**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-Q**





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




For
      the
      quarterly period ended August
      4,
      2007





or





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





For
      the
      transition period from _________ to __________





Commission
      File Number: 0-25716





FINLAY
      ENTERPRISES, INC.


(Exact
      name of registrant as specified in its charter)




Delaware
              13-3492802(State
                  or other jurisdiction of incorporation
                  or organization)
              (I.R.S.
                  Employer 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
                filer
o
              Accelerated
                filer
x
              Non-accelerated
                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
      September 7, 2007, there were 9,218,046 shares of common stock, par value $.01
      per share, of the registrant outstanding.














**FINLAY
      ENTERPRISES, INC.**





**FORM
      10-Q**





**QUARTERLY
      PERIOD ENDED AUGUST 4, 2007**





**INDEX**


**PAGE(S)****PART
                  I - FINANCIAL INFORMATION**Item
                  1.
              Consolidated
                  Financial Statements (Unaudited)Consolidated
                  Statements of Operations for the thirteen weeks endedAugust
                  4, 2007 and July 29, 2006
              2Consolidated
                  Statements of Operations for the twenty-six weeks ended August
                  4, 2007 and July 29, 2006
              3Consolidated
                  Balance Sheets as of August 4, 2007 and February
                  3, 2007
              4Consolidated
                  Statements of Changes in Stockholders’ Equity and Comprehensive Income
                  (Loss) for the twenty-six weeks ended August 4, 2007
              5Consolidated
                  Statements of Cash Flows for the twenty-six weeks ended August
                  4, 2007 and July 29, 2006
              6Notes
                  to Consolidated Financial Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial
                  Condition and Results of Operations
              19Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              33Item
                  4.
              Controls
                  and Procedures
              33**PART
                  II - OTHER INFORMATION**Item
                  1A.
              Risk
                  Factors
              34Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              34Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              34Item
                  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****August
                4,**
              **2007**
            
            **July
                29,**
              **2006**Sales
            
            $
            148,004
            
            $
            149,270Cost
                of sales
            
            
            79,628
            
            
            78,295Gross
                margin
            
            
            68,376
            
            
            70,975Selling,
                general and administrative expenses
            
            
            70,274
            
            
            70,301Depreciation
                and amortization
            
            
            3,704
            
            
            3,590Loss
                from operations
            
            
            (5,602
            )
            
            (2,916
            )Interest
                expense, net
            
            
            6,412
            
            
            5,594Loss
                from continuing operations before income taxes
            
            
            (12,014
            )
            
            (8,510
            )Benefit
                for income taxes
            
            
            (3,559
            )
            
            (3,363
            )Loss
                from continuing operations
            
            
            (8,455
            )
            
            (5,147
            )Discontinued
                operations, net of tax
            
            
            87
            
            
            1,165Net
                loss
            
            $
            (8,368
            )
            $
            (3,982
            )Net
                loss per share applicable to common shares -Basic
                and Diluted:Loss
                from continuing operations
            
            $
            (0.93
            )
            $
            (0.57
            )Discontinued
                operations, net of tax
            
            $
            0.01
            
            $
            0.13Net
                loss
            
            $
            (0.92
            )
            $
            (0.44
            )Weighted
                average shares outstanding -Basic
                and Diluted
            
            
            9,094,353
            
            
            9,018,029





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




2


**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


**(unaudited)**





**Twenty-Six
                Weeks Ended****August
                4,**
              **2007**
            
            **July
                29,**
              **2006**Sales
            
            $
            310,875
            
            $
            293,659Cost
                of sales
            
            
            166,133
            
            
            152,816Gross
                margin
            
            
            144,742
            
            
            140,843Selling,
                general and administrative expenses
            
            
            148,053
            
            
            142,366Depreciation
                and amortization
            
            
            7,247
            
            
            7,247Loss
                from operations
            
            
            (10,558
            )
            
            (8,770
            )Interest
                expense, net
            
            
            12,490
            
            
            10,821Loss
                from continuing operations before income taxes
            
            
            (23,048
            )
            
            (19,591
            )Benefit
                for income taxes
            
            
            (6,840
            )
            
            (7,743
            )Loss
                from continuing operations
            
            
            (16,208
            )
            
            (11,848
            )Discontinued
                operations, net of tax
            
            
            236
            
            
            7,987Net
                loss
            
            $
            (15,972
            )
            $
            (3,861
            )Net
                loss per share applicable to common shares -Basic
                and Diluted:Loss
                from continuing operations
            
            $
            (1.79
            )
            $
            (1.32
            )Discontinued
                operations, net of tax
            
            $
            0.03
            
            $
            0.89Net
                loss
            
            $
            (1.76
            )
            $
            (0.43
            )Weighted
                average shares outstanding -Basic
                and Diluted
            
            
            9,073,415
            
            
            9,000,531





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




3




**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


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





**August
                4,**
              **2007**
            
            **February
                3,**
              **2007****(unaudited)**
            
            **(audited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            3,010
            
            $
            2,415Accounts
                receivable
            
            
            25,469
            
            
            26,271Other
                receivables
            
            
            2,397
            
            
            2,314Merchandise
                inventories
            
            
            414,369
            
            
            430,479Prepaid
                expenses and other
            
            
            5,789
            
            
            4,356Total
                current assets
            
            
            451,034
            
            
            465,835Fixed
                assets:Building,
                equipment, fixtures and leasehold improvements
            
            
            101,758
            
            
            98,229Less
                - accumulated depreciation and amortization
            
            
            47,867
            
            
            43,236Fixed
                assets, net
            
            
            53,891
            
            
            54,993Deferred
                charges and other assets, net
            
            
            11,819
            
            
            13,517Goodwill
            
            
            3,009
            
            
            3,009Total
                assets
            
            $
            519,753
            
            $
            537,354**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Short-term
                borrowings
            
            $
            102,084
            
            $
            45,876Accounts
                payable - trade
            
            
            38,904
            
            
            85,053Accrued
                liabilities:Accrued
                salaries and benefits
            
