**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-Q**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
                SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended May
      5,
      2007





or





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
                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.
                Employerincorporation
                or organization)
            
            Identification
                No.)529
                Fifth Avenue, New York,
                NY
            
            10017(Address
                of principal executive
                offices)
            
            (Zip
                Code)





(212)
      808-2800


(Registrant’s
      telephone number, including area code)





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





Yes x    No
o





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





Large
                accelerated
            Accelerated
            Non-acceleratedfiler
o
            filer
x
            filer
o





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




Yes
o    No x





As
      of
      June 8, 2007, there were 9,221,432 shares of common stock, par value $.01 per
      share, of the registrant outstanding.












**FINLAY
      ENTERPRISES, INC.**





**FORM
      10-Q**





**QUARTERLY
      PERIOD ENDED MAY 5, 2007**





**INDEX**


**PAGE(S)****PART
                  I - FINANCIAL INFORMATION**Item
                  1.
              Consolidated
                  Financial Statements (Unaudited)Consolidated
                  Statements of Operations for the thirteen weeks ended May 5, 2007
                  and
                  April 29, 2006
              
              2Consolidated
                  Balance Sheets as of May 5, 2007 and February 3, 2007
              
              3Consolidated
                  Statements of Changes in Stockholders’ Equity and Comprehensive Income
                  (Loss) for the thirteen weeks ended May 5, 2007
              
              4Consolidated
                  Statements of Cash Flows for the thirteen weeks ended May 5, 2007
                  and
                  April 29, 2006
              
              5Notes
                  to Consolidated Financial Statements
              
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              18Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              33Item
                  4.
              Controls
                  and Procedures
              
              33**PART
                  II - OTHER INFORMATION**Item
                  1A.
              Risk
                  Factors
              
              35Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              35Item
                  6.
              Exhibits
              
              36**SIGNATURES**
              
              
              37


**PART
      I - FINANCIAL INFORMATION**


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





**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


**(unaudited)**








**Thirteen
                Weeks Ended****May
                5,**
              **2007**
            
            **April
                29,**
              **2006**Sales
            
            $
            166,438
            
            $
            149,343Cost
                of sales
            
            
            88,346
            
            
            76,836Gross
                margin
            
            
            78,092
            
            
            72,507Selling,
                general and administrative expenses
            
            
            79,120
            
            
            74,019Depreciation
                and amortization
            
            
            3,653
            
            
            3,704Loss
                from operations
            
            
            (4,681
            )
            
            (5,216
            )Interest
                expense, net
            
            
            6,105
            
            
            5,245Loss
                from continuing operations before income taxes
            
            
            (10,786
            )
            
            (10,461
            )Benefit
                for income taxes
            
            
            (3,182
            )
            
            (4,131
            )Loss
                from continuing operations
            
            
            (7,604
            )
            
            (6,330
            )Discontinued
                operations, net of tax
            
            
            -
            
            
            6,449Net
                income (loss)
            
            $
            (7,604
            )
            $
            119Net
                income (loss) per share applicable to common shares -Basic
                and Diluted:Loss
                from continuing operations
            
            $
            (0.84
            )
            $
            (0.70
            )Discontinued
                operations, net of tax
            
            $
            -
            
            $
            0.71Net
                income (loss)
            
            $
            (0.84
            )
            $
            0.01Weighted
                average shares outstanding -Basic
                and Diluted
            
            
            9,052,477
            
            
            8,983,032




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





2


**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


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








**May
                5,**
              **2007**
            
            **February
                3,**
              **2007****(unaudited)**
            
            **(audited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            2,952
            
            $
            2,415Accounts
                receivable
            
            
            32,065
            
            
            26,271Other
                receivables
            
            
            1,854
            
            
            2,314Merchandise
                inventories
            
            
            437,828
            
            
            430,479Prepaid
                expenses and other
            
            
            4,004
            
            
            4,356Total
                current assets
            
            
            478,703
            
            
            465,835Fixed
                assets:Building,
                equipment, fixtures and leasehold improvements
            
            
            100,634
            
            
            98,229Less
                - accumulated depreciation and amortization
            
            
            45,694
            
            
            43,236Fixed
                assets, net
            
            
            54,940
            
            
            54,993Deferred
                charges and other assets, net
            
            
            12,497
            
            
            13,517Goodwill
            
            
            3,009
            
            
            3,009Total
                assets
            
            $
            549,149
            
            $
            537,354**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Short-term
                borrowings
            
            $
            92,813
            
            $
            45,876Accounts
                payable - trade
            
            
            63,808
            
            
            85,053Accrued
                liabilities:Accrued
                salaries and benefits
            
            
            12,520
            
            
            16,940Accrued
                miscellaneous taxes
            
            
            7,023
            
            
            7,226Accrued
                interest
            
            
            7,228
            
            
            2,874Deferred
                income
            
            
            4,767
            
            
            5,206Deferred
                income taxes
            
            
            10,826
            
            
            13,322Other
            
            
            14,496
            
            
            16,394Income
                taxes payable
            
            
            11,184
            
            
            13,471Total
                current liabilities
            
            
            224,665
            
            
            206,362Long-term
                debt
            
            
            200,000
            
            
            200,000Deferred
                income taxes
            
            
            7,023
            
            
            7,827Other
                non-current liabilities
            
            
            2,707
            
            
            936Total
                liabilities
            
            
            434,395
            
            
            415,125Commitments
                and contingencies (Note 13)Stockholders’
                equity:Common
                Stock, par value $.01 per share; authorized 25,000,000 shares;issued
                11,462,683 and 11,348,017 shares, at May 5, 2007 and February
                3, 2007, respectively
            
            
            114
            
            
            113Additional
                paid-in capital
            
            
            94,244
            
            
            92,999Retained
                earnings
            
            
            48,076
            
            
            56,704Less
                treasury stock of 2,243,255 and 2,227,366 shares, at May 5, 2007and
                February 3, 2007, respectively, at cost
            
            
            (27,680
            )
            
            (27,587
            )Total
                stockholders’ equity
            
            
            114,754
            
            
            122,229Total
                liabilities and stockholders’ equity
            
            $
            549,149
            
            $
            537,354




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





3





**FINLAY
      ENTERPRISES, INC.**


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


**AND
      COMPREHENSIVE INCOME (LOSS)**


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





**Common
                Stock**
            
            **Additional**
            
            
            
            
            
            **Total****Number**
            
            
            
            **Paid-in**
            
            **Retained**
            
            **Treasury**
            
            **Stockholders’**
            
            **Comprehensive****of
                Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Stock**
            
            **Equity**
            
            **Income
                (Loss)**Balance,
                February 3, 2007
            
            
            9,120,651
            
            $
            113
            
            $
            92,999
            
            $
            56,704
            
            $
            (27,587
            )
            $
            122,229Effect
                of adoption of FIN 48
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,024
            )
            
            -
            
            
            (1,024
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (7,604
            )
            
            -
            
            
            (7,604
            )
            $
            (7,604
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (7,604
            )Issuance
                of common stock
            
            
            114,666
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            1Award
                of restricted stock andrestricted
                stock units
            
            
            -
            
            
            -
            
            
            804
            
            
            -
            
            
            -
            
            
            804Amortization
                of restricted stockcompensation
                and restrictedstock
                units
            
            
            -
            
            
            -
            
            
            441
            
            
            -
            
            
            -
            
            
            441Purchase
                of treasury stock
            
            
            (15,889
            )
            
            -
            
            
            -
            
            
            -
            
            
            (93
            )
            
            (93
            )Balance,
                May 5, 2007 (unaudited)
            
            
            9,219,428
            
            $
            114
            
            $
            94,244
            
            $
            48,076
            
            $
            (27,680
            )
            $
            114,754




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





4


**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**


**(unaudited)**





**Thirteen
                Weeks Ended****May
                5,**
              **2007**
            
            **April
                29,**
              **2006**OPERATING
                ACTIVITIESNet
                income (loss)
            
            $
            (7,604
            )
            $
            119Adjustments
                to reconcile net income (loss) to net cash used inoperating
                activities:Depreciation
                and amortization
            
            
            3,653
            
            
            5,847Loss
                on disposal of fixed assets
            
            
            71
            
            
            1,100Amortization
                of deferred financing costs
            
            
            228
            
            
            298Amortization
                of restricted stock compensation andrestricted
                stock units
            
            
            441
            
            
            388Deferred
                income tax benefit
            
            
            (3,300
            )
            
            (890
            )Other,
                net
            
            
            322
            
            
            (271
            )Changes
                in operating assets and liabilities:Increase
                in accounts and other receivables
            
            
            (5,334
            )
            
            (19,023
            )Increase
                in merchandise inventories
            
            
            (7,349
            )
            
            (9,390
            )Decrease
                in prepaid expenses and other
            
            
            352
            
            
            66Decrease
                in accounts payable and accrued liabilities
            
            
            (37,496
            )
            
            (44,018
            )NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (56,016
            )
            
            (65,774
            )INVESTING
                ACTIVITIESPurchases
                of equipment, fixtures and leasehold improvements
            
            
            (3,709
            )
            
            (4,779
            )Deferred
                charges and other assets
            
            
            (31
            )
            
