earnings. Changes in the fair value of the derivative
      attributable to hedge ineffectiveness were recorded in earnings immediately.
      At
      February 3, 2007, we had no open positions in gold forward contracts and we
      currently do not engage in any hedging activities.





***Net
      Income (Loss) Per Share*** **:** Net
      income (loss) per share has been computed in accordance with SFAS No. 128,
      “Earnings per Share”. Basic and diluted net income (loss) per share were
      calculated using the weighted average number of shares outstanding during each
      period, with options to purchase common stock, par value $0.01 per share
      (“Common Stock”), restricted stock and restricted stock units, included in
      diluted net income (loss) per share, using the treasury stock method, to the
      extent that such options, restricted stock and restricted stock units were
      dilutive. As we had a loss from continuing operations for the thirteen weeks
      and
      thirty-nine weeks ended November 3, 2007 and October 28, 2006, the stock
      options, restricted stock and restricted stock units are not considered in
      the
      calculation of diluted net income (loss) per share due to their anti-dilutive
      effect. As a result, the weighted average number of shares outstanding used
      for
      both the basic and diluted net income (loss) per share calculations was the
      same. Total stock options, restricted stock and restricted stock units
      outstanding were 1,284,279 and 1,538,889 at November 3, 2007 and October 28,
      2006, respectively. The stock options have exercise prices ranging from $7.05
      to
      $24.31 per share in each period.





***Stock-based
      Compensation:*** Effective
      January 29, 2006, we began recording compensation expense associated with stock
      options in accordance with SFAS No. 123R, ** “Share-Based
      Payment” (“SFAS No. 123R”), as interpreted by the Commission Staff Accounting
      Bulletin No. 107. Prior to January 29, 2006, we had accounted for stock
      options according to the provisions of Accounting Principles Board Opinion
      No.
      25, ** “Accounting
      for Stock Issued to Employees”, and related interpretations, under which no
      compensation expense was recorded for awards granted without intrinsic value.
      We
      adopted the modified prospective transition method provided for under SFAS
      No.
      123R, and, consequently, have not retroactively adjusted results from prior
      periods. Under this method, compensation cost recorded for stock options during
      2006 included amortization of the remaining unvested portion of the stock option
      awards granted prior to January 29, 2006, based on the estimated fair value.
      Moreover, in accordance with the provisions of SFAS No. 123R, in 2006, we
      reversed the balance in deferred compensation to additional paid-in-capital
      on
      our Consolidated Balance Sheets upon adoption of SFAS No. 123R. At February
      3,
      2007, all stock options were fully vested and, therefore, there has been no
      expense in 2007 relating to stock options.





***Discontinued
      Operations:*** We
      account for closing stores as discontinued operations when the operations and
      cash flows of a store being disposed of are eliminated from on-going operations
      and we do not have any significant continuing involvement in its operations.
      In
      reaching the determination as to whether the cash flows of a store will be
      eliminated from ongoing operations, we consider whether it is likely that
      customers will migrate to similar stores in the same geographic market, and
      our
      analysis includes an evaluation of the proximity to the disposed store.





***Goodwill:*** As
      a
      result of the acquisition of L. Congress, Inc. (“Congress”) in 2006, goodwill of
      $3.0 million was recorded in our stand-alone jewelry store segment. As goodwill
      has an indefinite life, we will perform an assessment of goodwill impairment
      each year or as impairment indicators arise in accordance with SFAS No. 142,
      “Goodwill and Other Intangible Assets” (“SFAS No. 142”).


9


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      2 - SIGNIFICANT ACCOUNTING POLICIES**  **(continued)**





***Intangible
      Assets:*** As
      a
      result of the acquisition of Carlyle & Co. Jewelers (“Carlyle”) in 2005 and
      Congress in 2006, trade names and other intangible assets were recorded and
      are
      included in Deferred charges and other assets, net in the accompanying
      Consolidated Balance Sheets. Indefinite lived intangible assets, consisting
      of
      tradenames, are tested for impairment each year or as impairment indicators
      arise in accordance with SFAS No. 142.





**NOTE
      3 - DESCRIPTION OF BUSINESS**





We
      conduct business through our wholly-owned subsidiary, Finlay Jewelry. We are
      a
      retailer of fine jewelry products and primarily operate licensed fine jewelry
      departments in department stores throughout the United States. Additionally,
      we
      operate luxury stand-alone jewelry stores. Due to the seasonality of the retail
      jewelry industry, the fourth quarter of 2006 accounted for approximately 42.0%
      of our sales. During 2006, the departments in store groups owned by Macy’s
      accounted for 57.0% of our sales (excluding the Macy’s departments that closed
      in 2006 and the departments in Lord & Taylor, which was sold to NRDC Equity
      Partners in late 2006).





In
      May
      2005, Finlay Jewelry completed the acquisition of Carlyle. Carlyle currently
      operates 33 specialty jewelry stores, which sell luxury priced jewelry in nine
      states under the Carlyle & Co., J.E. Caldwell & Co. and Park Promenade
      trade names.





In
      November 2006, Finlay Jewelry completed the acquisition of Congress. Congress
      currently operates five specialty jewelry stores in southwest Florida, also
      with
      a focus on the luxury jewelry market. Congress’ results of operations are
      included in the accompanying Consolidated Statements of Operations since the
      date of acquisition.





Refer
      to
      Note 15 for a discussion of the acquisition of the Bailey Banks & Biddle
      division of Zale Corporation (“Bailey Banks & Biddle”) on November 9,
      2007.





**NOTE
      4 - MERCHANDISE INVENTORIES**





Merchandise
      inventories consisted of the following:




**November 3,**
              **2007**
            
            **February 3,**
              **2007****(in
                thousands)**Jewelry
                goods – rings, watches and other fine jewelry(first-in,
                first-out (“FIFO”) basis)
            
            $
            491,062
            
            $
            458,920Less:
                Excess of FIFO cost over LIFO inventory value
            
            
            32,799
            
            
            28,441$
            458,263
            
            $
            430,479





We
      determine our LIFO inventory value by utilizing internally developed indices.
      The LIFO method had the effect of increasing the loss from continuing operations
      before income taxes for the thirteen weeks ended November 3, 2007 and October
      28, 2006 by $1.5 million in each period. The LIFO method had the effect of
      increasing the loss from continuing operations before income taxes for the
      thirty-nine weeks ended November 3, 2007 and October 28, 2006 by $4.4 million
      and $3.0 million, respectively.





Approximately
      $199.5 million and $204.0 million at November 3, 2007 and February 3, 2007,
      respectively, of merchandise received on consignment is not included in
      merchandise inventories and accounts payable-trade in the accompanying
      Consolidated Balance Sheets.


10


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      4 - MERCHANDISE INVENTORIES (continued)**




Effective
      as of November 29, 2006, Finlay Jewelry entered into an agreement to terminate
      and retire its obligation under the amended and restated gold consignment
      agreement (the “Gold Consignment Agreement”). The Gold Consignment Agreement
      enabled Finlay Jewelry to receive consignment merchandise by providing gold,
      or
      otherwise making payment, to certain vendors. In accordance with the termination
      agreement, Finlay Jewelry paid approximately $49.9 million to purchase the
      outstanding gold. The payment of the gold was financed through additional
      borrowings under the Revolving Credit Facility (as defined in Note 5
      below).





Finlay
      Jewelry considered many factors when evaluating whether to terminate the Gold
      Consignment Agreement, including the volatility of gold prices in recent years
      and our belief that we can better manage our gross margins under an owned
      inventory program working directly with our vendors. In addition, the
      termination simplified our capital structure by eliminating an off-balance
      sheet
      contractual obligation. With the retirement of the obligation, we converted
      the
      majority of Finlay Jewelry’s gold consignment inventory of approximately $99.0
      million to owned inventory on our Consolidated Balance Sheets and eliminated
      our
      other receivables, which represented cash advances to certain vendors for the
      cost of the non-gold portion of the gold consignment merchandise.





**NOTE
      5 - SHORT AND LONG-TERM DEBT**





Our
      revolving credit agreement with General Electric Capital Corporation (“GECC”)
      and certain other lenders (the “Revolving Credit Agreement”), which was in place
      until November 9, 2007, provided Finlay Jewelry with a senior secured revolving
      line of credit (the “Revolving Credit Facility”) of $300.0 million, as increased
      from $225.0 million in June 2007 as a result of the conversion to owned
      merchandise of the gold consignment merchandise under the former Gold
      Consignment Agreement, which increased Finlay Jewelry’s collateral base.
      Effective November 9, 2007, in connection with the acquisition of Bailey Banks
      & Biddle, the Revolving Credit Agreement was replaced by a new revolving
      credit agreement (the “New Revolving Credit Agreement”) providing Finlay Jewelry
      with a $550.0 million senior secured revolving line of credit (the “New
      Revolving Credit Facility”). Refer to Note 15. At November 3, 2007, $124.6
      million was outstanding under the Revolving Credit Facility, at which point
      the
      available borrowings were $162.2 million. The average amounts outstanding under
      the Revolving Credit Facility were $106.5 million and $60.5 million for the
      thirty-nine weeks ended November 3, 2007 and October 28, 2006, respectively.
      The
      maximum amount outstanding for the thirty-nine weeks ended November 3, 2007
      was
      $139.3 million, at which point the available borrowings were an additional
      $131.6 million.





Amounts
      outstanding under the Revolving Credit Facility bore interest at a rate equal
      to, at our option, (i) the prime rate plus a margin ranging from zero to 0.25%
      or (ii) the adjusted Eurodollar rate plus a margin ranging from 1.25% to 2.0%,
      in each case depending on availability under our facility. The weighted average
      interest rate was 7.1% and 7.5% for the thirty-nine weeks ended November 3,
      2007
      and October 28, 2006, respectively.




At
      November 3, 2007 and February 3, 2007, we had letters of credit outstanding
      totaling $6.2 million and $6.1 million, respectively, which guarantee various
      trade activities.




11


**FINLAY
        ENTERPRISES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        5 - SHORT AND LONG-TERM DEBT (continued)**




The
      Revolving Credit Agreement and, as of November 9, 2007, the New Revolving Credit
      Agreement, contains customary covenants, including limitations on, or relating
      to liens, indebtedness, investments, mergers, acquisitions, affiliate
      transactions, management compensation and the payment of dividends and other
      restricted payments. The Revolving Credit Agreement also contained a fixed
      charge coverage ratio requirement under certain circumstances. As of November
      3,
      2007, Finlay Jewelry was in compliance with this financial covenant. We also
      expect to be in compliance with all of our covenants during the balance of
      2007.
      Because compliance is based, in part, on our management’s estimates and actual
      results can differ from those estimates, there can be no assurance that we
      will
      be in compliance with these covenants in the future or that the lenders will
      waive or amend any of the covenants should we be in violation thereof. We
      believe the assumptions used are appropriate.





Finlay
      Jewelry’s 8-3/8% Senior Notes due June 1, 2012 (the “Senior Notes”), have an
      aggregate principal amount of $200.0 million. Interest on the Senior **** Notes
      is
      payable semi-annually on June 1 and December 1 of each year.