            
            12,903
            
            
            16,940Accrued
                miscellaneous taxes
            
            
            6,563
            
            
            7,226Accrued
                interest
            
            
            3,171
            
            
            2,874Deferred
                income
            
            
            4,755
            
            
            5,206Deferred
                income taxes
            
            
            8,609
            
            
            13,322Other
            
            
            16,431
            
            
            16,394Income
                taxes payable
            
            
            9,500
            
            
            13,471Total
                current liabilities
            
            
            202,920
            
            
            206,362Long-term
                debt
            
            
            200,000
            
            
            200,000Deferred
                income taxes
            
            
            7,233
            
            
            7,827Other
                non-current liabilities
            
            
            2,679
            
            
            936Total
                liabilities
            
            
            412,832
            
            
            415,125Commitments
                and contingencies (Note 13)Stockholders’
                equity:Common
                Stock, par value $.01 per share; authorized 25,000,000
                shares;
              issued
                11,470,688 and 11,348,017 shares, at August 4, 2007 andFebruary
                3, 2007, respectively
            
            
            114
            
            
            113Additional
                paid-in capital
            
            
            94,845
            
            
            92,999Retained
                earnings
            
            
            39,709
            
            
            56,704Less
                treasury stock of 2,255,735 and 2,227,366 shares, at August 4, 2007and
                February 3, 2007, respectively, at cost
            
            
            (27,747
            )
            
            (27,587
            )Total
                stockholders’ equity
            
            
            106,921
            
            
            122,229Total
                liabilities and stockholders’ equity
            
            $
            519,753
            
            $
            537,354




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




4




**FINLAY
      ENTERPRISES, INC.**


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


**AND
      COMPREHENSIVE INCOME (LOSS)**


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





**Common
                Stock****Number**
                **of
                  Shares**
            
            **Amount**
            
            **Additional**
                  **Paid-in**
                  **Capital**
            
            **Retained**
                **Earnings**
            
            **Treasury**
                **Stock**
            
            **Total**
                  **Stockholders’**
                  **Equity**
            
            **Comprehensive**
                **Income
                  (Loss)**Balance,
                February 3, 2007
            
            
            9,120,651
            
            $
            113
            
            $
            92,999
            
            $
            56,704
            
            $
            (27,587
            )
            $
            122,229Effect
                of adoption of FIN 48
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,023
            )
            
            -
            
            
            (1,023
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (15,972
            )
            
            -
            
            
            (15,972
            )
            $
            (15,972
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (15,972
            )Issuance
                of common stock
            
            
            122,671
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            1Award
                of restricted stock units
            
            
            -
            
            
            -
            
            
            756
            
            
            -
            
            
            -
            
            
            756Amortization
                of restricted stockcompensation
                and restrictedstock
                units
            
            
            -
            
            
            -
            
            
            1,090
            
            
            -
            
            
            -
            
            
            1,090Purchase
                of treasury stock
            
            
            (28,369
            )
            
            -
            
            
            -
            
            
            -
            
            
            (160
            )
            
            (160
            )Balance,
                August 4, 2007 (unaudited)
            
            
            9,214,953
            
            $
            114
            
            $
            94,845
            
            $
            39,709
            
            $
            (27,747
            )
            $
            106,921





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




5




**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**


**(unaudited)**





**Twenty-Six
                Weeks Ended****August
                4,**
              **2007**
            
            **July
                29,**
              **2006**OPERATING
                ACTIVITIESNet
                loss
            
            $
            (15,972
            )
            $
            (3,861
            )Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Depreciation
                and amortization
            
            
            7,420
            
            
            10,688Loss
                on disposal of fixed assets
            
            
            240
            
            
            3,141Amortization
                of deferred financing costs
            
            
            472
            
            
            606Amortization
                of restricted stock compensation andrestricted
                stock units
            
            
            1,090
            
            
            831Deferred
                income taxes
            
            
            (5,307
            )
            
            (1,593
            )Other,
                net
            
            
            251
            
            
            (310
            )Changes
                in operating assets and liabilities:(Increase)
                decrease in accounts and other receivables
            
            
            719
            
            
            (4,429
            )Decrease
                in merchandise inventories
            
            
            16,110
            
            
            4,131Increase
                in prepaid expenses and other
            
            
            (1,433
            )
            
            (1,273
            )Decrease
                in accounts payable and accrued liabilities
            
            
            (58,481
            )
            
            (86,992
            )NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (54,891
            )
            
            (79,061
            )INVESTING
                ACTIVITIESPurchases
                of equipment, fixtures and leasehold improvements
            
            
            (5,133
            )
            
            (6,459
            )Deferred
                charges
            
            
            (62
            )
            
            -NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (5,195
            )
            
            (6,459
            )FINANCING
                ACTIVITIESProceeds
                from revolving credit facility
            
            
            322,205
            
            
            385,428Principal
                payments on revolving credit facility
            
            
            (265,997
            )
            
            (335,421
            )Capitalized
                financing costs
            
            
            (358
            )
            
            (50
            )Purchase
                of treasury stock
            
            
            (160
            )
            
            (187
            )Bank
                overdraft
            
            
            4,991
            
            
            10,433Stock
                options exercised
            
            
            -
            
            
            8NET
                CASH PROVIDED FROM FINANCING ACTIVITIES
            
            
            60,681
            
            
            60,211INCREASE
                (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            595
            
            
            (25,309
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            2,415
            
            
            28,191CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            3,010
            
            $
            2,882SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Interest
                paid
            
            $
            11,817
            
            $
            10,624Income
                taxes paid
            
            $
            2,091
            
            $
            8,237SUPPLEMENTAL
                DISCLOSURE OF NON-CASH ACTIVITIES:Restricted
                stock units issuance costs accrued but not paid
            