            -NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (3,740
            )
            
            (4,779
            )FINANCING
                ACTIVITIESProceeds
                from revolving credit facility
            
            
            176,948
            
            
            204,143Principal
                payments on revolving credit facility
            
            
            (130,011
            )
            
            (170,272
            )Capitalized
                financing costs
            
            
            -
            
            
            (50
            )Purchase
                of treasury stock
            
            
            (93
            )
            
            (79
            )Bank
                overdraft
            
            
            13,449
            
            
            11,833Stock
                options exercised
            
            
            -
            
            
            8NET
                CASH PROVIDED FROM FINANCING ACTIVITIES
            
            
            60,293
            
            
            45,583INCREASE
                (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            537
            
            
            (24,970
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            2,415
            
            
            28,191CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            2,952
            
            $
            3,221SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Interest
                paid
            
            $
            1,523
            
            $
            1,000Income
                taxes paid
            
            $
            1,905
            
            $
            6,403SUPPLEMENTAL
                DISCLOSURE OF NON-CASH ACTIVITIES:Restricted
                stock units issuance costs accrued but not paid
            
            $
            723
            
            $
            548Accrual
                for purchases of fixed assets
            
            $
            2,579
            
            $
            562




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





5




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





The
      accompanying unaudited consolidated financial statements of Finlay Enterprises,
      Inc. (the “Company,” the “Registrant,” “we,” “us” and “our”), and its
      wholly-owned subsidiary, Finlay Fine Jewelry Corporation and its wholly-owned
      subsidiaries (“Finlay Jewelry”), have been prepared in accordance with
      accounting principles generally accepted in the United States of America for
      interim financial information. References to “Finlay” mean collectively, the
      Company and Finlay Jewelry. In the opinion of management, the accompanying
      unaudited consolidated financial statements contain all adjustments necessary
      to
      present fairly our financial position as of May 5, 2007, and our results of
      operations and cash flows for the thirteen weeks ended May 5, 2007 and April
      29,
      2006. Due to the seasonal nature of our business, results for interim periods
      are not indicative of annual results. The unaudited consolidated financial
      statements have been prepared on a basis consistent with that of the audited
      consolidated financial statements as of February 3, 2007 referred to below.
      Certain information and footnote disclosures normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America have been condensed or omitted pursuant to
      the
      rules and regulations of the Securities and Exchange Commission (the
“Commission”).





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




As
      a
      result of the store closings in 2006 associated with the Federated Department
      Stores, Inc., now known as Macy’s Inc. (“Federated”) and The May Department
      Stores Company (“May”) merger, the results of operations for the 194 departments
      that were either divested or phased into the Macy’s East or Macy’s West
      divisions have been segregated from those of continuing operations, net of
      tax,
      and classified as discontinued operations for the thirteen weeks ended April
      29,
      2006. Additionally, as a result of the decision by Belk, Inc. (“Belk”) not to
      renew Finlay Jewelry’s license agreement, the results of operations of the 75
      Belk departments that closed in January 2007 have been segregated from those
      of
      continuing operations, net of tax, and classified as discontinued operations
      for
      the thirteen weeks ended April 29, 2006. Unless otherwise indicated, the
      following discussion relates to our continuing operations. See Note 10 for
      additional information regarding discontinued operations.





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





**NOTE
      2 - SIGNIFICANT ACCOUNTING POLICIES**





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





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




6


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





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





During
      the majority of 2006, and from time to time in past years, we entered into
      forward contracts based upon the anticipated sales of consigned gold
      merchandise. These contracts aided our efforts in hedging against the risk
      of
      gold price fluctuations, as the cost of gold for our consigned gold merchandise
      was not fixed until the merchandise was sold. For the thirteen weeks ended
      April
      29, 2006, the gain/loss on open forward contracts was not material.





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





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





As
      of May
      5, 2007 and February 3, 2007, deferred vendor allowances totaled (i) $8.3
      million and $9.4 million, respectively, for owned merchandise, which allowances
      are included as an offset to merchandise inventories on the Consolidated Balance
      Sheets, and (ii) $4.8 million and $5.2 million, respectively, for merchandise
      received on consignment, which allowances are included as deferred income on
      the
      Consolidated Balance Sheets.




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





During
      2006, and in past years, we had designated our derivative instruments,
      consisting of gold forward contracts, as cash flow hedges. For derivative
      instruments designated as cash flow hedges, the effective portion of the change
      in the fair value of the derivative was recorded in accumulated other
      comprehensive income, a separate component of stockholders’ equity, and was
      reclassified into cost of sales when the offsetting effects of the hedged
      transaction impacted earnings. Changes in the fair value of the derivative
      attributable to hedge ineffectiveness were recorded in earnings immediately.
      At
      May 5, 2007 and February 3,
      2007,
      we had no open positions in gold forward contracts and we currently do not
      engage in any hedging activities.




7


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





***Net
      Income (Loss) Per Share*** :
      Net
      income (loss) per share has been computed in accordance with SFAS No. 128,
      “Earnings per Share”. Basic and diluted net income (loss) per share were
      calculated using the weighted average number of shares outstanding during each
      period, with options to purchase common stock, par value $0.01 per share
      (“Common Stock”), restricted stock and restricted stock units, included in
      diluted net income (loss) per share, using the treasury stock method, to the
      extent that such options, restricted stock and restricted stock units were
      dilutive. As we had a loss from continuing operations for the thirteen weeks
      ended May 5, 2007 and April 29, 2006, the stock options, restricted stock and
      restricted stock units are not considered in the calculation of diluted net
      income (loss) per share due to their anti-dilutive effect. As a result, the
      weighted average number of shares outstanding used for both the basic and
      diluted net income (loss) per share calculations was the same. Total stock
      options, restricted stock and restricted stock units outstanding were 1,320,972
      and 1,548,027 at May 5, 2007 and April 29, 2006, respectively, at prices ranging
      from $7.05 to $24.31 per share in each period.





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





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





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





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





8





**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      3 - DESCRIPTION OF BUSINESS**





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





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





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





**NOTE
      4 - MERCHANDISE INVENTORIES**





Merchandise
      inventories consisted of the following:




**May
                5,**
              **2007**
            
            **February
                3,**
              **2007****(in
                thousands)**Jewelry
                goods - rings, watches and other fine jewelry(first-in,
                first-out (“FIFO”) basis)
            
            $
            467,261
            
            $
            458,920Less:
                Excess of FIFO cost over LIFO inventory value
            
            
            29,433
            
            
            28,441$
            437,828
            
            $
            430,479





We
      determine our LIFO inventory value by utilizing internally developed indices.
      The LIFO method had the effect of increasing the loss from continuing operations
      before income taxes for each of the thirteen weeks ended May 5, 2007 and April
      29, 2006 by $1.0 million and $0.4 million, respectively.





Approximately
      $197.8 million and $204.0 million at May 5, 2007 and February 3, 2007,
      respectively, of merchandise received on consignment is not included in
      merchandise inventories and accounts payable-trade in the accompanying
      Consolidated Balance Sheets.





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





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




9


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





Our
      revolving credit agreement with General Electric Capital Corporation and certain
      other lenders (the “Revolving Credit Agreement”), which matures in January 2011,
      provides Finlay Jewelry with a senior secured revolving line of credit up to
      $225.0 million (the “Revolving Credit Facility”). At May 5, 2007, $92.8 million
      was outstanding under this facility, at which point the available borrowings
      were $126.1 million. The average amounts outstanding under the Revolving Credit
      Agreement were $90.2 million and $43.2 million for the thirteen weeks ended
      May
      5, 2007 and April 29, 2006, respectively. The maximum amount outstanding for
      the
      thirteen weeks ended May 5, 2007 was $110.3 million, at which point the
      available borrowings were an additional $108.6 million.





Amounts
      outstanding under the Revolving Credit Agreement bear interest at a rate equal
      to, at our option, (i) the prime rate plus a margin ranging from zero to 0.25%
      or (ii) the adjusted Eurodollar rate plus a margin ranging from 1.25% to 2.0%,
      in each case depending on availability under our facility. The weighted average
      interest rate was 7.0% and 7.9% for the thirteen weeks ended May 5, 2007 and
      April 29, 2006, respectively.




At
      both
      May 5, 2007 and February 3, 2007, we had letters of credit outstanding totaling
      $6.1 million, which guarantee various trade activities.





The
      Revolving Credit Agreement contains customary covenants, including limitations
      on, or relating to capital expenditures, liens, indebtedness, investments,
      mergers, acquisitions, affiliate transactions, management compensation and
      the
      payment of dividends and other restricted payments. The Revolving Credit
      Agreement also contains a fixed charge coverage ratio requirement under certain
      circumstances. As of May 5, 2007, Finlay Jewelry is in compliance with this
      financial covenant. We also expect to be in compliance with all of our covenants
      during the balance of 2007. Because compliance is based, in part, on our
      management’s estimates and actual results can differ from those estimates, there
      can be no assurance that we will be in compliance with these covenants in the
      future or that the lenders will waive or amend any of the covenants should
      we be
      in violation thereof. We believe the assumptions used are
      appropriate.