The
      Senior Notes are unsecured senior obligations and rank equally in right of
      payment with all of the existing and future unsubordinated indebtedness of
      Finlay Jewelry and senior to any future indebtedness of Finlay Jewelry that
      is
      expressly subordinated to the Senior Notes. The Senior Notes are effectively
      subordinated to (a) Finlay Jewelry’s secured indebtedness, including obligations
      under its Revolving Credit Agreement and the New Revolving Credit Agreement,
      to
      the extent of the value of the assets securing such indebtedness, and (b) the
      indebtedness and other liabilities (including trade payables) of its
      subsidiaries. Finlay Jewelry may redeem the Senior Notes, in whole or in part,
      at any time on or after June 1, 2008 at specified redemption prices
      plus **** accrued
      and unpaid interest, if any, to the date of the redemption. Upon certain change
      of control events, each holder of the Senior Notes may require Finlay Jewelry
      to
      purchase all or a portion of such holder's Senior Notes at a purchase price
      equal to 101% of the principal amount thereof, plus accrued interest to the
      purchase date.





The
      indenture governing the Senior Notes contains restrictions relating to, among
      other things, the payment of dividends, redemptions or repurchases of capital
      stock, the incurrence of additional indebtedness, the making of certain
      investments, the creation of certain liens, the sale of certain assets, entering
      into transactions with affiliates, engaging in mergers and consolidations and
      the transfer of all or substantially all assets. Finlay Jewelry was in
      compliance with all of its covenants as of and for the thirty-nine weeks ended
      November 3, 2007. We
      expect to be in compliance with all of these covenants during the balance of
      2007.





**NOTE
      6 – LICENSE AGREEMENTS WITH DEPARTMENT STORES AND LEASE
      AGREEMENTS**





Our
      operating leases consist primarily of the stand-alone jewelry store locations
      and office space rentals, which leases expire on various dates through 2016.
      The
      department store license agreements provide for the payment of fees based on
      sales (i.e., contingent fees in the table below). Additionally, certain of
      the
      stand-alone jewelry store leases require payment of contingent rent based on
      a
      percentage of store sales in excess of a specified threshold. License fees
      and
      lease expense included in SG&A are as follows (in thousands):





**Thirteen Weeks Ended**
            
            **Thirty-Nine Weeks Ended****November 3,**
              **2007**
            
            **October 28,**
              **2006**
            
            **November 3,**
              **2007**
            
            **October 28,**
              **2006**Base rent
            
            $
            2,314
            
            $
            1,935
            
            $
            6,857
            
            $
            5,572Contingent fees
            
            
            20,077
            
            
            19,800
            
            
            63,733
            
            
            63,265Total
            
            $
            22,391
            
            $
            21,735
            
            $
            70,590
            
            $
            68,837




12




**FINLAY ENTERPRISES, INC.**


**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE 6 – LICENSE AGREEMENTS WITH DEPARTMENT STORES AND LEASE AGREEMENTS (continued)**




All
        of
        the department store licenses provide that, except under limited circumstances,
        the title to certain of our fixed assets transfers upon termination of the
        licenses, and that we will receive reimbursement for the undepreciated value
        of
        such fixed assets from the host store upon such transfer. The cost of such
        fixed
        assets are recorded at the inception of the license arrangement, as well
        as upon
        department renovations, and are reflected in the accompanying Consolidated
        Balance Sheets.




**NOTE 7 – STOCK-BASED COMPENSATION**




Stock
        options outstanding under our stock incentive plans have been granted at
        prices
        which are equal to the market value of our stock on the date of grant, generally
        vest over five years and expire no later than ten years after the grant date.
        Effective January 29, 2006, we began recognizing compensation expense ratably
        over the vesting period. During the thirty-nine weeks ended October 28, 2006,
        we
        recognized approximately $95,000 in stock-based compensation expense. At
        February 3, 2007, all stock options were fully vested and, therefore, there
        has
        been no expense in 2007 relating to stock options. There were no options
        granted
        during 2006 or in the 2007 period-to-date.
 The
          following table summarizes the changes in stock options outstanding during
          the
          thirty-nine weeks ended November 3, 2007:


**Options Outstanding**
              
              **Options Exercisable****Number**
                **Outstanding**
              
              **Wtd. Avg.**
                **Remaining**
                **Contractual Life**
              
              **Wtd. Avg.**
                **Ex. Price**
              
              **Aggregate**
                **Intrinsic**
                **Value (000’s)**
              
              **Number**
                **Exercisable**
              
              **Average**
                **Exercise Price**
              
              **Aggregate**
                **Intrinsic**
                **Value (000’s)**Balance
                  at February 3, 2007
              
              
              1,016,334
              
              
              2.24
              
              $
              12.10
              
              $
              618
              
              
              1,016,334
              
              $
              12.10
              
              $
              618Granted
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              (406,134
              )
              
              -
              
              
              13.76
              
              
              -
              
              
              (406,134
              )
              
              13.76
              
              
              -Balance
                  at November 3, 2007
              
              
              610,200
              
              
              2.82
              
              $
              10.99
              
              $
              -
              
              
              610,200
              
              $
              10.99
              
              $
              -




The
        following table summarizes the changes in restricted stock outstanding during
        the thirty-nine weeks ended November 3, 2007:


**Restricted**
                **Stock**
              
              **Wtd. Avg.**
                **Grant Date**
                **Fair Value**Balance
                  at February 3, 2007
              
              
              157,487
              
              $
              12.17Granted
              
              
              55,261
              
              
              9.32Vested
              
              
              (56,439
              )
              
              15.25Balance
                  at November 3, 2007
              
              
              156,309
              
              $
              10.04




The
        following table summarizes the changes in restricted stock units outstanding
        during the thirty-nine weeks ended November 3, 2007:




**Restricted**
                **Stock Units****(1)**
              
              **Wtd. Avg.**
                **Grant Date**
                **Fair Value**Balance
                  at February 3, 2007
              
              
              317,546
              
              $
              13.01Awarded
              
              
              276,477
              
              
              5.88Distributed
              
              
              (74,097
              )
              
              17.39Cancelled
              
              
              (2,156
              )
              
              12.74Balance
                  at November 3, 2007
              
              
              517,770
              
              $
              8.52





(1) Refer to Note 8 for additional information regarding restricted stock units.


13




**FINLAY ENTERPRISES, INC.**


**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE 7 – STOCK-BASED COMPENSATION (continued)**


For
        the
        thirty-nine weeks ended November 3, 2007, we purchased 34,429 shares for
        $184,000 from certain executives pursuant to the long-term incentive plan,
        to
        satisfy tax withholding obligations related to the issuance of Common Stock
        to
        the executives.




**NOTE 8 – EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION AND STOCK** **PURCHASE PLANS**


In
        April
        2003, the Board of Directors adopted the Executive Deferred Compensation
        and
        Stock Purchase Plan and the Director Deferred Compensation and Stock Purchase
        Plan (the “RSU Plans”), which were approved by our stockholders on June 19,
        2003. Under the RSU Plans, key executives and non-employee directors, as
        directed by our Compensation Committee, are eligible to acquire restricted
        stock
        units (“RSUs”). An RSU is a unit of measurement equivalent to one share of
        Common Stock, but with none of the attendant rights of a holder of a share
        of
        Common Stock. Two types of RSUs are awarded under the RSU Plans: (i) participant
        RSUs, where a plan participant may elect to defer, in the case of an executive
        employee, a portion of his or her actual or target bonus, and in the case
        of a
        non-employee director, all of his or her eligible
        director fees (which are annual retainer fees plus any annual fees received
        by a
        participant for services as chairperson of any committee of the Board of
        Directors, but excluding the Lead Independent Director’s annual fee) that would
        otherwise be paid in cash, and receive RSUs in lieu thereof, and (ii) matching
        RSUs, where we credit a participant’s plan account with one matching RSU for
        each participant RSU that a participant elects to purchase. While participant
        RSUs are fully vested at all times, matching RSUs are subject to vesting
        and
        forfeiture as set forth in the RSU Plans. At the time of distribution under
        the
        RSU Plans, RSUs are converted into actual shares of Common Stock. As of November
        3, 2007, 517,770 RSUs are outstanding under the RSU Plans. Amortization for
        the
        thirty-nine weeks ended November 3, 2007 and October 28, 2006 totaled
        approximately $0.5 million in each period.




**NOTE
      9** **–
      CONSOLIDATION OF HOST STORE GROUPS**





In
      August
      2005, Macy’s announced that it had completed a merger with May. In September
      2005, Macy’s announced its integration plans including a divisional realignment
      and divestiture of certain stores. As of November 3, 2007, we operated a total
      of 351 departments in five of Macy’s eight divisions, as follows:





Macy’s
                South
            
            
            123Macy’s
                Midwest
            
            
            100Macy’s
                North
            
            
            57Macy’s
                Northwest
            
            
            37Bloomingdale’s
            
            
            34Total
            
            
            351





During
      the first half of 2006, 194 stores were either divested or phased into the
      Macy’s East or Macy’s West divisions and have been classified as discontinued
      operations in accordance with SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets” (“SFAS No. 144”). During the thirty-nine weeks
      ended October 28, 2006, we recorded charges associated with accelerated
      depreciation of fixed assets and severance related to our field operations
      totaling approximately $4.0 million. These costs are included in discontinued
      operations in the accompanying Consolidated Statements of Operations.




14




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      9** **–
      CONSOLIDATION OF HOST STORE GROUPS (continued)**




In
        May
        2006, the Company announced that Belk would not renew Finlay Jewelry’s license
        agreement due to Belk’s acquisition of a privately-held company that licensed
        fine jewelry departments in certain of the Belk stores. The termination of
        the
        license agreement, effective at the end of 2006, resulted in the closure
        of 75
        departments. During the thirty-nine weeks ended October 28, 2006, we recorded
        charges associated with accelerated depreciation of fixed assets and severance
        related to our field operations totaling approximately $0.5 million. For
        the
        thirteen weeks and thirty-nine weeks ended October 28, 2006, the results
        of
        operations for these closed stores have been classified as discontinued
        operations in accordance with SFAS No. 144.





Further,
      as a result of Belk’s acquisition of Parisian from Saks in October 2006, the
      Parisian departments closed in July 2007. In 2006, we generated sales of
      approximately $22.9 million from our 33 Parisian departments. For the
      thirty-nine weeks ended November 3, 2007 and October 28, 2006, we generated
      sales of $9.8 million and $13.0 million, respectively, from these departments.
      The results of operations for these departments have been reclassified as
      discontinued operations in the accompanying Consolidated Statements of
      Operations. During the thirty-nine weeks ended November 3, 2007 and October
      28,
      2006, we recorded charges associated with accelerated depreciation of fixed
      assets relating to these departments totaling $0.1 million in each
      period.




Following
      is a summary of the activity in the accrual established for severance charges
      for both our field operations and corporate office that have been recorded
      within our department store based fine jewelry departments segment (in
      thousands):


**Severance and**
                **Termination**
                **Benefits**Balance
                  at January 28, 2006
              
              $
              1,258Charges(1)
              
              
              3,458Payments
              
              
              (4,131
              )Balance
                  at February 3, 2007
              
              
              585Reversal
                  of accrual
              
              
              (146
              )Payments
              
              
              (404
              )Balance
                  at November 3, 2007
              
              $
              35





(1)
      Includes $2.5 million of charges recorded in discontinued operations for 2006
      and $0.9 million of charges recorded in SG&A for
      2006.





