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



                       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  August 1, 1998
                                               --------------

                                       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 ____
                               
As of September 11, 1998,  there were  10,402,653  shares of common  stock,  par
value $.01 per share, of the Registrant outstanding.
<PAGE>

                             FINLAY ENTERPRISES, INC

                                    FORM 10-Q

                      QUARTERLY PERIOD ENDED AUGUST 1, 1998

                                      INDEX



                                                                         PAGE(S)

PART I - FINANCIAL INFORMATION

 Item 1. Consolidated Financial Statements (Unaudited)

         Consolidated Statements of Operations for the thirteen weeks and
         twenty-six weeks ended August 2, 1997 and August 1, 1998..............1

         Consolidated Balance Sheets as of January 31, 1998 and 
         August 1, 1998........................................................3

         Consolidated Statements of Changes in Stockholders' Equity for the year
         ended January 31, 1998 and twenty-six weeks ended August 1, 1998......4

         Consolidated Statements of Cash Flows for the thirteen weeks and
         twenty-six weeks ended August 2, 1997 and August 1, 1998..............5

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

 Item 2. Management's Discussion and Analysis of
         Financial Condition and Results of Operations........................13

PART II - OTHER INFORMATION

 Item 4. Submission of Matters to a Vote of Security Holders..................21

 Item 6. Exhibits and Reports on Form 8-K.....................................21

SIGNATURES....................................................................23
 
<PAGE>


PART 1 - FINANCIAL INFORMATION
  Item 1. Consolidated Financial Statements



                            FINLAY ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (in thousands, except share and per share data)
                                   (unaudited)
<TABLE>
<CAPTION>


                                                                       Thirteen Weeks Ended
                                                                 -----------------------------------

                                                                   August 2,             August 1,
                                                                      1997                 1998
                                                                 -------------        --------------

<S>                                                              <C>                  <C>         
Sales......................................................      $   148,060          $    177,366
Cost of sales..............................................           72,112                87,309
                                                                 -------------        --------------
    Gross margin...........................................           75,948                90,057
Selling, general and administrative expenses...............           66,424                79,998
Depreciation and amortization..............................            2,939                 3,907
                                                                 -------------        --------------
    Income (loss) from operations..........................            6,585                 6,152
Interest expense, net......................................            8,449                 8,025
Nonrecurring interest associated with refinancing..........            -                       655
                                                                 -------------        --------------
    Income (loss) before income taxes and extraordinary 
     charges...............................................           (1,864)               (2,528)
Provision (credit) for income taxes........................             (486)                 (811)
                                                                 -------------        --------------
    Income (loss) before extraordinary charges.............           (1,378)               (1,717)
Extraordinary charges from early extinguishment of debt,                             
      net of income tax benefit of $4,765..................            -                     7,415
                                                                 -------------        --------------
    Net income (loss)......................................      $    (1,378)         $     (9,132)
                                                                 =============        ==============

Net income (loss) per share applicable to common shares:
    Basic net income (loss) per share:
       Before extraordinary charges........................      $     (0.19)         $      (0.17)
                                                                 =============        ==============
       Extraordinary charges from early extinguishment 
          of debt..........................................      $      -             $      (0.71)
                                                                 =============        ==============
       Net income (loss)...................................      $     (0.19)         $      (0.88)
                                                                 =============        ==============
    Diluted net income (loss) per share:
       Before extraordinary charges........................      $     (0.18)         $      (0.17)
                                                                 =============        ==============
       Extraordinary charges from early extinguishment 
          of debt..........................................      $      -             $      (0.71)
                                                                 =============        ==============
        Net income (loss)...................................     $     (0.18)         $      (0.88)
                                                                 =============        ==============
Weighted average shares and share equivalents outstanding..        7,501,786            10,393,086
                                                                 =============        ==============
</TABLE>






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


                                       1
<PAGE>
   
                            FINLAY ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (in thousands, except share and per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                               
                                                                       Twenty-Six Weeks Ended
                                                                 -----------------------------------

                                                                   August 2,             August 1,
                                                                      1997                 1998
                                                                 -------------        --------------

<S>                                                              <C>                  <C>         
Sales......................................................      $   282,652          $    338,358
Cost of sales..............................................          137,834               165,413
                                                                 -------------        --------------
    Gross margin...........................................          144,818               172,945
Selling, general and administrative expenses...............          131,591               156,947
Depreciation and amortization..............................            5,692                 7,701
                                                                 -------------        --------------
    Income (loss) from operations..........................            7,535                 8,297
Interest expense, net......................................           16,148                17,030
Nonrecurring interest associated with refinancing..........            -                       655
                                                                 -------------        --------------
    Income (loss) before income taxes and extraordinary
      charges..............................................           (8,613)               (9,388)
Provision (credit) for income taxes........................           (3,009)               (3,469)
                                                                 -------------        --------------
    Income (loss) before extraordinary charges.............           (5,604)               (5,919)
Extraordinary charges from early extinguishment of debt,                             
      net of income tax benefit of $4,765..................            -                     7,415
                                                                 -------------        --------------
    Net income (loss)......................................      $    (5,604)         $    (13,334)
                                                                 =============        ==============

Net income (loss) per share applicable to common shares:
    Basic net income (loss) per share:
       Before extraordinary charges........................      $     (0.76)         $      (0.59)
                                                                 =============        ==============
       Extraordinary charges from early extinguishment 
          of debt..........................................      $      -             $      (0.74)
                                                                 =============        ==============
       Net income (loss)...................................      $     (0.76)         $      (1.33)
                                                                 =============        ==============
    Diluted net income (loss) per share:
       Before extraordinary charges........................      $     (0.75)         $      (0.59)
                                                                 =============        ==============
       Extraordinary charges from early extinguishment 
          of debt..........................................      $       -            $      (0.74)
                                                                 =============        ==============
       Net income (loss)...................................      $     (0.75)         $      (1.33)
                                                                 =============        ==============
Weighted average shares and share equivalents outstanding..        7,497,210            10,057,033
                                                                 =============        ==============








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


                                       2

<PAGE>

                            FINLAY ENTERPRISES, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)

                                                                                     (unaudited)
                                                                  January 31,         August 1,
                                                                      1998              1998
                                                                 -------------     --------------
                                      ASSETS
Current assets
  Cash and cash equivalents....................................  $    13,588       $      2,890
  Accounts receivable - department stores......................       20,772             37,066
  Other receivables............................................        6,862             21,114
  Merchandise inventories......................................      279,766            307,273
  Prepaid expenses and other...................................        1,781              3,674
                                                                 -------------     --------------
     Total current assets......................................      322,769            372,017
                                                                 -------------     --------------
Fixed assets
  Equipment, fixtures and leasehold improvements...............       95,257            102,378
  Less - accumulated depreciation and amortization.............       28,249             33,557
                                                                 -------------     --------------
     Fixed assets, net.........................................       67,008             68,821
                                                                 -------------     --------------
Deferred charges and other assets..............................       14,188             12,215
Goodwill.......................................................      104,271            102,384
                                                                 -------------     --------------
     Total assets..............................................  $   508,236       $    555,437
                                                                 =============     ==============

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
  Notes payable................................................  $     -           $    128,695
  Accounts payable - trade.....................................      160,434             78,348
  Accrued liabilities:
     Accrued salaries and benefits.............................       12,694             13,646
     Accrued miscellaneous taxes...............................        5,014              3,496
     Accrued insurance.........................................          215              1,290
     Accrued interest..........................................        3,902              5,655
     Accrued management transition and consulting..............        1,092                808
     Other.....................................................       15,558             12,555
  Income taxes payable.........................................       14,246              -
  Deferred income taxes........................................        1,219              1,845
                                                                 -------------     --------------
     Total current liabilities.................................      214,374            246,338
Long-term debt.................................................      221,026            225,000
Other non-current liabilities..................................          497              8,483
                                                                 -------------     --------------
     Total liabilities.........................................      435,897            479,821
                                                                 -------------     --------------
Stockholders' equity
  Common Stock, par value $.01 per share; authorized 25,000,000
    shares; issued and outstanding 9,779,050 and 10,411,653 
    shares, respectively.......................................           98                104
  Additional paid-in capital ..................................       86,135            101,381
  Distributions to investor group in excess of carryover basis.      (24,390)           (24,390)
  Note receivable from stock sale..............................       (1,001)             -
  Retained earnings (deficit)..................................       18,340              5,006
  Foreign currency translation adjustment......................       (6,843)            (6,485)
                                                                 -------------     --------------
     Total stockholders' equity................................       72,339             75,616
                                                                 -------------     --------------
     Total liabilities and stockholders' equity................  $   508,236       $    555,437
                                                                 =============     ==============
</TABLE>