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





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




10


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      5 - SHORT AND LONG-TERM DEBT (continued)**





The
      indenture governing the Senior Notes contains restrictions relating to, among
      other things, the payment of dividends, redemptions or repurchases of capital
      stock, the incurrence of additional indebtedness, the making of certain
      investments, the creation of certain liens, the sale of certain assets, entering
      into transactions with affiliates, engaging in mergers and consolidations and
      the transfer of all or substantially all assets. Finlay Jewelry was in
      compliance with all of its covenants as of and for the thirteen weeks ended
      May
      5, 2007. We
      believe we will be in compliance with our financial covenant throughout
      2007.





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


**AGREEMENTS**





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





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





**Thirteen
                Weeks Ended****May
                5,**
              **2007**
            
            **April
                29,**
              **2006****(in
                thousands)**Base
                rent
            
            $
            2,261
            
            $
            1,863Contingent
                fees
            
            
            23,660
            
            
            22,306Total
            
            $
            25,921
            
            $
            24,169





**NOTE
      7 - STOCK-BASED COMPENSATION**





Stock
      options outstanding under our stock incentive plans have been granted at prices
      which are equal to the market value of our stock on the date of grant, generally
      vest over five years and expire no later than ten years after the grant date.
      Effective January 29, 2006, we began recognizing compensation expense ratably
      over the vesting period. During the thirteen weeks ended April 29, 2006, we
      recognized approximately $36,000 in stock-based compensation expense. At
      February 3, 2007, all stock options were fully vested and, therefore, there
      has
      been no expense in 2007 relating to stock options.





There
      were no options granted during 2006 or 2007. The fair value of options granted
      in previous years was estimated using the Black-Scholes option pricing model.
      The Black-Scholes option pricing model was developed for use in estimating
      the
      fair value of traded options, which have no vesting restrictions and are fully
      transferable. In addition, option valuation models require input of highly
      subjective assumptions including the expected stock price volatility. Because
      our employee stock options have characteristics significantly different from
      those of traded options, and because changes in subjective input assumptions
      can
      materially affect the fair value estimate, the actual value realized at the
      time
      the options are exercised may differ from the estimated values.




11


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





The
      following table summarizes the changes in stock options outstanding during
      the
      thirteen weeks ended May 5, 2007:





**Options
                Outstanding**
            
            **Options
                Exercisable****Number**
              **Outstanding**
            
            **Wtd.
                Avg.**
              **Remaining**
              **Contractual
                Life**
            
            **Wtd.
                Avg.**
              **Ex.
                Price**
            
            **Aggregate**
              **Intrinsic**
              **Value
                (000’s)**
            
            **Number**
              **Exercisable**
            
            **Average**
              **Exercise
                Price**
            
            **Aggregate**
              **Intrinsic**
              **Value
                (000’s)**Balance
                at February 3, 2007
            
            
            1,016,334
            
            
            2.24
            
            $
            12.10
            
            $
            618
            
            
            1,016,334
            
            $
            12.10
            
            $
            618Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            (404,034
            )
            
            -
            
            
            13.77
            
            
            -
            
            
            (404,034
            )
            
            13.77
            
            
            -Balance
                at May 5, 2007
            
            
            612,300
            
            
            3.32
            
            $
            11.00
            
            $
            -
            
            
            612,300
            
            $
            11.00
            
            $
            -




The
      following table summarizes the changes in restricted stock outstanding during
      the thirteen weeks ended May 5, 2007:





**Restricted**
              **Stock**
            
            **Wtd.
                Avg. Grant Date Fair Value**Balance
                at February 3, 2007
            
            
            157,487
            
            $
            12.17Granted
            
            
            55,261
            
            
            9.32Vested
            
            
            (189
            )
            
            5.82Cancelled
            
            
            -
            
            
            -Balance
                at May 5, 2007
            
            
            212,559
            
            $
            11.43




The
      following table summarizes the changes in restricted stock units outstanding
      during the thirteen weeks ended May 5, 2007:





**Restricted**
              **Stock
                Units****(1)**
            
            **Wtd.
                Avg. Grant Date**
              **Fair
                Value**Balance
                at February 3, 2007
            
            
            317,546
            
            $
            13.01Awarded
            
            
            241,695
            
            
            5.95Distributed
            
            
            (60,972
            )
            
            6.26Cancelled
            
            
            (2,156
            )
            
            12.74Balance
                at May 5, 2007
            
            
            496,113
            
            $
            8.92


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





12




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








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





In
      April
      2003, the Board of Directors adopted the Executive Deferred Compensation and
      Stock Purchase Plan and the Director Deferred Compensation and Stock Purchase
      Plan (the “RSU Plans”), which were approved by our stockholders on June 19,
      2003. Under the RSU Plans, key executives and non-employee directors, as
      directed by our Compensation Committee, are eligible to acquire restricted
      stock
      units (“RSUs”). An RSU is a unit of measurement equivalent to one share of
      Common Stock, but with none of the attendant rights of a stockholder of a share
      of Common Stock. Two types of RSUs are awarded under the RSU Plans: (i)
      participant RSUs, where a plan participant may elect to defer, in the case
      of an
      executive employee, a portion of his or her actual or target bonus, and in
      the
      case of a non-employee director, all of his or her eligible director fees (which
      are annual retainer fees plus any annual fees received by a participant for
      services as chairperson of any committee of the Board of Directors, but
      excluding the Lead Independent Director’s annual fee) that would otherwise be
      paid in cash, and receive RSUs in lieu thereof, and (ii) matching RSUs, where
      we
      credit a participant’s plan account with one matching RSU for each participant
      RSU that a participant elects to purchase. While participant RSUs are fully
      vested at all times, matching RSUs are subject to vesting and forfeiture as
      set
      forth in the RSU Plans. At the time of distribution under the RSU Plans, RSUs
      are converted into actual shares of Common Stock. As of May 5, 2007, 496,113
      RSUs are outstanding under the RSU Plans. Amortization for the thirteen weeks
      ended May 5, 2007 and April 29, 2006 totaled approximately $154,000 and
      $145,000, respectively.





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





In
      August
      2005, Federated announced that it had completed a merger with May. In September
      2005, Federated announced its integration plans including a divisional
      realignment and divestiture of certain stores. As of May 5, 2007, we operated
      a
      total of 349 departments in five of Federated’s eight divisions, as
      follows:




Macy’s
                South
            
            
            123Macy’s
                Midwest
            
            
            100Macy’s
                North
            
            
            57Macy’s
                Northwest
            
            
            36Bloomingdale’s
            
            
            33Total
            
            
            349





During
      the first half of 2006, 194 stores were either divested or phased into the
      Macy’s East or Macy’s West divisions and have been classified as discontinued
      operations in accordance with SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets” (“SFAS No. 144”). See Note 10 for additional
      information regarding discontinued operations. During the thirteen weeks ended
      April 29, 2006, we recorded charges associated with accelerated depreciation
      of
      fixed assets and severance related to our field operations totaling
      approximately $2.5 million. These costs are included in discontinued operations
      in the accompanying Consolidated Statements of Operations.





In
      May
      2006, the Company announced that Belk would not renew Finlay Jewelry’s license
      agreement due to Belk’s acquisition of a privately-held company that licensed
      fine jewelry departments in certain of the Belk stores. The termination of
      the
      license agreement, effective at the end of 2006, resulted in the closure of
      75
      departments. For the thirteen weeks ended April 29, 2006, the results of
      operations for these closed stores have been classified as discontinued
      operations in accordance with SFAS No. 144.





Further,
      as a result of Belk’s acquisition of Parisian from Saks, Inc. (“Saks”) in
      October 2006, the Parisian departments will close in July 2007. In 2006, we
      generated sales of approximately $22.9 million from our 33 Parisian departments.
      For the thirteen week periods ended May 5, 2007 and April 29, 2006, we generated
      sales of $3.6 million and $4.3 million, respectively, from these departments.
      The results of operations for these departments are included in continuing
      operations in the accompanying Consolidated Statements of Operations and will
      be
      reclassified to discontinued operations in the second quarter of 2007 when
      the
      departments close. During the thirteen weeks ended May 5, 2007, we recorded
      charges associated with accelerated depreciation of fixed assets totaling $0.1
      million.




13


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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




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





**Severance
                and**
              **Termination**
              **Benefits**Balance
                at January 28, 2006
            
            $
            1,258Charges**(1)**
            
            
            3,458Payments
            
            
            (4,131
            )Balance
                at February 3, 2007
            
            
            585Reversal
                of accrual
            
            
            (155
            )Payments
            
            
            (357
            )Balance
                at May 5, 2007
            
            $
            73


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





**NOTE
      10 - DISCONTINUED OPERATIONS**





As
      a
      result of the store closings associated with the Federated/May merger as well
      as
      the Belk store closings, the results of operations of the departments closed
      during 2006 have been segregated from those of continuing operations, net of
      tax, and classified as discontinued operations for the thirteen weeks ended
      April 29, 2006. All of the closed stores operated in our department store based
      fine jewelry departments segment.