            $
            770
            
            $
            582Accrual
                for purchases of fixed assets
            
            $
            3,223
            
            $
            1,302




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




6




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





The
      accompanying unaudited consolidated financial statements of Finlay Enterprises,
      Inc. (the “Company,” the “Registrant,” “we,” “us” and “our”), and our
      wholly-owned subsidiary, Finlay Fine Jewelry Corporation and its wholly-owned
      subsidiaries (“Finlay Jewelry”), have been prepared in accordance with
      accounting principles generally accepted in the United States of America for
      interim financial information. References to “Finlay” mean collectively, the
      Company and Finlay Jewelry. In the opinion of management, the accompanying
      unaudited consolidated financial statements contain all adjustments necessary
      to
      present fairly our financial position as of August 4, 2007, and our results
      of
      operations for the thirteen weeks and twenty-six weeks ended August 4, 2007
      and
      July 29, 2006 and cash flows for the twenty-six weeks ended August 4, 2007
      and
      July 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. (“Macy’s”) and The May Department Stores
      Company (“May”) merger, the results of operations for the 194 departments that
      were either divested or phased into the Macy’s East or Macy’s West divisions
      have been segregated from those of continuing operations, net of tax, and
      classified as discontinued operations for the thirteen weeks and twenty-six
      weeks ended July 29, 2006. Additionally, as a result of the decision by Belk,
      Inc. (“Belk”) not to renew Finlay Jewelry’s license agreement at the end of
      2006, the results of operations of the 75 Belk departments that closed in
      January 2007 have been segregated from those of continuing operations, net
      of
      tax, and classified as discontinued operations for the thirteen weeks and
      twenty-six weeks ended July 29, 2006. Further, as a result of Belk’s acquisition
      of Parisian from Saks, Inc. (“Saks”) in October 2006, the Parisian departments
      closed in July 2007. The results of operations for these departments have also
      been reclassified as discontinued operations in the accompanying statements
      of
      operations for the thirteen weeks and twenty-six weeks ended August 4, 2007
      and
      July 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.




7


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




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





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





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





During
      the majority of 2006, and from time to time in past years, we entered into
      forward contracts based upon the anticipated sales of consigned gold
      merchandise. These contracts aided our efforts in hedging against the risk
      of
      gold price fluctuations, as the cost of gold for our consigned gold merchandise
      was not fixed until the merchandise was sold. For the thirteen weeks and
      twenty-six weeks ended July 29, 2006, the gain/loss on open forward contracts
      was not material. During 2007, gold merchandise has been purchased rather than
      consigned and the gold price is fixed quarterly with our vendors. As such,
      we
      currently do not engage in any hedging activities.





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





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




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




8




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





During
      2006, and in past years, we had designated our derivative instruments,
      consisting of gold forward contracts, as cash flow hedges. For derivative
      instruments designated as cash flow hedges, the effective portion of the change
      in the fair value of the derivative was recorded in accumulated other
      comprehensive income, a separate component of stockholders’ equity, and was
      reclassified into cost of sales when the offsetting effects of the hedged
      transaction impacted earnings. Changes in the fair value of the derivative
      attributable to hedge ineffectiveness were recorded in earnings immediately.
      At
      August 4, 2007 and February 3, 2007, we had no open positions in gold forward
      contracts and we currently do not engage in any hedging activities.





***Net
      Income (Loss) Per Share*** **:** Net
      income (loss) per share has been computed in accordance with SFAS No. 128,
      “Earnings per Share”. Basic and diluted net income (loss) per share were
      calculated using the weighted average number of shares outstanding during each
      period, with options to purchase common stock, par value $0.01 per share
      (“Common Stock”), restricted stock and restricted stock units, included in
      diluted net income (loss) per share, using the treasury stock method, to the
      extent that such options, restricted stock and restricted stock units were
      dilutive. As we had a loss from continuing operations for the thirteen weeks
      and
      twenty-six weeks ended August 4, 2007 and July 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 1,300,885 and 1,555,083 at August 4, 2007 and July 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”).




9





**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




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





***Intangible
      Assets:*** As
      a
      result of the acquisition of Carlyle & Co. Jewelers (“Carlyle”) in 2005 and
      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.





**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,
      the
      349 departments in store groups owned by Macy’s accounted for 57.0% of our sales
      (excluding the Macy’s departments that closed in 2006 and the departments in
      Lord & Taylor).





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:




**August
                4,**
              **2007**
            
            **February
                3,**
              **2007****(in
                thousands)**Jewelry
                goods - rings, watches and other fine jewelry(first-in,
                first-out (“FIFO”) basis)
            
            $
            445,628
            
            $
            458,920Less:
                Excess of FIFO cost over LIFO inventory value
            
            
            31,259
            
            
            28,441$
            414,369
            
            $
            430,479





We
      determine our LIFO inventory value by utilizing internally developed indices.
      The LIFO method had the effect of increasing the loss from continuing operations
      before income taxes for the thirteen weeks ended August 4, 2007 and July 29,
      2006 by $1.8 million and $1.0 million, respectively. The LIFO method had the
      effect of increasing the loss from continuing operations before income taxes
      for
      the twenty-six weeks ended August 4, 2007 and July 29, 2006 by $2.8 million
      and
      $1.5 million, respectively.





Approximately
      $187.6 million and $204.0 million at August 4, 2007 and February 3, 2007,
      respectively, of merchandise received on consignment is not included in
      merchandise inventories and accounts payable-trade in the accompanying
      Consolidated Balance Sheets.




10




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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




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





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





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





Our
      revolving credit agreement with General Electric Capital Corporation 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
      $300.0 million (the “Revolving Credit Facility”). The Revolving Credit Facility
      was increased from $225.0 million to $300.0 million in June 2007 as a result
      of
      the conversion to owned merchandise of the gold consignment merchandise under
      the former Gold Consignment Agreement, which increased Finlay Jewelry’s
      collateral base. At August 4, 2007, $102.1 million was outstanding under this
      facility, at which point the available borrowings were $147.4 million. The
      average amounts outstanding under the Revolving Credit Agreement were $100.2
      million and $53.0 million for the twenty-six weeks ended August 4, 2007 and
      July
      29, 2006, respectively. The maximum amount outstanding for the twenty-six weeks
      ended August 4, 2007 was $121.7 million, at which point the available borrowings
      were an additional $145.5 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 7.4% for the twenty-six weeks ended August 4, 2007
      and July 29, 2006, respectively.