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


                                       3

<PAGE>

                            FINLAY ENTERPRISES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
<CAPTION>



                                                              Distributions      
                                                                    to
                              Common Stock                    investor group       Note                    Foreign 
                          ---------------------  Additional         in          Receivable     Retained    Currency        Total
                            Number                Paid-in        excess of         from        Earnings   Translation  Stockholders'
                           of shares    Amount    Capital     carryover basis   Stock Sale    (Deficit)    Adjustment     Equity
                          -----------   ------  -----------   ---------------- ------------  ----------- ------------ -------------
<S>              <C>        <C>         <C>     <C>           <C>               <C>          <C>         <C>           <C>       
Balance, February 1, 1997.  7,558,838   $   76  $    47,725   $      (24,390)   $  (1,001)   $    3,145  $   (3,050)   $   22,505
 Net income (loss).......       -          -          -                -            -            15,195       -            15,195
 Foreign currency  
  translation adjutment..       -          -          -                -            -             -          (3,793)       (3,793)
 Issuance of Common        
  Stock..................   2,196,971       22       38,102            -            -             -           -            38,124
 Exercise of stock         
   options...............      23,241      -            308            -            -             -           -               308
                          -----------   ------  -----------   ---------------- ------------  ----------- ------------  ------------
Balance, January 31, 1998   9,779,050       98       86,135          (24,390)      (1,001)       18,340      (6,843)       72,339
 Net income (loss).......       -          -          -                -            -           (13,334)      -           (13,334)
 Foreign currency
  translation adjustment.       -          -          -                -            -             -             358           358
 Issuance of Common        
  Stock..................     567,310        6       13,753            -            -             -           -            13,759 
 Note receivable        
  repayment..............       -          -          -                -            1,001         -           -             1,001
 Exercise of stock          
  options................      65,293      -          1,493            -            -             -           -             1,493
Balance, August 1,        -----------   ------   ----------   ---------------- ------------  ----------- ------------  ------------
 1998 (unaudited)........  10,411,653   $  104   $  101,381   $      (24,390)   $   -        $    5,006  $   (6,485)   $   75,616 
                          ===========   ======   ==========   ================ ============  =========== ============  ============
</TABLE>









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






                                       4



<PAGE>


                            FINLAY ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>


                                                                                         Thirteen Weeks Ended
                                                                                     ------------------------------
                                                                                      August 2,        August 1,
                                                                                        1997              1998
                                                                                     ------------     -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                  <C>              <C>         
  Net income (loss)..............................................................    $   (1,378)      $    (9,132)
  Adjustments to reconcile net income (loss) to net cash used in
     operating activities:
  Depreciation and amortization..................................................         3,254             4,237
  Imputed interest on debentures.................................................         2,385             -
  Write-off deferred financing costs and debt discount...........................         -                 3,900
  Redemption premiums............................................................         -                 7,102
  Other extraordinary charges from early extinguishment of debt..................         -                 1,178
  Other, net.....................................................................          (597)              271
  Changes in operating assets and liabilities:
     (Increase) decrease in accounts and other receivables.......................         1,505            (5,577)
     (Increase) decrease in merchandise inventories..............................        23,165            (6,801)
     (Increase) decrease in prepaid expenses and other...........................          (657)              762
     Decrease in accounts payable and accrued liabilities........................       (31,056)           (4,039)
                                                                                     ------------     -------------
        NET CASH USED IN OPERATING ACTIVITIES....................................        (3,379)           (8,099)
                                                                                     ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of equipment, fixtures and leasehold improvements....................        (5,102)           (3,721)
  Other, net.....................................................................        (1,171)               27
                                                                                     ------------     -------------
        NET CASH USED IN INVESTING ACTIVITIES....................................        (6,273)           (3,694)
                                                                                     ------------     -------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from revolving credit facility........................................       117,722           295,125
  Principal payments on revolving credit facility................................      (107,410)         (166,430)
  Prepayment of notes............................................................         -              (135,000)
  Prepayment of debentures.......................................................         -               (50,266)
  Payment of redemption premiums.................................................         -                (7,102)
  Capitalized financing costs....................................................         -                  (336)
  Other, net.....................................................................           112            (1,532)
                                                                                     ------------     -------------
        NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES....................        10,424           (65,541)
                                                                                     ------------     -------------
        EFFECT OF EXCHANGE RATE CHANGES ON CASH..................................           (81)             (171)
                                                                                     ------------     -------------
        INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.........................           691           (77,505)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................................         2,762            80,395
                                                                                     ------------     -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.........................................    $    3,453       $     2,890
                                                                                     ============     =============
Supplemental disclosure of cash flow information:
  Interest paid..................................................................    $    2,017       $     3,178
  Income taxes paid..............................................................         3,400               197

</TABLE>


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


                                       5

<PAGE>

                            FINLAY ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                       Twenty-Six Weeks Ended
                                                                                    ------------------------------
                                                                                     August 2,        August 1,
                                                                                       1997              1998
                                                                                    ------------     -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                 <C>              <C>         
  Net income (loss)..............................................................   $   (5,604)      $   (13,334)
  Adjustments to reconcile net income (loss) to net cash used in
     operating activities:
  Depreciation and amortization..................................................        6,315             8,359
  Imputed interest on debentures.................................................        4,634             2,527
  Write-off deferred financing costs and debt discount...........................        -                 3,900
  Redemption premiums............................................................        -                 7,102
  Other extraordinary charges from early extinguishment of debt..................        -                 1,178
  Other, net.....................................................................         (951)              315
  Changes in operating assets and liabilities:
     Increase in accounts and other receivables..................................      (18,267)          (30,388)
     Increase in merchandise inventories.........................................       (2,146)          (26,824)
     Increase in prepaid expenses and other......................................         (675)           (1,876)
     Decrease in accounts payable and accrued liabilities........................     (101,653)          (84,107)
                                                                                    ------------     -------------
        NET CASH USED IN OPERATING ACTIVITIES....................................     (118,347)         (133,148)
                                                                                    ------------     -------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of equipment, fixtures and leasehold improvements....................       (8,477)           (7,178)
  Other, net.....................................................................       (1,718)             (742)
                                                                                    ------------     -------------
        NET CASH USED IN INVESTING ACTIVITIES....................................      (10,195)           (7,920)
                                                                                    ------------     -------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from revolving credit facility........................................      297,109           503,542
  Principal payments on revolving credit facility................................     (185,587)         (374,847)
  Prepayment of notes............................................................        -              (135,000)
  Prepayment of debentures.......................................................        -               (89,293)
  Payment of redemption premiums.................................................        -                (7,102)
  Net proceeds from public offering of Common Stock..............................        -                13,759
  Proceeds from senior note offering.............................................        -               150,000
  Proceeds from senior debenture offering........................................        -                75,000
  Proceeds from repayment of note receivable.....................................        -                 1,001
  Capitalized financing costs....................................................        -                (6,144)
  Other, net.....................................................................          126              (397)
                                                                                    ------------     -------------
        NET CASH PROVIDED FROM FINANCING ACTIVITIES..............................      111,648           130,519
                                                                                    ------------     -------------
        EFFECT OF EXCHANGE RATE CHANGES ON CASH..................................         (499)             (149)
                                                                                    ------------     -------------
        DECREASE IN CASH AND CASH EQUIVALENTS....................................      (17,393)          (10,698)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................................       20,846            13,588
                                                                                    ------------     -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.........................................   $    3,453       $     2,890
                                                                                    ============     =============
Supplemental disclosure of cash flow information:
  Interest paid..................................................................   $   10,548       $    12,746
  Income taxes paid..............................................................        8,013             1,111
</TABLE>


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

                                       6

<PAGE>


                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

     The  accompanying  unaudited  consolidated  financial  statements of Finlay
Enterprises,  Inc.  (the  "Company" or the  "Registrant"),  and its wholly owned
subsidiary,  Finlay Fine Jewelry  Corporation and its wholly owned  subsidiaries
("Finlay  Jewelry"),  have been prepared in accordance  with generally  accepted
accounting principles 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 the financial position of the Company as
of August 1, 1998, and the results of operations and cash flows for the thirteen
weeks and  twenty-six  weeks ended August 2, 1997 and August 1, 1998. 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 31, 1998  referred to below.  Certain  information  and
footnote  disclosures  normally  included in  financial  statements  prepared in
accordance with generally accepted accounting  principles 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 the
Company's  annual report on Form 10-K for the fiscal year ended January 31, 1998
("Form 10-K") previously filed with the Commission.

     Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1995, 1996, 1997 and 1998 relate to the fiscal years ending February 3, 1996,
February 1, 1997, January 31, 1998 and January 30, 1999,  respectively.  Each of
the  fiscal  years  includes   fifty-two  weeks  except  1995,   which  includes
fifty-three weeks.

     Net  income  (loss)  per share has been  computed  in  accordance  with the
Statement of Financial  Accounting  Standards  ("SFAS') No. 128,  'Earnings  per
Share',  which was adopted by the Company at the end of 1997.  Basic and diluted
net income (loss) per share were calculated using the weighted average number of
shares  outstanding  during each period,  with options to purchase  Common Stock
included  in diluted  net income  (loss) per  share,  using the  treasury  stock
method, to the extent that such options were dilutive. The per share amounts for
the prior period  presented  have been  restated to reflect the adoption of SFAS
No. 128.  The  following  is an analysis of the  differences  between  basic and
diluted net income (loss) per share:
<TABLE>
<CAPTION>

                                  Thirteen Weeks Ended                                           Twenty-Six Weeks Ended
                            ---------------------------------------------------    -------------------------------------------------
                                August 2, 1997              August 1, 1998             August 2, 1997             August 1, 1998
                            ------------------------    -----------------------    ------------------------  -----------------------
Weighted average
<S>                          <C>          <C>            <C>          <C>           <C>         <C>           <C>          <C>      
 shares outstanding......    7,423,090    $  (0.19)      10,393,086   $  (0.88)     7,421,754   $  (0.76)     10,057,033   $  (1.33)
Dilutive stock          
 options.................      78,696         0.01           -           -             75,456       0.01           -           -
                            -----------   ----------    ------------  ---------    -----------  ---------    -----------   ---------
Weighted average
 shares and share                 
 equivalents.............    7,501,786    $  (0.18)      10,393,086   $  (0.88)     7,497,210   $  (0.75)     10,057,033   $  (1.33)
                            ===========   ==========    ============  =========    ===========  =========    ===========   =========
</TABLE>

     For each of the periods above,  there were no adjustments to the Net income
(loss)  applicable  to common  shares  used to  calculate  basic and diluted net
income (loss) per share.






                                       7
<PAGE>
                                      

                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION (continued)

     During  the first  quarter  of 1998,  the  Company  adopted  SFAS No.  130,
"Reporting  Comprehensive  Income",  which  became  effective  for fiscal  years
beginning  after  December 15,  1997.  This  Statement  requires  disclosure  of
comprehensive income,  defined as the total of net income and all other nonowner
changes in equity,  which under generally accepted  accounting  principles,  are
recorded  directly  to the  stockholders'  equity  section  of the  consolidated
balance  sheet and,  therefore  bypass net income.  In Finlay's  case,  the only
nonowner  change  in  equity  relates  to  the  foreign   currency   translation
adjustment.

     Comprehensive income (loss) is as follows (in thousands):
<TABLE>
<CAPTION>

                                                                       Thirteen Weeks Ended             Twenty-Six Weeks Ended
                                                                   ----------------------------    -------------------------------
                                                                     August 2,       August 1,        August 2,        August 1,
                                                                       1997            1998             1997              1998
                                                                   ------------    ------------    --------------    -------------
<S>                                                                <C>             <C>             <C>               <C>         
Net income (loss).......................................           $   (1,378)     $   (9,132)     $    (5,604)      $   (13,334)
Foreign currency translation adjustment.................               (2,440)           (587)          (4,672)              358
                                                                   ------------    ------------    --------------    -------------
Comprehensive income (loss).............................           $   (3,818)     $   (9,719)     $   (10,276)      $   (12,976)
                                                                   ============    ============    ==============    =============
</TABLE>

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative  Instruments and Hedging  Activities".  The Statement
establishes  accounting  and reporting  standards  requiring that all derivative
instruments  be recorded in the  balance  sheet as either an asset or  liability
measured at its fair value and that  changes in the  derivative's  fair value be
recognized  currently  in earnings.  SFAS No. 133 is effective  for fiscal years
beginning  after June 15, 1999 and is not expected to have a material  impact on
the Company's financial position or results of operations.

NOTE 2 - DESCRIPTION OF BUSINESS

     The Company conducts business through its wholly owned  subsidiary,  Finlay
Jewelry.  Finlay is a retailer of fine jewelry  products and primarily  operates
leased fine jewelry department stores throughout the United States and France. A
significant portion of Finlay's revenues are generated in the fourth quarter due
to the  seasonality  of  the  retail  industry.  Approximately  72% of  Finlay's
domestic  sales in 1997  were from  operations  in two  major  department  store
groups,  of which 49%  represents  Finlay's  domestic  sales from one department
store group.

NOTE 3 - MERCHANDISE INVENTORIES

     Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
                                                                                                          (unaudited)
                                                                                  January 31,              August 1,
                                                                                     1998                    1998
                                                                                ----------------       ------------------
                                                                                            (in thousands)
     Jewelry goods - rings, watches and other fine jewelry
<S>                                                                             <C>                    <C>            
         (specific identification basis)...............................         $     286,289          $       313,449
     Less:  Excess of specific identification cost over LIFO
         inventory value...............................................                6,523                     6,176
                                                                                ----------------       ------------------
                                                                                $     279,766          $       307,273
                                                                                ================       ==================
</TABLE>


                                       8
<PAGE>

                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - MERCHANDISE INVENTORIES (continued)

     The LIFO method had the effect of  decreasing  the loss before income taxes
for the  thirteen  weeks ended August 2, 1997 and August 1, 1998 by $191,000 and
$439,000,  respectively. The LIFO method had no effect on the loss before income
taxes for the twenty-six  weeks ended August 2, 1997. The effect of applying the
LIFO method for the  twenty-six  weeks ended  August 1, 1998 was to decrease the
loss before income taxes by $346,000. Finlay determines its LIFO inventory value
by utilizing  selected  producer price indices published for jewelry and watches
by the Bureau of Labor Statistics. Due to the application of APB Opinion No. 16,
inventory  valued at LIFO for income tax  reporting  purposes was  approximately
$21,000,000  lower than that for  financial  reporting  purposes  at January 31,
1998.

     Approximately  $219,822,000 and $247,908,000 at January 31, 1998 and August
1, 1998, respectively,  of merchandise received on consignment has been excluded
from  Merchandise  inventories and Accounts  payable-trade  in the  accompanying
Consolidated Balance Sheets.