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





**Thirteen
                Weeks Ended****April
                29,**
              **2006**Sales
            
            $
            85,871Income
                before income taxes
            
            
            10,659Discontinued
                operations, net of tax
            
            
            6,449





14




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      11 - SEGMENT INFORMATION**





Prior
      to
      the acquisition of Carlyle in May 2005, we operated in a single reportable
      segment, i.e., the operation of department store based fine jewelry departments.
      In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise
      and Related Information”, we have two operating segments - department store
      based fine jewelry departments and stand-alone jewelry stores (which includes
      the Carlyle and Congress operating segments which are aggregated into one
      reporting segment). The accounting policies of the segments are generally the
      same as those described in Note 2. There are no intercompany sales between
      the
      segments.




The
      following table provides segment level financial information for the thirteen
      weeks ended May 5, 2007 and April 29, 2006 (in thousands):




**Thirteen
                Weeks Ended****May
                5, 2007**
            
            **April
                29, 2006****Department
                Store Based Fine Jewelry Departments (2)**
            
            **Stand-alone**
              **Jewelry**
              **Stores
                (1)**
            
            **Total**
            
            **Department
                Store Based Fine Jewelry**
              **Departments
                (2)**
            
            **Stand-alone**
              **Jewelry**
              **Stores**
            
            **Total**Sales
            
            $
            139,205
            
            $
            27,233
            
            $
            166,438
            
            $
            131,796
            
            $
            17,547
            
            $
            149,343Depreciation
                and amortization
            
            
            3,284
            
            
            369
            
            
            3,653
            
            
            3,557
            
            
            147
            
            
            3,704Income
                (loss) from operations
            
            
            (5,236
            )
            
            555
            
            
            (4,681
            )
            
            (5,506
            )
            
            290
            
            
            (5,216
            )Interest
                expense, net
            
            
            5,447
            
            
            658
            
            
            6,105
            
            
            4,940
            
            
            305
            
            
            5,245Benefit
                for income taxes
            
            
            (3,143
            )
            
            (39
            )
            
            (3,182
            )
            
            (4,125
            )
            
            (6
            )
            
            (4,131
            )Total
                assets
            
            
            448,399
            
            
            100,750
            
            
            549,149
            
            
            453,469
            
            
            67,000
            
            
            520,469Capital
                expenditures
            
            
            3,530
            
            
            179
            
            
            3,709
            
            
            4,488
            
            
            291
            
            
            4,779





(1)
            Includes
                Congress since the date of acquisition in November
                2006.





(2)
            Included
                in interest expense, net for each of the thirteen weeks ended May
                5, 2007
                and April 29, 2006, is $4.2 million related to the Senior
                Notes.





Additionally,
      our sales mix by merchandise category was as follows for the thirteen weeks
      ended May 5, 2007 and April 29, 2006 (dollars in thousands):




**Thirteen
                Weeks Ended****May
                5, 2007**
            
            **April
                29, 2006****Department
                Store Based**
              **Fine
                Jewelry Departments**
            
            **Stand-alone**
              **Jewelry
                Stores (1)**
            
            **Department
                Store Based**
              **Fine
                Jewelry Departments**
            
            **Stand-alone**
              **Jewelry
                Stores****Sales**
            
            **%
                of**
              **Sales**
            
            **Sales**
            
            **%
                of**
              **Sales**
            
            **Sales**
            
            **%
                of**
              **Sales**
            
            **Sales**
            
            **%
                of**
              **Sales**Diamonds
            
            $
            34,743
            
            
            25.0
            %
            $
            8,106
            
            
            29.8
            %
            $
            35,999
            
            
            27.3
            %
            $
            4,785
            
            
            27.3
            %Gemstones
            
            
            26,328
            
            
            18.9
            
            
            3,018
            
            
            11.1
            
            
            26,400
            
            
            20.0
            
            
            1,324
            
            
            7.5Gold
            
            
            24,150
            
            
            17.4
            
            
            718
            
            
            2.6
            
            
            23,041
            
            
            17.5
            
            
            185
            
            
            1.0Watches
            
            
            18,308
            
            
            13.1
            
            
            10,245
            
            
            37.6
            
            
            15,494
            
            
            11.8
            
            
            6,519
            
            
            37.2Designer
            
            
            15,863
            
            
            11.4
            
            
            2,908
            
            
            10.7
            
            
            14,007
            
            
            10.6
            
            
            2,771
            
            
            15.8Other
                (2)
            
            
            19,813
            
            
            14.2
            
            
            2,238
            
            
            8.2
            
            
            16,855
            
            
            12.8
            
            
            1,963
            
            
            11.2Total
                Sales
            
            $
            139,205
            
            
            100.0
            %
            $
            27,233
            
            
            100.0
            %
            $
            131,796
            
            
            100.0
            %
            $
            17,547
            
            
            100.0
            %





(1)
            Includes
                Congress since the date of acquisition in November
                2006.





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





**NOTE
      12 - CONGRESS ACQUISITION**





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




15


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      12 - CONGRESS ACQUISITION (continued)**





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





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





**NOTE
      13 - COMMITMENTS AND CONTINGENCIES**





From
      time
      to time, we are involved in litigation arising out of our operations in the
      normal course of business. As of June 8, 2007, we are not a party to any legal
      proceedings that, individually or in the aggregate, are reasonably expected
      to
      have a material adverse effect on our business, results of operations, financial
      condition or cash flows. However, the results of these matters cannot be
      predicted with certainty, and an unfavorable resolution of one or more of these
      matters could have a material adverse effect on our consolidated financial
      statements.




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




Our
      concentration of credit risk consists principally of accounts receivable. During
      2006, store groups owned by Federated accounted for approximately 57.0% of
      our
      sales (excluding the Federated departments that closed in 2006 and Lord &
Taylor, which was sold in late 2006). We believe that the risk of insolvency
      associated with these receivables, other than those from Federated, would not
      have a material adverse effect on our financial position or results of
      operations.





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





We
      did
      not provide any third-party financial guarantees as of May 5, 2007 and February
      3, 2007.





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





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





16


**FINLAY
        ENTERPRISES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        14 - INCOME TAXES**
 
 In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
        No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of
        FASB Statement No. 109” (“FIN 48”). FIN 48 seeks to reduce the diversity in
        practice associated with certain aspects of measurement and recognition in
        accounting for income taxes. In addition, FIN 48 provides guidance on
        derecognition, classification, interest and penalties and accounting in interim
        periods and requires expanded disclosure with respect to the uncertainty
        in
        income taxes. FIN 48 is effective as of the beginning of the Company’s 2007
        fiscal year.
 
 The
        Company adopted FIN 48 on the first day of the current fiscal year. As a
        result
        of the implementation of FIN 48, during the first quarter of 2007, the Company
        recognized an increase of $1.0 million in the liability for unrecognized
        tax
        benefits that was accounted for as a decrease to opening retained earnings.
        As
        of the date of adoption and after the impact of recognizing the increase
        in
        liability noted above, the Company’s unrecognized tax benefits totaled $2.6
        million. Included in the balance at the date of adoption are $2.0 million
        of
        unrecognized tax benefits that if recognized, would affect the annual effective
        income tax rate.
 
 The
        Company files a consolidated federal income tax return and numerous consolidated
        and separate income tax returns in many state and local jurisdictions. The
        tax
        years 2002 through 2007 remain open to examination by the major taxing
        jurisdictions to which we are subject. The Company recognizes accrued interest
        and penalties related to unrecognized tax benefits in income tax expense,
        which
        is a continuation of the Company’s historical accounting policy. Approximately
        $0.4 million in potential interest and penalties is included as a component
        of
        the $2.6 million. The Company does not anticipate that total unrecognized
        tax
        benefits will significantly change due to the settlement of audits and the
        expiration of the statute of limitations prior to April 30,
        2008.




17


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




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




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





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





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





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





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





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





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





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





****** In
      November 2006, Finlay Jewelry completed the acquisition of Congress, a
      privately-owned regional chain of five jewelry stores located in southwest
      Florida, with annual sales of approximately $23.6 million in 2006. The purchase
      price was $6.0 million plus transaction fees and the assumption of $10.0 million
      of debt. The transaction was financed with additional borrowings under the
      Revolving Credit Agreement. Congress’ results of operations are included in the
      accompanying Consolidated Statements of Operations since the date of
      acquisition.





**Executive
      Overview**





**Our
      Business**





We
      are
      one of the leading retailers of fine jewelry in the United States and primarily
      operate licensed fine jewelry departments in major department stores where
      we
      sell a broad selection of moderately priced jewelry, with an average sales
      price
      of approximately $248 per item. We also operate stand-alone jewelry stores
      which
      sell luxury priced jewelry, with an average sales price of approximately $1,400
      per item. We have two operating segments - department store based fine jewelry
      departments and stand-alone jewelry stores. As of May 5, 2007, we operated
      a
      total of 749 locations, including 711 department store based fine jewelry
      departments in eleven host store groups, in 40 states and the District of
      Columbia, as well as 33 Carlyle specialty jewelry stores in nine states, located
      principally in the southeastern United States and five Congress specialty
      jewelry stores in southwest Florida.