At
      August
      4, 2007 and February 3, 2007, we had letters of credit outstanding totaling
      $6.2
      million and $6.1 million, respectively, which guarantee various trade
      activities.





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 August 4, 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.




11




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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




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.





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 twenty-six weeks ended
      August 4, 2007. We
      expect to be in compliance with all of our covenants during the balance of
      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.




12




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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


**AGREEMENTS
      (continued)**




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**
            
            **Twenty-Six
                Weeks Ended****August
                4,**
              **2007**
            
            **July
                29,**
              **2006**
            
            **August
                4,**
              **2007**
            
            **July
                29,**
              **2006****(in
                thousands)**
            
            **(in
                thousands)**Base
                rent
            
            $
            2,282
            
            $
            1,774
            
            $
            4,543
            
            $
            3,637Contingent
                fees
            
            
            20,550
            
            
            21,938
            
            
            43,656
            
            
            43,465Total
            
            $
            22,832
            
            $
            23,712
            
            $
            48,199
            
            $
            47,102





**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 twenty-six weeks ended July 29, 2006, we
      recognized approximately $70,000 in stock-based compensation expense. At
      February 3, 2007, all stock options were fully vested and, therefore, there
      has
      been no expense in 2007 relating to stock options. There were no options granted
      during 2006 or in the 2007 period-to-date.





The
      following table summarizes the changes in stock options outstanding during
      the
      twenty-six weeks ended August 4, 2007:





**Options
                Outstanding**
            
            **Options
                Exercisable****Number**
              **Outstanding**
            
            **Wtd.
                Avg.**
              **Remaining**
              **Contractual
                Life**
            
            **Wtd.
                Avg.**
              **Ex.
                Price**
            
            **Aggregate**
              **Intrinsic**
              **Value
                (000’s)**
            
            **Number**
              **Exercisable**
            
            **Average**
              **Exercise
                Price**
            
            **Aggregate**
              **Intrinsic**
              **Value
                (000’s)**Balance
                at February 3, 2007
            
            
            1,016,334
            
            
            2.24
            
            $
            12.10
            
            $
            618
            
            
            1,016,334
            
            $
            12.10
            
            $
            618Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            (406,134
            )
            
            -
            
            
            13.76
            
            
            -
            
            
            (406,134
            )
            
            13.76
            
            
            -Balance
                at August 4, 2007
            
            
            610,200
            
            
            3.07
            
            $
            10.99
            
            $
            -
            
            
            610,200
            
            $
            10.99
            
            $
            -




The
      following table summarizes the changes in restricted stock outstanding during
      the twenty-six weeks ended August 4, 2007:





**Restricted**
              **Stock**
            
            **Wtd.
                Avg. Grant Date**
              **Fair
                Value**Balance
                at February 3, 2007
            
            
            157,487
            
            $
            12.17Granted
            
            
            55,261
            
            
            9.32Vested
            
            
            (25,189
            )
            
            15.40Balance
                at August 4, 2007
            
            
            187,559
            
            $
            10.89





13




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





The
      following table summarizes the changes in restricted stock units outstanding
      during the twenty-six weeks ended August 4, 2007:





**Restricted**
              **Stock
                Units****(1)**
            
            **Wtd.
                Avg. Grant Date**
              **Fair
                Value**Balance
                at February 3, 2007
            
            
            317,546
            
            $
            13.01Awarded
            
            
            256,713
            
            
            5.97Distributed
            
            
            (68,977
            )
            
            6.15Cancelled
            
            
            (2,156
            )
            
            12.74Balance
                at August 4, 2007
            
            
            503,126
            
            $
            8.72




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





**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 August 4, 2007, 503,126
      RSUs are outstanding under the RSU Plans. Amortization for the twenty-six weeks
      ended August 4, 2007 and July 29, 2006 totaled approximately $0.3 million in
      each period.





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





In
      August
      2005, Macy’s announced that it had completed a merger with May. In September
      2005, Macy’s announced its integration plans including a divisional realignment
      and divestiture of certain stores. As of August 4, 2007, we operated a total
      of
      349 departments in five of Macy’s eight divisions, as follows:





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





14




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





During
      the first half of 2006, 194 stores were either divested or phased into the
      Macy’s East or Macy’s West divisions and have been classified as discontinued
      operations in accordance with SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets” (“SFAS No. 144”). During the twenty-six weeks
      ended July 29, 2006, we recorded charges associated with accelerated
      depreciation of fixed assets and severance related to our field operations
      totaling approximately $4.4 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. During the twenty-six weeks ended July 29, 2006, we recorded
      charges associated with accelerated depreciation of fixed assets and severance
      related to our field operations totaling approximately $0.2 million. For the
      thirteen weeks and twenty-six weeks ended July 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 in October 2006, the
      Parisian departments closed in July 2007. In 2006, we generated sales of
      approximately $22.9 million from our 33 Parisian departments. For the twenty-six
      weeks ended August 4, 2007 and July 29, 2006, we generated sales of $9.8 million
      and $9.3 million, respectively, from these departments. The results of
      operations for these departments have been reclassified as discontinued
      operations in the accompanying statements of operations. During the twenty-six
      weeks ended August 4, 2007, we recorded charges associated with accelerated
      depreciation of fixed assets relating to these departments totaling $0.1
      million.




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




**Severance
                and**
              **Termination**
              **Benefits**Balance
                at January 28, 2006
            
            $
            1,258Charges**(1)**
            
            
            3,458Payments
            
            
            (4,131
            )Balance
                at February 3, 2007
            
            
            585Reversal
                of accrual
            
            
            (146
            )Payments
            
            
            (368
            )Balance
                at August 4, 2007
            
            $
            71




(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 Parisian store closings in July 2007, the results of operations
      for these departments have been segregated from those of continuing operations,
      net of tax, and classified as discontinued operations for each of the thirteen
      week and twenty-six week periods ended August 4, 2007 and July 29, 2006.
      Additionally, as a result of the store closings associated with the Macy’s/May
      merger as well as the Belk store closings, the results of operations of the
      departments closed during 2006 have been segregated from those of continuing
      operations, net of tax, and classified as discontinued operations for the
      thirteen weeks and twenty-six weeks ended July 29, 2006. All of the closed
      stores were operated in our department store based fine jewelry departments
      segment.




