`================================================================================

                                  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 1934

                 For the Quarterly Period Ended October 29, 2005

                                       or

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

             For 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. Employer
 incorporation 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 [_]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

                                 Yes [X] No [_]

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

                                 Yes [_] No [X]

As of December 2, 2005, there were 9,006,710 shares of common stock, par value
$.01 per share, of the registrant outstanding.

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



                            FINLAY ENTERPRISES, INC.

                                    FORM 10-Q

                     QUARTERLY PERIOD ENDED OCTOBER 29, 2005

                                      INDEX



                                                                            PAGE(S)
                                                                            -------

PART I - FINANCIAL INFORMATION

   Item 1.   Consolidated Financial Statements (Unaudited)

             Consolidated Statements of Operations for the thirteen weeks and
                thirty-nine weeks ended October 29, 2005 and October 30, 2004.....1

             Consolidated Balance Sheets as of October 29, 2005 and
                January 29, 2005..................................................3

             Consolidated Statements of Changes in Stockholders' Equity and
                Comprehensive Income (Loss) for the year ended January 29, 2005
                and the thirty-nine weeks ended October 29, 2005..................4

             Consolidated Statements of Cash Flows for the thirteen weeks and
                thirty-nine weeks ended October 29, 2005 and October 30, 2004.....5

             Notes to Consolidated Financial Statements...........................7

   Item 2.   Management's Discussion and Analysis of
                Financial Condition and Results of Operations....................21

   Item 3.   Quantitative and Qualitative Disclosures about Market Risk..........42

   Item 4.   Controls and Procedures.............................................42

PART II - OTHER INFORMATION

   Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.........44

   Item 6.   Exhibits............................................................44

SIGNATURES.......................................................................45




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
                                                   -------------------------
                                                   OCTOBER 29,   OCTOBER 30,
                                                       2005          2004
                                                   -----------   -----------

Sales ..........................................   $  183,261    $  166,841
Cost of sales ..................................       92,768        82,229
                                                   ----------    ----------
   Gross margin ................................       90,493        84,612
Selling, general and administrative expenses ...       89,949        82,629
Depreciation and amortization ..................        5,322         4,298
                                                   ----------    ----------
   Loss from operations ........................       (4,778)       (2,315)
Interest expense, net ..........................        6,761         5,596
Other expense ..................................           79            --
                                                   ----------    ----------
   Loss before income taxes ....................      (11,618)       (7,911)
Benefit for income taxes .......................       (4,744)       (3,085)
                                                   ----------    ----------
   Net loss ....................................   $   (6,874)   $   (4,826)
                                                   ==========    ==========
Net loss per share applicable to common shares:
      Basic net loss per share .................   $    (0.77)   $    (0.55)
                                                   ==========    ==========
      Diluted net loss per share ...............   $    (0.77)   $    (0.55)
                                                   ==========    ==========
Weighted average shares outstanding - basic and
   diluted .....................................    8,981,710     8,714,961
                                                   ==========    ==========

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


                                        1



                            FINLAY ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                   (UNAUDITED)

                                                       THIRTY-NINE WEEKS ENDED
                                                      -------------------------
                                                      OCTOBER 29,   OCTOBER 30,
                                                          2005          2004
                                                      -----------   -----------
Sales .............................................    $  568,725    $  543,051
Cost of sales .....................................       284,623       266,546
                                                       ----------    ----------
   Gross margin ...................................       284,102       276,505
Selling, general and administrative expenses ......       272,163       258,096
Depreciation and amortization .....................        13,651        13,061
Impairment of goodwill ............................        77,288            --
                                                       ----------    ----------
   Income (loss) from operations ..................       (79,000)        5,348
Interest expense, net .............................        17,903        17,109
Other expense .....................................            79         9,090
                                                       ----------    ----------
   Loss before income taxes .......................       (96,982)      (20,851)
Benefit for income taxes ..........................       (12,501)       (8,756)
                                                       ----------    ----------
   Net loss .......................................    $  (84,481)   $  (12,095)
                                                       ==========    ==========

Net loss per share applicable to common shares:
      Basic net loss per share ....................    $    (9.41)   $    (1.39)
                                                       ==========    ==========
      Diluted net loss per share ..................    $    (9.41)   $    (1.39)
                                                       ==========    ==========

Weighted average shares outstanding -
   basic and diluted ..............................     8,980,258     8,718,083
                                                       ==========    ==========

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


                                        2



                            FINLAY ENTERPRISES, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                   (UNAUDITED)



                                                                                  OCTOBER 29,   JANUARY 29,
                                                                                      2005          2005
                                                                                  -----------   -----------

                                         ASSETS

Current assets:
   Cash and cash equivalents ..................................................    $  2,540      $ 64,443
   Accounts receivable ........................................................      53,169        22,598
   Other receivables ..........................................................      48,807        35,692
   Merchandise inventories ....................................................     377,240       278,589
   Prepaid expenses and other .................................................       4,463         2,958
                                                                                   --------      --------
      Total current assets ....................................................     486,219       404,280
                                                                                   --------      --------
Fixed assets:
   Building, equipment, fixtures and leasehold improvements ...................     124,025       113,039
   Less - accumulated depreciation and amortization ...........................      61,203        50,558
                                                                                   --------      --------
      Fixed assets, net .......................................................      62,822        62,481
                                                                                   --------      --------
Deferred charges and other assets, net ........................................      15,692        16,859
Goodwill ......................................................................          --        77,288
                                                                                   --------      --------
      Total assets ............................................................    $564,733      $560,908
                                                                                   ========      ========

                        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Short-term borrowings ......................................................    $133,123      $     --
   Accounts payable - trade ...................................................      68,199       102,994
   Accrued liabilities:
      Accrued salaries and benefits ...........................................      16,081        14,654
      Accrued miscellaneous taxes .............................................       6,309         7,242
      Accrued interest ........................................................       7,590         3,120
      Deferred income .........................................................       6,652         8,449
      Deferred income taxes ...................................................      12,696         6,593
      Other ...................................................................      13,598        10,539
   Income taxes payable .......................................................       1,534        16,479
                                                                                   --------      --------
      Total current liabilities ...............................................     265,782       170,070
Long-term debt ................................................................     200,000       200,000
Deferred income taxes .........................................................      11,188        21,070
Other non-current liabilities .................................................         967           587
                                                                                   --------      --------
      Total liabilities .......................................................     477,937       391,727
                                                                                   --------      --------
Commitments and contingencies (see Note 10)
   Stockholders' equity:
   Common Stock, par value $.01 per share; authorized 25,000,000 shares; issued
      11,214,614 and 11,197,281 shares, at October 29, 2005 and
      January 29, 2005, respectively ..........................................         112           112
   Additional paid-in capital .................................................      92,385        90,048
   Retained earnings ..........................................................      23,551       108,032
   Unamortized restricted stock compensation ..................................      (1,873)       (1,500)
   Accumulated other comprehensive income (loss) ..............................          20          (112)
   Less treasury stock of 2,207,904 shares, at both October 29, 2005 and
      January 29, 2005, at cost ...............................................     (27,399)      (27,399)
                                                                                   --------      --------
      Total stockholders' equity ..............................................      86,796       169,181
                                                                                   --------      --------
      Total liabilities and stockholders' equity ..............................    $564,733      $560,908
                                                                                   ========      ========


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


                                        3



                            FINLAY ENTERPRISES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                         AND COMPREHENSIVE INCOME (LOSS)
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                   (UNAUDITED)



                                                                                  ACCUMULATED
                                                                                     OTHER
                                                                                 COMPREHENSIVE
                                                                                 INCOME (LOSS)/
                                            COMMON STOCK                          UNAMORTIZED
                                        -------------------  ADDITIONAL           RESTRICTED                 TOTAL
                                           NUMBER              PAID-IN  RETAINED     STOCK     TREASURY  STOCKHOLDERS' COMPREHENSIVE
                                         OF SHARES   AMOUNT    CAPITAL  EARNINGS COMPENSATION    STOCK       EQUITY    INCOME/(LOSS)
                                        ----------   ------  ---------- -------- ------------- --------  ------------- -------------

Balance, January 31, 2004 .............  9,017,921     $108    $82,808  $ 92,007   $(1,490)    $(20,537)    $152,896
   Net income .........................         --       --         --    16,025        --           --       16,025     $ 16,025
   Change in fair value of gold
      forward contracts, net of tax ...         --       --         --        --       (27)          --          (27)         (27)
                                                                                                                         --------
   Comprehensive income ...............                                                                                  $ 15,998
                                                                                                                         ========
   Exercise of stock options and
      related tax benefit .............    364,201        4      4,964        --        --           --        4,968
   Issuance of restricted stock and
       restricted stock units .........         --       --      2,276        --    (1,453)          --          823
   Amortization of restricted stock
       and restricted stock units .....         --       --         --        --     1,358           --        1,358
   Purchase of treasury stock .........   (392,745)      --         --        --        --       (6,862)      (6,862)
                                         ---------     ----    -------  --------   -------     --------     --------
Balance, January 29, 2005 .............  8,989,377      112     90,048   108,032    (1,612)     (27,399)     169,181
   Net loss ...........................         --       --         --   (84,481)       --           --      (84,481)    $(84,481)
   Change in fair value of gold
      forward contracts, net of tax ...         --       --         --        --       132           --          132          132
                                                                                                                         --------
   Comprehensive loss .................                                                                                  $(84,349)
                                                                                                                         ========
   Exercise of stock options
      and related tax benefits ........     17,333       --        209        --        --           --          209
   Issuance of restricted stock and
      restricted stock units ..........         --       --      2,128        --    (1,262)          --          866
   Amortization of restricted stock
      and restricted stock units ......         --       --         --        --       889           --          889
                                         ---------     ----    -------  --------   -------     --------     --------
Balance, October 29, 2005 .............  9,006,710     $112    $92,385  $ 23,551   $(1,853)    $(27,399)    $ 86,796
                                         =========     ====    =======  ========   =======     ========     ========




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


                                        4



                            FINLAY ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)



                                                                        THIRTEEN WEEKS ENDED
                                                                     -------------------------
                                                                     OCTOBER 29,   OCTOBER 30,
                                                                         2005          2004
                                                                     -----------   -----------

CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss ......................................................    $  (6,874)    $  (4,826)
   Adjustments to reconcile net loss to net cash used in
      operating activities:
   Depreciation and amortization .................................        5,322         4,298
   Amortization of deferred financing costs ......................          315           290
   Amortization of restricted stock compensation and restricted
      stock units ................................................          328           377
   Deferred income tax provision .................................        1,740         1,676
   Other, net ....................................................         (267)         (369)
   Changes in operating assets and liabilities, net
      of effects from purchase of Carlyle (Note 11):
      (Increase) decrease in accounts and other receivables ......      (16,069)        2,344
      Increase in merchandise inventories ........................      (22,983)      (24,854)
      (Increase) decrease in prepaid expenses and other ..........          535        (1,359)
      Increase in accounts payable and accrued liabilities .......        8,100        11,852
                                                                      ---------     ---------
         NET CASH USED IN OPERATING ACTIVITIES ...................      (29,853)      (10,571)
                                                                      ---------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of equipment, fixtures and leasehold improvements ...       (5,533)       (3,279)
   Acquisition of Carlyle, net of cash acquired ..................         (768)           --
                                                                      ---------     ---------
         NET CASH USED IN INVESTING ACTIVITIES ...................       (6,301)       (3,279)
                                                                      ---------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from revolving credit facility .......................      173,964       149,237
   Principal payments on revolving credit facility ...............     (129,269)     (130,708)
   Capitalized financing costs ...................................         (188)          (78)
   Bank overdraft ................................................       (8,330)       (3,788)
   Stock options exercised .......................................           --           362
                                                                      ---------     ---------
         NET CASH PROVIDED FROM FINANCING ACTIVITIES .............       36,177        15,025
                                                                      ---------     ---------
         INCREASE IN CASH AND CASH EQUIVALENTS ...................           23         1,175
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................        2,517         1,802
                                                                      ---------     ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .........................    $   2,540     $   2,977
                                                                      =========     =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid .................................................    $   2,197     $   1,208
                                                                      =========     =========
   Income taxes refunded .........................................    $     (61)    $  (9,412)
                                                                      =========     =========


        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
                                                                     -------------------------
                                                                     OCTOBER 29,   OCTOBER 30,
                                                                         2005          2004
                                                                     -----------   -----------

CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss ......................................................    $ (84,481)    $ (12,095)
   Adjustments to reconcile net loss to net cash used in
      operating activities:
   Impairment of goodwill ........................................       77,288            --
   Depreciation and amortization .................................       13,651        13,061
   Amortization of deferred financing costs ......................          938           827
   Amortization of restricted stock compensation and
      restricted stock units .....................................          889           983
   Loss on extinguishment of debt ................................           --         9,090
   Deferred income tax provision .................................       (4,171)       13,857
   Other, net ....................................................           83           150
   Changes in operating assets and liabilities, net of effects
      from purchase of Carlyle (Note 11):
      Increase in accounts and other receivables .................      (42,796)      (31,978)
      Increase in merchandise inventories ........................      (43,494)      (32,334)
      Increase in prepaid expenses and other .....................         (493)       (2,485)
      Decrease in accounts payable and accrued liabilities .......      (78,611)      (84,691)
                                                                      ---------     ---------
         NET CASH USED IN OPERATING ACTIVITIES ...................     (161,197)     (125,615)
                                                                      ---------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of equipment, fixtures and leasehold improvements ...       (9,882)       (8,914)
   Acquisition of Carlyle, net of cash acquired ..................      (28,714)           --
                                                                      ---------     ---------
         NET CASH USED IN INVESTING ACTIVITIES ...................      (38,596)       (8,914)
                                                                      ---------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from revolving credit facility .......................      540,335       478,753
   Principal payments on revolving credit facility ...............     (407,212)     (400,256)
   Proceeds from issuance of Senior Notes ........................           --       200,000
   Purchase and redemption of Old Senior Debentures and Old
      Senior Notes ...............................................           --      (231,971)
   Capitalized financing costs ...................................         (311)       (4,849)
   Bank overdraft ................................................        4,932         8,432
   Purchase of treasury stock ....................................           --        (6,862)
   Stock options exercised .......................................          146         2,957
                                                                      ---------     ---------
         NET CASH PROVIDED FROM FINANCING ACTIVITIES .............      137,890        46,204
                                                                      ---------     ---------
         DECREASE IN CASH AND CASH EQUIVALENTS ...................      (61,903)      (88,325)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................       64,443        91,302
                                                                      ---------     ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .........................    $   2,540     $   2,977
                                                                      =========     =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid .................................................    $  12,495     $  14,119
                                                                      =========     =========
   Income taxes paid (refunded) ..................................    $   6,838     $  (6,138)
                                                                      =========     =========


        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
its 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 October 29, 2005, and our results of
operations and cash flows for the thirteen weeks and thirty-nine weeks ended
October 29, 2005 and October 30, 2004. Due to the seasonal nature of the
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
January 29, 2005 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 January 29, 2005 ("Form
10-K") previously filed with the Commission.