18





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





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





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





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





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





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





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





19





**First
      Quarter Highlights**





Total
      sales were $166.4 million for the thirteen weeks ended May 5, 2007 compared
      to
      $149.3 million for the thirteen weeks ended April 29, 2006, an increase of
      11.4%. Total sales for the first quarter of 2007 included $27.2 million of
      sales
      generated by our stand-alone jewelry stores compared to $17.5 million in the
      first quarter of 2006; an increase which primarily relates to the acquisition
      of
      Congress in November 2006. Comparable store sales increased 8.1%, partially
      due
      to a shift in the fiscal calendar associated with Mother’s Day. Gross margin
      increased by $5.6 million compared to 2006, and, as a percentage of sales,
      gross
      margin decreased by 1.7% from 48.6% to 46.9%. The decrease in gross margin,
      as a
      percentage of sales, relates to a change in the mix of sales with higher sales
      in the designer and watch categories which have lower margins than other
      categories, the calendar shift which increased the rate of promotional sales
      and
      lower vendor concessions due to reduced merchandise receipts. SG&A increased
      $5.1 million, and, as a percentage of sales, SG&A decreased 2.1%, from 49.6%
      to 47.5%, primarily as a result of corporate office cost savings, including
      staff reductions, and corporate office severance in the prior year, as well
      as
      the impact of increased sales in the stand-alone jewelry stores which have
      a
      significantly lower rent structure as a percentage of sales compared to that
      of
      the department store based fine jewelry departments. Borrowings under the
      Revolving Credit Agreement increased by $58.9 million at May 5, 2007 as compared
      to April 29, 2006, which reflects additional borrowings attributable to the
      approximately $49.9 million impact as a result of the retirement of the Gold
      Consignment Agreement as well as the approximately $16.0 million impact of
      the
      Congress acquisition, including debt assumed. Maximum outstanding borrowings
      during the thirteen weeks ended May 5, 2007 were $110.3 million, at which point
      the available borrowings under the Revolving Credit Agreement were an additional
      $108.6 million.





**Opportunities**





We
      believe that current trends in jewelry retailing provide a significant
      opportunity for our growth. Consumers spent approximately $63.0 billion on
      jewelry (including both fine jewelry and costume jewelry) in the United States
      in calendar year 2006, an increase of approximately $22.0 billion over 1996,
      according to the United States Department of Commerce. In the department store
      and specialty jewelry store sectors in which we operate, consumers spent an
      estimated $12.3 billion on fine jewelry in 2005.





Our
      management believes that demographic factors such as the maturing U.S.
      population and an increase in the number of working women, have resulted in
      greater disposable income, thus contributing to the growth of the fine jewelry
      retailing industry. Our management also believes that jewelry consumers today
      increasingly perceive fine jewelry as a fashion accessory, resulting in
      purchases which augment our gift and special occasion sales.





In
      November 2005, Finlay Jewelry signed new agreements with Federated for the
      Macy’s Midwest and Macy’s North divisions and amended the existing Macy’s
      Northwest and Macy’s South agreements, effective at the beginning of 2006. The
      agreements expire on January 31, 2009, and cover approximately 316 departments
      in total. In addition to extending the agreements for three years, all
      non-compete provisions from the previous May contracts that required Finlay
      Jewelry to obtain May’s permission before opening a new department or store
      within a certain radius of a May store were eliminated. We believe that the
      elimination of this non-compete provision provides Finlay Jewelry with
      significantly greater opportunity to expand its business and continue to
      diversify beyond the traditional department store sector. The agreement has
      no
      impact on the Bloomingdale’s division whose license agreement, covering 33
      departments, currently runs through January 30, 2010.





Additional
      growth opportunities exist with respect to opening departments within existing
      host stores that do not currently operate jewelry departments. For example,
      over
      the past three years, we have added 30 departments in Dillard’s, Inc.
      (“Dillard’s”). During the thirteen weeks ended May 5, 2007, we opened one
      department within Dillard’s and we plan to add two additional departments in
      2007. Moreover, we opened four departments with Federated during the first
      quarter of 2007, including one Bloomingdale’s store. We project opening one new
      Carlyle store and another Bloomingdale’s department in 2007. Through opening new
      Bloomingdale’s departments, as well as new stand-alone stores, we expect to have
      a larger portion of our business dedicated to the high-end luxury
      sector.




20





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





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





·
            Increase
                comparable store sales;





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





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





·
            Add
                new host store relationships;





·
            Capitalize
                on developing fashion trends and emerging merchandise
                categories;





·
            Expand
                our most productive departments;





·
            Continue
                to improve operating leverage;





·
            Continue
                to raise customer service standards;
                and





·
            De-leverage
                the balance sheet.





**Risks
      and Uncertainties**





The
      risks
      and challenges facing our business include:





·
            Dependence
                on or loss of certain host store relationships;
                and





·
            Host
                store consolidation.





**** As
      of May
      5, 2007, we operated a total of 316 departments in four of Federated’s Macy’s
      divisions and 33 departments in Federated’s Bloomingdale’s division. These
      departments exclude the 194 departments either divested or phased into the
      Macy’s East or Macy’s West divisions during the first half of 2006. In 2006, we
      generated sales of approximately $105.9 million from these 194 departments.
      During 2006, we recorded charges of $4.1 million related to the accelerated
      depreciation of fixed assets and severance for our field operations with respect
      to these departments.




21





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





In
      May
      2006, the Company announced that Belk would not renew Finlay Jewelry’s license
      agreement due to Belk’s acquisition of a privately-held company that licensed
      fine jewelry departments in certain of the Belk stores. The termination of
      the
      license agreement, effective at the end of 2006, resulted in the closure of
      75
      departments. In 2006, we generated sales of approximately $51.9 million from
      the
      Belk departments. During 2006, we recorded charges of approximately $0.3 million
      related to the accelerated depreciation of fixed assets and severance related
      to
      our field operations with respect to these departments.





Further,
      as a result of Belk’s acquisition of Parisian from Saks in October 2006, the
      Parisian departments will close in July 2007. In 2006, we generated sales of
      approximately $22.9 million from our 33 Parisian departments. During 2006,
      we
      recorded charges of approximately $0.2 million related to the accelerated
      depreciation of fixed assets with respect to these departments.





**Results
      of Operations**





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





**Thirteen
                Weeks Ended****May
                5,**
              **2007**
            
            **April
                29,**
              **2006****Statement
                of Operations Data:**Sales
            
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            53.1
            
            
            51.4Gross
                margin
            
            
            46.9
            
            
            48.6Selling,
                general and administrative expenses
            
            
            47.5
            
            
            49.6Depreciation
                and amortization
            
            
            2.2
            
            
            2.5Loss
                from operations
            
            
            (2.8
            )
            
            (3.5
            )Interest
                expense, net
            
            
            3.7
            
            
            3.5Loss
                from continuing operations beforeincome
                taxes
            
            
            (6.5
            )
            
            (7.0
            )Benefit
                for income taxes
            
            
            (1.9
            )
            
            (2.8
            )Loss
                from continuing operations
            
            
            (4.6
            )
            
            (4.2
            )Discontinued
                operations, net of tax
            
            
            -
            
            
            4.3Net
                income (loss)
            
            
            (4.6
            )%
            
            0.1
            %





**Thirteen
      Weeks Ended May 5, 2007 Compared with Thirteen Weeks Ended April 29,
      2006**





***Sales.*** Sales
      for the thirteen weeks ended May 5, 2007 increased $17.1 million, or 11.4%,
      compared to 2006. Sales include $139.2 million in sales from the department
      store based fine jewelry departments for the thirteen weeks ended May 5, 2007,
      which represented a 5.6% increase compared to the $131.8 million in sales for
      the thirteen weeks ended April 29, 2006. Sales also include $27.2 million in
      sales generated by our stand-alone jewelry stores in 2007 compared to $17.5
      million in 2006, the increase of which primarily relates to the acquisition
      of
      Congress in November 2006. Comparable store sales increased 8.1% and relate,
      in
      part, to a shift in the fiscal calendar associated with Mother’s Day, which we
      have estimated had an approximate 3% to 4% positive impact in the first quarter
      of 2007.




22




During
      the thirteen weeks ended May 5, 2007, we opened nine department store based
      fine
      jewelry departments within existing host store groups. Additionally, during
      the
      thirteen weeks ended May 5, 2007, we closed 18 department store based fine
      jewelry departments. The openings were comprised of the following:




**Store
                Group**
            
            **Number
                of**
              **Locations**Bon
                Ton
            
            
            4Federated
            
            
            4Dillard’s
            
            
            1Total
            
            
            9




The
      closings were comprised of the following:





**Store
                Group**
            
            **Number
                of**
              **Locations**
            
            **Reason**Parisian
            
            9
            
            Host
                store decision to close these locations.Federated
            
            4
            
            Host
                store decision to close these locations.Other
            
            5
            
            Department
                closings within existing host store groups.Total
            
            18




Our
      major
      merchandise categories include diamonds, gold, gemstones, watches and designer
      jewelry. With respect to the department store based fine jewelry departments
      in
      the first quarter of 2007 compared to 2006, watch sales increased $2.8 million,
      or 18.2%, and designer sales increased $1.9 million, or 13.3%, due primarily
      to
      increased consumer demand.