15




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      10 - DISCONTINUED OPERATIONS (continued)**





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




**August
                4, 2007**
            
            **July
                29, 2006****Thirteen
                Weeks Ended**
            
            **Twenty-Six
                Weeks Ended**
            
            **Thirteen
                Weeks Ended**
            
            **Twenty-Six
                Weeks Ended**Sales
            
            $
            6,266
            
            $
            9,833
            
            $
            43,589
            
            $
            134,413Income
                before income taxes
            
            
            145
            
            
            393
            
            
            1,928
            
            
            13,209Discontinued
                operations, net of tax
            
            
            87
            
            
            236
            
            
            1,165
            
            
            7,987




**NOTE
      11 - SEGMENT INFORMATION**





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




The
      following table provides segment level financial information for the thirteen
      weeks and twenty-six weeks ended August 4, 2007 and July 29, 2006 (in
      thousands):





**Thirteen
                Weeks Ended****August
                4, 2007**
            
            **July
                29, 2006****Department
                Store Based Fine Jewelry Departments (1)**
            
            **Stand-alone**
              **Jewelry**
              **Stores
                (2)**
            
            **Total**
            
            **Department
                Store Based Fine Jewelry Departments (1)**
            
            **Stand-alone**
              **Jewelry**
              **Stores**
            
            **Total**Sales
            
            $
            120,975
            
            $
            27,029
            
            $
            148,004
            
            $
            129,302
            
            $
            19,968
            
            $
            149,270Depreciation
                and amortization
            
            
            3,303
            
            
            401
            
            
            3,704
            
            
            3,446
            
            
            144
            
            
            3,590Income
                (loss) from operations
            
            
            (6,051
            )
            
            449
            
            
            (5,602
            )
            
            (3,895
            )
            
            979
            
            
            (2,916
            )Interest
                expense, net
            
            
            5,740
            
            
            672
            
            
            6,412
            
            
            5,204
            
            
            390
            
            
            5,594Provision
                (benefit) for income taxes
            
            
            (3,471
            )
            
            (88
            )
            
            (3,559
            )
            
            (3,596
            )
            
            233
            
            
            (3,363
            )Total
                assets
            
            
            422,639
            
            
            97,114
            
            
            519,753
            
            
            418,113
            
            
            70,598
            
            
            488,711Capital
                expenditures
            
            
            1,266
            
            
            158
            
            
            1,424
            
            
            1,035
            
            
            645
            
            
            1,680







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




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





**Twenty-Six
                Weeks Ended****August
                4, 2007**
            
            **July
                29, 2006****Department
                Store Based Fine Jewelry Departments (1)**
            
            **Stand-alone**
              **Jewelry**
              **Stores
                (2)**
            
            **Total**
            
            **Department
                Store Based Fine Jewelry Departments (1)**
            
            **Stand-alone**
              **Jewelry**
              **Stores**
            
            **Total**Sales
            
            $
            256,613
            
            $
            54,262
            
            $
            310,875
            
            $
            256,144
            
            $
            37,515
            
            $
            293,659Depreciation
                and amortization
            
            
            6,477
            
            
            770
            
            
            7,247
            
            
            6,956
            
            
            291
            
            
            7,247Income
                (loss) from operations
            
            
            (11,562
            )
            
            1,004
            
            
            (10,558
            )
            
            (10,039
            )
            
            1,269
            
            
            (8,770
            )Interest
                expense, net
            
            
            11,160
            
            
            1,330
            
            
            12,490
            
            
            10,128
            
            
            693
            
            
            10,821Provision
                (benefit) for income taxes
            
            
            (6,713
            )
            
            (127
            )
            
            (6,840
            )
            
            (7,971
            )
            
            228
            
            
            (7,743
            )Total
                assets
            
            
            422,639
            
            
            97,114
            
            
            519,753
            
            
            418,113
            
            
            70,598
            
            
            488,711Capital
                expenditures
            
            
            4,796
            
            
            337
            
            
            5,133
            
            
            5,523
            
            
            936
            
            
            6,459







(1)  Included
      in interest expense, net for each of the twenty-six week periods, is $8.4
      million related to the Senior Notes.




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




16








**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





Additionally,
      our sales mix by merchandise category was as follows for each of the twenty-six
      week periods ended August 4, 2007 and July 29, 2006 (dollars in
      thousands):





**Twenty-Six
                Weeks Ended****August
                4, 2007**
            
            **July
                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
            
            $
            60,931
            
            
            23.7
            %
            $
            15,193
            
            
            28.0
            %
            $
            65,392
            
            
            25.5
            %
            $
            9,844
            
            
            26.2
            %Gemstones
            
            
            47,106
            
            
            18.4
            
            
            5,960
            
            
            11.0
            
            
            48,690
            
            
            19.0
            
            
            3,404
            
            
            9.1Gold
            
            
            44,117
            
            
            17.2
            
            
            1,226
            
            
            2.3
            
            
            45,858
            
            
            17.9
            
            
            383
            
            
            1.0Watches
            
            
            37,866
            
            
            14.7
            
            
            22,751
            
            
            41.9
            
            
            34,025
            
            
            13.3
            
            
            15,019
            
            
            40.0Designer
            
            
            26,931
            
            
            10.5
            
            
            5,860
            
            
            10.8
            
            
            25,162
            
            
            9.8
            
            
            5,457
            
            
            14.6Other
                (2)
            
            
            39,662
            
            
            15.5
            
            
            3,272
            
            
            6.0
            
            
            37,017
            
            
            14.5
            
            
            3,408
            
            
            9.1Total
                Sales
            
            $
            256,613
            
            
            100.0
            %
            $
            54,262
            
            
            100.0
            %
            $
            256,144
            
            
            100.0
            %
            $
            37,515
            
            
            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.