     Finlay  Jewelry  is  party  to a  gold  consignment  agreement  (the  "Gold
Consignment   Agreement"),   which  expires  on  December  31,  2001.  The  Gold
Consignment Agreement enables Finlay Jewelry to receive merchandise by providing
gold, or otherwise  making  payment,  to certain  vendors who  currently  supply
Finlay with merchandise on consignment.  While the merchandise  involved remains
consigned,  title to the gold  content  of the  merchandise  transfers  from the
vendors to the gold  consignor.  As a result,  such vendors  have reduced  their
working  capital  requirements  and associated  financing  costs.  Consequently,
Finlay has  negotiated  more favorable  prices and terms with the  participating
vendors.  Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement,
up to the lesser of (i) 85,000  fine troy  ounces or (ii)  $32,000,000  worth of
gold, subject to a formula as prescribed by the Gold Consignment  Agreement.  At
August 1, 1998, amounts outstanding under the Gold Consignment Agreement totaled
42,021 fine troy ounces,  valued at approximately  $12.1 million.  For financial
statement   purposes,   the  consigned  gold  is  not  included  in  Merchandise
inventories  on the Company's  Consolidated  Balance Sheets and,  therefore,  no
related liability has been recorded.

     The cost to Finlay of gold merchandise sold on consignment in some cases is
not fixed until the sale is reported to the vendor or to the gold  consignor  in
the case of merchandise sold pursuant to the Gold Consignment Agreement.  Finlay
at times enters into futures contracts,  such as options or forwards, based upon
the  anticipated  sales of gold product,  to hedge against the risk arising from
those payment arrangements. Changes in the market value of futures contracts are
accounted for as an addition to or reduction from the inventory  cost. At August
2, 1997, the gain/loss on open futures  contracts was not material.  The Company
did not have any open  positions  in futures  contracts  for gold at January 31,
1998 or August 1, 1998

NOTE 4 - LEASE AGREEMENTS

     Finlay conducts  substantially all of its operations as leased  departments
in department  stores.  All of these leases, as well as rentals for office space
and equipment,  are accounted for as operating  leases. A substantial  number of
such  operating  leases expire on various dates  through  2008.  All  references
herein to leased  departments refer to departments  operated pursuant to license
agreements or other arrangements with host department stores.


                                       9

<PAGE>

                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - LEASE AGREEMENTS (continued)

     Substantially  all of the department store leases provide that the title to
certain fixed assets of Finlay  transfers upon  termination  of the leases,  and
that Finlay will receive the  undepreciated  value of such fixed assets from the
host store in the event such  transfers  occur.  The values of such fixed assets
are recorded at the inception of the lease  arrangement and are reflected in the
accompanying Consolidated Balance Sheets.

     In many cases,  Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.

     The store leases  provide for the payment of fees based on sales,  plus, in
some instances,  installment payments for fixed assets. Lease expense,  included
in Selling, general and administrative expenses, is as follows (unaudited):
<TABLE>
<CAPTION>

                                                 Thirteen Weeks Ended                Twenty - Six Weeks Ended
                                             ------------------------------       -------------------------------
                                               August 2,        August 1,          August 2,          August 1,
                                                 1997             1998                1997              1998
                                             --------------    ------------       -------------      ------------
<S>                                          <C>               <C>                <C>                <C>        
     Minimum fees..........................  $     1,968       $     5,088        $     3,810        $     9,656
     Contingent fees.......................       21,814            23,853             41,705             45,251
                                             ==============    ============       =============      ============
       Total...............................  $    23,782       $    28,941        $    45,515        $    54,907
                                             ==============    ============       =============      ============
</TABLE>

NOTE 5 - STOCKHOLDERS' EQUITY

     On March 5, 1997,  an  executive  officer of the Company  received  options
under the Company's  Long Term  Incentive  Plan (the "1993 Plan") to purchase an
aggregate of 139,719  shares of Common Stock at an exercise  price of $14.00 per
share. Such options vest and become exercisable on January 2, 2001.

     On March 6, 1997,  the Board of Directors  of the Company  adopted the 1997
Long Term Incentive Plan (the "1997 Plan"),  which was approved by the Company's
stockholders in June 1997. The 1997 Plan,  which is similar to the 1993 Plan, is
intended as a successor  to the 1993 Plan and provides for the grant of the same
types of awards as are  currently  available  under the 1993 Plan.  The Board of
Directors  adopted an  amendment  to the 1997 Plan,  which was  approved  by the
Company's  stockholders  in June 1998,  pursuant to which options  available for
issuance under the 1997 Plan were increased to 850,000. Of the 850,000 shares of
the Company's Common Stock that have been reserved for issuance  pursuant to the
1997 Plan, a total of 481,915  shares are subject to options  granted to certain
senior  management,  key employees and a director.  The exercise  prices of such
options range from $13.875 per share to $24.313 per share.

     Upon the  commencement  of his  employment,  an  executive  officer  of the
Company purchased 138,525 shares of Common Stock (the "Purchased Shares"),  at a
price of $7.23 per share. The aggregate  purchase price of these shares was paid
in the  form of a note  issued  to the  Company  in the  amount  of  $1,001,538.
Pursuant to the terms of the note, the amount of the note has historically  been
reflected as a reduction to equity and reflected in the  Company's  Consolidated
Balance  Sheets as Note  receivable  from stock  sale.  On April 24,  1998,  the
executive  officer  sold  100,000  of the  Purchased  shares and repaid the note
("Note Receivable  Repayment").

                                       10

<PAGE>

                 FINLAY ENTERPRISES, INC. NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

NOTE 6 - OTHER TRANSACTIONS

     On April 24,  1998,  the Company  completed a public  offering of 1,800,000
shares  of its  Common  Stock  at a price  of  $27.50  per  share  (the  "Equity
Offering"),  of which  567,310  shares were sold by the  Company  and  1,232,690
shares were sold by certain selling  stockholders.  Concurrently with the Equity
Offering,  the Company and Finlay Jewelry completed the public offering of $75.0
million aggregate  principal amount of 9% Senior Debentures due May 1, 2008 (the
"Senior  Debentures")  and $150.0 million  aggregate  principal amount of 8-3/8%
Senior Notes due May 1, 2008 (the "Senior Notes"), respectively. In addition, on
April 24, 1998, the existing  revolving credit agreement (the "Revolving  Credit
Agreement")  was amended to  increase  the line of credit  thereunder  to $275.0
million and to make certain other changes.

     On May 1, 1998,  the Company  prepaid all of the $39.0  million of accreted
interest on the  Company's  12% Senior  Discount  Debentures  due 2005 (the "Old
Debentures") as of such date, in accordance  with the indenture  relating to the
Debentures (the "Old Debenture Indenture").  The Company exercised its option to
prepay all such accreted interest to reduce outstanding indebtedness and to take
advantage of the resulting tax benefits  relating to the  deductibility  of such
prepayment in 1998.

     On May 26, 1998, the net proceeds to the Company from the Equity  Offering,
the  sale of the  Senior  Debentures,  the  Note  Receivable  Repayment  and the
repayment of approximately  $1.0 million of an intercompany  liability by Finlay
Jewelry (the  "Intercompany  Repayment")  were used to redeem the  Company's Old
Debentures, including associated premiums. Also, on May 26, 1998, Finlay Jewelry
used the net  proceeds  from  the sale of the  Senior  Notes  to  redeem  Finlay
Jewelry's 10-5/8% Senior Notes due 2003 (the "Old Notes"),  including associated
premiums,  and to make  the  Intercompany  Repayment.  The  above  transactions,
excluding the Equity Offering, are referred to herein as the "Refinancing".  The
Company  recorded,  in the second  quarter,  a pre-tax  extraordinary  charge of
approximately $12.2 million,  including $7.1 million for redemption premiums and
approximately  $3.9  million  to write  off  deferred  financing  costs and debt
discount  associated  with the Old Debentures and the Old Notes.  As a result of
certain call requirements  associated with the Old Debentures and the Old Notes,
the debt could not be repaid until May 26, 1998.  Thus, for twenty-five  days in
the second quarter,  Finlay was required to maintain as outstanding both the new
debt issued on April 24, 1998 as well as the old debt  retired on May 26,  1998.
The net effect of  carrying  the new and old debt,  offset by  reduced  interest
expense on the Company's revolving credit facility and interest income on excess
cash balances, was an increase to interest expense of $0.7 million.