***Gross
      margin.*** Gross
      margin increased by $5.6 million in the first quarter of 2007 compared to 2006.
      As a percentage of sales, gross margin decreased by 1.7% from 48.6% to 46.9%.
      The components of this net decrease in gross margin are as follows:





**Component**
            
            **%**
            
            **Reason**Merchandise
                cost of sales
            
            (1.8)%
            
            Increase
                in cost of sales is due to the change in mix of sales with higher
                sales in
                the designer and watch categories which have lower margins than other
                categories, higher promotional sales as a result of the fiscal calendar
                shift and lower vendor concessions.LIFO
            
            (0.3)
            
            Increase
                in the LIFO provision is due to higher asset inventory levels associated
                with the conversion of gold inventory from consignment to asset at
                the end
                of 2006.Other
            
            0.4
            
            Decrease
                in various other components of cost of sales.Total
                decrease
            
            (1.7)%





***Selling,
      general and administrative expenses.*** The
      components of SG&A include payroll expense, license fees, rent expense, net
      advertising expenditures and other field and administrative expenses. SG&A
      increased $5.1 million, or 6.9%. SG&A dollars have increased as the 2007
      period includes Congress and certain expenses for the department store based
      fine jewelry departments increase with higher sales, such as rent and payroll.
      As a percentage of sales, SG&A decreased by 2.1% from 49.6% to 47.5%. The
      components of this net decrease in SG&A are as follows:





**Component**
            
            **%**
            
            **Reason**Net
                advertising expenditures
            
            (0.2)%
            
            Increase
                is primarily due to higher gross advertising
                expenditures.License
                and lease fees
            
            0.6
            
            Decrease
                is primarily due to the significantly lower rent structure for the
                stand-alone jewelry business, which represented a larger portion
                of total
                sales.Payroll
                expense
            
            0.5
            
            Decrease
                is due to the leveraging of field payroll.Other
            
            1.2
            
            Decrease
                is due to corporate office cost savings, including staff reductions,
                as
                well as corporate office severance in the prior year
                period.Total
                decrease
            
            2.1%




23




***Depreciation
      and amortization.*** Depreciation and amortization for both the 2007 and 2006 periods totaled
      approximately $3.7 million. Included in the first quarter of 2007 is
      approximately $0.1 million for accelerated depreciation charges associated
      with
      the Parisian stores, which will close at the end of July 2007.





***Interest
      expense, net.*** Interest
      expense increased by $0.9 million primarily as a result of higher average
      borrowings under the Revolving Credit Facility. The additional borrowings,
      which
      occurred in the fourth quarter of 2006, were used to finance the termination
      of
      the Gold Consignment Agreement, which totaled $49.9 million, as well as to
      finance the acquisition of Congress, which totaled approximately $16 million.
      The weighted average interest rate on all outstanding borrowings was
      approximately 8.0% for the first quarter in 2007 compared with 8.3% for the
      comparable period in 2006.





***Benefit
      for income taxes.*** The
      income tax benefit for the first quarter of 2007 reflects an effective tax
      rate
      of 29.5% compared to 39.5% for the same period in the prior year. The effective
      tax rate is expected to be significantly lower than the rate for 2006 due to
      the
      projected low-level of pre-tax loss for 2007 and, therefore, resulting
      in the permanent tax items having a larger impact on the overall effective
      rate.





***Discontinued
      operations.*** Discontinued operations for the thirteen weeks ended April 29, 2006 includes
      the
      results of operations for the 194 Federated stores closed during the first
      half
      of 2006 as well as the results of operations of the Belk departments that closed
      in January 2007. Sales related to these operations totaled $85.9 million for
      the
      thirteen weeks ended April 29, 2006. Gross margin related to the discontinued
      departments totaled $41.1 million, or 47.8% as a percentage of sales. The net
      income from discontinued operations for the thirteen weeks ended April 29,
      2006
      was $6.4 million.





***Net
      income (loss).*** Net
      loss
      of $7.6 million for the 2007 period compares to net income of $0.1 million
      in
      the prior year period as a result of the factors discussed above.





**Liquidity
      and Capital Resources**





Information
      about our financial position as of May 5, 2007 and February 3, 2007 is presented
      in the following table:




**May
                5,**
              **2007**
            
            **February
                3,**
              **2007****(dollars
                in thousands)**Cash
                and cash equivalents
            
            $
            2,952
            
            $
            2,415Working
                capital
            
            
            254,038
            
            
            259,473Long-term
                debt
            
            
            200,000
            
            
            200,000Stockholders’
                equity
            
            
            114,754
            
            
            122,229




Our
      primary capital requirements are funding working capital for new locations
      and
      growth of existing locations, as well as debt service obligations and license
      fees to host store groups, rent payments for the stand-alone jewelry stores,
      funding potential acquisitions, and, to a lesser extent, capital expenditures
      for opening new locations, renovating existing locations and information
      technology investments. For 2006, capital expenditures totaled $11.8 million
      and
      for 2007 are estimated to be approximately $11.0 to $12.0 million. Although
      capital expenditures are limited by the terms of the Revolving Credit Agreement,
      to date, this limitation has not precluded us from satisfying our capital
      expenditure requirements.





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




24




****** Cash
      flows provided from (used in) operating, investing and financing activities
      for
      the thirteen weeks ended May 5, 2007 and April 29, 2006 were as
      follows:




**Thirteen
                Weeks Ended****May
                5,**
            
            **April
                29,****2007**
            
            **2006****(dollars
                in thousands)**Operating
                activities
            
            $
            (56,016
            )
            $
            (65,774
            )Investing
                activities
            
            
            (3,740
            )
            
            (4,779
            )Financing
                activities
            
            
            60,293
            
            
            45,583Net
                increase (decrease) in cash and cashequivalents
            
            $
            537
            
            $
            (24,970
            )





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





·
            Investment
                in inventory and for working capital;





·
            Strategic
                acquisitions;





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





·
            Investments
                in technology.





***Operating
      Activities***





Operating
      cash outflows include payments to vendors for inventory, services and supplies,
      payments for employee payroll, license fees, rent and payments of interest
      and
      taxes. Net cash flows used in operating activities were $56.0 million and $65.8
      million for the thirteen weeks ended May 5, 2007 and April 29, 2006,
      respectively.





Our
      principal operations involving licensed fine jewelry departments substantially
      preclude customer receivables, as our license agreements typically require
      host
      stores to remit sales proceeds for each month (without regard to whether such
      sales were cash, store credit or national credit card) to us approximately
      three
      weeks after the end of such month. Additionally, at the end of 2006,
      approximately 30% of our merchandise was held on consignment. Our working
      capital balance was $254.0 million at May 5, 2007, a decrease of $5.4 million
      from February 3, 2007.





The
      seasonality of our business causes working capital requirements, and therefore,
      borrowings under the Revolving Credit Agreement, to reach their highest level
      in
      the months of October, November and December in anticipation of the year-end
      holiday season. Accordingly, we experience seasonal cash needs as inventory
      levels peak. Additionally, substantially all of our license agreements provide
      for accelerated payments during the months of November and December, which
      require the host store groups to remit to us 75% of the estimated months' sales
      prior to or shortly following the end of that month. These proceeds result
      in a
      significant increase in our cash, which is used to reduce our borrowings under
      the Revolving Credit Agreement. Inventory levels at May 5, 2007 increased by
      $7.3 million, or 1.7%, as compared to February 3, 2007.





***Investing
      Activities***





Net
      cash
      used in investing activities, consisting of payments for capital expenditures,
      was $3.7 million and $4.8 million for the thirteen weeks ended May 5, 2007
      and
      April 29, 2006, respectively. Capital expenditures during each period related
      primarily to expenditures for opening new locations and renovating existing
      locations.




25





***Financing
      Activities***





Net
      cash
      provided from financing activities was $60.3 million for the thirteen weeks
      ended May 5, 2007, consisting primarily of proceeds from, and principal
      repayments on, the Revolving Credit Facility. Net cash provided from financing
      activities was $45.6 million for the thirteen weeks ended April 29,
      2006.





Our
      Revolving Credit Agreement provides us with a line of credit of up to $225.0
      million to finance working capital needs. In December 2006, the Revolving Credit
      Agreement was amended to, among other things, extend the maturity date to
      January 2011, allow for a facilities increase of up to $75.0 million in the
      aggregate, eliminate the yearly outstanding balance reduction requirement,
      eliminate all of the financial covenants except for the requirement to maintain
      a certain fixed charge ratio at certain times, and allow us to engage in
      business acquisitions of a certain size without obtaining prior approval of
      the
      lenders. We have received commitments from various lenders to fulfill the
      facilities increase discussed above and we expect to complete this transaction
      by the end of June 2007. This will increase our line of credit to $300.0 million
      under the Revolving Credit Agreement. Amounts outstanding under the Revolving
      Credit Agreement bear interest at a rate equal to, at our option, (i) the prime
      rate plus a margin ranging from zero to 0.25% or (ii) the adjusted Eurodollar
      rate plus a margin ranging from 1.25% to 2.0%, in each case depending on
      availability under our facility. The weighted average interest rate was 7.0%
      and
      7.9% for the thirteen weeks ended May 5, 2007 and April 29, 2006,
      respectively.