     Our fiscal year ends on the Saturday closest to January 31. References to
2005, 2004, 2003 and 2002 relate to the fiscal years ending January 28, 2006,
January 29, 2005, January 31, 2004 and February 1, 2003, respectively. Each of
the fiscal years includes 52 weeks.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

     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 as well as the reported
amounts of revenues and expenses during the reporting period. Significant
estimates include merchandise inventories, finite-lived assets, 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.
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.

     The cost to us of gold merchandise sold on consignment, which typically
varies with the price of gold, is not fixed until the merchandise is sold. We,
at times, enter into forward contracts based upon the anticipated sales of gold
product. Such contracts typically have durations ranging from one to nine
months. At October 29, 2005, we had one open position in a gold forward contract
totaling 5,000 fine troy ounces to purchase gold for $2.3 million. At January
29, 2005, we had several open positions in gold forward contracts totaling
37,000 fine troy ounces to purchase gold for $16.1 million. The fair value of


                                        7



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

gold under such contracts was $2.4 million and $15.8 million at October 29, 2005
and January 29, 2005, respectively.

     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 02-16"). EITF
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.

     As of October 29, 2005 and January 29, 2005, deferred vendor allowances
totaled (i) $11.9 million and $14.8 million, respectively, for owned
merchandise, which allowances are included as an offset to merchandise
inventories on the Consolidated Balance Sheets, and (ii) $6.7 million and $8.4
million, respectively, for merchandise received on consignment, which allowances
are included as deferred income on the Consolidated Balance Sheets.

     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.

     We have designated our existing 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 is recorded in accumulated other comprehensive income, a separate
component of stockholders' equity, and is reclassified into cost of sales when
the offsetting effects of the hedged transaction impact earnings. Changes in the
fair value of the derivative attributable to hedge ineffectiveness are recorded
in earnings immediately. At October 29, 2005, the fair value of the gold forward
contracts resulted in the recognition of an asset of $34,000. At January 29,
2005, the fair value of the gold forward contracts resulted in the recognition
of a liability of $0.2 million. The amount recorded in accumulated other
comprehensive income at October 29, 2005 of $20,000, net of tax, is expected to
be reclassified into earnings during the remainder of 2005. The amount recorded
in accumulated other comprehensive loss at January 29, 2005 of $0.1 million, net
of tax, was reclassified


                                        8



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

into earnings in the first quarter of 2005.

     We have documented all relationships between hedging instruments and hedged
items, as well as our risk management objectives and strategy for undertaking
various hedge transactions. We also assess, both at the hedge's inception and on
an ongoing basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in cash flows of hedged items. We
believe that the designated hedges will be highly effective.

     NET INCOME (LOSS) PER SHARE: Net loss per share has been computed in
accordance with SFAS No. 128, "Earnings per Share". Basic and diluted net 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 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 net loss for the thirteen weeks and thirty-nine weeks
ended October 29, 2005 and October 30, 2004, the stock options, restricted stock
and restricted stock units are not considered in the calculation of diluted net
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
loss per share calculations was the same. Total stock options, restricted stock
and restricted stock units outstanding were 1,411,094 and 1,486,827 at October
29, 2005 and October 30, 2004, respectively, at prices ranging from $7.05 to
$24.31 per share in each period. For the thirty-nine weeks ended October 29,
2005, 137,050 shares of restricted stock and 205,410 restricted stock units were
excluded from the computation of diluted earnings per share. For the thirty-nine
weeks ended October 30, 2004, 213,750 shares of restricted stock and 93,742
restricted stock units were excluded from the computation of diluted earnings
per share. See Note 7.

     FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
Consolidated Financial Statements at fair value due to the short-term maturity
of these instruments.

     STOCK-BASED COMPENSATION: SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" amends SFAS No. 123 "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for an
entity that voluntarily changes to the fair value method of accounting for stock
options. As permitted by SFAS No. 123, we have elected to account for stock
options using the intrinsic value method. In accordance with the provisions of
SFAS No. 148 and APB No. 25, we have not recognized compensation expense related
to our stock options. However, deferred stock-based compensation is amortized
using the straight-line method over the vesting period. Had the fair value
method of accounting been applied to our stock option plans, which requires
recognition of compensation cost ratably over the vesting period of the stock
options, net loss and net loss per share would be as follows:


                                        9



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



                                                             THIRTEEN WEEKS ENDED      THIRTY-NINE WEEKS ENDED
                                                          -------------------------   -------------------------
                                                          OCTOBER 29,   OCTOBER 30,   OCTOBER 29,   OCTOBER 30,
                                                              2005          2004          2005          2004
                                                          -----------   -----------   -----------   -----------
                                                                (IN THOUSANDS)              (IN THOUSANDS)

Reported net loss......................................     $(6,874)      $(4,826)     $(84,481)     $(12,095)
Add: Stock-based employee compensation expense
   determined under the fair value method, net of tax..        (142)         (335)         (538)         (859)
Deduct: Stock-based employee compensation expense
   included in reported net loss, net of tax...........         107           254           434           619
                                                            -------       -------      --------      --------
Pro forma net loss.....................................     $(6,909)      $(4,907)     $(84,585)     $(12,335)
                                                            =======       =======      ========      ========
Basic and diluted net loss per share:
Reported net loss per share............................     $ (0.77)      $ (0.55)     $  (9.41)     $  (1.39)
                                                            =======       =======      ========      ========
Pro forma net loss per share...........................     $ (0.77)      $ (0.56)     $  (9.42)     $  (1.41)
                                                            =======       =======      ========      ========


     In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation". This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123(R) requires that the fair value of such equity
instruments be recognized as expense in the historical financial statements as
services are performed. Currently, only certain pro forma disclosures of fair
value are required. Although we are in the process of determining the impact of
this Statement on our results of operations, the historical impact for the
thirteen weeks and thirty-nine weeks ended October 29, 2005 and October 30,
2004, respectively, under SFAS No. 123 is shown in the table above. We will
adopt SFAS No. 123(R) for the first quarter of fiscal 2006.

     INCOME TAXES: The income tax benefit for 2005 and 2004 reflects effective
tax rates of 39.5% (before reflecting the impairment of goodwill) and 39%,
respectively. During the third quarter of 2005, a benefit of approximately $0.2
million was recorded resulting from a refund of foreign taxes. Additionally,
during the second quarter of 2005, a benefit of approximately $4.4 million was
recorded resulting from the impairment of goodwill and a benefit of
approximately $0.2 million was recorded associated with the reversal of tax
accruals no longer required as a result of a decrease in state tax rates. During
the second quarter of 2004, a benefit of approximately $0.6 million was recorded
associated with the reversal of tax accruals no longer required.

     NEW ACCOUNTING PRONOUNCEMENT: In May 2005, the FASB issued SFAS No. 154,
"Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20
and FASB Statement No. 3". SFAS No. 154 changes the requirements with respect to
the accounting for, and reporting of, a change in accounting principle.
Previously, voluntary changes in accounting principle were required to be


                                       10



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

recognized, by including in net income of the period of change, the cumulative
effect of changing to the new accounting principle. SFAS No. 154 requires
retrospective application to prior period financial statements, unless it is
impractical to do so. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 is not expected to have a material effect on our
Consolidated Financial Statements.

NOTE 3 - DESCRIPTION OF BUSINESS

     We conduct business through our wholly-owned subsidiary, Finlay Fine
Jewelry Corporation. We are a retailer of fine jewelry products and primarily
operate licensed fine jewelry departments in department stores throughout the
United States. The fourth quarter of 2004 accounted for approximately 41% of our
sales and approximately 90% of our income from operations, due to the
seasonality of the retail jewelry industry. During 2004, store groups owned by
Federated Department Stores, Inc. ("Federated") and those stores previously
owned by The May Department Stores Company ("May") which were acquired by
Federated in August 2005, accounted for 78% of our sales.

     On May 19, 2005, we completed the acquisition of Carlyle & Co. Jewelers and
its subsidiaries ("Carlyle"). Carlyle is located primarily in the southeastern
United States, and operates 34 specialty jewelry stores under the Carlyle & Co.,
J.E. Caldwell & Co. and Park Promenade trade names. Carlyle had annual sales of
$86.0 million during its last fiscal year. Carlyle's results of operations are
included in the accompanying Consolidated Statements of Operations since the
date of acquisition.

NOTE 4 - MERCHANDISE INVENTORIES

     Merchandise inventories consisted of the following:



                                                             OCTOBER 29,   JANUARY 29,
                                                               2005 (A)        2005
                                                             -----------   -----------
                                                                   (IN THOUSANDS)

Jewelry goods - rings, watches and other fine jewelry
   (first-in, first-out ("FIFO") basis)...................     $397,087      $297,266
Less: Excess of FIFO cost over LIFO inventory value.......       19,847        18,677
                                                               --------      --------
                                                               $377,240      $278,589
                                                               ========      ========


----------
(a)  Merchandise inventories as of October 29, 2005 includes approximately $60.0
     million of inventory related to Carlyle.

     We determine our LIFO inventory value by utilizing internally developed
indices. The LIFO method had the effect of increasing the loss before income
taxes for each of the thirteen weeks ended October 29, 2005 and October 30, 2004
by $0.3 million. The LIFO method had the effect of increasing the loss before
income taxes for the thirty-nine weeks ended October 29, 2005 and October 30,
2004 by $1.2 million and $0.9 million, respectively.

     Approximately $360.3 million and $349.7 million at October 29, 2005 and
January 29, 2005, respectively, of merchandise received on consignment is not
included in merchandise inventories and accounts payable-trade in the
accompanying Consolidated Balance Sheets.


                                       11



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - MERCHANDISE INVENTORIES (CONTINUED)

     Finlay Jewelry is a party to an amended and restated gold consignment
agreement (as amended, the "Gold Consignment Agreement"), which enables Finlay
Jewelry to receive consignment merchandise by providing gold, or otherwise
making payment, to certain vendors. While the merchandise involved remains
consigned, title to the gold content of the merchandise transfers from the
vendors to the gold consignor.

     On July 29, 2005, Finlay Jewelry amended the Gold Consignment Agreement, to
among other things, extend the maturity date to October 31, 2007, and to
establish financial covenants (including minimum earnings and fixed charge
coverage ratio requirements and certain maximum debt limitations). The Gold
Consignment Agreement permits Finlay Jewelry to consign up to the lesser of (i)
165,000 fine troy ounces or (ii) $50.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement. In the event this
agreement is terminated, Finlay Jewelry would be required to return the gold or
purchase the outstanding gold at the prevailing gold rate in effect on that
date. At October 29, 2005 and January 29, 2005, amounts outstanding under the
Gold Consignment Agreement totaled 105,084 and 116,687 fine troy ounces,
respectively, valued at $49.5 million and $49.8 million, respectively. For
financial statement purposes, the consigned gold is not included in merchandise
inventories on the Consolidated Balance Sheets and, therefore, no related
liability has been recorded.

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
matures in January 2008, provides Finlay Jewelry with a senior secured revolving
line of credit up to $225.0 million (the "Revolving Credit Facility"). At
October 29, 2005, $133.1 million was outstanding under this facility, at which
point the available borrowings were $81.0 million. The average amounts
outstanding under the Revolving Credit Agreement were $75.6 million and $49.4
million for the thirty-nine weeks ended October 29, 2005 and October 30, 2004,
respectively. The maximum amount outstanding for the thirty-nine weeks ended
October 29, 2005 was $158.2 million, at which point the available borrowings
were an additional $55.9 million. Amounts outstanding under the Revolving Credit
Agreement bear interest at a rate equal to, at our option, (i) the prime rate
plus a margin ranging from zero to 1.0% or (ii) the adjusted Eurodollar rate
plus a margin ranging from 1.0% to 2.0%, in each case depending on our financial
performance. The weighted average interest rate was 5.6% and 3.7% for the
thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively.