**NOTE
      10 – DISCONTINUED OPERATIONS**





As
      a
      result of the 33 Parisian store closings in July 2007, the results of operations
      for these departments have been segregated from those of continuing operations,
      net of tax, and classified as discontinued operations for the thirty-nine week
      period ended November 3, 2007 and the thirteen and thirty-nine weeks ended
      October 28, 2006. Additionally, as a result of the store closings associated
      with the Macy’s/May merger as well as the Belk store closings, the results of
      operations of the departments closed during 2006 have been segregated from
      those
      of continuing operations, net of tax, and classified as discontinued operations
      for the thirteen weeks and thirty-nine weeks ended October 28, 2006. All of
      the
      closed stores were operated in our department store based fine jewelry
      departments segment.





A
      summary
      of the statement of operations information relating to our discontinued
      operations is as follows (in thousands):


**November 3, 2007**
              
              **October 28, 2006****Thirty-Nine**
                **Weeks Ended**
              
              **Thirteen**
                **Weeks Ended**
              
              **Thirty-Nine**
                **Weeks Ended**Sales
              
              $
              9,833
              
              $
              11,894
              
              $
              146,307Income before income taxes
              
              
              393
              
              
              849
              
              
              14,058Discontinued operations, net of tax
              
              
              236
              
              
              511
              
              
              8,498




15




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      11 – SEGMENT INFORMATION**





In
      accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
      Related Information”, we have two operating segments - department store based
      fine jewelry departments and stand-alone jewelry stores (which includes, as
      of
      November 3, 2007, the Carlyle and Congress divisions which are aggregated into
      one reporting segment). The accounting policies of the segments are generally
      the same as those described in Note 2. There are no intercompany sales between
      the segments.




The
      following tables provide segment level financial information for the thirteen
      weeks and thirty-nine weeks ended November 3, 2007 and October 28, 2006 (in
      thousands):


**Thirteen Weeks Ended****November 3, 2007**
              
              **October 28, 2006****Department Store**
                **Based Fine Jewelry**
                **Departments (1)**
              
              **Stand-alone**
                **Jewelry**
                **Stores (2)**
              
              **Total**
              
              **Department Store**
                **Based Fine Jewelry**
                **Departments (1)**
              
              **Stand-alone**
                **Jewelry**
                **Stores**
              
              **Total**Sales
              
              $
              118,308
              
              $
              23,610
              
              $
              141,918
              
              $
              117,391
              
              $
              18,986
              
              $
              136,377Depreciation
                  and amortization
              
              
              3,206
              
              
              405
              
              
              3,611
              
              
              3,462
              
              
              168
              
              
              3,630Loss
                  from operations
              
              
              (7,762
              )
              
              (1,010
              )
              
              (8,772
              )
              
              (7,458
              )
              
              (430
              )
              
              (7,888
              )Interest
                  expense, net
              
              
              6,060
              
              
              703
              
              
              6,763
              
              
              5,531
              
              
              494
              
              
              6,025Benefit
                  for income taxes
              
              
              (7,336
              )
              
              (678
              )
              
              (8,014
              )
              
              (5,131
              )
              
              (365
              )
              
              (5,496
              )Total
                  assets
              
              
              452,645
              
              
              109,431
              
              
              562,076
              
              
              439,590
              
              
              80,052
              
              
              519,642Capital
                  expenditures
              
              
              3,478
              
              
              411
              
              
              3,889
              
              
              2,624
              
              
              798
              
              
              3,422







(1)  Included
      in interest expense, net for each of the thirteen week periods, is $4.2 million
      related to the Senior Notes.


(2)  Includes
      Congress, which was acquired in November 2006.


**Thirty-Nine Weeks Ended****November 3, 2007**
              
              **October 28, 2006****Department Store**
                **Based Fine Jewelry**
                **Departments (1)**
              
              **Stand-alone**
                **Jewelry**
                **Stores (2)**
              
              **Total**
              
              **Department Store**
                **Based Fine Jewelry**
                **Departments (1)**
              
              **Stand-alone**
                **Jewelry**
                **Stores**
              
              **Total**Sales
              
              $
              374,921
              
              $
              77,872
              
              $
              452,793
              
              $
              373,535
              
              $
              56,501
              
              $
              430,036Depreciation
                  and amortization
              
              
              9,683
              
              
              1,175
              
              
              10,858
              
              
              10,419
              
              
              459
              
              
              10,878Income
                  (loss) from operations
              
              
              (19,324
              )
              
              (6
              )
              
              (19,330
              )
              
              (17,498
              )
              
              838
              
              
              (16,660
              )Interest
                  expense, net
              
              
              17,220
              
              
              2,033
              
              
              19,253
              
              
              15,658
              
              
              1,188
              
              
              16,846Benefit
                  for income taxes
              
              
              (14,049
              )
              
              (805
              )
              
              (14,854
              )
              
              (13,102
              )
              
              (138
              )
              
              (13,240
              )Total
                  assets
              
              
              452,645
              
              
              109,431
              
              
              562,076
              
              
              439,590
              
              
              80,052
              
              
              519,642Capital
                  expenditures
              
              
              8,274
              
              
              748
              
              
              9,022
              
              
              8,147
              
              
              1,734
              
              
              9,881







(1)  Included
      in interest expense, net for each of the thirty-nine week periods, is $12.6
      million related to the Senior Notes.


(2)  Includes
      Congress, which was acquired in November 2006.




Additionally,
      our sales mix by mer chandise
      category was as follows for each of the thirty-nine week periods ended November
      3, 2007 and October 28, 2006 (in thousands):





16


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      11 – SEGMENT INFORMATION (continued)**


**Thirty-Nine Weeks Ended****November 3, 2007**
              
              
              **October 28, 2006****Department Store Based**
                **Fine Jewelry Departments**
              
              
              **Stand-alone**
                **Jewelry Stores (1)**
              
              
              **Department Store Based**
                **Fine Jewelry Departments**
              
              
              **Stand-alone**
                **Jewelry Stores****Sales**
              
              **% of**
                **Sales**
              
              
              **Sales**
              
              **% of**
                **Sales**
              
              
              **Sales**
              
              **% of**
                **Sales**
              
              
              **Sales**
              
              **% of**
                **Sales**Diamonds
              
              $
              88,982
              
              
              23.7
              %
              
              $
              20,787
              
              
              26.7
              %
              
              $
              94,539
              
              
              25.3
              %
              
              $
              14,570
              
              
              25.8
              %Gemstones
              
              
              68,572
              
              
              18.3
              
              
              
              7,858
              
              
              10.1
              
              
              
              70,858
              
              
              19.0
              
              
              
              4,810
              
              
              8.5Gold
              
              
              63,459
              
              
              16.9
              
              
              
              1,566
              
              
              2.0
              
              
              
              66,175
              
              
              17.7
              
              
              
              589
              
              
              1.0Watches
              
              
              56,944
              
              
              15.2
              
              
              
              34,491
              
              
              44.3
              
              
              
              51,438
              
              
              13.8
              
              
              
              24,489
              
              
              43.3Designer
              
              
              42,095
              
              
              11.2
              
              
              
              8,631
              
              
              11.1
              
              
              
              37,653
              
              
              10.1
              
              
              
              7,725
              
              
              13.7Other
                  (2)
              
              
              54,869
              
              
              14.7
              
              
              
              4,539
              
              
              5.8
              
              
              
              52,872
              
              
              14.1
              
              
              
              4,318
              
              
              7.7Total
                  Sales
              
              $
              374,921
              
              
              100.0
              %
              
              $
              77,872
              
              
              100.0
              %
              
              $
              373,535
              
              
              100.0
              %
              
              $
              56,501
              
              
              100.0
              %







(1)
            Includes
                Congress, which was acquired in November
                2006.


(2)
            Includes
                special promotional items, remounts, estate jewelry, pearls, beads,
                cubic
                zirconia, sterling silver and men’s jewelry, as well as repair services
                and accommodation sales to our
                employees.





**NOTE
      12 – CONGRESS ACQUISITION**





In
      November 2006, Finlay Jewelry completed the acquisition of Congress. The
      purchase price was approximately $6.0 million plus transaction fees of
      approximately $0.4 million and the assumption of debt. The transaction was
      financed with additional borrowings under the Revolving Credit Facility. The
      acquisition was undertaken to complement and diversify our existing business
      and
      provides us the opportunity to increase our presence in the luxury jewelry
      market. In connection with the purchase, **** Congress’
      revolving credit facility and outstanding debt totaling $10.0 million were
      terminated and paid in full at the closing. Since the date of the acquisition,
      Congress’ cash requirements have been funded under the Revolving Credit Facility
      and will continue to be funded under the New Revolving Credit
      Facility.





The
      purchase agreement relating to Congress provides for additional purchase price
      consideration to be paid to the former principals of Congress in 2009. The
      payment is contingent upon the achievement of certain results of operations
      of
      the Congress stores for the 36 months following the acquisition as set forth
      in
      the purchase agreement. No additional consideration has been included in our
      disclosure of the purchase price as it is not yet determinable if any such
      payments will be made.




The
      Congress acquisition has been accounted for as a purchase, and, accordingly,
      the
      operating results of Congress have been included in our consolidated financial
      statements since the date of acquisition. No proforma information has been
      disclosed due to the materiality of this acquisition.





**NOTE
      13 – COMMITMENTS, CONTINGENCIES AND OTHER**





From
      time
      to time, we are involved in litigation arising out of our operations in the
      normal course of business. As of December 7, 2007, we are not a party to any
      legal proceedings that, individually or in the aggregate, are reasonably
      expected to have a material adverse effect on our business, results of
      operations, financial condition or cash flows. However, the results of these
      matters cannot be predicted with certainty, and an unfavorable resolution of
      one
      or more of these matters could have a material adverse effect on our
      consolidated financial statements.





The
      Senior Notes and the Revolving Credit Agreement and, beginning November 9,
      2007,
      the New Revolving Credit Agreement restrict the amount of annual distributions
      from Finlay Jewelry to us.




17




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      13 – COMMITMENTS, CONTINGENCIES AND OTHER (continued)**





Our
      concentration of credit risk consists principally of accounts receivable. During
      2006, jewelry departments in store groups owned by Macy’s accounted for
      approximately 57.0% of our sales (excluding the Macy’s departments that closed
      in 2006 and the departments in Lord & Taylor, which was sold in 2006). We
      believe that the inability of Macy’s to pay its receivables could have a
      material adverse effect on our financial position or results of operations.





In
      2006,
      approximately 43.0% of the sales related to department store based fine jewelry
      departments were generated by merchandise obtained from their ten largest
      vendors, and approximately 9.0% of sales were generated by merchandise obtained
      from their single largest vendor. Additionally, in 2006, merchandise obtained
      from our stand-alone jewelry stores’ two largest vendors generated approximately
      44.0% of their sales.





We
      did
      not provide any third-party financial guarantees as of November 3, 2007 and
      February 3, 2007.





Refer
      to
      Note 12 for a discussion of the contingent purchase price relating to the
      Congress acquisition.





Refer
      to
      Note 5 for a discussion of letters of credit outstanding.