Borrowings
      under the Revolving Credit Agreement were $92.8 million at May 5, 2007, compared
      to $45.9 million at February 3, 2007 and $33.9 million at April 29, 2006. The
      average amounts outstanding under the Revolving Credit Agreement were $90.2
      million and $43.2 million for the thirteen weeks ended May 5, 2007 and April
      29,
      2006, respectively. The maximum amount outstanding for the thirteen weeks ended
      May 5, 2007 was $110.3 million, **** at
      which
      point the available borrowings were an additional $108.6 million. At May 5,
      2007
      we had letters of credit outstanding totaling $6.1 million, which guarantee
      various trade activities.





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





In
      November 2006, Finlay Jewelry completed the acquisition of Congress. At the
      time
      of the stock purchase, Congress was a privately-owned regional chain of five
      jewelry stores located in southwest Florida, with a focus on the luxury market.
      The purchase price was $6.0 million plus transaction fees, and was financed
      with
      additional borrowings under the Revolving Credit Agreement. Congress’ revolving
      credit facility totaling $10.0 million was terminated and paid in full at the
      closing. Since the date of acquisition, Congress’ cash requirements have been,
      and will continue to be, funded under the Revolving Credit Agreement. Congress’
annual sales for 2006 were approximately $23.6 million.





A
      significant amount of our operating cash flows will be used to pay interest
      with
      respect to the Senior Notes and amounts due under the Revolving Credit
      Agreement. As of May 5, 2007, our outstanding borrowings were $292.8 million,
      which included a $200.0 million balance under the Senior Notes and a $92.8
      million balance under the Revolving Credit Agreement, compared to $233.9 million
      as of April 29, 2006.




26





The
      agreements covering the Revolving Credit Agreement and the Senior Notes each
      require that Finlay Jewelry comply with certain covenants. Finlay Jewelry was
      in
      compliance with its covenants as of May 5, 2007. Because compliance is based,
      in
      part, on management’s estimates, and actual results can differ from those
      estimates, there can be no assurance that Finlay Jewelry will be in compliance
      with those covenants in the future or that our lenders will waive or amend
      any
      of the covenants should Finlay Jewelry be in violation thereof. However, we
      do
      believe the assumptions used are appropriate.





The
      Revolving Credit Agreement contains customary covenants, including limitations
      on, or relating to, capital expenditures, liens, indebtedness, investments,
      mergers, acquisitions, affiliate transactions, management compensation and
      the
      payment of dividends and other restricted payments.





The
      indenture related to the Senior Notes contains restrictions relating to, among
      other things, the payment of dividends, redemptions or repurchases of capital
      stock, the incurrence of additional indebtedness, the making of certain
      investments, the creation of certain liens, the sale of certain assets, entering
      into transactions with affiliates, engaging in mergers and consolidations and
      the transfer of all or substantially all assets. Refer to Note 5 of Notes to
      the
      Consolidated Financial Statements.





We
      believe that, based upon current operations, anticipated growth and continued
      availability under the Revolving Credit Agreement, Finlay Jewelry will, for
      the
      foreseeable future, be able to meet its debt service and anticipated working
      capital obligations and to make distributions sufficient to permit us to pay
      certain expenses as they come due. No assurances, however, can be given that
      Finlay Jewelry’s current level of operating results will continue or improve or
      that Finlay Jewelry’s income from operations will continue to be sufficient to
      permit Finlay Jewelry to meet its debt service and other obligations. The
      amounts required to satisfy the aggregate of Finlay Jewelry’s interest expense
      totaled $1.5 million and $1.0 million for the thirteen weeks ended May 5, 2007
      and April 29, 2006, respectively.





Our
      long-term needs for external financing will depend on our rate of growth, the
      level of internally generated funds and our ability to continue obtaining
      substantial amounts of merchandise on advantageous terms, including consignment
      arrangements, with our vendors. As of May 5, 2007, $197.8 million of consignment
      merchandise from approximately 300 vendors was on hand as compared to $312.2
      million at April 29, 2006. The decrease in consignment merchandise reflects
      the
      conversion of the majority of our gold consignment inventory to owned inventory
      at the end of 2006. For 2006, we had an average balance of consignment
      merchandise of $296.5 million.





The
      following table summarizes our contractual and commercial obligations which
      may
      have an impact on future liquidity and the availability of capital resources,
      as
      of May 5, 2007 (dollars in thousands):




**Payments
                Due By Period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than**
              **1
                year**
            
            **1
                - 3 years**
            
            **3
                - 5 years**
            
            **More
                than**
              **5
                years**Long-Term
                Debt Obligations:Senior
                Notes (due 2012)
            
            $
            200,000
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            200,000Interest
                payments on Senior Notes
            
            
            92,125
            
            
            16,750
            
            
            33,500
            
            
            33,500
            
            
            8,375Operating
                lease obligations (1)
            
            
            33,746
            
            
            7,426
            
            
            10,792
            
            
            7,666
            
            
            7,862Revolving
                Credit Agreement (due 2011) (2)
            
            
            92,812
            
            
            92,812
            
            
            -
            
            
            -
            
            
            -Employment
                agreements
            
            
            5,039
            
            
            3,504
            
            
            1,535
            
            
            -
            
            
            -Contractual
                bonuses (3)
            
            
            862
            
            
            -
            
            
            862
            
            
            -
            
            
            -Letters
                of credit
            
            
            6,121
            
            
            5,871
            
            
            250
            
            
            -
            
            
            -Total
            
            $
            430,705
            
            $
            126,363
            
            $
            46,939
            
            $
            41,166
            
            $
            216,237





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




27







(2)
            The
                above table excludes interest due under the Revolving Credit Agreement.
                The outstanding balance as of June 8, 2007 was $116.8
                million.


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





The
      operating leases included in the above table do not include contingent rent
      based upon sales volume, which amounted to approximately $23.7 million for
      the
      thirteen weeks ended May 5, 2007, or variable costs such as maintenance,
      insurance and taxes. Our open purchase orders are cancelable without penalty
      and
      are therefore not included in the above table. There were no commercial
      commitments outstanding as of May 5, 2007 other than as disclosed in the table
      above, nor have we provided any third-party financial guarantees as of and
      for
      the thirteen weeks ended May 5, 2007.





***Off-Balance
      Sheet Arrangements***





Effective
      as of November 29, 2006, Finlay Jewelry entered into an agreement to terminate
      and retire its obligation under the Gold Consignment Agreement, which was an
      off-balance sheet arrangement. In accordance with the termination agreement,
      Finlay Jewelry paid approximately $49.9 million to purchase the outstanding
      gold
      thereunder. The purchased gold is reflected as inventory on our Consolidated
      Balance Sheets from the date of purchase. Payment of the $49.9 million gold
      purchase price was financed through additional borrowings under the Revolving
      Credit Agreement.





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





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





***Other
      Activities Affecting Liquidity***





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





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




28





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





**Seasonality**





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





**Inflation**





The
      effect of inflation on our results of operations has not been material in the
      periods discussed.





**Critical
      Accounting Policies and Estimates**





**** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires the appropriate application
      of
      certain accounting policies, many of which require us to make estimates and
      assumptions about future events and their impact on amounts reported in our
      financial statements and related notes. We believe the application of our
      accounting policies, and the estimates inherently required therein, are
      reasonable. These accounting policies and estimates are periodically
      re-evaluated, as appropriate, and adjustments are made when facts and
      circumstances dictate a change. However, since future events and their impact
      cannot be determined with certainty, actual results may differ from our
      estimates, and such differences could be material to the consolidated financial
      statements. Historically, we have found our application of accounting policies
      to be appropriate, and actual results have not differed materially from those
      determined using necessary estimates. A summary of our significant accounting
      policies and a description of accounting policies that we believe are most
      critical may be found in Note 2 of Notes to the Consolidated Financial
      Statements included in our Form 10-K for the year ended February 3,
      2007.





***Merchandise
      Inventories***





We
      value
      our inventories at the lower of cost or market. The cost is determined by the
      LIFO method utilizing an internally generated index. We determine the LIFO
      cost
      on an interim basis by estimating annual inflation trends, annual purchases
      and
      ending inventory levels for the fiscal year. Actual annual inflation rates
      and
      inventory balances as of the end of any fiscal year may differ from interim
      estimates, and, accordingly, estimates are adjusted in the fourth quarter of
      each year. Factors related to inventories, such as future consumer demand and
      the economy's impact on consumer discretionary spending, inventory aging,
      ability to return merchandise to vendors, merchandise condition and anticipated
      markdowns, are analyzed to determine estimated net realizable values. An
      adjustment is recorded to reduce the LIFO cost of inventories, if required,
      to
      their estimated net realizable values. Any significant unanticipated changes
      in
      the factors above could have a significant impact on the value of the
      inventories and our reported operating results. Adjustments
      to earnings resulting from changes in historical loss trends have been
      insignificant for the thirteen weeks ended May 5, 2007 and April 29, 2006.
      Further, we do not anticipate any significant change in LIFO that would cause
      a
      material change in our earnings.