     During 2004, we and Finlay Jewelry each commenced an offer to purchase for
cash our 9% Senior Debentures, due May 1, 2008, having an aggregate principal
amount of $75.0 million (the "Old Senior Debentures") and Finlay Jewelry's
8-3/8% Senior Notes, due May 1, 2008, having an aggregate principal amount of
$150.0 million (the "Old Senior Notes"), respectively. Holders of approximately
79% and 98% of the Old Senior Debentures and the Old Senior Notes, respectively,
tendered their securities and consented to amendments to the related indentures.
Additionally, during 2004, Finlay Jewelry completed the sale of 8-3/8% Senior
Notes, due June 1, 2012, having an aggregate principal amount of $200.0 million
(the "Senior Notes"). Interest on the Senior Notes is payable semi-annually on
June 1 and December 1 of each year.


                                       12



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - SHORT AND LONG-TERM DEBT (CONTINUED)

     Finlay Jewelry incurred approximately $5.2 million in costs, including $5.0
million associated with the sale of the Senior Notes, which have been deferred
and are being amortized over the term of the Senior Notes. In June 2004, we
recorded pre-tax charges of approximately $9.1 million, including $6.7 million
for redemption premiums paid on the Old Senior Debentures and the Old Senior
Notes, $2.1 million to write-off deferred financing costs related to the
refinancing of the Old Senior Debentures and the Old Senior Notes and $0.3
million for other expenses. These costs are included in other expense in the
accompanying Consolidated Statements of Operations for the thirty-nine weeks
ended October 30, 2004.

     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 its Gold Consignment Agreement (as
defined herein), 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.
In addition, before June 1, 2007, Finlay Jewelry may redeem up to 35% of the
aggregate principal amount of the Senior Notes with the net proceeds of certain
equity offerings at 108.375% of the principal amount thereof, plus accrued
interest to the redemption date. 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.

NOTE 6 - LICENSE AGREEMENTS WITH DEPARTMENT STORES AND LEASE AGREEMENTS

     We conduct the majority of our operations as licensed departments in
department stores. 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 in the event such
transfers occur. The value 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.

Our operating leases consist primarily of office space rentals and the Carlyle
retail store locations, which leases expire on various dates through 2016.
Minimum fees, in the table below, represent the rent paid on these operating
leases. The department store license agreements provide for the payment of fees
based on sales (i.e., contingent fees in the table below), plus, in some
instances, installment payments for fixed assets. Additionally, certain of the
Carlyle leases require payment of contingent rent based on a


                                       13



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - LICENSE AGREEMENTS WITH DEPARTMENT STORES AND LEASE AGREEMENTS
         (CONTINUED)

percentage of the store's sales in excess of a specified threshold. License fees
and lease expense, included in selling, general and administrative expenses, are
as follows (in thousands):

                        THIRTEEN WEEKS ENDED      THIRTY-NINE WEEKS ENDED
                     -------------------------   -------------------------
                     OCTOBER 29,   OCTOBER 30,   OCTOBER 29,   OCTOBER 30,
                         2005          2004          2005          2004
                     -----------   -----------   -----------   -----------
                           (IN THOUSANDS)              (IN THOUSANDS)
Minimum fees......     $ 1,816       $   444       $ 3,773       $ 1,333
Contingent fees...      28,088        27,761        90,501        90,507
                       -------       -------       -------       -------
   Total..........     $29,904       $28,205       $94,274       $91,840
                       =======       =======       =======       =======

NOTE 7 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK AWARDS

     As of October 29, 2005, and from inception of our stock repurchase program,
which expired in September 2005, we repurchased a total of 2,207,904 shares for
$27.4 million.

     In February 2001, an executive officer of the Company was issued 100,000
shares of Common Stock, subject to restrictions ("Restricted Stock"), pursuant
to a restricted stock agreement. The Restricted Stock became fully vested on
January 29, 2005 and was accounted for as a component of stockholders' equity.
Compensation expense of approximately $1.2 million has been amortized over four
years and totaled approximately $78,000 and $230,000, respectively, for the
thirteen weeks and thirty-nine weeks ended October 30, 2004.

     In August 2003, an executive officer of the Company was issued an
additional 50,000 shares of Restricted Stock pursuant to a restricted stock
agreement. Fifty percent of the Restricted Stock became fully vested on January
29, 2005, and was accounted for as a component of stockholders' equity.
Compensation expense of approximately $0.4 million has been amortized over the
vesting period and totaled approximately $66,000 and $199,000, respectively, for
the thirteen weeks and thirty-nine weeks ended October 30, 2004. The remaining
50% of the Restricted Stock becomes fully vested on June 30, 2007 and has been
accounted for as a component of stockholders' equity. Compensation expense of
approximately $0.4 million is being amortized over the vesting period.
Amortization for each of the thirteen week periods ended October 29, 2005 and
October 30, 2004 totaled approximately $25,000. Amortization for each of the
thirty-nine week periods ended October 29, 2005 and October 30, 2004 totaled
approximately $75,000.

     In October 2003, certain executives of the Company were awarded a total of
31,250 shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after four years of continuous employment
with the Company and is accounted for as a component of stockholders' equity
with respect to unamortized restricted stock compensation. However, such shares
are not considered outstanding. Compensation expense of approximately $0.5
million is being amortized over four years. Amortization for each of the
thirteen week periods ended October 29, 2005 and October 30, 2004 totaled
approximately $30,000. Amortization for each of the thirty-nine week periods
ended October 29, 2005 and October 30, 2004 totaled approximately $90,000.


                                       14



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK AWARDS (CONTINUED)

     In April 2004, certain executives of the Company were awarded a total of
32,500 shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after two years of continuous employment
with the Company and is accounted for as a component of stockholders' equity
with respect to unamortized restricted stock compensation. However, such shares
are not considered outstanding. Compensation expense of approximately $0.6
million is being amortized over two years. Amortization for each of the thirteen
week periods ended October 29, 2005 and October 30, 2004 totaled approximately
$79,000. Amortization for the thirty-nine weeks ended October 29, 2005 and
October 30, 2004 totaled approximately $236,000 and $156,000, respectively.

     Commencing in February 2005, an executive officer of the Company became
entitled to receive stock incentive compensation based on the attainment of
financial objectives established by senior management and approved by the Board
of Directors. The maximum amount of stock incentive compensation payable in any
fiscal year is equal to the number of restricted shares of Common Stock having
an aggregate value nearest to $400,000. These shares are not considered
outstanding. Compensation expense is being recognized ratably over a one year
period and is adjusted based on our financial performance. Amortization for the
thirty-nine weeks ended October 29, 2005 totaled approximately $0.2 million.

     In April 2005, certain executives of the Company were awarded a total of
48,300 shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after three years of continuous employment
with the Company and is accounted for as a component of stockholders' equity
with respect to unamortized restricted stock compensation. However, such shares
are not considered outstanding. Compensation expense of approximately $0.6
million is being amortized over three years. Amortization for the thirteen weeks
and thirty-nine weeks ended October 29, 2005 totaled approximately $47,000 and
$94,000, respectively.

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, which was approved by our stockholders on June 19, 2003
(the "RSU Plans"). Under the RSU Plans, key executives and our non-employee
directors as designated 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
stockholder 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, his or her retainer fees and
Committee chairmanship fees, 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 October
29, 2005, 205,410 restricted stock units have been awarded under the RSU Plans.
Amortization for the thirteen weeks ended October 29, 2005 and October 30, 2004
totaled approximately $146,000 and $98,000, respectively. Amortization for the
thirty-nine weeks ended October 29, 2005 and October 30, 2004 totaled
approximately $394,000 and $232,000, respectively.


                                       15



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - CONSOLIDATION OF HOST STORE GROUPS AND OTHER

     On February 28, 2005, Federated and May announced that they had entered
into a merger agreement whereby Federated would acquire May. On August 30, 2005,
Federated announced that it had completed the merger with May. In September
2005, Federated announced its integration plans including a divisional
realignment and divestiture of certain stores. Accordingly, at the beginning of
2006, we expect to operate in six of Federated's nine divisions, for a total of
404 departments compared to the 598 Federated departments we currently operate
in as follows:

                            Macy's South (1)     145
                            Macy's Midwest (2)    79
                            Macy's North (3)      54
                            Macy's Northwest (4)  38
                            Bloomingdale's        30
                            Lord & Taylor         58
                                                 ---
                            Total                404
                                                 ===

----------
(1)  Primarily comprised of the former Rich's/Lazarus/Goldsmith's division of
     Federated and May's former Foley's and Hecht's stores.

(2)  Primarily comprised of the former Famous-Barr/L.S. Ayres/Jones and
     Kaufmann's divisions of May.

(3)  Primarily comprised of the former Marshall Fields's division of May.

(4)  Primarily comprised of the former Bon-Macy's division of Federated and
     May's former Meier & Frank stores.

     As a result of Federated's integration plans, we expect to no longer
operate in the following 198 departments:

     o    142 stores under various regional nameplates that will be phased into
          the Macy's East and Macy's West divisions, which are Federated
          divisions in which we have not historically operated the fine jewelry
          departments. The transition of these departments is expected to begin
          in the second quarter of 2006 and be completed by the end of July
          2006;

     o    52 stores that will be divested by Federated; and

     o    4 stores that will be closed in preparation for reopening as
          Bloomingdale's stores.

In 2004, we generated sales of approximately $243.0 million from these 198
departments. We intend to record charges associated with accelerated
depreciation of fixed assets and severance totaling approximately $7.2 million
related to these departments beginning in 2005 through the dates of the store
closings, estimated to be July 2006. During the thirty-nine weeks ended October
29, 2005, we recorded charges of approximately $1.7 million related to the
accelerated depreciation of fixed assets and severance, of which $1.6 million
was recorded in the third quarter.

     Additionally, in November 2005, we signed a new agreement with Federated,
effective at the beginning of 2006, which will govern our operations in Macy's
South, Macy's Midwest, Macy's North and Macy's Northwest. This new agreement is
three years in length and expires January 31, 2009. Approximately 316 stores
will be covered by the agreement. The agreement has no impact on the
Bloomingdale's and Lord & Taylor divisions whose license agreements, which cover
a total of 88 departments, currently run through February 3, 2007.


                                       16



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - CONSOLIDATION OF HOST STORE GROUPS AND OTHER (CONTINUED)

     In addition to extending our agreement for three years, the new agreement
eliminates all non-compete provisions from the previous May contracts that
required us to obtain May's permission before opening a new department or store
within a ten mile radius of a May store.

     In July 2003, May announced its intention to divest 32 Lord & Taylor
stores, as well as two other stores in its Famous-Barr division resulting in the
closure of four departments during the thirty-nine weeks ended October 29, 2005.
For the thirty-nine weeks ended October 29, 2005 and October 30, 2004, we
recorded charges of approximately $31,000 and $0.9 million, respectively,
relating to the accelerated depreciation of fixed assets and the loss on
disposal of fixed assets.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

     From time to time, we are involved in litigation arising out of our
operations in the normal course of business. As of December 2, 2005, 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.

     In November 2004, we entered into an employment agreement with a senior
executive. The employment agreement has a term of four years commencing on
January 30, 2005 and 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.

     During 2005, we entered into employment agreements with certain executives
of the Company. Each of the employment agreements has a term of three years,
unless earlier terminated in accordance with the provisions of the employment
agreements. The agreements provide for salary levels totaling approximately $1.8
million, incentive compensation based on meeting specific financial goals and a
special bonus equal to 50% of the executives' salary if employed by the Company
on June 30, 2008.

     The Senior Notes, the Revolving Credit Agreement and the Gold Consignment
Agreement currently restrict the amount of annual distributions from Finlay
Jewelry to us.

     Our concentration of credit risk consists principally of accounts
receivable. Over the past three years, store groups owned by Federated and those
stores previously owned by May accounted for 72% of our sales. We believe that
the risk associated with these receivables, other than those from department
store groups indicated above, would not have a material adverse effect on our
financial position or results of operations.

     We have not provided any third-party financial guarantees as of October 29,
2005 and January 29, 2005.


                                       17



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - CARLYLE & CO. JEWELERS ACQUISITION

     On May 19, 2005, we completed the acquisition of Carlyle. The purchase
price was approximately $29.0 million, plus estimated transaction fees of
approximately $1.7 million, and was financed with additional borrowings under
the Revolving Credit Agreement. In connection with the acquisition, Carlyle's
revolving credit facility was terminated and paid in full at the closing and,
since the date of the acquisition, Carlyle's cash requirements have been, and
will continue to be, funded under Finlay's Revolving Credit Agreement. In
connection with the acquisition, we replaced the existing Revolving Credit
Agreement and entered into an amended and restated credit agreement (the
"Restated Credit Agreement") with GECC and certain other lenders and Finlay
Jewelry entered into a consent and amendment to the Gold Consignment Agreement
(the "Gold Consignment Amendment"), to, among other things, permit the
acquisition transaction. In addition, Carlyle and its subsidiaries, together
with Finlay Jewelry, entered into supplemental indentures and guarantees (the
"Supplemental Indentures") to guarantee obligations of Finlay Jewelry under the
Senior Notes.