**NOTE
      14 – INCOME TAXES**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes – an
      Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 seeks to reduce the
      diversity in practice associated with certain aspects of measurement and
      recognition in accounting for income taxes. In addition, FIN 48 provides
      guidance on derecognition, classification, interest and penalties and accounting
      in interim periods and requires expanded disclosure with respect to the
      uncertainty in income taxes. FIN 48 was effective as of the beginning of the
      Company’s 2007 fiscal year.





The
      Company adopted FIN 48 on the first day of the current fiscal year. As a result
      of the implementation of FIN 48, during the first quarter of 2007, the Company
      recognized an increase of $1.0 million in the liability for unrecognized tax
      benefits that was accounted for as a decrease to opening retained earnings.
      As
      of the date of adoption and after the impact of recognizing the increase in
      liability noted above, the Company’s unrecognized tax benefits totaled $2.6
      million. Included in the balance at the date of adoption are $2.0 million of
      unrecognized tax benefits that if recognized, would affect the annual effective
      income tax rate. At November 3, 2007, there have been no material changes to
      these balances.





The
      Company files a consolidated federal income tax return and numerous consolidated
      and separate income tax returns in many state and local jurisdictions. During
      the third quarter, the Internal Revenue Service concluded the examination of
      our
      consolidated federal income tax return for the tax years 2005 and 2006. The
      results had no material impact on our Consolidated Statements of Operations.
      The
      tax years 2002 through 2006 remain open to examination by the various major
      taxing jurisdictions to which we are subject. The Company recognizes accrued
      interest and penalties related to unrecognized tax benefits in income tax
      expense, which is a continuation of the Company’s historical accounting policy.
      Approximately $0.4 million in potential interest and penalties is included
      as a
      component of the $2.6 million at both the date of adoption and at November
      3,
      2007. The Company anticipates that approximately $0.3 million of unrecognized
      foreign tax benefits will be recognized prior to November 3, 2008 as a result
      of
      the expiration of the statute of limitations. The Company does not anticipate
      that any other unrecognized tax benefits will significantly change due to the
      settlement of audits and the expiration of the statute of
      limitations.




18




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      15 – SUBSEQUENT EVENTS**





On
      November 9, 2007, Finlay Jewelry completed the acquisition of Bailey Banks
&
Biddle. Bailey Banks & Biddle operates a chain of 70 stand-alone retail
      stores in 24 states with a focus on the luxury market, offering jewelry and
      watches under high-end name brands. The purchase price of $200 million was
      financed through borrowings under the New Revolving Credit Facility, a $550.0
      million senior secured line of credit, which replaced our existing Revolving
      Credit Facility. A post closing inventory adjustment of $26.0 million was also
      financed through borrowings under the New Revolving Credit Facility in November
      2007.





The
      New
      Revolving Credit Facility consists of (i) a $512,500,000 Tranche A revolving
      credit facility, which from November 9, 2007 through January 1, 2009 bears
      interest at a floating rate equal to a margin of 0.25% over the Index Rate
      (defined below) or 2.00% over the London Interbank Offered Rate (LIBOR), subject
      to adjustment under various circumstances and (ii) a $37,500,000 Tranche B
      revolving credit facility which bears interest at a floating rate equal to
      a
      margin of 2.75% over the Index Rate or 4.50% over the London Interbank Offered
      Rate. The Index Rate is equal to the higher of (i) the federal funds rate plus
      0.50 basis points and (ii) the publicly quoted rate published by The Wall Street
      Journal as the “prime rate”. After January 1, 2009, the loans under the Tranche
      A revolving credit facility will bear interest in accordance with a graduated
      pricing matrix based on the average excess availability under the revolving
      credit facility for the previous quarter. The term of the New Revolving Credit
      Agreement is five-years, subject to earlier termination upon the occurrence
      of
      certain events.




19




**Item
      2.** **Management’s
      Discussion and Analysis of Financial Condition and Results
      of** **Operations**




The
      following Management's Discussion and Analysis of Financial Condition and
      Results of Operations ("MD&A") is organized as follows:




·
            ***Executive
                Overview –***This
                section provides a general description of our business and a brief
                discussion of the opportunities, risks and uncertainties that we
                focus on
                in the operation of our business.





·
            ***Results
                of Operations –***This
                section provides an analysis of the significant line items on the
                Consolidated Statements of
                Operations.





·
            ***Liquidity
                and Capital Resources –***This
                section provides an analysis of liquidity, cash flows, sources and
                uses of
                cash, contractual obligations and financial
                position.





·
            ***Seasonality –***This
                section describes the effects of seasonality on our
                business.





·
            ***Critical
                Accounting Policies and Estimates –***This
                section addresses those accounting policies that are considered important
                to our financial condition and results of operations, and require
                us to
                exercise subjective or complex judgments in their application. All
                of our
                significant accounting policies, including critical accounting policies,
                are summarized in Note 2 of Notes to the Consolidated Financial Statements
                included in our Form 10-K.





·
            ***Special
                Note Regarding Forward-Looking Statements –***This
                section provides cautionary information about forward-looking statements
                and a description of certain risks and uncertainties that could cause
                actual results to differ materially from our historical results or
                current
                expectations or projections.





This
      MD&A has been updated for the purpose of reclassifying our financial
      statements for stores which have been treated as discontinued operations during
      2006 and 2007.





In
      May
      2005, Finlay Jewelry completed the acquisition of Carlyle. The purchase price
      was approximately $29.0 million plus transaction fees and the assumption of
      $17.1 million of debt. The transaction was financed with additional borrowings
      under the Revolving Credit Facility.





In
      November 2006, Finlay Jewelry completed the acquisition of Congress. The
      purchase price was $6.0 million plus transaction fees and the assumption of
      $10.0 million of debt. The transaction was financed with additional borrowings
      under the Revolving Credit Facility. Congress’ results of operations are
      included in the accompanying Consolidated Statements of Operations since the
      date of acquisition.





On
      November 9, 2007, Finlay Jewelry completed the acquisition of Bailey Banks
&
Biddle. Bailey Banks & Biddle operates a chain of 70 stand-alone retail
      stores in 24 states with a focus on the luxury market, offering jewelry and
      watches under high-end name brands. The purchase price of $200 million was
      financed through borrowings under the New Revolving Credit Facility, which
      replaced the existing Revolving Credit Facility. The New Revolving Credit
      Agreement matures in November 2012. A post closing inventory adjustment of
      $26.0
      million was also financed through borrowings under the New Revolving Credit
      Facility in November 2007.




20





**Executive
      Overview**





**Our
      Business**





We
      are
      one of the leading retailers of fine jewelry in the United States and primarily
      operate licensed fine jewelry departments in major department stores where
      we
      sell a broad selection of moderately priced jewelry, with an average sales
      price
      of approximately $248 per item. We also operate stand-alone jewelry stores
      which
      sell luxury priced jewelry, with an average sales price of approximately $1,400
      per item. We have two operating segments – department store based fine
      jewelry departments and stand-alone jewelry stores. As of November 3, 2007,
      we
      operated a total of 729 locations, including 691 department store based fine
      jewelry departments in ten host store groups, in 40 states and the District
      of
      Columbia, as well as 33 Carlyle specialty jewelry stores in nine states, located
      principally in the southeastern United States and five Congress specialty
      jewelry stores in southwest Florida.





Our
      primary focus is to offer desirable and competitively priced products, to offer
      a breadth of merchandise assortments and to provide superior customer service.
      Our ability to quickly identify emerging trends and maintain strong
      relationships with vendors has enabled us to present quality assortments in
      our
      showcases.





With
      respect to our department store based fine jewelry departments, we believe
      that
      we are an important contributor to each of our host store groups and we continue
      to seek opportunities to penetrate the department store segment. By outsourcing
      their fine jewelry departments to us, host store groups gain our expertise
      in
      merchandising, selling and marketing jewelry and customer service. Additionally,
      by avoiding high working capital investments typically required of the
      traditional retail jewelry business, host stores improve their return on
      investment and increase their profitability. As a licensee, we benefit from
      the
      host stores’ reputation, customer traffic, credit services and established
      customer base. We also avoid the substantial capital investment in fixed assets
      typical of a stand-alone retail format. At the end of 2006, approximately 30%
      of
      our merchandise was carried on consignment, which reduces our inventory exposure
      to changing fashion trends. These factors have generally led our new departments
      to achieve profitability within the first twelve months of
      operation.





Our
      stand-alone jewelry stores **** offer
      compelling shopping environments for the high-end luxury consumer, and focus
      on
      watches, designer jewelry, diamonds, precious gemstones and gold, complemented
      by an assortment of giftware. Each of our stand-alone jewelry store divisions
      strives to provide its customers with a premier shopping experience by utilizing
      knowledgeable, professional and well-trained sales associates, by marketing
      programs designed to promote customer awareness of its merchandise assortments
      and by extending credit to its customers through credit card programs which
      are
      managed by a third-party.





We
      measure ourselves against key financial measures that we believe provide a
      well-balanced perspective regarding our overall financial success. Those
      benchmarks are as follows, together with an explanation of how they are
      computed:





·
            Diluted
                earnings per share (net income divided by weighted average shares
                outstanding and share equivalents included to the extent they are
                dilutive) which is an indicator of the returns generated for our
                shareholders;





·
            Comparable
                store sales (stores open for the same months during the comparable
                period)
                growth computed as the percentage change in sales for locations open
                for
                the same months during the comparable periods. Comparable store sales
                are
                measured against our host store groups as well as other jewelry
                retailers;




21




·
            Total
                net sales growth (current period total net sales minus prior period
                total
                net sales divided by prior period total net sales equals percentage
                change) which indicates, among other things, the success of our selection
                of new store locations and the effectiveness of our merchandising
                strategies; and





·
            Operating
                margin rate (income from operations divided by net sales) which is
                an
                indicator of our success in leveraging our fixed costs and managing
                our
                variable costs. Key components of income from operations on which
                management focuses, include monitoring gross margin levels as well
                as
                continued emphasis on leveraging our
                SG&A.





**Third
      Quarter Highlights**





Total
      sales were $141.9 million for the thirteen weeks ended November 3, 2007 compared
      to $136.4 million for the thirteen weeks ended October 28, 2006, an increase
      of
      4.1%. Total sales for the third quarter of 2007 included $23.6 million of sales
      generated by our stand-alone jewelry stores compared to $19.0 million in the
      third quarter of 2006, an increase which primarily relates to the acquisition
      of
      Congress in November 2006. Comparable store sales increased 1.6%. Gross margin
      increased by $0.7 million compared to the same period in 2006, and, as a
      percentage of sales, gross margin, decreased by 1.3% to 45.1% from 46.4%. The
      decrease in gross margin, as a percentage of sales, relates to a change in
      the
      mix of sales with higher sales in the designer and watch categories which have
      lower margins than other categories, increased volume from the stand-alone
      jewelry division at lower gross margins, as well as higher gold prices. SG&A
      increased by $1.6 million as compared to the prior year period, and, as a
      percentage of sales, SG&A decreased by 0.8%, from 49.5% to 48.7%, primarily
      relating to lower administrative costs at our corporate office.





Borrowings
      under the Revolving Credit Facility increased by $56.7 million at November
      3,
      2007 compared to October 28, 2006, which reflects additional borrowings of
      approximately $49.9 million as a result of the retirement of the Gold
      Consignment Agreement as well as the approximately $16.0 million impact of
      the
      Congress acquisition. Maximum outstanding borrowings during the thirty-nine
      weeks ended November 3, 2007 were $139.3 million, at which point the available
      borrowings under the Revolving Credit Facility were an additional $131.6
      million.