29





We
      estimate inventory shrinkage for the period from the last inventory date to
      the
      end of the reporting period on a store-by-store basis. Our inventory shortage
      estimate can be affected by changes in merchandise mix and changes in actual
      shortage trends. The shrinkage rate from the most recent physical inventory,
      in
      combination with historical experience, is the basis for ** estimating
      shrinkage. As a result of the change in timing of our physical inventories,
      as
      of May 5, 2007, our shrink reserve totaled $0.5 million compared to $1.6 million
      as of April 29, 2006.





***Vendor
      Allowances***





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





Vendor
      allowances have been accounted for in accordance with EITF No. 02-16. Vendor
      allowances provided as a reimbursement of specific, incremental and identifiable
      costs incurred to promote a vendor’s products are recorded as an SG&A
      reduction when the cost is incurred. All other vendor allowances are initially
      deferred with the deferred amounts recognized as a reduction in ** cost
      of
      sales when the related product is sold.





As
      of May
      5, 2007 and February 3, 2007, deferred vendor allowances totaled (i) $8.3
      million and $9.4 million, respectively, for owned merchandise, which allowances
      are included as an offset to merchandise inventories on the Consolidated Balance
      Sheets, and (ii) $4.8 million and $5.2 million, respectively, for merchandise
      received on consignment, which allowances are included as deferred income on
      the
      Consolidated Balance Sheets.





***Long-Lived
      Assets***




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





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




·  Significant
      negative industry or economic trends; or




·  Store
      closings.





When
      we
      determine that the carrying value of long-lived assets may
      not
      be ** recoverable
      based upon the existence of one or more of the above indicators of impairment,
      we recognize an impairment loss at the time the undiscounted estimated future
      net cash flows expected to be generated by an asset (or group of assets) is
      less
      than its carrying value. We measure impairment losses as the amount
      by ** which
      the
      asset’s carrying value exceeds its fair
      value. To the extent future cash flows are less than anticipated, additional
      impairment charges may result. There have been no adjustments to earnings
      resulting from the impairment of long-lived assets for the thirteen weeks ended
      May 5, 2007. We also review the estimated useful lives of the assets and reduce
      such lives if necessary.  During
      the thirteen weeks ended May 5, 2007, we recorded charges of $0.1 million
      related to the accelerated depreciation of fixed assets for the Parisian
      departments that will close in July 2007.




30





***Revenue
      Recognition***





We
      recognize revenue upon the sale of merchandise, either owned or consigned,
      to
      our customers, net of anticipated returns and net of sales taxes collected.
      The
      provision for sales returns is based on historical evidence of our return rate.
      As of May 5, 2007 and April 29, 2006, our allowance for sales returns totaled
      $1.9 million and $2.0 million, respectively. Layaway deposits are not recognized
      as sales until fully paid for by the customer and the customer claims the
      merchandise.





***Self-insurance
      Reserves***





We
      are
      self-insured for medical claims and workers’ compensation claims up to certain
      maximum liability amounts. Although the amounts accrued are determined based
      on
      an analysis of historical trends of losses, settlements, litigation costs and
      other factors, the amounts that we will ultimately disburse could differ
      materially from the accrued amounts. Self-insurance
      reserves aggregated $8.0 million and $7.1 million at May 5, 2007 and April
      29,
      2006, respectively.





***Income
      Taxes***





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





In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
      seeks to reduce the diversity in practice associated with certain aspects of
      measurement and recognition in accounting for income taxes. In addition, FIN
      48
      provides guidance on derecognition, classification, interest and penalties
      and
      accounting in interim periods and requires expanded disclosure with respect
      to
      the uncertainty in income taxes. The Company adopted FIN 48 on the first day
      of
      the current fiscal year, as required. As a result of the implementation of
      FIN
      48, the Company recognized an increase of $1.0 million in the liability for
      unrecognized tax benefits that was accounted for as a decrease to opening
      retained earnings. Refer to Note 14 of Notes to the Consolidated Financial
      Statements for a discussion of FIN 48.





***Accounting
      for Acquisitions***





In
      May
      2005, Finlay Jewelry completed the acquisition of Carlyle, and in November
      2006,
      Finlay Jewelry completed the acquisition of Congress. These acquisitions have
      been accounted for under the purchase method of accounting in accordance with
      SFAS No. 141, “Business Combinations”. As such, we have undertaken an analysis
      of the fair value of identified tangible and intangible assets and liabilities,
      and determined the excess of fair value of net assets acquired over cost. We
      utilized estimates to determine the fair value of inventory and certain
      acquisition costs.




31





**Special
      Note Regarding Forward-Looking Statements**





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





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





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





·
            The
                seasonality of the retail jewelry business;





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





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





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





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





·
            The
                impact of fluctuations in gold and diamond prices;





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





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





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





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





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





·
            Our
                dependence on key officers;





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






32




·
            Our
                compliance with applicable contractual covenants;





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





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





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





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





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





***Interest
      Rate Risk***





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




***Commodity
      Risk***





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





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





**Disclosure
      Controls and Procedures**





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




33




**Changes
      in Internal Controls over Financial Reporting**





Our
      management, with the participation of our CEO and CFO, also conducted an
      evaluation of our internal control over financial reporting, as defined in
      Exchange Act Rule 13a-15(f), to determine whether any changes occurred during
      the quarter ended May 5, 2007 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial reporting.
      Based on that evaluation, there was no such change during the quarter ended
      May
      5, 2007.





We
      excluded from our assessment any changes in internal control over financial
      reporting within our Congress subsidiary, which was acquired in November 2006,
      and whose financial statements reflect total assets and net sales constituting
      4.5% and 4.5%, respectively, of the related consolidated financial statement
      amounts as of and for the thirteen weeks ended May 5, 2007. We will include
      Congress in our evaluation of the design and effectiveness of internal control
      over financial reporting as of February 2, 2008.





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




34




**PART
      II - OTHER INFORMATION**





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





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





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





**Issuer
      Purchases of Equity Securities**





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





**Period**
            
            **Total
                Number of Shares Purchased (1)**
            
            **Average
                Price Paid per Share**
            
            **Total
                Number of Shares Purchased as Part of Publicly Announced Plans
                (2)**
            
            **Maximum
                Number of Shares that May Yet Be Purchased Under the Plans
                (2)**February
                4 - March 3, 2007
            
            
            17
            
            $
            8.581
            
            
            -
            
            
            -March
                4 - April 7, 2007
            
            
            150
            
            $
            9.44
            
            
            -
            
            
            -April
                8 - May 5, 2007
            
            
            15,722
            
            $
            5.8152
            
            
            -
            
            
            -Total
            
            
            15,889
            
            $
            5.85
            
            
            -
            
            
            -







(1)
            We
                repurchased 15,889 shares from certain executives for approximately
                $93,000 pursuant to our long-term incentive plan, to satisfy tax
                withholding obligations related to the issuance of Common Stock to
                the
                executives.


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




35


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


**Exhibit
                  No.**
              
              **Description**2.1
              
              Agreement
                  and Plan of Merger, dated May 19, 2005, by and among Finlay Fine
                  Jewelry
                  Corporation, FFJ Acquisition Corp., Carlyle & Co. Jewelers, certain
                  stockholders of Carlyle & Co. Jewelers and Russell L. Cohen (as
                  stockholders' agent) (incorporated by reference to Exhibit 2.1
                  to the
                  Company’s Current Report on Form 8-K filed May 25,
                  2005).3.1
              
              Certificate
                  of Incorporation of the Company (incorporated by reference to Exhibit
                  3.1
                  to the Company’s Annual Report on Form 10-K for the year ended January 28,
                  1995).3.2(a)
              
              Amended
                  and Restated By-Laws of the Company (incorporated by reference
                  to Exhibit
                  3.2 to the Company’s Annual Report on Form 10-K for the year ended
                  February 1, 2003).3.2(b)
              
              Second
                  Amendment, dated as of September 10, 2003, to the Amended and Restated
                  By-Laws of the Company (incorporated by reference to Exhibit 3.2
                  to the
                  Company’s Quarterly Report on Form 10-Q for the quarter ended November
                  1,
                  2003).10.5
                  (d)
              
              Amendment,
                  dated February 27, 2007, to the Company’s 1997 Long Term
                  Incentive Plan (incorporated by reference to Exhibit 10.5(d) to
                  the
                  Company’s Annual Report on Form 10-K for the year ended February 3, 2007).10.6
                  (c)
              
              Amendment,
                  dated February 27, 2007, to the Company’s Executive Deferred
                  Compensation and Stock Purchase Plan (incorporated by reference
                  to Exhibit
                  10.6(c) to the Company’s Annual Report on Form 10-K for the year ended
                  February 3, 2007).31.1
              
              Certification
                  of principal executive officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of principal financial officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Certification
                  of principal executive officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2
              
              Certification
                  of principal financial officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.




36





**SIGNATURES**





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


**FINLAY
              ENTERPRISES, INC.**Date:
              June 14, 2007
            By:
            /s/ Bruce
              E.
              ZurlnickBruce
                E. Zurlnick
              Senior
                Vice President, Treasurer
              and
                Chief Financial Officer
              (As
                both a duly authorized officer of
              registrant
                and as principal financial
              officer
                of registrant)


37