     On October 6, 1997,  Finlay  completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation  ("Diamond Park"), a
leading operator of departments,  for approximately  $63.0 million. By acquiring
Diamond Park (the "Diamond Park Acquisition"), Finlay added 139 departments that
had total sales of  approximately  $103.0  million for the twelve  months  ended
January 31,  1998 and also added new host store  relationships  with  Mercantile
Stores,  Marshall  Field's  and  Parisian.  Finlay  financed  the  Diamond  Park
Acquisition with borrowings under the Revolving Credit Agreement.


                                       11

<PAGE>


                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - UNAUDITED PRO FORMA FINANCIAL INFORMATION

     The following  table  presents the  calculation  of pro forma  earnings per
share data for the thirteen weeks and twenty-six weeks ended August 1, 1998. The
pro forma consolidated  financial  information excludes the extraordinary charge
of $12.2  million,  on a pre-tax  basis,  including  $7.1 million for redemption
premiums and approximately $3.9 million to write off deferred financing and debt
discount costs  associated with the Old Debentures and the Old Notes. The income
tax benefit on the extraordinary charges totaled $4.8 million. In addition,  the
pro forma consolidated  financial information excludes the nonrecurring interest
associated with refinancing as a result of certain call requirements on the debt
retired.
 
In thousands, except share and
per share amounts
<TABLE>
<CAPTION>
                                                                                                
                                                                                               (unaudited)
                                                                                              August 1, 1998
                                                                                 --------------------------------------
                                                                                    Thirteen             Twenty-Six
                                                                                   Weeks Ended           Weeks Ended
                                                                                 ----------------      ----------------
<S>                                                                              <C>                   <C>             
Net income (loss) per Consolidated Statements of Operations.........             $        (9,132)      $       (13,334)
Add:   Extraordinary charges from early extinguishment of
       debt, net of income tax benefit..............................                       7,415                 7,415
Add:   Nonrecurring interest associated with refinancing,
       net of income tax benefit....................................                         400                   400
                                                                                 ----------------      ----------------
Pro Forma net income (loss).........................................             $        (1,317)      $        (5,519)
                                                                                 ================      ================

Pro Forma net income (loss) per share applicable to
    common shares:
    Basic net income (loss) per share...............................             $        (0.13)       $        (0.55)
                                                                                 ================      ================
    Diluted net income (loss) per share.............................             $        (0.13)       $        (0.55)
                                                                                 ================      ================
Weighted average shares and share equivalents outstanding...........                 10,393,086            10,057,033
                                                                                 ================      ================
</TABLE>






                                       12


<PAGE>

PART I - FINANCIAL INFORMATION
  Item 2. Management's Discussion and Analysis of
            Financial Condition and Results of Operations

Results of Operations

     The following table sets forth  operating  results as a percentage of sales
for the periods indicated:

Statements of Operations Data
(unaudited)

<TABLE>
<CAPTION>
                                                           Thirteen Weeks Ended             Twenty-Six Weeks Ended
                                                        ----------------------------     -----------------------------
                                                        August 2,        August 1,       August 2,         August 1,
                                                           1997             1998            1997              1998
                                                        -----------      -----------     -----------       -----------
<S>                                                       <C>              <C>             <C>               <C>   
Sales.................................................    100.0%           100.0%          100.0%            100.0%
Cost of sales.........................................     48.7             49.2            48.8              48.9
                                                        -----------      -----------     -----------       -----------
    Gross margin......................................     51.3             50.8            51.2              51.1
Selling, general and administrative expenses..........     44.9             45.1            46.5              46.4
Depreciation and amortization.........................      2.0              2.2             2.0               2.3
                                                        -----------      -----------     -----------       -----------
    Income (loss) from operations.....................      4.4              3.5             2.7               2.4
Interest expense, net.................................      5.7              4.5             5.7               5.0
Nonrecurring interest associated with refinancing.....      -                0.4             -                 0.2
                                                        -----------      -----------     -----------       -----------
    Income (loss) before income taxes and
      extraordinary charges...........................     (1.3)            (1.4)           (3.0)             (2.8)
Provision (credit) for income taxes...................     (0.4)            (0.5)           (1.0)             (1.0)
                                                        -----------      -----------     -----------       -----------
    Income (loss) before extraordinary charges........     (0.9)            (0.9)           (2.0)             (1.8)
Extraordinary charges from early extinguishment
      of debt, net of income tax benefit..............      -                4.2             -                 2.2
                                                        -----------      -----------     -----------       -----------
    Net income (loss).................................     (0.9)%           (5.1)%          (2.0)%            (4.0)%
                                                        ===========      ===========     ===========       ===========
</TABLE>

Thirteen Weeks Ended August 1, 1998 Compared with Thirteen Weeks Ended August 2,
1997

     Sales.  Sales for the thirteen weeks ended August 1, 1998  increased  $29.3
million,  or 19.8%,  over the comparable period in 1997.  Comparable  department
sales (departments open for the same months during comparable periods) increased
2.8%.  Management attributes this increase in comparable department sales to the
following Company  initiatives:  (i) emphasizing its "Key Item" and "Best Value"
merchandising  programs,  which  provide  a  targeted  assortment  of  items  at
competitive prices; (ii) increasing focus on holiday and event-driven promotions
as well as host  store  marketing  programs;  (iii)  positioning  the  Company's
departments as a "destination  location" for fine jewelry,  and (iv)  continuing
project PRISM (Promptly Reduce  Inefficiencies  and Sales  Multiply),  a program
designed to allow  Finlay's  sales  associates  more time for customer sales and
service.  During the second quarter,  Sonab,  the Company's  French  subsidiary,
experienced lower sales trends due to the transition from a promotional  pricing
strategy to an everyday low price strategy.  This change was made as a result of
Sonab  reassessing  its pricing  policy  following  certain  local  French court
decisions and the adverse  impact of such change is expected to continue for the
balance  of  the  year.   Sales  from  the  operation  of  net  new  departments
(departments  not included in comparable  department  sales)  contributed  $25.2
million,  which included $25.0 million from the former Diamond Park departments.
During the thirteen weeks ended August 1, 1998,  Finlay opened eight departments
and closed five departments. The 




                                       13

<PAGE>

openings  were all within  existing  store  groups,  with the  exception  of two
departments opened in new store groups in the United Kingdom.  The closings were
all within existing store groups.

     Gross  margin.  Gross  margin for the period  increased  by $14.1  million,
primarily as a result of the sales  increase.  As a percentage  of sales,  gross
margin  decreased  by 0.5%,  which is  primarily  attributed  to (i) lower gross
margins experienced by the former Diamond Park departments,  particularly as the
merchandise  acquired as part of the Diamond  Park  Acquisition  continues to be
sold and (ii) duplicative  freight costs relating to certain operational aspects
of the  Company's  new  central  distribution  facility  that are not yet  fully
functional.  These  factors were offset by a $0.2  million  decrease in the LIFO
provision.

     Selling,  general  and  administrative   expenses.   Selling,  general  and
administrative   expenses  ("SG&A")  increased  $13.6  million,  or  20.4%,  due
primarily to payroll  expense and lease fees associated with the increase in the
Company's  sales.  The  increased  sales  generated  by the former  Diamond Park
departments  enabled the Company to leverage  administrative  and certain  other
expenses.  Offsetting this were higher than anticipated expenses relating to the
central  distribution  facility,  increased medical expenses associated with the
implementation  of a new medical benefit plan and rising wage rates related to a
challenging  employment  market.  These  factors are  expected to have a similar
effect on  performance  for the balance of the year.  In  addition,  the Company
increased its advertising  expenditures,  net of increased vendor participation,
as compared with the 1997 period.  As a result of the factors  discussed  above,
SG&A as a percentage of sales increased by 0.2%.

     Depreciation and amortization.  Depreciation and amortization  increased by
$1.0 million, reflecting an increase in capital expenditures for the most recent
twelve months,  depreciation on Finlay's new central  distribution  facility and
amortization  related to the Diamond Park  Acquisition,  offset by the effect of
certain assets becoming fully depreciated.  The increase in fixed assets was due
to  the  addition  of  new  departments,   including  the  former  Diamond  Park
departments, and the renovation of existing departments.