**Opportunities**





An
      important initiative and focus of management is developing opportunities for
      our
      growth. We consider it a high priority to identify new businesses that offer
      growth, financial viability and manageability and will have a positive impact
      on
      shareholder value.





With
      the
      November 2007 acquisition of Bailey Banks & Biddle, a premier luxury brand,
      we will have a significantly higher portion of our business dedicated to the
      high-end sector. We currently project that Bailey Banks & Biddle will
      generate $280.0 to $300.0 million in revenue in fiscal 2008, the first full
      fiscal year of operation following the acquisition. The Bailey Banks &
Biddle stand-alone jewelry stores provide us with a national presence in
      addition to further diversifying our revenue stream between the department
      store
      based fine jewelry business and the stand-alone jewelry store
      business.





We
      believe that current trends in jewelry retailing provide a significant
      opportunity for growth. Consumers spent approximately $63.0 billion on jewelry
      (including both fine jewelry and costume jewelry) in the United States in
      calendar year 2006, an increase of approximately $22.0 billion over 1996,
      according to the United States Department of Commerce. Our management believes
      that greater disposable income in the United States population in general has
      contributed to the growth of the fine jewelry retailing industry. Our management
      also believes that jewelry consumers today increasingly perceive fine jewelry
      as
      a fashion accessory, resulting in purchases which augment gift and special
      occasion sales.




22




In
      November 2005, Finlay Jewelry signed new agreements with Macy’s for the Macy’s
      Midwest and Macy’s North divisions and amended the existing Macy’s Northwest and
      Macy’s South agreements, effective at the beginning of 2006. The agreements are
      subject to termination effective January 31, 2009, and cover 317 departments
      as
      of November 3, 2007. In addition to extending the term of the agreements, all
      non-compete provisions from the previous May contracts that required Finlay
      Jewelry to obtain May’s permission before opening a new department or store
      within a certain radius of a May store were eliminated. We believe that the
      elimination of this non-compete provision has provided Finlay Jewelry with
      the
      opportunity to expand its business, including its recent acquisitions, and
      continue to diversify beyond the traditional department store sector. These
      agreements have no impact on the Bloomingdale’s division whose license
      agreement, covering 34 departments, currently runs through January 30, 2010.





Growth
      opportunities exist with respect to opening departments within existing host
      stores that do not currently operate jewelry departments. For example, over
      the
      past three years, we have added over 30 departments in Dillard’s, Inc.
      (“Dillard’s”). During the thirty-nine weeks ended November 3, 2007, we opened
      four departments with Macy’s and two departments in Bloomingdale’s stores. We
      project opening one new Carlyle store at the end of the fourth quarter of 2007.





We
      will
      continue to seek to identify complementary businesses to leverage our core
      competencies in the jewelry industry, and to pursue the following key
      initiatives to further increase sales and earnings:





·
            Increase
                comparable store sales;





·
            Identify
                and acquire new businesses which diversify our existing businesses
                and
                provide additional growth
                opportunities;





·
            Add
                locations within our existing department store based fine jewelry
                and
                stand-alone jewelry store
                businesses;





·
            Add
                new host store relationships;





·
            Capitalize
                on developing fashion trends and emerging merchandise
                categories;





·
            Expand
                our most productive departments;





·
            Continue
                to improve operating leverage; and





·
            Continue
                to raise customer service
                standards.





**Risks
      and Uncertainties**





The
      risks
      and challenges facing our business include:





·
            Dependence
                on or loss of certain host store
                relationships;





·
            Host
                store consolidation; and





·
            Substantial
                debt leverage.




23




As
      of
      November 3, 2007, we operated a total of 351 departments in five of Macy’s
      divisions, including 34 departments in the Bloomingdale’s division. These
      departments exclude the 194 departments either divested or phased into the
      Macy’s East or Macy’s West divisions during the first half of 2006. In 2006, we
      generated sales of approximately $105.9 million from these 194 departments.





In
      May
      2006, the Company announced that Belk would not renew Finlay Jewelry’s license
      agreement due to Belk’s acquisition of a privately-held company that licensed
      fine jewelry departments in certain of the Belk stores. The termination of
      the
      license agreement, effective at the end of 2006, resulted in the closure of
      75
      departments. In 2006, we generated sales of approximately $51.9 million from
      the
      Belk departments. Further, as a result of Belk’s acquisition of Parisian from
      Saks in October 2006, the 33 Parisian departments closed in July 2007. In 2006,
      we generated sales of approximately $22.9 million from our Parisian departments.





During
      2006, approximately 57.0% of our sales were generated by the departments
      operated in store groups owned by Macy’s (excluding the Macy’s departments that
      closed in 2006 and the departments in Lord & Taylor). A decision by Macy’s
      or certain of our other host store groups to terminate our existing
      relationships, to assume the operation of departments themselves or to close
      a
      significant number of stores, would have a material adverse effect on our
      business and financial condition.




We
      currently have a significant amount of debt. As of November 3, 2007, we had
      $200.0 million of debt outstanding under our Senior Notes. Additionally, at
      November 3, 2007, borrowings under the Revolving Credit Facility were $124.6
      million. Subsequent to the Bailey Banks & Biddle acquisition, on November 9,
      2007, our outstanding borrowings under the New Revolving Credit Facility were
      $347.3 million.





**Results
      of Operations**





**** The
      following table sets forth operating results as a percentage of sales for the
      periods indicated. The discussion that follows should be read in conjunction
      with the following table:


**Thirteen Weeks Ended**
              
              **Thirty-Nine Weeks Ended****November 3,**
                **2007**
              
              **October 28,**
                **2006**
              
              **November 3,**
                **2007**
              
              **October 28,**
                **2006****Statement
                  of Operations Data:**Sales
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Cost
                  of sales
              
              
              54.9
              
              
              53.6
              
              
              53.9
              
              
              52.6Gross
                  margin
              
              
              45.1
              
              
              46.4
              
              
              46.1
              
              
              47.4Selling,
                  general and administrative expenses
              
              
              48.7
              
              
              49.5
              
              
              48.0
              
              
              48.8Depreciation
                  and amortization
              
              
              2.5
              
              
              2.7
              
              
              2.4
              
              
              2.5Loss
                  from operations
              
              
              (6.1
              )
              
              (5.8
              )
              
              (4.3
              )
              
              (3.9
              )Interest
                  expense, net
              
              
              4.8
              
              
              4.4
              
              
              4.2
              
              
              3.9Loss
                        from continuing operations before income
                        taxes
              
              
              (10.9
              )
              
              (10.2
              )
              
              (8.5
              )
              
              (7.8
              )Benefit
                  for income taxes
              
              
              (5.6
              )
              
              (4.0
              )
              
              (3.3
              )
              
              (3.1
              )Loss
                  from continuing operations
              
              
              (5.3
              )
              
              (6.2
              )
              
              (5.2
              )
              
              (4.7
              )Discontinued
                  operations, net of tax
              
              
              -
              
              
              0.4
              
              
              -
              
              
              2.0Net
                  loss
              
              
              (5.3
              )%
              
              (5.8
              )%
              
              (5.2
              )%
              
              (2.7
              )%




**Thirteen
      Weeks Ended November 3, 2007 Compared with Thirteen Weeks Ended October 28,
      2006**





***Sales.*** Sales
      for the thirteen weeks ended November 3, 2007 totaled $141.9 million compared
      to
      $136.4 million for the thirteen weeks ended October 28, 2006. Sales include
      $118.3 million in sales from the department store based fine jewelry departments
      for the thirteen weeks ended November 3, 2007, which represented a 0.8% increase
      compared to the $117.4 million in sales for the thirteen weeks ended October
      28,
      2006. Sales also include $23.6 million in sales generated by our stand-alone
      jewelry stores in 2007 compared to $19.0 million in 2006, an increase which
      primarily relates to the acquisition of Congress in November 2006. Comparable
      store sales increased 1.6%.




24




During
      the thirteen weeks ended November 3, 2007, we opened five department store
      based
      fine jewelry departments. Additionally, during the thirteen weeks ended November
      3, 2007, we closed one department store based fine jewelry department in
      Dillard’s. The openings were comprised of the following:




**Store
                Group**
            
            **Number of**
              **Locations**Dillard’s
            
            2Macy’s
            
            1Bloomingdale’s
            
            1Bon-Ton
            
            1Total
            
            5




***Gross
      margin.*** Gross
      margin increased by $0.7 million in the third quarter of 2007 compared to 2006.
      As a percentage of sales, gross margin decreased by 1.3% from 46.4% to 45.1%.
      The components of this net decrease in gross margin are as follows:





**Component**
            
            **%**
            
            **Reason**Merchandise
                cost of sales
            
            (1.7
            )%
            Increase
                in cost of sales is due to the change in mix of sales with higher
                sales in
                the designer and watch categories which have lower margins than other
                categories, increased volume from the stand-alone jewelry division
                at
                lower gross margins as well as higher gold prices.Other
            
            0.4
            
            Decreases
                in various other components of cost of sales.Net
                decrease
            
            (1.3
            )%





***Selling,
      general and administrative expenses.*** The
      components of SG&A include payroll expense, license fees, rent expense, net
      advertising expenditures and other field and administrative expenses. SG&A
      dollars increased by $1.6 million as compared to the prior year. As a percentage
      of sales, SG&A decreased by 0.8% from 49.5% to 48.7%. The components of this
      net decrease in SG&A are as follows:





**Component**
            
            **%**
            
            **Reason**License
                and lease fees
            
            (0.1
            )%
            Decrease
                is primarily due to the significantly lower rent structure for the
                stand-alone jewelry business, which represented a larger portion
                of total
                sales.Other
            
            (0.7
            )
            Decrease
                is due to corporate office cost savings.Net
                decrease
            
            (0.8
            )%




***Depreciation
      and amortization.*** Depreciation and amortization for both the 2007 and 2006 periods totaled
      approximately $3.6 million.





***Interest
      expense, net.*** Interest
      expense increased by $0.7 million primarily as a result of higher average
      borrowings under the Revolving Credit Facility ($119.3 million in the 2007
      period as compared to $75.4 million for the 2006 period). The additional
      borrowings, which occurred in the fourth quarter of 2006, were used to finance
      the termination of the Gold Consignment Agreement, which totaled $49.9 million,
      as well as to finance the acquisition of Congress, which totaled approximately
      $16.0 million. The weighted average interest rate on all outstanding borrowings
      was approximately 8.0% for the third quarter in 2007 compared with 8.2% for
      the
      comparable period in 2006.





***Benefit
      for income taxes.***  Under
      APB
      No. 28, “Interim Financial Reporting”, the effective tax rate is adjusted each
      quarter to reflect the estimated annual effective tax rate with certain
      limitations applying to the recognition of interim period tax benefits. At
      the
      end of the third quarter, with the inclusion of Bailey Banks & Biddle in the
      fiscal 2007 projections, the effective tax rate for the first nine months was
      38.5%. Since the prior quarters had utilized a 29.6% effective tax rate, the
      resulting rate for the third quarter of 2007 was 51.6% compared to 39.5% for
      the
      third quarter of 2006.