     The Carlyle acquisition has been accounted for as a purchase, and,
accordingly, the operating results of Carlyle have been included in our
consolidated financial statements since the date of acquisition. Our October 29,
2005 consolidated balance sheet reflects the Carlyle acquisition using a
preliminary purchase price allocation. The following table summarizes the fair
values of the assets and liabilities at the date of acquisition (dollars in
thousands):

Cash........................................   $ 1,695
Merchandise inventories.....................    55,157
Prepaid expenses and other current assets...     2,308
Property and equipment......................     1,751
Other assets................................     7,284
Liabilities assumed.........................    37,710
                                               -------
Net assets acquired.........................   $30,485
                                               =======

     The following consolidated pro forma information presents our sales, net
loss and basic and diluted net loss per share as if the Carlyle acquisition had
taken place at the beginning of the respective periods presented:

                                                THIRTY-NINE WEEKS ENDED
                                               -------------------------
                                               OCTOBER 29,   OCTOBER 30,
                                                   2005          2004
                                               -----------   -----------
                                                     (IN THOUSANDS)
Sales.......................................    $592,175      $591,788
Net loss (a)................................    $(87,939)     $(14,793)
Basic and diluted net loss per share (a)....    $  (9.79)     $  (1.70)

----------
(a)  The net loss and net loss per share for the thirty-nine weeks ended October
     29, 2005 includes a charge of approximately $72.9 million, net of tax,
     related to the impairment of goodwill. See Note 13.

     Pro forma adjustments have been made to reflect depreciation and
amortization using the asset values recognized after applying purchase
accounting adjustments and interest expense on borrowings used to finance the
acquisition. This pro forma information is presented for informational purposes
only and is not necessarily indicative of actual results had the acquisition
been effected at the beginning of the


                                       18



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - CARLYLE & CO. JEWELERS ACQUISITION (CONTINUED)

respective periods presented, is not necessarily indicative of future results,
and does not reflect potential synergies, integration costs or other such costs
or savings.

NOTE 12 - SEGMENT INFORMATION

     Prior to the acquisition of Carlyle in May 2005, we operated in a single
reportable segment, the operation of department store based fine jewelry
departments, in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Since the acquisition of Carlyle, we now
have two operating segments - department store based fine jewelry departments
and stand-alone jewelry stores. 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 table provides segment level financial information for the
thirteen weeks and thirty-nine weeks ended October 29, 2005 (dollars in
thousands):



                                   THIRTEEN WEEKS ENDED          THIRTY-NINE WEEKS ENDED
                                     OCTOBER 29, 2005               OCTOBER 29, 2005
                              -----------------------------   -----------------------------
                               FINLAY    CARLYLE     TOTAL     FINLAY    CARLYLE     TOTAL
                              --------   -------   --------   --------   -------   --------

Sales .....................   $167,339   $15,922   $183,261   $538,876   $29,849   $568,725
Loss from operations (a)...     (4,244)     (534)    (4,778)   (78,579)     (421)   (79,000)
Total assets ..............    496,878    67,855    564,733    496,878    67,855    564,733
Capital expenditures ......      4,481     1,052      5,533      8,364     1,518      9,882


----------
(a)  The loss from operations for the thirty-nine weeks ended October 29, 2005
     for Finlay includes a pre-tax charge of approximately $77.3 million related
     to the impairment of goodwill. See Note 13.

     Additionally, our sales mix by merchandise category was as follows for the
thirteen weeks and thirty-nine weeks ended October 29, 2005 and October 30, 2004
(dollars in thousands):



                          THIRTEEN WEEKS ENDED                 THIRTY-NINE WEEKS ENDED
                  -----------------------------------   -----------------------------------
                     OCTOBER 29,        OCTOBER 30,        OCTOBER 29,        OCTOBER 30,
                        2005                2004              2005               2004
                  ----------------   ----------------   ----------------   ----------------
                              % OF              % OF               % OF               % OF
                    SALES    SALES     SALES    SALES     SALES    SALES     SALES    SALES
                  --------   -----   --------   -----   --------   -----   --------   -----

Diamonds ......   $ 45,777    25.0%  $ 42,041    25.2%  $145,884    25.7%  $135,651    25.0%
Gemstones .....     35,495    19.4     35,248    21.1    114,640    20.2    118,244    21.8
Gold ..........     32,358    17.7     34,053    20.4    106,707    18.8    113,880    21.0
Watches .......     32,221    17.6     25,387    15.2     87,954    15.5     77,248    14.2
Designer ......     14,100     7.7     10,532     6.3     39,006     6.9     31,487     5.8
Other (1) .....     23,310    12.6     19,580    11.8     74,534    12.9     66,541    12.2
                  --------   -----   --------   -----   --------   -----   --------   -----
Total Sales ...   $183,261   100.0%  $166,841   100.0%  $568,725   100.0%  $543,051   100.0%
                  ========   =====   ========   =====   ========   =====   ========   =====


----------
(1)  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.


                                       19



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - GOODWILL IMPAIRMENT

     SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142")
requires an impairment-only approach to accounting for goodwill. We performed
our required annual impairment assessment during the fourth quarter of 2004 and
concluded that our goodwill was not impaired.

     During the quarter ended July 30, 2005, Federated announced their intention
to divest certain stores in which we operate the fine jewelry departments. Based
upon this business indicator, we utilized our SFAS No. 142 model to evaluate the
carrying value of the goodwill recorded on our department store based fine
jewelry departments segment as of July 30, 2005.

     The goodwill impairment analysis took into consideration our results for
the first half of the year and estimates for the balance of the year and beyond,
as well as Federated's announcement to divest certain stores. We performed our
impairment analysis in accordance with SFAS No. 142, the provisions of which
require, similar to the recognition of goodwill in a business combination, an
allocation of the fair value to all of our assets and liabilities (excluding
Carlyle) (including any unrecognized intangible assets) as if the Company had
been acquired in a business combination and the fair value of the Company was
the price paid to acquire the Company. As a result of this analysis, an
impairment of goodwill of $77.3 million, on a pre-tax basis, was recorded as a
component of loss from operations in the accompanying Consolidated Statements of
Operations for the thirty-nine weeks ended October 29, 2005, which eliminated
all of the goodwill that was on our balance sheet.


                                       20



PART I - FINANCIAL INFORMATION

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

     Our Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") is provided as a supplement to the accompanying
consolidated financial statements and notes thereto contained in Item 1 of this
report. This MD&A is organized as follows:

     o    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.

     o    RESULTS OF OPERATIONS - This section provides an analysis of the
          significant line items on the consolidated statements of operations.

     o    LIQUIDITY AND CAPITAL RESOURCES - This section provides an analysis of
          liquidity, cash flows, sources and uses of cash, contractual
          obligations and financial position.

     o    SEASONALITY - This section describes the effects of seasonality on our
          business.

     o    CRITICAL ACCOUNTING POLICIES AND ESTIMATES - This section discusses
          those accounting policies that are considered both important to our
          financial condition and results of operations, and require us to
          exercise subjective or complex judgments in their application. In
          addition, all of our significant accounting policies, including
          critical accounting policies, are summarized in Note 2 to the
          consolidated financial statements included in our Form 10-K.

     o    FORWARD-LOOKING INFORMATION AND RISK FACTORS THAT MAY AFFECT FUTURE
          RESULTS - 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.

     On May 19, 2005, we completed the acquisition of Carlyle and its
subsidiaries. The purchase price was approximately $29.0 million, plus estimated
transaction fees of approximately $1.7 million, and was financed with additional
borrowings under the Revolving Credit Agreement. Carlyle is located primarily in
the southeastern United States and operates 34 specialty jewelry stores under
the Carlyle & Co., J.E. Caldwell & Co. and Park Promenade trade names. Carlyle
had annual sales of $86.0 million during its last fiscal year. Carlyle's results
of operations are included in the accompanying Consolidated Statements of
Operations since the date of acquisition.

EXECUTIVE OVERVIEW

OUR BUSINESS

     We are one of the leading retailers of fine jewelry in the United States
and primarily operate fine jewelry departments in major department stores for
retailers where we sell a broad selection of moderately priced jewelry, with an
average sales price of approximately $201 per item. As of October 29, 2005, we
operated a total of 1,009 locations, including 975 Finlay departments in 16 host
store groups, in 46 states and the District of Columbia, as well as 34 Carlyle
specialty jewelry stores, located primarily in the southeastern United States,
which sell luxury priced jewelry, with an average sales price of approximately
$1,200 per item.


                                       21



     Our primary focus is to offer desirable and competitively priced products,
a breadth of merchandise assortments and to provide exceptional customer
service. Our ability to quickly identify emerging trends and maintain strong
relationships with vendors has enabled us to present superior assortments in our
showcases. With respect to our department store operations, 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. In recent years, on average,
approximately 50% of our merchandise has been 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.

     In May 2005, we completed the acquisition of Carlyle and its subsidiaries.
Carlyle operates 34 specialty jewelry stores located primarily in the
southeastern United States under the Carlyle & Co., J.E. Caldwell & Co. and Park
Promenade trade names. The Carlyle stores are primarily located in shopping
malls and lifestyle centers and focus on the designer and high-end jewelry
markets. The average size of a store is approximately 2,500 square feet and
average sales per store are approximately $2.6 million.

     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 how they are computed:

     o    Diluted earnings per share ("EPS") (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;

     o    Comparable department sales growth computed as the percentage change
          in sales for departments open for the same months during the
          comparable periods. Comparable department sales are measured against
          our host store groups as well as other jewelry retailers;

     o    Total sales growth (current period total sales minus prior period
          total sales divided by prior period total 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

     o    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
          which management focuses on, include monitoring gross margin levels as
          well as continued emphasis on leveraging our SG&A.

     In October 2005, Saks Incorporated ("Saks") announced that it has agreed to
sell its Northern Department Store Group (which operates Carson Pirie Scott,
Bergner's, Boston Store, Younkers and Herberger's) to The Bon-Ton Stores, Inc.
We currently operate the fine jewelry departments in these host store groups and
will continue to do so upon completion of the acquisition.


                                       22



THIRD QUARTER HIGHLIGHTS

     Total sales were $183.3 million for the thirteen weeks ended October 29,
2005 compared to $166.8 million for the thirteen weeks ended October 30, 2004,
an increase of 9.8%. Total sales for the third quarter of 2005 included $15.9
million of sales generated by Carlyle. Comparable department sales increased
1.3% and our strongest performances were in our Bloomingdale's store group and
in Parisian, a division of Saks. Gross margin increased by $5.9 million compared
to 2004, and, as a percentage of sales, gross margin decreased by 1.3% from
50.7% to 49.4%, approximately half of the decrease is associated with the
addition of Carlyle whose margins are typically lower than Finlay's due to the
strong emphasis on the watch category. SG&A increased $7.3 million and, as a
percentage of sales, SG&A decreased 0.4% from 49.5% to 49.1%, primarily as a
result of Carlyle's significantly lower rent structure as a percentage of sales
compared to Finlay's licensed department business. Borrowings under the
Revolving Credit Agreement increased by $54.6 million at October 29, 2005 as
compared to October 30, 2004, which reflects additional borrowings to finance
the acquisition of Carlyle in May 2005 and to fund Carlyle's working capital
requirements. Maximum outstanding borrowings during the thirteen weeks ended
October 29, 2005 were $158.2 million, at which point the available borrowings
under the Revolving Credit Agreement were an additional $55.9 million.

OPPORTUNITIES

     We believe that current trends in jewelry retailing provide a significant
opportunity for our future growth. Consumers spent approximately $57.0 billion
on jewelry (including both fine jewelry and costume jewelry) in the United
States in calendar year 2004, an increase of approximately $21.0 billion over
1994, according to the United States Department of Commerce. In the department
store sector in which we operate the majority of our business, consumers spent
an estimated $4.1 billion on fine jewelry in calendar year 2003.

     Our management believes that demographic factors such as the maturing U.S.
population and an increase in the number of working women, have resulted in
greater disposable income, thus contributing 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 our gift and special occasion sales.

     In November 2005, we signed a new agreement with Federated, effective at
the beginning of 2006, which will govern our operations in Macy's South, Macy's
Midwest, Macy's North and Macy's Northwest. This new agreement is three years in
length and expires January 31, 2009. Approximately 316 stores will be covered by
the agreement. The agreement has no impact on the Bloomingdale's and Lord &
Taylor divisions whose license agreements, which cover a total of 88
departments, currently run through February 3, 2007. In addition to extending
our agreement for three years, the new agreement eliminates all non-compete
provisions from the previous May contracts that required us to obtain May's
permission before opening a new department or store within a ten mile radius of
a May store. We believe that the elimination of this non-compete provision
provides us with significantly greater opportunity to expand our business and
continue to diversify beyond the traditional department store sector.

     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. As discussed above, we completed the acquisition of
Carlyle in May 2005.

     In 2004, we tested moissanite merchandise (moissanite is a lab-created
stone with greater brilliance and luster than a diamond) in certain departments.
This new category of merchandise has been expanded


                                       23



to additional departments during 2005 and is estimated to generate sales of
approximately $10 million on an annual basis.