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




17




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      13 - COMMITMENTS AND CONTINGENCIES** **(continued)**





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, the 349 departments in store groups owned by Macy’s accounted for
      approximately 57.0% of our sales (excluding the Macy’s departments that closed
      in 2006 and the departments in Lord & Taylor). We believe that the inability
      of Macy’s to pay these receivables could 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, in 2006, merchandise obtained from
      our
      stand-alone jewelry stores’ two largest vendors generated approximately 44.0% of
      their sales.





We
      did
      not provide any third-party financial guarantees as of August 4, 2007 and
      February 3, 2007.





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





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





**NOTE
      14 - INCOME TAXES**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of
      FASB Statement No. 109” (“FIN 48”). FIN 48 seeks to reduce the diversity in
      practice associated with certain aspects of measurement and recognition in
      accounting for income taxes. In addition, FIN 48 provides guidance on
      derecognition, classification, interest and penalties and accounting in interim
      periods and requires expanded disclosure with respect to the uncertainty in
      income taxes. FIN 48 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. At August 4, 2007, there have been no material changes to
      these
      balances.





The
      Company files a consolidated federal income tax return and numerous consolidated
      and separate income tax returns in many state and local jurisdictions. The
      tax
      years 2002 through 2006 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 at both the date of adoption and at August 4, 2007. 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 August 4, 2008.




18


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




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




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




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


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




·
              ***Seasonality
                  -***This
                  section describes the effects of seasonality on our
                  business.
  ·
                  ***Critical Accounting
                    Policies and
                    Estimates -***This
                    section addresses those accounting policies that are considered
                    important
                    to our financial condition and results of operations, and require
                    us to
                    exercise subjective or complex judgments in their application.
                    All of our
                    significant accounting policies, including critical accounting
                    policies,
                    are summarized in Note 2 of Notes to the Consolidated Financial
                    Statements
                    included in our Form 10-K.
 ·
                  ***Special Note Regarding
                    Forward-Looking Statements -***This
                    section provides cautionary information about forward-looking
                    statements
                    and a description of certain risks and uncertainties that could
                    cause
                    actual results to differ materially from our historical results
                    or current
                    expectations or projections.


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





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





****** In
      November 2006, Finlay Jewelry completed the acquisition of Congress. The
      purchase price was $6.0 million plus transaction fees and the assumption of
      $10.0 million of debt. The transaction was financed with additional borrowings
      under the Revolving Credit 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 August 4, 2007, we operated
      a
      total of 725 locations, including 687 department store based fine jewelry
      departments in ten host store groups, in 40 states and the District of Columbia,
      as well as 33 Carlyle specialty jewelry stores in nine states, located
      principally in the southeastern United States and five Congress specialty
      jewelry stores in southwest Florida.




19





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, designer jewelry, diamonds, precious gemstones and gold, complemented
      by an assortment of giftware. Each of our stand-alone jewelry store divisions
      strives to provide its customers with a premier shopping experience by utilizing
      knowledgeable, professional and well-trained sales associates, by marketing
      programs designed to promote customer awareness of its merchandise assortments
      and by extending credit to its customers through credit card programs which
      are
      managed by a third-party.





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





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





·
            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.




20


**Second
      Quarter Highlights**





Total
      sales were $148.0 million for the thirteen weeks ended August 4, 2007 compared
      to $149.3 million for the thirteen weeks ended July 29, 2006, a decrease of
      0.8%. Total sales for the second quarter of 2007 included $27.0 million of
      sales
      generated by our stand-alone jewelry stores compared to $20.0 million in the
      second quarter of 2006; an increase which primarily relates to the acquisition
      of Congress in November 2006. Comparable store sales decreased 3.6% due to
      a
      shift in the fiscal calendar associated with Mother’s Day. Gross margin
      decreased by $2.6 million compared to the same period in 2006, and, as a
      percentage of sales, gross margin, decreased by 1.3% from 47.5% to 46.2%. The
      decrease in gross margin, as a percentage of sales, relates to an increase
      in
      the LIFO provision as well as a change in the mix of sales with higher sales
      in
      the stand-alone jewelry division in the designer and watch categories which
      have
      lower margins than other categories. SG&A dollars were flat as compared to
      the prior year period, and, as a percentage of sales, SG&A increased 0.4%,
      from 47.1% to 47.5%, primarily relating to the unfavorable leveraging of field
      payroll offset by lower advertising expenditures and 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 $52.1 million at August 4,
      2007 compared to July 29, 2006, which reflects additional borrowings of
      approximately $49.9 million as a result of the retirement of the Gold
      Consignment Agreement as well as the approximately $16.0 million impact of
      the
      Congress acquisition, including debt assumed. Maximum outstanding borrowings
      during the twenty-six weeks ended August 4, 2007 were $121.7 million, at which
      point the available borrowings under the Revolving Credit Agreement were an
      additional $145.5 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.





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 gift and special occasion sales.





In
      November 2005, Finlay Jewelry signed new agreements with Macy’s for the Macy’s
      Midwest and Macy’s North divisions and amended the existing Macy’s Northwest and
      Macy’s South agreements, effective at the beginning of 2006. The agreements are
      subject to termination effective January 31, 2009, and cover 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 a greater
      opportunity to expand its business and continue to diversify beyond the
      traditional department store sector. These agreements have 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 over 30 departments in Dillard’s, Inc.
      (“Dillard’s”). Moreover, we opened four departments with Macy’s during the
      twenty-six weeks ended August 4, 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.




21





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 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
      August 4, 2007, we operated a total of 349 departments in five of Macy’s
      divisions, including 33 departments in the Bloomingdale’s division. These
      departments exclude the 194 departments either divested or phased into the
      Macy’s East or Macy’s West divisions during the first half of 2006. In 2006, we
      generated sales of approximately $105.9 million from these 194 departments.





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




22





During
      2006, approximately 57.0% of our sales were generated by the 349 departments
      operated in store groups owned by Macy’s (excluding the Macy’s departments that
      closed in 2006 and the departments in Lord & Taylor). A decision by Macy’s
      or certain of our other host store groups to terminate our existing
      relationships, to assume the operation of departments themselves or to close
      a
      significant number of stores, would have a material adverse effect on our
      business and financial condition.