     Interest   expense,   net.  Interest  expense  decreased  by  $0.4  million
reflecting  a lower  weighted  average  interest  rate (8.2% for the 1998 period
compared  to 10.1%  for the  comparable  period in 1997)  relating  to the lower
interest rates on the Senior  Debentures and the Senior Notes as compared to the
Old  Debentures  and the Old Notes  offset by an increase in average  borrowings
($379.0  million  for the  period in 1998  compared  to $327.9  million  for the
comparable  period in 1997).  The increase in average  borrowings is a result of
additional  indebtedness   outstanding  under  the  Revolving  Credit  Agreement
(adjusted  to exclude  the  timing  impact of the call  requirements  on the Old
Debentures and the Old Notes, discussed below).

     Nonrecurring  interest associated with refinancing.  As a result of certain
call requirements associated with the Old Debentures and the Old Notes, the debt
could not be repaid until May 26, 1998. Thus, for twenty-five days in the second
quarter, Finlay was required to maintain as outstanding both the new debt issued
on April  24,  1998 as well as the old debt  retired  on May 26,  1998.  The net
effect of carrying the new and old debt,  offset by reduced  interest expense on
the  Company's  revolving  credit  facility and  interest  income on excess cash
balances, was an increase to interest expense of $0.7 million.
 
     Provision  (credit) for income taxes. The income tax provision for the 1998
and 1997 periods reflects effective tax rates of 40.5% and 41.5%, respectively.


                                       14

<PAGE>

     Extraordinary  charges from early extinguishment of debt, net of income tax
benefit.  In  conjunction  with the repayment of the Old  Debentures and the Old
Notes,  the Company  recorded a pre-tax  extraordinary  charge of $12.2 million,
including $7.1 million for redemption premiums and approximately $3.9 million to
write off deferred  financing and debt discount  costs  associated  with the Old
Debentures  and the Old  Notes.  The income  tax  benefit  on the  extraordinary
charges totaled $4.8 million.

     Net income  (loss).  The net loss of $9.1  million  for the 1998 period was
$7.8 million higher than the net loss of $1.4 million for the comparable  period
as a result of the factors discussed above.

Twenty-Six  Weeks Ended  August 1, 1998  Compared  with  Twenty-Six  Weeks Ended
August 2, 1997

     Sales.  Sales for the twenty-six weeks ended August 1, 1998 increased $55.7
million,  or 19.7%,  over the comparable period in 1997.  Comparable  department
sales  increased  3.1%.   Management  attributes  this  increase  in  comparable
department  sales  primarily  to the "Key Item" and "Best  Value"  merchandising
programs and to the marketing  initiatives  discussed  above.  During the second
quarter,  Sonab  experienced  lower sales  trends due to the  transition  from a
promotional pricing strategy to an everyday low price strategy.  This change was
made as a result of Sonab reassessing its pricing policy following certain local
French  court  decisions  and the  adverse  impact of such change is expected to
continue  for the  balance  of the year.  Sales  from the  operation  of net new
departments  contributed  $46.9  million,  which included $46.0 million from the
former Diamond Park  departments.  During the  twenty-six  weeks ended August 1,
1998, Finlay opened 22 departments and closed 27 departments.  The openings were
all within existing store groups,  with the exception of two departments  opened
in new store  groups in the  United  Kingdom.  The  closings  included  all five
departments  in  Dillard's  and all seven  departments  in  Debenhams,  with the
remaining 15 departments closed within existing store groups.

     Gross  margin.  Gross  margin for the period  increased  by $28.1  million,
primarily as a result of the sales  increase.  As a percentage  of sales,  gross
margin  decreased  by 0.1%,  which is  primarily  attributed  to (i) lower gross
margins experienced by the former Diamond Park departments,  particularly as the
merchandise  acquired as part of the Diamond  Park  Acquisition  continues to be
sold and (ii) duplicative  freight costs relating to certain operational aspects
of  the  Company's  central  distribution   facility  that  are  not  yet  fully
functional.  These  factors were offset by a $0.3  million  decrease in the LIFO
provision.

     Selling, general and administrative expenses. SG&A increased $25.4 million,
or 19.3%,  due primarily to payroll  expense and lease fees  associated with the
increase in the Company's  sales.  The increased  sales  generated by the former
Diamond  Park  departments  enabled the Company to leverage  administrative  and
certain other expenses.  Offsetting this were higher than  anticipated  expenses
relating  to the  central  distribution  facility,  increased  medical  expenses
associated with the implementation of a new medical benefit plan and rising wage
rates related to a challenging  employment market. These factors are expected to
have a similar effect on performance for the balance of the year. As a result of
the factors discussed above, SG&A as a percentage of sales decreased by 0.1%

     Depreciation and amortization.  Depreciation and amortization  increased by
$2.0 million, reflecting an increase in capital expenditures for the most recent
twelve months,  depreciation on Finlay's new central  distribution  facility and
amortization  related to the Diamond Park  Acquisition,  offset by the effect of
certain assets becoming fully depreciated.  The increase in fixed assets was due
to  the  addition  of  new  departments,   including  the  former  Diamond  Park
departments and the renovation of existing departments.


                                       15

<PAGE>

     Interest   expense,   net.  Interest  expense  increased  by  $0.9  million
reflecting an increase in average  borrowings  ($353.7 million for the period in
1998 compared to $310.9 million for the comparable  period in 1997) primarily as
a result of an increase in the outstanding  balance of the Old Debentures due to
the  accretion of interest and  additional  indebtedness  outstanding  under the
Revolving  Credit  Agreement  (adjusted to exclude the timing impact of the call
requirements  on the Old Debentures  and the Old Notes,  discussed  above).  The
increase in average  borrowings was partially offset by a lower weighted average
interest  rate (9.1% for the 1998 period  compared  to 10.2% for the  comparable
period in 1997) relating to the lower  interest  rates on the Senior  Debentures
and the Senior Notes as compared to the Old Debentures and the Old Notes.

     Nonrecurring   interest  associated  with  refinancing.   For  the  reasons
discussed  above,  the Company  incurred  nonrecurring  interest expense of $0.7
million  relating to the net effect of carrying the new and old debt,  offset by
reduced interest expense on the Company's revolving credit facility and interest
income on excess cash balances.

     Provision  (credit) for income taxes. The income tax provision for the 1998
and 1997 periods reflects effective tax rates of 40.5% and 41.5%, respectively.

     Extraordinary  charges from early extinguishment of debt, net of income tax
benefit.  In  conjunction  with the repayment of the Old  Debentures and the Old
Notes,  the Company  recorded a pre-tax  extraordinary  charge of $12.2 million,
including $7.1 million for redemption premiums and approximately $3.9 million to
write off deferred  financing and debt discount  costs  associated  with the Old
Debentures  and the Old  Notes.  The income  tax  benefit  on the  extraordinary
charges totaled $4.8 million.

     Net income  (loss).  The net loss of $13.3  million for the 1998 period was
$7.8 million higher than the net loss of $5.6 million for the comparable  period
as a result of the factors discussed above.

Liquidity and Capital Resources

     Finlay's  primary capital  requirements are for funding working capital for
new departments and for working capital growth of existing departments and, to a
lesser extent,  capital  expenditures for opening new departments and renovating
existing  departments.  For the twenty-six weeks ended August 2, 1997 and August
1,  1998,   capital   expenditures   totaled  $8.5  million  and  $7.2  million,
respectively.  For 1997,  capital  expenditures  totaled  $19.3  million,  which
included  construction  costs  related  to the  Company's  central  distribution
facility, and in 1996 totaled $17.5 million. Total capital expenditures for 1998
are estimated to be approximately $15.0 million.  Although capital  expenditures
are  limited  by the  terms of the  Revolving  Credit  Agreement,  to date  this
limitation has not precluded the Company from satisfying its capital expenditure
requirements.