     Additional growth opportunities exist with respect to opening departments
within existing host store groups that do not currently operate jewelry
departments. Such opportunities exist within Dillard's and Belk's. During 2003
and 2004, we added a total of 24 new departments in Dillard's and Belk's. During
the thirty-nine weeks ended October 29, 2005, we added a total of ten new
departments in Dillard's and Belk's. Additionally, we anticipate opening ten to
15 departments in Dillard's in 2006.

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

     o    Increase comparable department sales;

     o    Add departments within existing host store groups;

     o    Add new Carlyle stores;

     o    Expand our most productive departments;

     o    Identify and acquire new businesses which diversify our business and
          provide additional growth opportunities;

     o    Open new channels of distribution;

     o    Increase our business in the luxury jewelry market both in specialty
          and department stores;

     o    Capitalize on developing fashion trends and emerging merchandise
          categories;

     o    Add new host store relationships;

     o    Continue to raise customer service standards;

     o    Strengthen selling teams through training programs;

     o    Continue to improve operating leverage; and

     o    De-leverage the balance sheet.

RISKS AND UNCERTAINTIES

     The risks and challenges facing our business include:

          o    Host store consolidation, particularly in light of the
               Federated/May merger; and

          o    Dependence on or loss of certain host store relationships.

     On February 28, 2005, Federated and May announced that they had entered
into a merger agreement whereby Federated would acquire May. On August 30, 2005,
Federated announced that it had completed the merger with May. In September
2005, Federated announced its integration plans for the merger with


                                       24



May including a divisional realignment and divestiture of certain stores.
Accordingly, at the beginning of 2006, we expect to operate in six of
Federated's nine divisions, for a total of 404 departments compared to the 598
Federated departments we currently operate in. As a result of Federated's
integration plans, we expect to no longer operate in 198 departments. In 2004,
we generated sales of approximately $243.0 million from these 198 departments.
During the thirty-nine weeks ended October 29, 2005, we recorded charges of
approximately $1.7 million related to the accelerated depreciation of fixed
assets and severance, of which $1.6 million was recorded in the third quarter.

     During 2004, approximately 78% of our sales were generated by departments
operated in store groups owned by Federated and those stores previously owned by
May. We have operated departments with Federated since 1983 and believe that our
relationship with Federated is excellent. Nevertheless, a decision by Federated
or certain of our other host store groups, to terminate existing relationships,
to assume the operation of these departments themselves, or to close a
significant number of stores would have a material adverse effect on our
business and financial condition.

     During 2003, May announced its intention to close certain of its smaller,
less profitable stores, including 32 Lord & Taylor stores, as well as two stores
in its Famous-Barr division, resulting in the closure of four departments during
the thirty-nine weeks ended October 29, 2005. Through October 29, 2005, a total
of 31 stores have closed.

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:

STATEMENTS OF OPERATIONS DATA



                                                      THIRTEEN WEEKS ENDED      THIRTY-NINE WEEKS ENDED
                                                   -------------------------   -------------------------
                                                   OCTOBER 29,   OCTOBER 30,   OCTOBER 29,   OCTOBER 30,
                                                       2005          2004          2005          2004
                                                   -----------   -----------   -----------   -----------

Sales...........................................      100.0%        100.0%        100.0%        100.0%
Cost of sales...................................       50.6          49.3          50.0          49.1
                                                      -----         -----         -----         -----
   Gross margin.................................       49.4          50.7          50.0          50.9
Selling, general and administrative expenses....       49.1          49.5          47.9          47.5
Depreciation and amortization...................        2.9           2.6           2.4           2.4
Impairment of goodwill..........................         --            --          13.6            --
                                                      -----         -----         -----         -----
   Income (loss) from operations................       (2.6)         (1.4)        (13.9)          1.0
Interest expense, net...........................        3.7           3.3           3.2           3.1
Other expense...................................         --            --            --           1.7
                                                      -----         -----         -----         -----
   Loss before income taxes.....................       (6.3)         (4.7)        (17.1)         (3.8)
Benefit for income taxes........................       (2.5)         (1.8)         (2.2)         (1.6)
                                                      -----         -----         -----         -----
   Net loss.....................................       (3.8)%        (2.9)%       (14.9)%        (2.2)%
                                                      =====         =====         =====         =====


THIRTEEN WEEKS ENDED OCTOBER 29, 2005 COMPARED WITH THIRTEEN WEEKS ENDED OCTOBER
30, 2004

     SALES. Sales for the thirteen weeks ended October 29, 2005 increased $16.4
million, or 9.8%, over the comparable period in 2004. Comparable department
sales (departments open for the same months during the comparable periods)
increased 1.3%. Sales include $167.3 million in sales from the Finlay
departments, which represented a 0.3% increase over the $166.8 million in sales
reported in the thirteen weeks ended October 30, 2004, and $15.9 million in
sales from the Carlyle division.


                                       25



     During the thirteen weeks ended October 29, 2005, we opened 18 departments,
and closed two departments. The openings and closings were all within existing
store groups.

     GROSS MARGIN. Gross margin increased by $5.9 million in 2005 compared to
2004. As a percentage of sales, gross margin decreased by 1.3% from 50.7% to
49.4%. Approximately 0.7% of the decrease is associated with the addition of
Carlyle whose margins are typically lower than Finlay's due to the strong
emphasis on the watch category. The components of this net decrease in gross
margin are as follows:

          COMPONENT               %                      REASON
-----------------------------   -----   ----------------------------------------
Merchandise cost of sales....   (1.4)%  Increase in merchandise cost of sales is
                                        due to our efforts to increase market
                                        penetration and market share through our
                                        pricing strategy, the mix of sales with
                                        increased sales in the diamond, designer
                                        and clearance categories, which have
                                        lower margins than other categories, as
                                        well as the increased price of gold.
                                        Additionally, the increase is due to the
                                        impact of Carlyle's lower gross margins
                                        as a result of the strong emphasis on
                                        the watch category.
Other .......................    0.1    Decrease in various other components of
                                        cost of sales.
                                ----
   Total ....................   (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 increased $7.3
million, or 8.9%. As a percentage of sales, SG&A decreased by 0.4% from 49.5% to
49.1%, substantially all related to the addition of Carlyle as a result of their
lower rent structure as a percentage of sales compared to Finlay's licensed
department business. The components of this net decrease in SG&A are as follows:

          COMPONENT               %                      REASON
-----------------------------   -----   ----------------------------------------
Net advertising
   expenditures..............   (0.6)%  Decrease is primarily due to lower gross
                                        advertising expenditures and increased
                                        vendor support.

License and lease fees.......   (0.6)   Decrease is primarily due to Carlyle's
                                        significantly lower rent structure as a
                                        percentage of sales compared to Finlay's
                                        licensed department business.

Other expenses...............    0.8    Increase in other expenses is due to
                                        higher expenses for credit card fees,
                                        telephone, utilities, security and
                                        supplies as a result of Carlyle being a
                                        stand-alone retailer as well as
                                        Carlyle's higher administrative costs as
                                        a percentage of sales. Additionally, the
                                        increase is due to Finlay's lower than
                                        expected same store sales negatively
                                        impacting the leveraging of these
                                        expenses.
                                ----
   Total ....................   (0.4)%
                                ====

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.0 million primarily due to accelerated depreciation costs totaling
approximately $1.2 million associated with future store closings as a result of
the Federated/May merger, as well as additional depreciation and amortization as
a result of capital expenditures for the most recent twelve months, offset by
the effect of certain assets becoming fully depreciated.


                                       26



     INTEREST EXPENSE, NET. Interest expense increased by $1.2 million primarily
due to an increase in average borrowings ($328.9 million for the period in 2005
compared to $280.2 million in 2004) as a result of additional borrowings to
finance the acquisition of Carlyle in May 2005 and to fund Carlyle's working
capital requirements, offset by the refinancing of the Old Senior Debentures and
the Old Senior Notes during 2004. The weighted average interest rate was
approximately 7.3% for the 2005 period compared to 7.1% for the comparable
period in 2004.

     OTHER EXPENSE. Other expense for the thirteen weeks ended October 29, 2005
includes approximately $79,000 associated with a loss on foreign exchange
related to a refund of foreign taxes.

     BENEFIT FOR INCOME TAXES. The income tax benefit for the 2005 and 2004
periods reflects effective tax rates of 39.5% and 39.0%, respectively. The 2005
period reflects a benefit of approximately $0.2 million related to a refund of
foreign taxes.

     NET LOSS. Net loss of $6.9 million for the 2005 period represents an
increased loss of $2.1 million as compared to the net loss of $4.8 million in
the prior period as a result of the factors discussed above.

THIRTY-NINE WEEKS ENDED OCTOBER 29, 2005 COMPARED WITH THIRTY-NINE WEEKS ENDED
OCTOBER 30, 2004

     SALES. Sales for the thirty-nine weeks ended October 29, 2005 increased
$25.7 million, or 4.7%, over the comparable period in 2004. Comparable
department sales increased 0.6%. Sales include $538.9 million in sales from the
Finlay departments, which represented a 0.8% decrease compared to the $543.1
million in sales reported in the thirty-nine weeks ended October 30, 2004, and
$29.8 million in sales from the Carlyle division.

     During the thirty-nine weeks ended October 29, 2005, we opened 23
departments and closed ten departments. The openings and closings were all
within existing store groups.

     GROSS MARGIN. Gross margin increased by $7.6 million in 2005 compared to
2004. As a percentage of sales, gross margin decreased by 0.9% from 50.9% to
50.0%. Approximately 0.4% of the decrease is associated with the addition of
Carlyle whose margins are typically lower than Finlay's due to the strong
emphasis on the watch category. The components of this net decrease in gross
margin are as follows:

          COMPONENT               %                      REASON
-----------------------------   -----   ----------------------------------------
Merchandise cost of sales....   (0.7)%  Increase in merchandise cost of sales is
                                        due to our efforts to increase market
                                        penetration and market share through our
                                        pricing strategy, the mix of sales with
                                        increased sales in the diamond, designer
                                        and clearance categories, which have
                                        lower margins than other categories, as
                                        well as the increased price of gold.
                                        Additionally, the increase is due to the
                                        impact of Carlyle's lower gross margins
                                        as a result of the strong emphasis on
                                        the watch category.

Other .......................   (0.2)   Increase in various other components of
                                        cost of sales.
                                ----
   Total ....................   (0.9)%
                                ====

     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 increased $14.1
million, or 5.5%. As a percentage of sales, SG&A increased by 0.4% from 47.5%


                                       27



to 47.9%. Approximately 0.2% of the increase is associated with the addition of
Carlyle. The components of this net increase in SG&A are as follows:

          COMPONENT               %                      REASON
-----------------------------   ----    ----------------------------------------
Net advertising
   expenditures..............   (0.5)%  Decrease is primarily due to lower gross
                                        advertising expenditures and increased
                                        vendor support.

License and lease fees.......   (0.3)   Decrease is primarily due to Carlyle's
                                        significantly lower rent structure as a
                                        percentage of sales compared to Finlay's
                                        licensed department business.

Payroll expense..............    0.4    Increase in payroll expense is due to
                                        lower than expected same store sales
                                        negatively impacting the leveraging of
                                        payroll expense.

Other expenses...............    0.8    Increase is due to Finlay's lower than
                                        expected same store sales negatively
                                        impacting the leveraging of these
                                        expenses as well as Carlyle's higher
                                        field and administrative expenses.
                                 ---
   Total ....................    0.4%
                                 ===

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$0.6 million primarily due to accelerated depreciation costs totaling
approximately $1.3 million associated with future store closings as a result of
the Federated/May merger, as well as additional depreciation and amortization as
a result of capital expenditures for the most recent twelve months, offset by
the effect of certain assets becoming fully depreciated.

     IMPAIRMENT OF GOODWILL. During the quarter ended July 30, 2005, Federated
announced its intention to divest certain stores, beginning in 2006, for which
we operate the fine jewelry departments. Based upon this business indicator, we
utilized our SFAS No. 142 model to evaluate the carrying value of goodwill as of
July 30, 2005. As a result, we determined that goodwill was impaired and an
impairment of $77.3 million, on a pre-tax basis, was recorded during the
thirty-nine weeks ended October 29, 2005.

     INTEREST EXPENSE, NET. Interest expense increased by $0.8 million primarily
due to an increase in average borrowings ($275.6 million for the period in 2005
compared to $262.8 million in 2004) as a result of additional borrowings to
finance the acquisition of Carlyle in May 2005 and to fund Carlyle's working
capital requirements offset by the refinancing of the Old Senior Debentures and
the Old Senior Notes during 2004. The weighted average interest rate was
approximately 7.6% for both the 2005 and 2004 periods.

     OTHER EXPENSE. Other expense for the thirty-nine weeks ended October 29,
2005 includes approximately $79,000 associated with a loss on foreign exchange
related to a refund of foreign taxes. Other expense for the thirty-nine weeks
ended October 30, 2004 includes $6.7 million for redemption premiums paid on the
Old Senior Debentures and the Old Senior Notes, $2.1 million to write-off
deferred financing costs related to the refinancing of the Old Senior Debentures
and the Old Senior Notes and $0.3 million for other expenses.