**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**
            
            **Twenty-Six
                Weeks Ended****August
                4,**
              **2007**
            
            **July
                29,**
              **2006**
            
            **August
                4,**
              **2007**
            
            **July
                29,**
              **2006****Statement
                of Operations Data:**Sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            53.8
            
            
            52.5
            
            
            53.5
            
            
            52.0Gross
                margin
            
            
            46.2
            
            
            47.5
            
            
            46.5
            
            
            48.0Selling,
                general and administrative expenses
            
            
            47.5
            
            
            47.1
            
            
            47.6
            
            
            48.5Depreciation
                and amortization
            
            
            2.5
            
            
            2.4
            
            
            2.3
            
            
            2.5Loss
                from operations
            
            
            (3.8
            )
            
            (2.0
            )
            
            (3.4
            )
            
            (3.0
            )Interest
                expense, net
            
            
            4.3
            
            
            3.7
            
            
            4.0
            
            
            3.7Loss
                from continuing operations beforeincome
                taxes
            
            
            (8.1
            )
            
            (5.7
            )
            
            (7.4
            )
            
            (6.7
            )Benefit
                for income taxes
            
            
            (2.4
            )
            
            (2.2
            )
            
            (2.2
            )
            
            (2.6
            )Loss
                from continuing operations
            
            
            (5.7
            )
            
            (3.5
            )
            
            (5.2
            )
            
            (4.1
            )Discontinued
                operations, net of tax
            
            
            0.1
            
            
            0.8
            
            
            0.1
            
            
            2.8Net
                loss
            
            
            (5.6
            )%
            
            (2.7
            )%
            
            (5.1
            )%
            
            (1.3
            )%





**Thirteen
      Weeks Ended August 4, 2007 Compared with Thirteen Weeks Ended July 29,
      2006**





***Sales.*** Sales
      for the thirteen weeks ended August 4, 2007 totaled $148.0 million compared
      to
      $149.3 million for the thirteen weeks ended July 29, 2006. Sales include $121.0
      million in sales from the department store based fine jewelry departments for
      the thirteen weeks ended August 4, 2007, which represented a 6.4% decrease
      compared to the $129.3 million in sales for the thirteen weeks ended July 29,
      2006. Sales also include $27.0 million in sales generated by our stand-alone
      jewelry stores in 2007 compared to $20.0 million in 2006, an increase which
      primarily relates to the acquisition of Congress in November 2006. Comparable
      store sales decreased 3.6% and relate to a shift in the fiscal calendar
      associated with Mother’s Day, which we estimate had an approximate 3% to 4%
      negative impact in the second quarter of 2007.





During
      the thirteen weeks ended August 4, 2007, we opened one department store based
      fine jewelry department in Dillard’s. Additionally, during the thirteen weeks
      ended August 4, 2007, we closed 25 department store based fine jewelry
      departments. The closings were comprised of the following:





**Store
                Group**
            
            **Number
                of**
              **Locations**
            
            **Reason**Parisian
            
            24
            
            Host
                store did not renew our license agreement.Gottschalks
            
            1
            
            Department
                closing within existing host store group.Total
            
            25




23




***Gross
      margin.*** Gross
      margin decreased by $2.6 million in the second quarter of 2007 compared to
      2006.
      As a percentage of sales, gross margin decreased by 1.3% from 47.5% to 46.2%.
      The components of this net decrease in gross margin are as follows:





**Component**
            
            **%**
            
            **Reason**Merchandise
                cost of sales
            
            (0.7)%
            
            Increase
                in cost of sales is due to the change in mix of sales with higher
                sales in
                the stand-alone jewelry division in the designer and watch categories
                which have lower margins than other categories.LIFO
            
            (0.5)
            
            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
            
            (0.1)
            
            Increase
                in various other components of cost of sales.Total
                decrease
            
            (1.3)%





***Selling,
      general and administrative expenses.*** The
      components of SG&A include payroll expense, license fees, rent expense, net
      advertising expenditures and other field and administrative expenses. SG&A
      dollars were flat as compared to the prior year. As a percentage of sales,
      SG&A increased by 0.4% from 47.1% to 47.5%. The components of this net
      increase in SG&A are as follows:





**Component**
            
            **%**
            
            **Reason**Net
                advertising expenditures
            
            (0.6)%
            
            Decrease
                is primarily due to lower net advertising expenditures.License
                and lease fees
            
            (0.5)
            
            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
            
            1.2
            
            Increase
                is due to the unfavorable leveraging of field payroll primarily as
                a
                result of lower sales associated with the calendar
                shift.Other
            
            0.3
            
            Increase
                is due, in part, to the inclusion of Congress.Total
                increase
            
            0.4%




***Depreciation
      and amortization.*** Depreciation and amortization for the 2007 and 2006 periods totaled
      approximately $3.7 million and $3.6 million, respectively.





***Interest
      expense, net.*** Interest
      expense increased by $0.8 million primarily as a result of higher average
      borrowings under the Revolving Credit Agreement. The additional borrowings,
      which occurred in the fourth quarter of 2006, were used to finance the
      termination of the Gold Consignment Agreement, which totaled $49.9 million,
      as
      well as to finance the acquisition of Congress, which totaled approximately
      $16.0 million. The weighted average interest rate on all outstanding borrowings
      was approximately 7.9% for the second quarter in 2007 compared with 8.1% for
      the
      comparable period in 2006.





***Benefit
      for income taxes.*** The
      income tax benefit for the second quarter of 2007 reflects an effective tax
      rate
      of 29.6% compared to 39.5% for the same period in the prior year. The effective
      tax rate for all of 2007 is expected to be significantly lower than the rate
      for
      2006 primarily due to the projected low level of pre-tax loss and certain
      non-deductible permanent differences for 2007 included in the financial
      statement loss, resulting in a lower effective tax rate for financial statement
      purposes.