25




***Discontinued
      operations.*** Discontinued operations for the thirteen weeks ended October 28, 2006 includes
      the results of operations of the 33 Parisian departments, which closed in July
      2007, and the Belk departments that closed in January 2007. Sales related to
      these operations totaled $11.9 million for the thirteen weeks ended October
      28,
      2006. Gross margin related to the discontinued departments totaled $6.2 million,
      or 52.2% as a percentage of sales, for the thirteen weeks ended October 28,
      2006. The net income from discontinued operations for the thirteen weeks ended
      October 28, 2006 was $0.5 million.





***Net
      loss.*** Net
      loss
      of $7.5 million for the 2007 period compares to net loss of $7.9 million in
      the
      prior year period as a result of the factors discussed above.





**Thirty-Nine
      Weeks Ended November 3, 2007 Compared with Thirty-Nine Weeks Ended October
      28,
      2006**





***Sales.*** Sales
      for the thirty-nine weeks ended November 3, 2007 totaled $452.8 million compared
      to $430.0 million in the prior period, an increase of $22.8 million, or 5.3%.
      Sales include $374.9 million in sales from the department store based fine
      jewelry departments for the thirty-nine weeks ended November 3, 2007, which
      represented a 0.4% increase compared to the $373.5 million in sales for the
      thirty-nine weeks ended October 28, 2006. Sales also include $77.9 million
      in
      sales generated by our stand-alone jewelry stores in 2007 compared to $56.5
      million in 2006, for which the majority of the increase relates to the
      acquisition of Congress in November 2006. Comparable store sales increased
      2.1%.





During
      the thirty-nine weeks ended November 3, 2007, we opened 15 department store
      based fine jewelry departments within existing host store groups. Additionally,
      during the thirty-nine weeks ended November 3, 2007, we closed 44 department
      store based fine jewelry departments. The openings were comprised of the
      following:




**Store Group**
            
            **Number of**
              **Locations**Bon-Ton
            
            5Dillard’s
            
            4Macy’s
            
            4Bloomingdale’s
            
            2Total
            
            15




The
      closings were comprised of the following:





**Store Group**
            
            **Number of**
              **Locations**
            
            **Reason**Parisian
            
            33
            
            Host
                store did not renew our license agreement.Macy’s
            
            4
            
            Host
                store decision to close these locations.Other
            
            7
            
            Department
                closings within existing host store groups.Total
            
            44




Our
      major
      merchandise categories include diamonds, gold, gemstones, watches and designer
      jewelry. With respect to the department store based fine jewelry departments
      in
      2007 compared to 2006, watch sales increased $5.5 million, or 10.7%, and
      designer sales increased $4.4 million, or 11.8%, due primarily to increased
      consumer demand offset by a decrease in diamond sales of $5.6 million, or 5.9%.





***Gross
      margin.*** Gross
      margin increased by $4.6 million in the thirty-nine weeks ended November 3,
      2007
      compared to 2006. As a percentage of sales, gross margin decreased by 1.3%
      from
      47.4% to 46.1%. The components of this net decrease in gross margin are as
      follows:




26




**Component**
            
            **%**
            
            **Reason**Merchandise
                cost of sales
            
            (1.4
            )%
            Increase
                in cost of sales is due to the change in mix of sales with higher
                sales in
                the designer and watch categories which have lower margins than other
                categories, increased volume from the stand-alone jewelry division
                at
                lower gross margins as well as higher gold prices.LIFO
            
            (0.3
            )
            Increase
                in the LIFO provision is due to higher asset inventory levels associated
                with the conversion of gold inventory from consignment to asset at
                the end
                of 2006 as well as higher projected annual inflation
                rates.Other
            
            0.4
            
            Decreases
                in various other components of cost of sales.Net
                decrease
            
            (1.3
            )%




***Selling,
      general and administrative expenses.*** The
      components of SG&A include payroll expense, license fees, rent expense, net
      advertising expenditures and other field and administrative expenses. SG&A
      dollars increased $7.3 million, or 3.5%, primarily as a result of the addition
      of Congress. As a percentage of sales, SG&A decreased by 0.8% from 48.8% to
      48.0%. The components of this net decrease in SG&A are as follows:





**Component**
            
            **%**
            
            **Reason**License
                and lease fees
            
            (0.4
            )%
            Decrease
                is primarily due to the significantly lower rent structure for the
                stand-alone jewelry business, which represented a larger portion
                of total
                sales.Payroll
                expense
            
            0.3
            
            Increase
                is due to the unfavorable leveraging of field payroll.Other
            
            (0.7
            )
            Decrease
                is due to corporate office cost savings, including staff reductions,
                as
                well as corporate office severance in the prior year
                period.Net
                decrease
            
            (0.8
            )%




***Depreciation
      and amortization.*** Depreciation and amortization for both the 2007 and 2006 periods totaled
      approximately $10.9 million.





***Interest
      expense, net.*** Interest
      expense increased by $2.4 million primarily as a result of higher average
      borrowings under the Revolving Credit Facility ($106.5 million for the 2007
      period as compared to $60.5 million for the 2006 period). The additional
      borrowings, which occurred in the fourth quarter of 2006, were used to finance
      the termination of the Gold Consignment Agreement, which totaled $49.9 million,
      as well as to finance the acquisition of Congress, which totaled approximately
      $16.0 million. The weighted average interest rate on all outstanding borrowings
      was approximately 7.9% for the thirty-nine weeks ended November 3, 2007 compared
      with 8.2% for the comparable period in 2006.





***Benefit
      for income taxes.*** The
      income tax benefit for the thirty-nine weeks ended November 3, 2007 reflects
      an
      effective tax rate of 38.5% compared to 39.5% for the same period in the prior
      year, as discussed above.





***Discontinued
      operations.*** Discontinued operations for the thirty-nine weeks ended November 3, 2007 and
      October 28, 2006 includes the results of operations of the 33 Parisian
      departments, which closed in July 2007, the Belk departments that closed in
      January 2007 as well as the Macy’s stores closed during the first half of 2006.
      Sales related to these operations totaled $9.8 million and $146.3 million for
      the thirty-nine weeks ended November 3, 2007 and October 28, 2006, respectively.
      Gross margin related to the discontinued departments totaled $4.3 million,
      or
      43.3% as a percentage of sales, for the thirty-nine weeks ended November 3,
      2007
      and $70.3 million, or 48.1% as a percentage of sales, for the thirty-nine weeks
      ended October 28, 2006. The net income from discontinued operations for the
      thirty-nine weeks ended November 3, 2007 and October 28, 2006 was $0.2 million
      and $8.5 million, respectively.





***Net
      loss.*** Net
      loss
      of $23.5 million for the 2007 period compares to net loss of $11.8 million
      in
      the prior year period as a result of the factors discussed above.




27




**Liquidity
      and Capital Resources**





Information
      about our financial position as of November 3, 2007 and February 3, 2007 is
      presented in the following table:




**November 3,**
              **2007**
            
            **February 3,**
              **2007****(in
                thousands)**Cash
                and cash equivalents
            
            $
            2,905
            
            $
            2,415Short-term
                borrowings
            
            
            124,572
            
            
            45,876Working
                capital
            
            
            240,334
            
            
            259,473Long-term
                debt
            
            
            200,000
            
            
            200,000Stockholders’
                equity
            
            
            99,954
            
            
            122,229





Our
      primary capital requirements are funding working capital for new locations
      and
      growth of existing locations, as well as debt service obligations and license
      fees to host store groups, rent payments for the stand-alone jewelry stores,
      funding potential acquisitions, and, to a lesser extent, capital expenditures
      for opening new locations, renovating existing locations and information
      technology investments. For 2006, capital expenditures totaled $11.8 million
      and
      for 2007 are estimated to be approximately $12.0 to $13.0 million, including
      approximately $1.0 million for Bailey Banks & Biddle.





We
      currently expect to fund capital expenditure requirements as well as liquidity
      needs from a combination of cash, internally generated funds and borrowings
      under our New Revolving Credit Facility. We believe that our internally
      generated liquidity through cash flows from operations, together with access
      to
      external capital resources, will be sufficient to satisfy existing commitments
      and will provide adequate financing flexibility.





Cash
      flows provided from (used in) operating, investing and financing activities
      for
      the thirty-nine weeks ended November 3, 2007 and October 28, 2006 were as
      follows:





**Thirty-Nine Weeks Ended****November 3,**
              **2007**
            
            **October
                28,**
              **2006****(in thousands)**Operating
                activities
            
            $
            (74,925
            )
            $
            (97,430
            )Investing
                activities
            
            
            (9,086
            )
            
            (9,881
            )Financing
                activities
            
            
            84,501
            
            
            81,829Net
                increase (decrease) in cash and cash equivalents
            
            $
            490
            
            $
            (25,482
            )




Our
      current priorities for the use of cash or borrowings, as a result of borrowings
      available under the New Revolving Credit Facility, are:





·
            Investment
                in inventory and for working capital;





·
            Strategic
                acquisitions;





·
            Capital
                expenditures for new locations, expansions and remodeling of existing
                locations; and





·
            Investments
                in technology.




28




***Operating
      Activities***





Operating
      cash outflows include payments to vendors for inventory, services and supplies,
      payments for employee payroll, license fees, rent and payments of interest
      and
      taxes. Net cash flows used in operating activities were $74.9 million and $97.4
      million for the thirty-nine weeks ended November 3, 2007 and October 28, 2006,
      respectively.




Our
      principal operations involving licensed fine jewelry departments substantially
      preclude customer receivables, as our license agreements typically require
      host
      stores to remit sales proceeds for each month (without regard to whether such
      sales were cash, store credit or national credit card) to us approximately
      three
      weeks after the end of such month. Additionally, at the end of 2006,
      approximately 30% of our merchandise was held on consignment. Our working
      capital balance was $240.3 million at November 3, 2007, a decrease of $19.1
      million from February 3, 2007.





The
      seasonality of our business causes working capital requirements, and therefore,
      borrowings under the Revolving Credit Facility and, beginning November 9, 2007,
      under the New Revolving Credit Facility, to reach their highest level in the
      months of October, November and December in anticipation of the year-end holiday
      season. Accordingly, we experience seasonal cash needs as inventory levels
      peak.
      Additionally, substantially all of our license agreements provide for
      accelerated payments during the months of November and December, which require
      the host store groups to remit to us 75% of the estimated months' sales prior
      to
      or shortly following the end of that month. These proceeds result in a
      significant increase in our cash, which is used to reduce our borrowings under
      the Revolving Credit Facility and, beginning November 9, 2007, under the New
      Revolving Credit Facility. Inventory levels at November 3, 2007 increased by
      $27.8 million, or 6.5%, as compared to February 3, 2007.





***Investing
      Activities***





Net
      cash
      used in investing activities, consisting primarily of payments for capital
      expenditures, was $9.0 million and $9.9 million for the thirty-nine weeks ended
      November 3, 2007 and October 28, 2006, respectively. Capital expenditures during
      each period related primarily to expenditures for opening new locations and
      renovating existing locations.





***Financing
      Activities***





Net
      cash
      provided from financing activities was $84.5 million for the thirty-nine weeks
      ended November 3, 2007, consisting primarily of proceeds from, and principal
      repayments on, the Revolving Credit Facility. Net cash provided from financing
      activities was $81.8 million for the thirty-nine weeks ended October 28,
      2006.