     BENEFIT FOR INCOME TAXES. The income tax benefit for the 2005 and 2004
periods reflects effective tax rates of 39.5% (before reflecting the impairment
of goodwill) and 39.0%, respectively. The 2005 period reflects a benefit of
approximately $0.2 million related to a refund of foreign taxes. Additionally,
the 2005 period includes a benefit of approximately $4.4 million associated with
the impairment of goodwill and a benefit of approximately $0.2 million
associated with the reversal of tax accruals no longer required as a result of a
decrease in state tax rates. The 2004 period includes a benefit of approximately
$0.6 million associated with the reversal of tax accruals no longer required as
a result of the closure of open tax years.


                                       28



     NET LOSS. Net loss of $84.5 million for the 2005 period represents an
increased loss of $72.4 million as compared to the net loss of $12.1 million in
the prior period as a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

     Information about our financial position as of October 29, 2005 and January
29, 2005 is presented in the following table:

                               OCTOBER 29,   JANUARY 29,
                                   2005          2005
                               -----------   -----------
                                 (DOLLARS IN THOUSANDS)
Cash and cash equivalents...     $  2,540      $ 64,443
Working capital.............      220,437       234,210
Long-term debt..............      200,000       200,000
Stockholders' equity (a)....       86,796       169,181

----------
(a)  The stockholders' equity balance at October 29, 2005 reflects a charge of
     approximately $72.9 million, net of tax, related to the impairment of
     goodwill.

     Our primary capital requirements are for funding working capital for new
locations and for growth of existing locations, as well as debt service
obligations and license fees to host store groups, rent payments for the Carlyle
stores, funding potential acquisitions, and, to a lesser extent, capital
expenditures for opening new locations, renovating existing locations and
information technology investments. For 2004, capital expenditures totaled $12.7
million and for 2005 are estimated to be approximately $13 million, including
Carlyle. Although capital expenditures are limited by the terms of the Revolving
Credit Agreement, to date, this limitation has not precluded us from satisfying
our capital expenditure requirements.

     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 Revolving Credit Agreement. 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 plans and will provide adequate financing flexibility.

     Cash flows provided from (used in) operating, investing and financing
activities for the thirty-nine weeks ended October 29, 2005 and October 30, 2004
were as follows:

                                       THIRTY-NINE WEEKS ENDED
                                      -------------------------
                                      OCTOBER 29,   OCTOBER 30,
                                          2005          2004
                                      -----------   -----------
                                        (DOLLARS IN THOUSANDS)
Operating activities...............    $(161,197)    $(125,615)
Investing activities...............      (38,596)       (8,914)
Financing activities...............      137,890        46,204
                                       ---------     ---------
   Net decrease in cash and cash
      equivalents..................    $ (61,903)    $ (88,325)
                                       =========     =========

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

     o    Investment in inventory and for working capital;

     o    Strategic acquisitions;

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


                                       29



     o    Investments in technology.

OPERATING ACTIVITIES

     The primary source of our liquidity is cash flows from operating
activities. The key component of operating cash flow is merchandise sales.
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 $161.2
million and $125.6 million for the thirty-nine weeks ended October 29, 2005 and
October 30, 2004, respectively.

     Our principal operations substantially preclude customer receivables as our
license agreements 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. However, we
cannot ensure the collection of sales proceeds from our host stores.
Additionally, on average, approximately 50% of our merchandise has been carried
on consignment. Our working capital balance was $220.4 million at October 29,
2005, a decrease of $13.8 million from January 29, 2005.

     The seasonality of our business causes working capital requirements, and
therefore, borrowings under the Revolving Credit Agreement, 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 Agreement. Inventory levels increased by $98.7
million, or 35.4%, as compared to January 29, 2005, primarily as a result of the
acquisition of Carlyle, whose inventory levels were $60.0 million as of October
29, 2005, as well as seasonality.

INVESTING ACTIVITIES

     Net cash used in investing activities, consisting of payments for capital
expenditures as well as the purchase of Carlyle, was $38.6 million and $8.9
million for the thirty-nine weeks ended October 29, 2005 and October 30, 2004,
respectively. Capital expenditures during each period related primarily to
expenditures for new department openings and renovations.

FINANCING ACTIVITIES

     Proceeds from, and principal payments on, the Revolving Credit Facility
have been our primary financing activities. Net cash provided from financing
activities was $137.9 million for the thirty-nine weeks ended October 29, 2005,
consisting principally of proceeds from, and principal payments on, the
Revolving Credit Facility. Net cash provided from financing activities was $46.2
million for the thirty-nine weeks ended October 30, 2004.

     Our Revolving Credit Agreement, which matures in January 2008, provides us
with a line of credit of up to $225.0 million to finance working capital needs.
Amounts outstanding under the Revolving Credit Agreement bear interest at a rate
equal to, at our option, (i) the prime rate plus a margin ranging from zero to
1.0% or (ii) the adjusted Eurodollar rate plus a margin ranging from 1.0% to
2.0%, in each case depending on our financial performance. The weighted average
interest rate was 5.6% and 3.7% for the thirty-nine weeks ended October 29, 2005
and October 30, 2004, respectively.

     In each year, we are required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less,


                                       30



respectively, for a 30 consecutive day period (the "Balance Reduction
Requirement"). Borrowings under the Revolving Credit Agreement were $133.1
million at October 29, 2005, compared to a zero balance at January 29, 2005 and
$78.5 million at October 30, 2004. The average amounts outstanding under the
Revolving Credit Agreement were $75.6 million and $49.4 million for the
thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively. The
maximum amount outstanding for the thirty-nine weeks ended October 29, 2005 was
$158.2 million, at which point the available borrowings were an additional $55.9
million.

     On February 28, 2005, Federated and May announced that they had entered
into a merger agreement whereby Federated would acquire May. On August 30, 2005,
Federated announced that it had completed the merger with May. In September
2005, Federated announced its integration plans including a divisional
realignment and divestiture of certain stores. Accordingly, at the beginning of
2006, we expect to operate in six of Federated's nine divisions, for a total of
404 departments compared to the 598 Federated departments we currently operate
in. As a result of Federated's integration plans, we expect to no longer operate
in 198 departments. In 2004, we generated sales of approximately $243.0 from
these 198 departments. We intend to record charges associated with accelerated
depreciation of fixed assets and severance totaling approximately $7.2 million
related to these departments beginning in 2005 through the dates of the store
closings, estimated to be July 2006. During the thirty-nine weeks ended October
29, 2005, we recorded charges of approximately $1.7 million related to the
accelerated depreciation of fixed assets and severance, of which $1.6 million
was recorded in the third quarter.

     On May 19, 2005, we signed a definitive merger agreement and completed the
acquisition of Carlyle. The purchase price was approximately $29.0 million, plus
estimated transaction fees of approximately $1.7 million, and was financed with
additional borrowings under the Revolving Credit Agreement. In Carlyle's most
recent fiscal year, average borrowings under their revolving credit facility
were approximately $20.0 million. This facility was terminated and paid in full
at the closing and since the closing of the acquisition, Carlyle's cash
requirements have been, and will continue to be, funded under Finlay's Revolving
Credit Agreement. Borrowings under our Revolving Credit Agreement have increased
by approximately $54.6 million over last year as a result of the acquisition of
Carlyle in May 2005 as well as to fund Carlyle's working capital requirements.
In connection with the acquisition, we replaced the existing Revolving Credit
Agreement and entered into the Restated Credit Agreement with GECC and certain
other lenders and Finlay Jewelry entered into the Gold Consignment Amendment,
to, among other things, permit the acquisition transaction. In addition, Carlyle
and its subsidiaries, together with Finlay Jewelry, entered into the
Supplemental Indenture to guarantee obligations of Finlay Jewelry under the
Senior Notes.

     During 2004, we and Finlay Jewelry each commenced an offer to purchase for
cash our Old Senior Debentures and Finlay Jewelry's Old Senior Notes,
respectively. Holders of approximately 79% and 98% of the Old Senior Debentures
and the Old Senior Notes, respectively, tendered their securities and consented
to amendments to the related indentures. Additionally, during 2004, Finlay
Jewelry completed the sale of the Senior Notes. Interest on the Senior Notes is
payable semi-annually on June 1 and December 1 of each year.

     Finlay Jewelry incurred approximately $5.2 million in costs, including $5.0
million associated with the sale of the Senior Notes, which have been deferred
and are being amortized over the term of the Senior Notes. In June 2004, we
recorded pre-tax charges of approximately $9.1 million, including $6.7 million
for redemption premiums paid on the Old Senior Debentures and the Old Senior
Notes, $2.1 million to write-off deferred financing costs related to the
refinancing of the Old Senior Debentures and the Old Senior Notes and $0.3
million for other expenses. These costs are included in other expense in the
accompanying Consolidated Statements of Operations for the thirty-nine weeks
ended October 30, 2004.


                                       31



     The tender offers, Senior Notes offering and redemptions of the outstanding
Old Senior Debentures and Old Senior Notes were all undertaken to decrease our
overall interest rate, extend our debt maturities and decrease total long-term
debt as well as simplify our capital structure by eliminating debt at the parent
company level. As a result of the completion of the redemption of the Old Senior
Debentures in 2004, Finlay Jewelry is no longer required to provide the funds
necessary to pay the higher debt service costs associated with the Old Senior
Debentures.

     A significant amount of our operating cash flow will be used to pay
interest with respect to the Senior Notes and amounts due under the Revolving
Credit Agreement, including the payments required pursuant to the Balance
Reduction Requirement. As of October 29, 2005, our outstanding borrowings were
$333.1 million, which included a $200.0 million balance under the Senior Notes
and $133.1 million balance under the Revolving Credit Agreement, compared to
$278.5 million as of October 30, 2004.

     Our agreements covering the Revolving Credit Agreement and the Senior Notes
each require that we comply with certain restrictive and financial covenants. In
addition, Finlay Jewelry is a party to the Gold Consignment Agreement, which
also contains certain covenants. As of and for the thirty-nine weeks ended
October 29, 2005, we are in compliance with all of our covenants. We expect to
be in compliance with all of our covenants through 2005. 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
the covenants through 2005 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. As a result of the Federated/May merger and the impact of the
merger on our future results of operations, it is likely we will be required to
amend our financial covenants in 2006 with respect to the Revolving Credit
Agreement and the Gold Consignment Agreement. We anticipate receiving
appropriate approvals from our lenders. There can be no assurances that the
lenders will amend any of the covenants.

     The Revolving Credit Agreement contains customary covenants, including
limitations on, or relating to, capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. The
Revolving Credit Agreement also contains various financial covenants, including
minimum earnings and fixed charge coverage ratio requirements and certain
maximum debt limitations.

     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.

     We believe that, based upon current operations, anticipated growth and
continued availability under the Revolving Credit Agreement, Finlay Jewelry
will, for the foreseeable future, be able to meet its debt service and
anticipated working capital obligations and to make distributions sufficient to
permit us to pay certain expenses as they come due. No assurances, however, can
be given that Finlay Jewelry's current level of operating results will continue
or improve or that Finlay Jewelry's income from operations will continue to be
sufficient to permit Finlay Jewelry to meet its debt service and other
obligations. Currently, Finlay Jewelry's principal financing arrangements
restrict the amount of annual distributions from Finlay Jewelry to us. The
amounts required to satisfy the aggregate of Finlay Jewelry's interest expense
totaled $12.5 million and $10.0 million for the thirty-nine weeks ended October
29, 2005 and October 30, 2004, respectively.


                                       32



     Our long-term needs for external financing will depend on our rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with our vendors. As of October 29, 2005, $360.3
million of consignment merchandise from approximately 300 vendors was on hand as
compared to $387.8 million at October 30, 2004. For 2004, we had an average
balance of consignment merchandise of $365.2 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 October 29, 2005 (dollars in thousands):



                                                                  PAYMENTS DUE BY PERIOD
                                               ------------------------------------------------------------
                                                          LESS THAN                               MORE THAN
CONTRACTUAL OBLIGATIONS                          TOTAL      1 YEAR    1 - 3 YEARS   3 - 5 YEARS    5 YEARS
--------------------------------------------   --------   ---------   -----------   -----------   ---------

Long-Term Debt Obligations:
   Senior Notes (due 2012) (1) .............   $200,000    $     --     $    --       $    --      $200,000
Interest payments on Senior Notes ..........    117,250      16,750      33,500        33,500        33,500
Operating lease obligations (2) ............     33,951       5,841      11,229         7,680         9,201
Revolving Credit Agreement (due 2008) (3) ..    133,123     133,123          --            --            --
Gold Consignment Agreement (expires 2007) ..     49,468          --      49,468            --            --
Gold forward contracts .....................      2,339       2,339          --            --            --
Employment agreements ......................      7,994       2,804       4,939           251            --
Letters of credit ..........................     10,852      10,602          --           250            --
                                               --------    --------     -------       -------      --------
   Total ...................................   $554,977    $171,459     $99,136       $41,681      $242,701
                                               ========    ========     =======       =======      ========


----------
(1)  On June 3, 2004, Finlay Jewelry issued $200.0 million of Senior Notes due
     2012. Refer to Note 5 of Notes to the Consolidated Financial Statements.

(2)  Represents future minimum payments under noncancellable operating leases as
     of January 29, 2005 and March 26, 2005 for Finlay and Carlyle,
     respectively.