     Finlay's  operations  substantially  preclude  customer  receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment.  Accordingly,  management  believes that relatively
modest  levels of working  capital  are  required  in  comparison  to many other
retailers. The Company's working capital balance was $125.7 million at August 1,
1998, an increase of $17.3 million from January 31, 1998. The increase  resulted
primarily from an income tax  receivable  relating to the prepayment of accreted
interest on the Company's Old  Debentures,  the net proceeds to the Company from
the Equity Offering and the sale of the Senior  Debentures and the Senior Notes,
partially  offset by the use of such proceeds to prepay the Old  Debentures  and
the Old Notes,  the impact of the interim net loss exclusive of depreciation and
amortization and capital expenditures.  Based 


                                       16

<PAGE>

on the seasonal nature of Finlay's  business,  working capital  requirements and
therefore  borrowings  under the Revolving  Credit  Agreement can be expected to
increase on an interim basis during the first three quarters of any given fiscal
year. See "-Seasonality".

     The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October and November in  anticipation
of the year-end holiday season.  Accordingly,  Finlay experiences  seasonal cash
needs as inventory levels peak. The Revolving  Credit Agreement  provides Finlay
with a line of credit of up to $275.0 million to finance seasonal cash and other
working capital needs.  Amounts outstanding under the Revolving Credit Agreement
presently  bear interest at a rate equal to, at Finlay's  option,  (i) the Index
Rate (as defined in the Revolving  Credit  Agreement) plus 0.5% or (ii) adjusted
LIBOR plus 1.5%.  Commencing in December  1998,  amounts  outstanding  under the
Revolving  Credit  Agreement  will bear interest at a rate equal to, at Finlay's
option,  (i) the  Index  Rate  plus a margin  ranging  from zero to 1.0% or (ii)
adjusted  LIBOR plus a margin  ranging from 1.0% to 2.0%, in each case depending
on the financial performance of the Company.

     In each year, Finlay is 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,  respectively,  for a 30
consecutive  day period (the "Balance  Reduction  Requirement").  The indentures
relating  to the Senior  Debentures  and the Senior  Notes do not have a balance
reduction requirement. Borrowings under the Revolving Credit Agreement at August
1, 1998 were $128.7 million,  compared to a zero balance at January 31, 1998 and
$111.5  million at August 2, 1997.  The average  amounts  outstanding  under the
Revolving Credit  Agreement were $96.4 million and $122.2 million  (adjusted for
the impact of the  temporary  paydown of the  revolving  credit  facility due to
certain call requirements  associated with the Old Debentures and the Old Notes)
for the twenty-six weeks ended August 2, 1997 and August 1, 1998,  respectively.
The maximum amount outstanding for the twenty-six weeks ended August 1, 1998 was
$154.2 million.

     Finlay does not expect that significant  additional working capital will be
required  with respect to the operation of the former  Diamond Park  departments
because Finlay purchased the inventory of those Diamond Park  departments  which
it acquired.  Inventory  purchases for the former Diamond Park  departments  has
been and will continue to be financed in part by trade payables combined with an
increased  utilization  of  consignment  inventory  compared  to the  amount  of
consignment merchandise on hand at the time of the Diamond Park Acquisition.  As
such,  management  believes  that working  capital  requirements  for the former
Diamond Park departments has been and will continue to be reduced as compared to
the  amount  of  working  capital  required  at the  time  of the  Diamond  Park
Acquisition.

     Finlay's  long-term needs for external financing will depend on its 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 its  vendors.  For 1997,  Finlay  had an average
balance of  consignment  merchandise  of $216.5 million from over 200 vendors as
compared to an average  balance of $201.8 million in 1996. As of August 1, 1998,
$247.9  million of  consignment  merchandise  was on hand as  compared to $219.8
million at January 31, 1998 and $205.5 million at August 2, 1997.

     A substantial  amount of Finlay's operating cash flow has been used or will
be required to pay,  directly or  indirectly,  interest  with respect to the Old
Debentures  and the Old  Notes  and  amounts  due  under  the  Revolving  Credit
Agreement,  including the payments  required  pursuant to the Balance  Reduction
Requirement  and,  as a result of the  completion  of the  Equity  Offering  and
Refinancing,  the Senior  Debentures and the Senior Notes. As of August 1, 1998,
Finlay's  outstanding  borrowings  were

                                       17

<PAGE>

$353.7  million,  which  included  a $75.0  million  balance  under  the  Senior
Debentures, a $150.0 million balance under the Senior Notes and a $128.7 million
balance  under the  Revolving  Credit  Agreement.  On May 1, 1998,  the  Company
prepaid in accordance with the Old Debenture Indenture, all of the $39.0 million
of  accreted  interest  on the Old  Debentures  as of  such  date.  The  Company
exercised its option to prepay all such accreted interest to reduce  outstanding
indebtedness and to take advantage of the resulting tax benefits relating to the
deductibility  of such  prepayment  in 1998. In addition,  on May 26, 1998,  the
Company  redeemed  the  outstanding  principal  amounts,   including  associated
premiums,  of the Old Debentures and the Old Notes. Finlay funded the prepayment
and the redemptions  using the proceeds from the sale of the Senior  Debentures,
the  Equity  Offering  and the sale of the  Senior  Notes,  together  with other
available funds. In connection with the redemption of the Old Debentures and the
Old Notes, the Company recorded,  in the second quarter, a pre-tax  nonrecurring
charge of  approximately  $12.2  million,  including $7.1 million for redemption
premiums and approximately $3.9 million to write off deferred financing and debt
discount costs associated with the Old Debentures and the Old Notes.

     Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
December 31, 2001.  The Gold  Consignment  Agreement  enables  Finlay Jewelry to
receive  merchandise by providing gold, or otherwise making payment,  to certain
vendors.  Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement,
up to the lesser of (i) 85,000 fine troy ounces or (ii) $32.0  million  worth of
gold, subject to a formula as prescribed by the Gold Consignment  Agreement.  At
August 1, 1998, amounts outstanding under the Gold Consignment Agreement totaled
42,021 fine troy ounces,  valued at  approximately  $12.1  million.  The average
amount  outstanding  under the Gold  Consignment  Agreement was $14.3 million in
1997.

     An organization-wide program is currently being executed to ensure that all
systems  critical to the operation of the Company are Year 2000 compliant.  This
process includes the review of various information technology systems, including
the Company's core business systems, end user systems as well as non-information
technology  systems.  The  Company  is  using,  and  will  continue  to  use,  a
combination  of internal and external  resources to assess,  remediate  and test
such  systems to ensure that all are Year 2000  compliant  by August  1999.  The
Company is in the process of  contacting  its software  and hardware  vendors to
determine Year 2000 compliance and is communicating  with all of its host stores
and merchandise vendors on their compliance and testing.

     The Company has  estimated the costs related to its Year 2000 efforts to be
approximately  $4.0  million  and is expected to incur these costs over the next
six quarters.  The  consequences  of a disruption  of the Company's  operations,
whether  caused by the  Company's  computer  systems or those of any of its host
stores or  vendors,  could  have a  material  adverse  effect  on the  Company's
financial  position  or  results of  operations.  In  addition,  there can be no
assurances  that the Company will not  experience  significant  cost overruns or
delays in addressing  this issue.  The Company  intends to develop a contingency
plan in the  event  that  remediation  of its  critical  systems,  or  those  of
significant third parties, are not completed in the required time frame.
 
     The  Company  is  in  the  process  of  implementing   several  information
technology   initiatives,   including  the  design  and  development  of  a  new
merchandising  system  and the  upgrade of  point-of-sale  systems  and  related
hardware in the majority of Finlay's  departments.  These projects will serve to
support  future growth of the Company as well as provide  improved  analysis and
reporting capabilities.  The cost associated with these projects is estimated to
be $10-12 million for software and  implementation  costs and such costs will be
included in Deferred  charges and other assets with  approximately  $4-6 million
for  hardware  and  related  equipment  to be  included  as a  component  of the
Company's capital expenditures and reflected in Fixed assets.