Our
      Revolving Credit Agreement, which was replaced by the New Revolving Credit
      Agreement on November 9, 2007, provided us with a line of credit of up to $300.0
      million to finance working capital needs. Amounts outstanding under the
      Revolving Credit Facility bore interest at a rate equal to, at our option,
      (i)
      the prime rate plus a margin ranging from zero to 0.25% or (ii) the adjusted
      Eurodollar rate plus a margin ranging from 1.25% to 2.0%, in each case depending
      on availability under our facility. The weighted average interest rate was
      7.1%
      and 7.5% for the thirty-nine weeks ended November 3, 2007 and October 28, 2006,
      respectively.





Borrowings
      under the Revolving Credit Facility were $124.6 million at November 3, 2007,
      compared to $45.9 million at February 3, 2007 and $67.8 million at October
      28,
      2006. The average amounts outstanding under the Revolving Credit Facility were
      $106.5 million and $60.5 million for the thirty-nine weeks ended November 3,
      2007 and October 28, 2006, respectively. The maximum amount outstanding for
      the
      thirty-nine weeks ended November 3, 2007 was $139.3 million, **** at
      which
      point the available borrowings were an additional $131.6 million. At November
      3,
      2007, we had letters of credit outstanding totaling $6.2 million, which
      guarantee various trade activities.




29


In
        May
        2005, Finlay Jewelry completed the acquisition of Carlyle. The purchase price
        was approximately $29.0 million plus transaction fees and the assumption
        of
        debt. The transaction was financed with additional borrowings under the
        Revolving Credit Facility. In connection with the acquisition, Carlyle’s
        revolving credit facility totaling $17.1 million was terminated and paid
        in full
        at the closing. Since the date of the acquisition, Carlyle’s cash requirements
        have been funded under the Revolving Credit Facility and will continue to
        be
        funded under the New Revolving Credit Facility.


In
      November 2006, Finlay Jewelry completed the acquisition of Congress. The
      purchase price was $6.0 million plus transaction fees and the assumption of
      debt, and was financed with additional borrowings under the Revolving Credit
      Facility. Congress’ revolving credit facility totaling $10.0 million was
      terminated and paid in full at the closing. Since the date of acquisition,
      Congress’ cash requirements have been funded under the Revolving Credit Facility
      and will continue to be funded under the New Revolving Credit
      Facility.





On
      November 9, 2007, Finlay Jewelry completed the acquisition of Bailey Banks
&
Biddle. Bailey Banks & Biddle operates a chain of 70 stand-alone retail
      stores in 24 states with a focus on the luxury market, offering jewelry and
      watches under high-end name brands. The purchase price of $200 million was
      financed through borrowings under the New Revolving Credit Facility, a $550.0
      million senior secured line of credit which replaced the existing Revolving
      Credit Facility. The New Revolving Credit Agreement matures in November 2012.
      A
      post closing inventory adjustment of $26.0 million was also financed through
      borrowings under the New Revolving Credit Facility in November
      2007.





A
      significant amount of our operating cash flows will be used to pay interest
      with
      respect to the Senior Notes and amounts due under the Revolving Credit Facility,
      and beginning November 9, 2007 under the New Revolving Credit Facility. As
      of
      November 3, 2007, our outstanding borrowings were $324.6 million, which included
      a $200.0 million balance under the Senior Notes and a $124.6 million balance
      under the Revolving Credit Facility, compared to $267.8 million as of October
      28, 2006.





The
      Revolving Credit Agreement, and, beginning November 9, 2007, the New Revolving
      Credit Agreement, and the Senior Notes each require that Finlay Jewelry comply
      with certain covenants. Finlay Jewelry was in compliance with its covenants
      as
      of November 3, 2007. We also expect Finlay Jewelry to be in compliance with
      all
      of its covenants during the balance of 2007. Because compliance is based, in
      part, on management’s estimates, and actual results can differ from those
      estimates, there can be no assurance that Finlay Jewelry will be in compliance
      with those covenants in the future or that Finlay Jewelry’s lenders will waive
      or amend any of the covenants should Finlay Jewelry be in violation thereof.
      However, we do believe the assumptions used are appropriate.





The
      New
      Revolving Credit Agreement contains customary covenants, including limitations
      on, or relating to, liens, indebtedness, investments, mergers, acquisitions,
      affiliate transactions, management compensation and the payment of dividends
      and
      other restricted payments. The only financial covenant is maintenance of a
      minimum of $30 million of availability under the facility. The indenture related
      to the Senior Notes contains restrictions relating to, among other things,
      the
      payment of dividends, redemptions or repurchases of capital stock, the
      incurrence of additional indebtedness, the making of certain investments, the
      creation of certain liens, the sale of certain assets, entering into
      transactions with affiliates, engaging in mergers and consolidations and the
      transfer of all or substantially all assets. Refer to Note 5 of Notes to the
      Consolidated Financial Statements.




30




We
        believe that, based upon current operations, anticipated growth and continued
        availability under the New Revolving Credit Facility, Finlay Jewelry will,
        for
        the foreseeable future, be able to meet its debt service and anticipated
        working
        capital obligations. No assurances, however, can be given that Finlay Jewelry’s
        current level of operating results will continue or improve or that Finlay
        Jewelry will continue to be able to meet its debt service and other obligations.
        The amounts required to satisfy the aggregate of Finlay Jewelry’s interest
        expense totaled $14.2 million and $12.1 million for the thirty-nine weeks
        ended
        November 3, 2007 and October 28, 2006, respectively.


Our
      long-term needs for external financing will depend on our rate of growth, the
      level of internally generated funds and our ability to continue obtaining
      substantial amounts of merchandise on advantageous terms, including consignment
      arrangements, with our vendors. As of November 3, 2007, $199.5 million of
      consignment merchandise from approximately 300 vendors was on hand as compared
      to $308.3 million at October 28, 2006. The decrease in consignment merchandise
      reflects the conversion of the majority of our gold consignment inventory to
      owned inventory at the end of 2006. For 2006, we had an average balance of
      consignment merchandise of $296.5 million.





The
      following table summarizes our contractual and commercial obligations which
      may
      have an impact on future liquidity and the availability of capital resources,
      as
      of November 3, 2007 (in thousands):




**Payments Due By Period****Contractual Obligations**
            
            **Total**
            
            **Less than**
              **1 year**
            
            **1 – 3 years**
            
            **3 – 5 years**
            
            **More than**
              **5 years**Long-Term
                Debt Obligations:Senior
                Notes (due 2012)
            
            $
            200,000
            
            $
            -
            
            $
            -
            
            $
            200,000
            
            $
            -Interest
                payments on Senior Notes
            
            
            83,750
            
            
            16,750
            
            
            33,500
            
            
            33,500
            
            
            -Operating
                lease obligations (1)
            
            
            33,746
            
            
            7,426
            
            
            10,792
            
            
            7,666
            
            
            7,862Revolving
                Credit Agreement (due 2011) (2)
            
            
            124,572
            
            
            124,572
            
            
            -
            
            
            -
            
            
            -Employment
                agreements
            
            
            5,915
            
            
            5,463
            
            
            452
            
            
            -
            
            
            -Contractual
                bonuses (3)
            
            
            862
            
            
            690
            
            
            172
            
            
            -
            
            
            -Letters
                of credit
            
            
            6,174
            
            
            6,174
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            455,019
            
            $
            161,075
            
            $
            44,916
            
            $
            241,166
            
            $
            7,862





(1)
                        Represents
                            future minimum payments under noncancellable operating
                            leases as of
                            February 3,
                            2007.


(2)
            The
                above table excludes interest due under the Revolving Credit Agreement.


(3)
            Represents
                a special bonus for four senior executives equal to 50% of the executives’
                salary if employed by Finlay Jewelry on the dates specified in their
                respective employment agreements.





The
      operating leases included in the above table do not include contingent rent
      based upon sales volume, which amounted to approximately $63.7 million for
      the
      thirty-nine weeks ended November 3, 2007, or variable costs such as maintenance,
      insurance and taxes. Our open purchase orders are cancelable without penalty
      and
      are therefore not included in the above table. There were no commercial
      commitments outstanding as of November 3, 2007 other than as disclosed in the
      table above, nor have we provided any third-party financial guarantees as of
      or
      for the thirty-nine weeks ended November 3, 2007.




***Off-Balance
      Sheet Arrangements***





We
      have
      not created, and are not party to, any off-balance sheet entities for the
      purpose of raising capital, incurring debt or operating our business. We do
      not
      have any arrangements or relationships with entities that are not consolidated
      into the financial statements that are reasonably likely to materially affect
      our liquidity or the availability of capital resources.





***Other
      Activities Affecting Liquidity***





In
      November 2004, we entered into an employment agreement with a senior executive.
      The employment agreement has a term ending on January 31, 2009, unless earlier
      terminated in accordance with the provisions of the employment agreement. The
      agreement provides an annual salary level of approximately $1.0 million as
      well
      as incentive compensation based on meeting specific financial goals.




31


In
        June
        2005, we entered into employment agreements with three other senior executives
        of Finlay Jewelry and, in March 2006, we entered into an employment agreement
        with a fourth senior executive of Finlay Jewelry. Each of the agreements
        has a
        term of three years, unless earlier terminated in accordance with the provisions
        of the employment agreements. The agreements provide for minimum annual salary
        levels totaling approximately $1.6 million, incentive compensation based
        on
        meeting specific financial goals and a special bonus equal to 50% of each
        executive’s salary if, in the case of the June 2005 agreements, the executive is
        employed by Finlay Jewelry on June 30, 2008, and, in the case of the March
        2006
        agreement, if the executive is employed by Finlay Jewelry on February 28,
        2009.




The
      purchase agreement relating to Congress provides for additional purchase price
      consideration to be paid to the former principals of Congress in 2009. The
      payment is contingent upon the achievement of certain results of operations
      of
      the Congress stores for the 36 months following the acquisition as compared
      to
      certain financial thresholds stated in the purchase agreement. No additional
      consideration has been included in our disclosure of the purchase price as
      it is
      not yet determinable if any such payments will be made.





**Seasonality**





Our
      business is highly seasonal, with a significant portion of our sales and income
      from operations generated during the fourth quarter of each year, which includes
      the year-end holiday season. The fourth quarter of 2006 and 2005 accounted
      for
      an average of approximately 42.0% of our annual sales. We have typically
      experienced net losses in the first three quarters of our fiscal year. During
      these periods, working capital requirements have been funded by borrowings
      under
      the Revolving Credit Facility. Accordingly, the results for any of the first
      three quarters of any given fiscal year, taken individually or in the aggregate,
      are not indicative of annual results.





**Inflation**





The
      effect of inflation on our results of operations has not been material in the
      periods reported, except for the impact of LIFO discussed above.