(3)  The outstanding balance under the Revolving Credit Agreement at December 2,
     2005 was $152.6 million.

     The operating leases included in the above table do not include contingent
rent based upon sales volume 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 October 29, 2005, other than as disclosed in the table above,
nor have we provided any third-party financial guarantees as of and for the
thirty-nine weeks ended October 29, 2005.

OFF-BALANCE SHEET ARRANGEMENTS

     Finlay Jewelry's Gold Consignment Agreement enables Finlay Jewelry to
receive consignment merchandise by providing gold, or otherwise making payment,
to certain vendors. While the merchandise involved remains consigned, title to
the gold content of the merchandise transfers from the vendors to the gold
consignor. On July 29, 2005, Finlay Jewelry amended the Gold Consignment
Agreement to among other things, extend the maturity date to October 31, 2007,
and to establish financial covenants (including minimum earnings and fixed
charge coverage ratio requirements and certain maximum debt limitations). The
Gold Consignment Agreement permits Finlay Jewelry to consign up to the lesser of
(i) 165,000 fine troy ounces or (ii) $50.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement. At October 29, 2005,
amounts outstanding under the Gold Consignment Agreement totaled 105,084 fine
troy ounces, valued at $49.5 million. The average amount outstanding under the
Gold Consignment Agreement was $48.9 million in 2004. In the event this
agreement is terminated, Finlay Jewelry would be required to return the gold or
purchase the outstanding gold at the prevailing gold rate in effect on that
date. For financial statement purposes, the consigned gold is not included in
merchandise inventories on the Consolidated Balance Sheets and, therefore, no
related liability has been recorded.


                                       33



     The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the creation of liens, engaging in transactions with affiliates
and limitations on the payment of dividends. In addition, the Gold Consignment
Agreement also contains various financial covenants, including minimum earnings
and fixed charge coverage ratio requirements and certain maximum debt
limitations. At October 29, 2005, Finlay Jewelry was in compliance with all of
its covenants under the Gold Consignment Agreement.

     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 of four years commencing on
January 30, 2005 and 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.

     During 2005, we entered into employment agreements with certain executives
of the Company. Each of the employment agreements has a term of three years,
unless earlier terminated in accordance with the provisions of the employment
agreements. The agreements provide for annual salary levels totaling
approximately $1.8 million, incentive compensation based on meeting specific
financial goals and a special bonus equal to 50% of the executives' salary if
employed by the Company on June 30, 2008.

     From time to time, we enter into forward contracts based upon the
anticipated sales of gold product in order to hedge against the risk arising
from our payment arrangements. At October 29, 2005, we had one open position in
a gold forward contract totaling 5,000 fine troy ounces, to purchase gold for
$2.3 million. There can be no assurance that these hedging techniques will be
successful or that hedging transactions will not adversely affect our results of
operations or financial position. A significant change in prices of key
commodities, including gold, could adversely affect the Company's business by
reducing operating margins and impacting consumer demand if retail prices are
increased significantly.

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 2004 accounted
for approximately 41% of our sales and approximately 90% of our income from
operations. 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 Agreement. 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 discussed.


                                       34



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. A summary of our significant accounting
policies and a description of accounting policies that we believe are most
critical may be found in Note 2 to the consolidated financial statements
included in our Form 10-K for the year ended January 29, 2005.

     MERCHANDISE INVENTORIES

     We value our inventories at the lower of cost or market. The cost is
determined by the LIFO method utilizing an internally generated index. We
determine the LIFO cost on an interim basis by estimating annual inflation
trends, annual purchases and ending inventory levels for the fiscal year. Actual
annual inflation rates and inventory balances as of the end of any fiscal year
may differ from interim estimates, and, as such, estimates are adjusted in the
fourth quarter of each year. Factors related to inventories, such as future
consumer demand and the economy's impact on consumer discretionary spending,
inventory aging, ability to return merchandise to vendors, merchandise condition
and anticipated markdowns, are analyzed to determine estimated net realizable
values. An adjustment is recorded to reduce the LIFO cost of inventories, if
required, to their estimated net realizable values. Any significant
unanticipated changes in the factors above could have a significant impact on
the value of the inventories and our reported operating results. Adjustments to
earnings resulting from changes in historical loss trends have been
insignificant for the thirteen weeks and thirty-nine weeks ended October 29,
2005 and October 30, 2004. Further, we do not anticipate any significant change
in LIFO that would cause a significant change in our earnings.

     We estimate inventory shrinkage for the period from the last inventory date
to the end of the reporting period on a store-by-store basis. Our inventory
shortage estimate can be affected by changes in merchandise mix and changes in
actual shortage trends. The shrinkage rate from the most recent physical
inventory, in combination with historical experience, is the basis for
estimating shrinkage. As of October 29, 2005, our shrink reserve totaled $0.9
million, compared to $1.5 million as of October 30, 2004.

     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 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 EITF Issue No.
02-16, "Accounting by a Customer (Including a Reseller) for Cash Consideration
Received from a Vendor". Vendor allowances provided as a reimbursement of
specific, incremental and identifiable costs incurred to promote a vendor's
products are recorded as an SG&A reduction when the cost is incurred. All other
vendor


                                       35



allowances are initially deferred with the deferred amounts recognized as a
reduction in cost of sales when the related product is sold. The amounts
recognized as a reduction in cost of sales has not differed significantly over
the past three fiscal years.

     As of October 29, 2005 and January 29, 2005, deferred vendor allowances
totaled (i) $11.9 million and $14.8 million, respectively, for owned
merchandise, which allowances are included as an offset to merchandise
inventories on the Consolidated Balance Sheets, and (ii) $6.7 million and $8.4
million, respectively, for merchandise received on consignment, which allowances
are included as deferred income on the Consolidated Balance Sheets.

     LONG-LIVED ASSETS

     The Company's judgment regarding the existence of impairment indicators is
based on market and operational performance. We assess the impairment of
long-lived assets, primarily fixed assets, whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review include the
following:

          o    Significant changes in the manner of our use of assets or the
               strategy for our overall business;

          o    Significant negative industry or economic trends; or

          o    Store closings, particularly in light of the recently announced
               store closings resulting from the Federated/May merger.

When we determine that the carrying value of long-lived assets other than
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of impairment, we recognize an impairment loss at the time the
undiscounted estimated future net cash flows expected to be generated by an
asset (or group of assets) is less than its carrying value. We measure
impairment losses as the amount by which the asset's carrying value exceeds its
fair value. To the extent future cash flows are less than anticipated,
additional impairment charges may result. There have been no adjustments to
earnings resulting from the impairment of long-lived assets for the thirteen
weeks and thirty-nine weeks ended October 29, 2005. We also review the estimated
useful lives of the assets and reduce such lives if necessary. During the
thirty-nine weeks ended October 29, 2005, we recorded charges of approximately
$1.3 million related to the accelerated depreciation of fixed assets as a result
of the store closings resulting from the Federated/May merger.

     REVENUE RECOGNITION

     We recognize revenue upon the sale of merchandise, either owned or
consigned, to our customers, net of anticipated returns. The provision for sales
returns is based on historical evidence of our return rate. We recorded an
allowance for sales returns of $1.5 million for both the thirty-nine weeks ended
October 29, 2005 and October 30, 2004. Adjustments to earnings resulting from
revisions to estimates on our sales return provision has been insignificant for
the thirteen weeks and thirty-nine weeks ended October 29, 2005 and October 30,
2004.

     SELF-INSURANCE RESERVES

     Other than with respect to our Carlyle operations, we are self-insured for
medical and workers' compensation claims up to certain maximum liability
amounts. Although the amounts accrued are determined based on analysis of
historical trends of losses, settlements, litigation costs and other factors,
the amounts that we will ultimately disburse could differ materially from the
accrued amounts. Self-insurance reserves aggregated $7.1 million and $5.8
million at October 29, 2005 and October 30, 2004, respectively.


                                       36



     INCOME TAXES

     In accordance with SFAS No. 109 "Accounting for Income Taxes," income taxes
must be accounted for by the asset/liability method. The income tax effects of
all revenues, expenses, gains, losses and other events that create differences
between the tax basis of assets and liabilities and their amounts for financial
reporting are required to be recognized. Inherent in the measurement of these
tax effects are certain judgments and interpretations of existing tax law and
other published guidance as applied to the Company's operations. Our effective
tax rate considers management's judgment of expected tax liabilities in the
various taxing jurisdictions within which it is subject to tax. At any given
time, multiple tax years are open to audit by various taxing authorities. The
recorded amounts of income tax are subject to adjustment upon audit, changes in
interpretation and changes in judgment utilized in determining estimates.

     The income tax provision for the 2005 period and the 2004 period reflects
effective tax rates of 39.5% (before reflecting the impairment of goodwill) and
39.0%, respectively. During the third quarter of 2005, a benefit of
approximately $0.2 million was recorded resulting from a refund of foreign
taxes. During the second quarter of 2005, a benefit of approximately $4.4
million was recorded resulting from the impairment of goodwill and a benefit of
approximately $0.2 million was recorded associated with the reversal of tax
accruals no longer required as a result of a decrease in state tax rates. During
the second quarter of 2004, a benefit of approximately $0.6 million was recorded
associated with the reversal of tax accruals no longer required, primarily as
the result of the closing of open tax years. Further, in 2004, we recorded
refunds claimed for foreign taxes originally paid in 1995 and 1996, together
with an adjustment for foreign tax credits previously used to reduce U.S. income
tax liability. This resulted in a net recovery of foreign tax of approximately
$0.6 million.

     ACCOUNTING FOR ACQUISITIONS

     In May 2005, we completed the acquisition of Carlyle. Carlyle operates 34
specialty jewelry stores, located primarily in the southeastern United States.
The acquisition of Carlyle is being accounted for under the purchase method of
accounting in accordance with SFAS No. 141, "Business Combinations". As such, we
have undertaken an analysis of the fair value of identified tangible and
intangible assets and liabilities, and determined the excess of fair value of
net assets acquired over cost. We utilized estimates to determine the fair value
of inventory and certain acquisition costs. We will continue to monitor our
estimates of the fair value of the assets and liabilities as we may adjust these
amounts. We believe that any changes to these amounts will not have a material
impact on our financial condition or results of operations.

     RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation". This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123(R) requires that the fair value of such equity
instruments be recognized as expense in the historical financial statements as
services are performed. Currently, only certain pro forma disclosures of fair
value are required. Although we are in the process of determining the impact of
this Statement on our results of operations, the historical impact under SFAS
No. 123 "Accounting for Stock-Based Compensation" is disclosed in Note 2 to the
Consolidated Financial Statements. We will adopt SFAS No. 123(R) for the first
quarter of fiscal 2006.

     In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3".
SFAS No. 154 changes the requirements for the accounting for, and reporting of,
a change in accounting principle. Previously, voluntary changes in accounting
principle were required to be recognized by including in net income of the
period of change the cumulative effect of changing to the new accounting
principle. SFAS No. 154


                                       37



requires retrospective application to prior periods financial statements, unless
it is impractical to do so. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 is not expected to have a material effect on our
Consolidated Financial Statements.

FORWARD-LOOKING INFORMATION AND RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

     This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. 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. 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 SALES PRIMARILY DEPEND UPON OUR HOST STORE RELATIONSHIPS. THE LOSS OF
OUR RELATIONSHIP WITH FEDERATED, OR SIGNIFICANT STORE CLOSURES BY OUR HOST STORE
GROUPS, COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.

     On August 30, 2005, Federated announced that it had completed the merger
with May. In September 2005, Federated announced its integration plans and,
accordingly, at the beginning of 2006, we expect to operate in six of
Federated's nine divisions, for a total of 404 departments compared to the 598
Federated departments we currently operate in. A decision by Federated, or
certain of our other host store groups, to terminate existing relationships,
transfer the operation of some or all of their departments to a competitor,
assume the operation of those departments themselves, or close a significant
number of stores, could have a material adverse effect on our business and
financial condition. During 2004, approximately 78% of our sales were generated
by departments operated in store groups owned by Federated and those stores
previously owned by May.

     SEASONALITY OF THE RETAIL JEWELRY BUSINESS AND FLUCTUATIONS IN OUR
QUARTERLY RESULTS COULD ADVERSELY AFFECT OUR PROFITABILITY.

     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 2004 accounted
for 41% of our sales and 90% of our operating income. 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
our revolving credit facility. This pattern is expected to continue. A
substantial decrease in sales during the fourth quarter, whether resulting from
adverse weather conditions, natural disasters or any other cause, would have a
material adverse effect on our profitability.

     OUR LOCATIONS ARE HEAVILY DEPENDENT ON CUSTOMER TRAFFIC AND THE CONTINUED
POPULARITY OF OUR HOST STORES AND MALLS.

     The success of our locations depends, in part, on the ability of host
stores to generate consumer traffic in their stores, and the continuing
popularity of malls and department stores as shopping destinations. Sales volume
and customer traffic may be adversely affected by economic slowdowns in a
particular geographic area, the closing of anchor tenants, or competition from
retailers such as discount and mass merchandise stores and other department
stores where we do not have locations.


                                       38



     WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, FINANCE, INTEGRATE OR MAKE
ACQUISITIONS OUTSIDE OF THE LICENSED JEWELRY DEPARTMENT BUSINESS.