                                       18
 
<PAGE>

    Section 382 of the Internal  Revenue Code of 1986,  as amended (the "Code")
restricts  utilization  of net operating  loss  carryforwards  ("NOLs") after an
ownership  change  exceeding  50%.  As  a  result  of  certain  recapitalization
transactions  in 1993,  a change  in  ownership  of the  Company  exceeding  50%
occurred  within the  meaning of Section 382 of the Code.  Similar  restrictions
apply to other  carryforwards.  Consequently,  there is a material limitation on
the  Company's  annual  utilization  of its NOLs and other  carryforwards  which
requires  a  deferral  or  loss  of  the  utilization  of  such  NOLs  or  other
carryforwards.  The Company  had, at October  31, 1997 (the  Company's  tax year
end), a NOL for tax purposes of approximately  $12.0 million which is subject to
an annual limit of approximately $2.0 million per year. For financial  reporting
purposes,  no NOL  existed as of  January  31,  1998.  An  additional  change in
ownership within the meaning of Section 382 of the Code has occurred as a result
of the sale of shares of Common Stock of the Company in 1997. However, there are
no additional  restrictions  upon the  Company's  ability to utilize its NOLs or
other carryforwards as a result of such ownership change.

     From time to time, Finlay enters into futures contracts, such as options or
forwards,  based upon the  anticipated  sales of gold  product in order to hedge
against the risk  arising from its payment  arrangements.  Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the year ended January 31, 1998 and the twenty-six weeks
ended  August  1,  1998,  the  gain or loss on open  futures  contracts  was not
material.  The Company did not have any open positions in futures  contracts for
gold  at  January  31,  1998.  There  can be no  assurance  that  these  hedging
techniques  will be successful or that hedging  transactions  will not adversely
affect the Company's results of operations or financial position.

     On March 19, 1998,  Liberty  House,  one of the host stores in which Finlay
operates,  filed a voluntary petition in bankruptcy under Title 11 of the United
States Code ( the "Bankruptcy  Code"). The Company is currently receiving weekly
payments  towards the  outstanding  balance that was due to the Company prior to
the filing of the  bankruptcy  petition,  which as of September 11, 1998 totaled
$0.5 million. Finlay believes that the bankruptcy of Liberty House will not have
a  material  adverse  effect  on  Finlay's  financial  position  or  results  of
operations.

     Finlay believes that, based upon current  operations,  anticipated  growth,
and 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  to the Company  sufficient to
permit the Company to meet its debt service obligations and to pay certain other
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 and the Company to meet their debt service and other obligations.
Currently,  Finlay Jewelry's  principal financing  arrangements  restrict annual
distributions  from Finlay  Jewelry to the Company to 0.25% of Finlay  Jewelry's
net sales for the  preceding  fiscal  year and also allow  distributions  to the
Company to enable it to make  interest  payments on the Senior  Debentures.  The
amounts  required to satisfy the  aggregate  of  Finlay's  interest  expense and
required  amortization  payments totaled $10.6 million and $12.7 million for the
twenty-six weeks ended August 2, 1997 and August 1, 1998, respectively.




                                       19

<PAGE>

Seasonality
 
     Finlay's  business is highly  seasonal,  with a significant  portion of its
sales and income from  operations  generated  during the fourth  quarter of each
year, which includes the year-end holiday season.  The fourth quarter  accounted
for an average of 42% of Finlay's  sales and 82% of its income  from  operations
(excluding  nonrecurring  charges) for 1995, 1996 and 1997. Finlay has typically
experienced  net losses in the first three  quarters of its 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 Finlay's  results of  operations  has not been
material in the periods discussed.

Special Note Regarding Forward-Looking Statements

     This Quarterly  Report on Form 10-Q includes  "forward-looking  statements"
within the meaning of Section 27A of the  Securities Act of 1993 and Section 21E
of the  Securities  Exchange Act of 1934 (the  "Exchange  Act").  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 to differ  materially  from those  reflected in 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", as well as trends in
the general  economy in the United States and France,  competition in the retail
jewelry business,  the seasonality of the retail jewelry business, the Company's
ability to increase comparable department sales and to open new departments, the
Company's  estimate  of the cost to address  Year 2000  compliance  issues,  the
Company's   dependence   on  certain  host  store   relationships   due  to  the
concentration  of sales generated by such host stores,  the  availability to the
Company of alternate sources of merchandise supply in the case of an abrupt loss
of any  significant  supplier,  the  Company's  ability  to  continue  to obtain
substantial amounts of merchandise on consignment,  the Company's  dependence on
key  officers,  the  Company's  ability to  integrate  the former  Diamond  Park
departments  (and any future  acquisitions  ) into its  existing  business,  the
Company's  high  degree of  leverage  and the  availability  to the  Company  of
financing and credit on favorable  terms and changes in regulatory  requirements
which are applicable to the Company's business.

     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.  The Company  undertakes no obligation to publicly revise these
forward-looking  statements to reflect events or circumstances  that arise after
the date hereof. In addition to the disclosure contained herein,  readers should
carefully  review any disclosure of risks and  uncertainties  contained in other
documents the Company  files or has filed from time to time with the  Commission
pursuant to the Exchange Act.




                                       20

<PAGE>

PART II - OTHER INFORMATION

Item 4.           Submission of Matters to a Vote of Security Holders

     The Annual Meeting of the  Stockholders of the Company was held on June 22,
1998,  pursuant to notice,  at which  Messrs.  Norman S.  Matthews and Warren C.
Smith, Jr. and Ms. Hanne M. Merriman were re-elected directors of the Company to
serve a three-year  term in the class of  directors  whose term expires in 2001.
Such members have been elected to serve until the expiration of their respective
terms of office and until their  successors are duly elected and  qualified.  At
such meeting, votes were cast as follows:

Name                             Votes for          Votes Withheld
----                             ---------          --------------

Norman S. Matthews               6,309,264                 -
Hanne M. Merriman                6,309,264                 -
Warren C. Smith, Jr.             6,309,264                 -

     Messrs.  Rohit M. Desai,  Thomas H. Lee, David B.  Cornstein,  James Martin
Kaplan  and  Arthur E.  Reiner  continued  to serve as  members  of the Board of
Directors after the meeting.

     In addition,  the proposal to approve an  amendment to the  Company's  1997
Long Term  Incentive  Plan,  to  increase by 500,000 the number of shares of the
Company's  Common  Stock  available  for  issuance  thereunder,  was passed with
5,697,879 votes in favor, 776,285 votes against and zero votes abstaining.

Item 6.           Exhibits and Reports on Form 8-K

     A.    Exhibits

          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.


                                       21

<PAGE>


         23   Not applicable.

         24   Not applicable.

         27   Financial Data Schedule.

         99   Not applicable.

     B. Reports on Form 8-K

     On May 11, 1998,  the Company filed with the Commission a Current Report on
Form 8-K  regarding  (i) the sale by the  Company  of  $75.0  million  aggregate
principal  amount  of  its 9%  Senior  Debentures  due  May 1,  2008;  (ii)  the
concurrent sale (a) by the Company and certain stockholders of the Company of an
aggregate of 1,800,000  shares of Common Stock of the Company (of which  567,310
shares were sold by the Company  and  1,232,690  shares were sold by the selling
stockholders)  and (b) by Finlay Jewelry of $150.0 million  aggregate  principal
amount of its 8-3/8% Senior Notes due May 1, 2008;  (iii) the amendment of the
Revolving Credit Agreement to increase the line of credit thereunder from $225.0
million  to $275.0  million  and to make  certain  other  changes;  and (iv) the
amendment  of the Gold  Consignment  Agreement  to renew the  agreement  through
December  31, 2001,  to allow  Finlay  Jewelry to obtain up to the lesser of (x)
85,000 fine troy ounces or (y) $32.0 million worth of gold,  and to make certain
other modifications.
 





 






                                       22




<PAGE>
 
                                   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: September 11, 1998             FINLAY ENTERPRISES, INC.

                                     By: /s/ Barry D. Scheckner                
                                         --------------------------------------
                                         Barry D. Scheckner, Senior Vice
                                         President and Chief Financial Officer
                                         (As both a duly authorized officer of
                                         Registrant and as principal financial
                                         officer of Registrant)








                                       23