**Critical
      Accounting Policies and Estimates**





**** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires the appropriate application
      of
      certain accounting policies, many of which require us to make estimates and
      assumptions about future events and their impact on amounts reported in our
      financial statements and related notes. We believe the application of our
      accounting policies, and the estimates inherently required therein, are
      reasonable. These accounting policies and estimates are periodically
      re-evaluated, as appropriate, and adjustments are made when facts and
      circumstances dictate a change. However, since future events and their impact
      cannot be determined with certainty, actual results may differ from our
      estimates, and such differences could be material to the consolidated financial
      statements. Historically, we have found our application of accounting policies
      to be appropriate, and actual results have not differed materially from those
      determined using necessary estimates. There have been no changes in our
      accounting policies since February 3, 2007. Our significant accounting policies
      relate to merchandise inventories, vendor allowances, long-lived assets, revenue
      recognition, self-insurance reserves, income taxes and accounting for
      acquisitions. A summary of our significant accounting policies and a description
      of accounting policies that we believe are most critical may be found in the
      MD&A included in our Form 10-K for the year ended February 3,
      2007.




32




**Special
      Note Regarding Forward-Looking Statements**





This
      Form
      10-Q includes forward-looking statements. All statements other than statements
      of historical information provided herein are forward-looking statements and
      may
      contain information about financial results, economic conditions, trends and
      known uncertainties. You can identify these forward-looking statements by the
      use of words like "strategy," "expect," "plan," "believe," "will," "estimate,"
      "intend," "project," "goals," "target," "anticipating," "hope" and other words
      of similar meaning. You can also identify them by the fact that they do not
      relate strictly to historical or current facts. The forward-looking statements
      contained herein are subject to certain risks and uncertainties that could
      cause
      actual results, performances or achievements to differ materially from those
      reflected in, or implied by, the forward-looking statements. Factors that might
      cause such a difference include, but are not limited to, those discussed under
      "Management's Discussion and Analysis of Financial Condition and Results of
      Operations." Important factors that could cause actual results to differ
      materially include, but are not limited to:




·
            Our
                dependence on, or loss of, certain host store relationships, particularly
                with respect to Macy’s, due to the concentration of sales generated by
                such host store groups;





·
            The
                impact of significant store closures by our host store groups;





·
            The
                seasonality of the retail jewelry business;





·
            The
                impact of changes in the popularity of malls and our host stores
                and mall
                traffic levels;





·
            Our
                ability to identify, finance and integrate any future acquisitions
                into
                our existing business;





·
            Our
                ability to continue to obtain substantial amounts of merchandise
                on
                consignment;





·
            Attacks
                or threats of attacks by terrorists or war which may negatively impact
                the
                economy and/or the financial markets and reduce discretionary spending;





·
            The
                impact of fluctuations in gold and diamond prices;





·
            Competition
                in the retail jewelry business and fluctuations in our quarterly
                results;





·
            Our
                ability to collect net sales proceeds from our host stores and the
                impact
                of any host store bankruptcy;





·
            The
                availability to us of alternate sources of merchandise supply in
                the case
                of an abrupt loss of any significant
                supplier;





·
            Our
                ability to identify and rapidly respond to fashion trends as well
                as our
                ability to maintain flexible return privileges on owned
                merchandise;





·
            Our
                ability to increase comparable store sales, expand our business or
                increase the number of locations we operate;





·
            Our
                dependence on key officers;





·
            Our
                high degree of leverage and the availability to us of financing and
                credit
                on favorable terms;




33




·
            Our
                compliance with applicable contractual covenants;





·
            Changes
                in regulatory requirements which are applicable to our business;





·
            The
                impact of future claims and legal actions arising in the ordinary
                course
                of business; and





·
            Low
                or negative growth in the economy or in the financial markets which
                reduces discretionary spending on goods perceived to be luxury
                items.




Readers
      are cautioned not to unduly rely on these forward-looking statements, which
      reflect management's analysis, judgment, belief or expectation only as of the
      date hereof. We undertake no obligation to publicly revise these forward-looking
      statements to reflect events or circumstances that arise after the date hereof
      or to reflect the occurrence of unanticipated events. In addition to the
      disclosure contained herein, readers should carefully review any disclosure
      of
      risks and uncertainties contained in other documents we file or have filed
      from
      time to time with the Commission. A complete discussion of forward-looking
      information and risk factors that may affect our future results, may be found
      in
      Item 1A – “Risk Factors”, included in our Form 10-K for the year ended
      February 3, 2007.





**Item
      3.** **Quantitative
      and Qualitative Disclosures About Market Risk**





**Interest
      Rate Risk**





We
      are
      exposed to market risk through the interest rate on our borrowings under the
      Revolving Credit Facility, which has a variable interest rate. Based on the
      average amounts outstanding under the Revolving Credit Facility for 2006, a
      100
      basis point change (up or down) in interest rates would have resulted in a
      change (up or down) in interest expense of approximately $0.7 million in 2006.
      In seeking to minimize the risks from interest rate fluctuations, we manage
      exposures through our regular operating and financing activities. In addition,
      the majority of our borrowings are under fixed rate arrangements, as described
      in Note 5 of Notes to the Consolidated Financial Statements.




**Commodity
      Risk**





We
      principally address commodity risk through retail price points. Our commodity
      risk exposure to diamond, gold and other merchandise categories is market price
      fluctuations and we currently do not engage in any hedging
      activities.





**Item
      4.** **Controls
      and Procedures**





**Disclosure
      Controls and Procedures**





Our
      management, with the participation of our Chief Executive Officer (“CEO”) and
      Chief Financial Officer (“CFO”), carried out an evaluation of the effectiveness
      of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15
      as of the end of the period covered by this report. Based upon that evaluation,
      the CEO and CFO concluded that the design and operation of these disclosure
      controls and procedures are effective in ensuring that material financial and
      non-financial information required to be disclosed by us in reports that we
      file
      or submit under the Exchange Act are recorded, processed, summarized and
      reported within the time periods specified in the Commission’s rules and forms.




34




**Changes
      in Internal Controls over Financial Reporting**





Our
      management, with the participation of our CEO and CFO, also conducted an
      evaluation of our internal control over financial reporting, as defined in
      Exchange Act Rule 13a-15(f), to determine whether any changes occurred during
      the quarter ended November 3, 2007 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting. Based on that evaluation, there was no such change during the quarter
      ended November 3, 2007.





A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      Further, the design of a control system must reflect the fact that there are
      resource constraints, and the benefits of controls must be considered relative
      to their costs. Because of the inherent limitations in all controls systems,
      no
      evaluation of controls can provide absolute assurance that all control issues
      and instances of fraud, if any, within the Company have been detected. We
      conduct periodic evaluations of our controls to enhance, where necessary, our
      procedures and controls. Because of the inherent limitations in a cost-effective
      control system, misstatements due to error or fraud may occur and not be
      detected.





35




**PART
      II**–**OTHER INFORMATION**





**Item
      1A.** **Risk
      Factors**





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Item 1A – “Risk Factors” in our Form 10-K
      for the year ended February 3, 2007, which could materially affect our business,
      financial condition or future results. There
      have been no material changes in the risks faced by us as disclosed in our
      Form
      10-K; however, the risks described in our Form 10-K are not the only risks
      we
      face. Additional risks and uncertainties not currently known to us or that
      we
      currently deem to be immaterial, also may materially adversely affect our
      business, financial condition and/or operating results.





**Item
      2.** **Unregistered
      Sales of Equity Securities and Use of Proceeds**





**Issuer
      Purchases of Equity Securities**





The
      table
      below sets forth information with respect to our repurchases of Common Stock
      during each month of the third quarter of 2007.





**Period**
            
            **Total Number of Shares**
              **Purchased (1)**
            
            **Average**
              **Price Paid**
              **per Share**
            
            **Total Number of Shares**
              **Purchased as Part of Publicly**
              **Announced Plans (2)**
            
            **Maximum Number of Shares**
              **that May Yet Be Purchased**
              **Under the Plans (2)**August
                5 – September 1, 2007
            
            
            420
            
            $
            3.21
            
            
            -
            
            
            -September
                2 – October 6, 2007
            
            
            5,238
            
            $
            4.06
            
            
            -
            
            
            -October
                7 – November 3, 2007
            
            
            402
            
            $
            4.81
            
            
            -
            
            
            -Total
            
            
            6,060
            
            $
            4.05
            
            
            -
            
            
            -





(1)
            We
                purchased 6,060 shares from certain executives for approximately
                $24,000
                pursuant to our long-term incentive plan, to satisfy tax withholding
                obligations related to the issuance of Common Stock to the executives.


(2)
            The
                Company’s stock repurchase program expired on September 30, 2005 and has
                not been renewed. No shares were repurchased by the Company during
                the
                third quarter of 2007 pursuant to a stock repurchase program.




36




**Item
      6.** **Exhibits**




**Exhibit No.**
              
              **Description**2.1
              
              Agreement
                  and Plan of Merger, dated May 19, 2005, by and among Finlay Fine
                  Jewelry
                  Corporation, FFJ Acquisition Corp., Carlyle & Co. Jewelers, certain
                  stockholders of Carlyle & Co. Jewelers and Russell L. Cohen (as
                  stockholders' agent) (incorporated by reference to Exhibit 2.1
                  to the
                  Company’s Current Report on Form 8-K filed May 25,
                  2005).2.2(a)
              
              Asset
                  Purchase Agreement, dated September 27, 2007, by and among Zale
                  Corporation, Zale Delaware, Inc., TXDC, L.P., Finlay Fine Jewelry
                  Corporation and, for limited purposes, the Company.2.2(b)
              
              Letter
                  Agreement, dated November 9, 2007, amending the Asset Purchase
                  Agreement,
                  dated September 27, 2007, by and among Zale Corporation, Zale Delaware,
                  Inc., TXDC, L.P., Finlay Fine Jewelry Corporation and, for limited
                  purposes, the Company.3.1
              
              Certificate
                  of Incorporation of the Company (incorporated by reference to Exhibit
                  3.1
                  to the Company’s Annual Report on Form 10-K for the year ended January 28,
                  1995).3.2
              
              Amended
                  and Restated By-Laws of the Company, dated as of December 4, 2007
                  (incorporated by reference to Exhibit 3.2 to the Company’s Current Report
                  on Form 8-K filed December 10, 2007).4.3(c)
              
              Omnibus
                  Agreement to Terminate Registration Rights Agreement and Stockholders’
                  Agreement, dated November 12, 2007, among the Company and David
                  B.
                  Cornstein and Arthur E. Reiner on behalf of certain stockholders
                  (incorporated by reference to Exhibit 4.3(c) to the Company’s Current
                  Report on Form 8-K filed November 16, 2007).10.8(a)
              
              Fourth
                  Amended and Restated Credit Agreement, dated November 9, 2007,
                  among
                  Finlay Fine Jewelry Corporation, Carlyle & Co. Jewelers, L. Congress,
                  Inc., the Company, General Electric Capital Corporation, individually
                  and
                  in its capacity as administrative agent, Wachovia Bank, N.A., individually
                  and in its capacity as documentation agent, and certain other lenders
                  and
                  financial institutions parties thereto.31.1
              
              Certification
                  of principal executive officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of principal financial officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Certification
                  of principal executive officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2
              
              Certification
                  of principal financial officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.




37





**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 thereunto
      duly authorized.





Date:
                December 13, 2007
            **FINLAY
                ENTERPRISES, INC.**By:
            /s/
                Bruce E. ZurlnickBruce
                E. ZurlnickSenior
                Vice President, Treasurerand
                Chief Financial Officer(As
                both a duly authorized officer ofregistrant
                and as principal financialofficer
                of registrant)





38