     We may from time to time examine opportunities to acquire or invest in
companies or businesses that complement our existing core business, such as our
recent acquisition of Carlyle. There can be no assurance that the Carlyle
acquisition or any other future acquisitions by us will be successful or improve
our operating results. In addition, our ability to complete acquisitions will
depend on the availability of both suitable target businesses and acceptable
financing. Any acquisitions may result in a potentially dilutive issuance of
additional equity securities, the incurrence of additional debt or increased
working capital requirements. Such acquisitions could involve numerous
additional risks, including difficulties in the assimilation of the operations,
products, services and personnel of any acquired company, diversion of our
management's attention from other business concerns, and expansion into new
businesses with which we may have no prior experience.

     OUR PROFITABILITY DEPENDS, IN PART, UPON OUR ABILITY TO CONTINUE TO OBTAIN
SUBSTANTIAL AMOUNTS OF MERCHANDISE ON CONSIGNMENT AND ON FINLAY JEWELRY'S
ABILITY TO CONTINUE ITS GOLD CONSIGNMENT AGREEMENT.

     In recent years, on average, approximately 50% of our merchandise has been
obtained on consignment. The willingness of vendors to enter into such
arrangements may vary substantially from time to time based on a number of
factors, including the merchandise involved, the financial resources of vendors,
interest rates, availability of financing, fluctuations in gem and gold prices,
inflation, our financial condition and a number of other economic or competitive
conditions in the jewelry business or generally. In addition, Finlay Jewelry's
Gold Consignment Agreement allows us to receive consignment merchandise by
providing gold, or otherwise making payment, to certain vendors. As the price of
gold increases, the amount of consigned gold that is available to us is reduced
pursuant to the limitations of the Gold Consignment Agreement. Additionally, in
the event that this agreement is terminated, Finlay Jewelry would be required to
return the gold or purchase the outstanding gold at the prevailing, and
potentially higher, gold price in effect on that date.

     TERRORIST ATTACKS, ACTS OF WAR, OR OTHER FACTORS AFFECTING DISCRETIONARY
CONSUMER SPENDING MAY ADVERSELY AFFECT OUR INDUSTRY, OUR OPERATIONS AND OUR
PROFITABILITY.

     Terrorist activities, armed hostilities and other political instability, as
well as a decline in general economic conditions, including the country's
financial markets, a decline in consumer credit availability, increases in
prevailing interest rates, or increases in energy costs, could materially reduce
discretionary consumer spending particularly with respect to luxury items and,
therefore, materially adversely affect our business and financial condition,
especially if such changes were to occur in the fourth quarter of our fiscal
year.

     VOLATILITY IN THE AVAILABILITY AND COST OF PRECIOUS METALS AND PRECIOUS AND
SEMI-PRECIOUS STONES COULD ADVERSELY AFFECT OUR BUSINESS.

     The jewelry industry in general is affected by fluctuations in the prices
of precious metals and precious and semi-precious stones. The availability and
prices of gold, diamonds and other precious metals and precious and
semi-precious stones may be influenced by cartels, political instability in
exporting countries and inflation. Shortages of these materials or sharp changes
in their prices could have a material adverse effect on our results of
operations or financial condition. Although we attempt to protect against such
fluctuations in the price of gold by entering into gold forward contracts, there
can be no assurance that these hedging practices will be successful or that
hedging transactions will not adversely affect our results of operations or
financial condition. A significant change in prices of key commodities,
including gold, could adversely affect the Company's business by reducing
operating margins and impacting consumer demand if retail prices are increased
significantly.


                                       39



     THE RETAIL JEWELRY BUSINESS IS HIGHLY COMPETITIVE.

     We face competition for retail jewelry sales from national and regional
jewelry chains, other department stores, local independently owned jewelry
stores and chains, specialty stores, mass merchandisers, catalog showrooms,
discounters, direct mail suppliers, internet merchants and televised home
shopping. Some of our competitors are substantially larger and have greater
financial resources than our business.

     WE MAY NOT BE ABLE TO COLLECT PROCEEDS FROM OUR HOST STORES.

     Our license agreements typically require the host stores to remit the net
sales proceeds for each month to us approximately three weeks after the end of
such month. However, we cannot assure you that we will timely collect the net
sales proceeds due to us from our host stores. If one or more host stores fail
to remit the net sales proceeds for a substantial period of time or during the
fourth quarter of our fiscal year due to financial instability, insolvency or
otherwise, this could have a material adverse impact on our liquidity.

     WE ARE DEPENDENT ON SEVERAL KEY VENDORS AND OTHER SUPPLIERS.

     In 2004, merchandise obtained by us from our five largest vendors generated
approximately 31% of sales, and merchandise obtained from our largest vendor
generated approximately 10% of sales. Additionally, in Carlyle's most recent
fiscal year, merchandise obtained from its two largest vendors generated
approximately 20% of their sales. There can be no assurances that we can
identify, on a timely basis, alternate sources of merchandise supply in the case
of an abrupt loss of any of our significant suppliers. Additionally, we receive
allowances from our vendors through a variety of programs and arrangements,
including cooperative advertising. A significant reduction in the collection of
such allowances may negatively impact our future gross margins and/or increase
future SG&A, and may reduce future net income.

     OUR SUCCESS DEPENDS ON OUR ABILITY TO IDENTIFY AND RAPIDLY RESPOND TO
FASHION TRENDS.

     The jewelry industry is subject to rapidly changing fashion trends and
shifting consumer demands. Accordingly, our success depends on the priority that
our target customers place on fashion and our ability to anticipate, identify
and capitalize upon emerging fashion trends.

     WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND OUR BUSINESS OR INCREASE THE
NUMBER OF DEPARTMENTS WE OPERATE.

     A significant portion of our growth in sales and income from operations in
recent years has resulted from our ability to obtain licenses to operate
departments in new host store groups and the addition of new departments in
existing host store groups. We cannot predict the number of departments we will
operate in the future or whether our expansion, if any, will be at levels
comparable to that experienced to date.

     WE COULD BE MATERIALLY ADVERSELY AFFECTED IF OUR DISTRIBUTION OPERATIONS
ARE DISRUPTED.

     In the event that our distribution facilities were to shut down or
otherwise become inoperable or inaccessible for any reason, we could incur
higher costs and longer lead times associated with the distribution of
merchandise to our stores during the time it takes to reopen or replace the
facility.


                                       40



     WE ARE HEAVILY DEPENDENT ON OUR MANAGEMENT INFORMATION SYSTEMS.

     The efficient operation of our business is heavily dependent on our
management information systems. In particular, we rely on our inventory and
merchandising control system, which allows us to make better decisions in the
allocation and distribution of our merchandise. Our business and operations
could be materially and adversely affected if our systems were inoperable or
inaccessible or if we were not able, for any reason, to successfully restore our
systems and fully execute our disaster recovery plan.

     WE DEPEND ON KEY PERSONNEL.

     Our success depends to a significant extent upon our ability to retain key
personnel, particularly Arthur E. Reiner, our Chairman and Chief Executive
Officer. The loss of Mr. Reiner's services or one or more of our current members
of senior management, or our failure to attract talented new employees, could
have a material adverse effect on our business.

     OUR SUBSTANTIAL DEBT AND DEBT SERVICE REQUIREMENTS COULD ADVERSELY AFFECT
OUR BUSINESS.

     We currently have a significant amount of debt. As of October 29, 2005, we
had $333.1 million of debt outstanding which included a $200.0 million balance
under the Senior Notes and $133.1 million balance under the Revolving Credit
Agreement, excluding $10.9 million in letters of credit. During the thirty-nine
weeks ended October 29, 2005, our average revolver balance was $75.6 million and
we peaked in usage at $158.2 million, at which point the available borrowings
were an additional $55.9 million. In addition, as of October 29, 2005, the value
of gold outstanding under the Gold Consignment Agreement totaled $49.5 million.
Subject to the terms of our indebtedness, we may incur additional indebtedness,
including secured debt, in the future.

     THE TERMS OF OUR DEBT INSTRUMENTS AND OTHER OBLIGATIONS IMPOSE FINANCIAL
AND OPERATING RESTRICTIONS.

     The Revolving Credit Agreement, Gold Consignment Agreement and the
indenture relating to the Senior Notes contain restrictive covenants that will
limit our ability to engage in activities that may be in our long-term best
interests. These covenants include limitations on, or relating to, capital
expenditures, liens, indebtedness, investments, mergers, acquisitions,
affiliated transactions, management compensation and the payment of dividends
and other restricted payments. As a result of the Federated and May merger, and
the impact of the merger on our future results of operations, it is likely we
will be required to amend our financial covenants in 2006 with respect to the
Revolving Credit Agreement and the Gold Consignment Agreement. We anticipate
receiving appropriate approvals from our lenders. There can be no assurances
that the lenders will amend any of the covenants.

     THE FUTURE IMPACT OF LEGAL AND REGULATORY ISSUES IS UNKNOWN.

     Our business is subject to government laws and regulations including, but
not limited to, employment laws and regulations, state advertising regulations,
quality standards imposed by federal law, and other laws and regulations. A
violation or change of these laws could have a material adverse effect on our
business, financial condition and results of operations. In addition, the future
impact of litigation arising in the ordinary course of business may have an
adverse effect on the financial results or reputation of the company.

      CARLYLE'S BUSINESS COULD BE ADVERSELY AFFECTED IF IT IS UNABLE TO
SUCCESSFULLY NEGOTIATE FAVORABLE LEASE TERMS.

      All of the Carlyle stores are leased. As of October 29, 2005, Carlyle had
a total of 34 leased stores. Carlyle's store leases are generally for a term of
ten years, with rent being a fixed minimum base plus for


                                       41



certain of the stores, a percentage of the store's sales in excess of a
specified threshold. Carlyle has generally been successful in negotiating leases
for new stores and lease renewals as its current leases near expiration.
However, Carlyle's business, financial condition, and operating results could be
adversely affected if Carlyle is unable to continue to negotiate favorable lease
and renewal terms.

     Readers are cautioned not to 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to market risk through the interest rate on our borrowings
under the Revolving Credit Agreement, which has a variable interest rate. Based
on the average amounts outstanding under the Revolving Credit Agreement for
2004, a 100 basis point change in interest rates would have resulted in an
increase in interest expense of approximately $0.5 million in 2004. 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 4 of Notes to 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 do not fully hedge our current positions.

     In 2005, we entered into forward contracts for the purchase of a portion of
our gold in order to hedge the risk of gold price fluctuations. The table below
provides information about our derivative financial instruments that are
sensitive to gold prices as of October 29, 2005:

                   CONTRACT    FINE TROY   PREVAILING
                  SETTLEMENT   OUNCES OF   GOLD PRICE   CONTRACT FAIR
   COMMODITY         DATE        GOLD       PER OUNCE    MARKET VALUE
---------------   ----------   ---------   ----------   -------------
Gold               12/30/05      5,000       $474.08      $2,370,000

     Based on the amount of sales of gold product, a $10 change in the price of
gold may have impacted gross margin by approximately $0.2 million and $0.6
million for the thirteen weeks and thirty-nine weeks ended October 29, 2005,
respectively.

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 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.


                                       42



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 October 29, 2005 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 October 29, 2005.

     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.

     There have been no changes in our internal controls over financial
reporting that occurred during our last fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. We excluded from our
assessment any changes in internal control over financial reporting within the
Carlyle division, which was acquired on May 19, 2005, and whose financial
statements reflect total assets and net sales constituting 12.0% and 8.7%,
respectively, of the related consolidated financial statement amounts as of and
for the thirteen weeks ended October 29, 2005. We will include the Carlyle
division in our evaluation of the design and effectiveness of internal control
over financial reporting as of February 3, 2007.


                                       43



PART II - OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

     There were no repurchases of equity securities made by us during the third
quarter of 2005.

     As of October 29, 2005, and from inception of our stock repurchase program,
which expired in September 2005, we repurchased a total of 2,207,904 shares for
$27.4 million.

ITEM 6. EXHIBITS

EXHIBIT NO.   DESCRIPTION
-----------   -----------
     2        Not Applicable.

     3        Not Applicable.

     4        Not Applicable.

    10        Not Applicable.

    11        Statement re: Computation of earnings per share (not required
              because the relevant computation can be clearly determined from
              material contained in the financial statements).

    15        Not applicable.

    18        Not applicable.

    19        Not applicable.

    22        Not applicable.

    23        Not applicable.

    24        Not applicable.

   31.1       Certification of principal executive officer pursuant to the
              Sarbanes-Oxley Act of 2002, Section 302.

   31.2       Certification of principal financial officer pursuant to the
              Sarbanes-Oxley Act of 2002, Section 302.

   32.1       Certification of principal executive officer pursuant to the
              Sarbanes-Oxley Act of 2002, Section 906.

   32.2       Certification of principal financial officer pursuant to the
              Sarbanes-Oxley Act of 2002, Section 906.


                                       44



                                   SIGNATURES

     Pursuant to the requirement 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 2, 2005                 FINLAY ENTERPRISES, INC.


                                       By: /s/ Bruce E. Zurlnick
                                           -------------------------------------
                                           Bruce E. Zurlnick
                                           Senior Vice President, Treasurer
                                           and Chief Financial Officer
                                           (As both a duly authorized officer of
                                           Registrant and as principal financial
                                           officer of Registrant)


                                       45`