***Discontinued
      operations.*** Discontinued operations for the thirteen weeks ended August 4, 2007 and July
      29,
      2006 includes the results of operations of the Parisian departments, which
      closed in July 2007. Additionally, discontinued operations for the thirteen
      weeks ended July 29, 2006 includes the results of operations for the 194 Macy’s
      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 $6.3 million and $43.6 million for the thirteen weeks ended
      August 4, 2007 and July 29, 2006. Gross margin related to the discontinued
      departments totaled $2.5 million, or 40.3% as a percentage of sales, for the
      thirteen weeks ended August 4, 2007 and $20.4 million, or 46.8% as a percentage
      of sales, for the thirteen weeks ended July 29, 2006. The net income from
      discontinued operations for the thirteen weeks ended August 4, 2007 and July
      29,
      2006 was $0.1 million and $1.2 million, respectively.




24




***Net
      loss.*** Net
      loss
      of $8.4 million for the 2007 period compares to net loss of $4.0 million in
      the
      prior year period as a result of the factors discussed above.





**Twenty-Six
      Weeks Ended August 4, 2007 Compared with Twenty-Six Weeks Ended July 29,
      2006**





***Sales.*** Sales
      for the twenty-six weeks ended August 4, 2007 increased $17.2 million, or 5.9%,
      compared to 2006. Sales include $256.6 million in sales from the department
      store based fine jewelry departments for the twenty-six weeks ended August
      4,
      2007, which represented a 0.2% increase compared to the $256.1 million in sales
      for the twenty-six weeks ended July 29, 2006. Sales also include $54.3 million
      in sales generated by our stand-alone jewelry stores in 2007 compared to $37.5
      million in 2006, for which the majority of the increase relates to the
      acquisition of Congress in November 2006. Comparable store sales increased
      2.4%.





During
      the twenty-six weeks ended August 4, 2007, we opened ten department store based
      fine jewelry departments within existing host store groups. Additionally, during
      the twenty-six weeks ended August 4, 2007, we closed 43 department store based
      fine jewelry departments. The openings were comprised of the
      following:




**Store
                Group**
            
            **Number
                of**
              **Locations**Macy’s
            
            4Bon
                Ton
            
            4Dillard’s
            
            2Total
            
            10




The
      closings were comprised of the following:





**Store
                Group**
            
            **Number
                of**
              **Locations**
            
            **Reason**Parisian
            
            33
            
            Host
                store did not renew our license agreement .Macy’s
            
            4
            
            Host
                store decision to close these locations.Other
            
            6
            
            Department
                closings within existing host store groups.Total
            
            43




Our
      major
      merchandise categories include diamonds, gold, gemstones, watches and designer
      jewelry. With respect to the department store based fine jewelry departments
      in
      2007 compared to 2006, watch sales increased $3.8 million, or 11.3%, and
      designer sales increased $1.8 million, or 7.0%, due primarily to increased
      consumer demand offset by a decrease in diamond sales of $4.5 million, or 6.8%.





***Gross
      margin.*** Gross
      margin increased by $3.9 million in the first half of 2007 compared to 2006.
      As
      a percentage of sales, gross margin decreased by 1.4% from 48.0% to 46.6%.
      The
      components of this net decrease in gross margin are as follows:





**Component**
            
            **%**
            
            **Reason**Merchandise
                cost of sales
            
            (1.2)%
            
            Increase
                in cost of sales is due to the change in mix of sales with higher
                sales in
                the stand-alone jewelry division in the designer and watch categories
                which have lower margins than other categories.LIFO
            
            (0.4)
            
            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
            
            0.2
            
            Decrease
                in various other components of cost of sales.Total
                decrease
            
            (1.4)%




25




***Selling,
      general and administrative expenses.*** The
      components of SG&A include payroll expense, license fees, rent expense, net
      advertising expenditures and other field and administrative expenses. SG&A
      dollars increased $5.7 million, or 4.0%, primarily as a result of the addition
      of Congress. As a percentage of sales, SG&A decreased by 0.9% from 48.5% to
      47.6%. The components of this net decrease in SG&A are as follows:





**Component**
            
            **%**
            
            **Reason**Net
                advertising expenditures
            
            (0.2)%
            
            Decrease
                is primarily due to lower net advertising expenditures.License
                and lease fees
            
            (0.5)
            
            Decrease
                is primarily due to the significantly lower rent structure for the
                stand-alone jewelry business, which represented a larger portion
                of total
                sales.Payroll
                expense
            
            0.3
            
            Increase
                is due to the unfavorable leveraging of field payroll.Other
            
            (0.5)
            
            Decrease
                is due to corporate office cost savings, including staff reductions,
                as
                well as corporate office severance in the prior year
                period.Total
                decrease
            
            (0.9)%




***Depreciation
      and amortization.*** Depreciation and amortization for both the 2007 and 2006 periods totaled
      approximately $7.2 million.





***Interest
      expense, net.*** Interest
      expense increased by $1.7 million primarily as a result of higher average
      borrowings under the Revolving Credit Agreement. The additional borrowings,
      which occurred in the fourth quarter of 2006, were used to finance the
      termination of the Gold Consignment Agreement, which totaled $49.9 million,
      as
      well as to finance the acquisition of Congress, which totaled approximately
      $16.0 million. The weighted average interest rate on all outstanding borrowings
      was approximately 7.9% for the first half of 2007 compared with 8.2% for the
      comparable period in 2006.





***Benefit
      for income taxes.*** The
      income tax benefit for the first half of 2007 reflects an effective tax rate
      of
      29.7% compared to 39.5% for the same period in the prior year, as discussed
      above.





***Discontinued
      operations.*** Discontinued operations for the twenty-six weeks ended August 4, 2007 and July
      29, 2006 includes the results of operations of the Parisian departments, which
      closed in July 2007. Additionally, discontinued operations for the twenty-six
      weeks ended July 29, 2006 includes the results of operations for the 194 Macy’s
      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 $9.8 million and $134.4 million for the twenty-six weeks
      ended August 4, 2007 and July 29, 2006, respectively. Gross margin related
      to
      the discontinued departments totaled $4.3 million, or 43.3% as a percentage
      of
      sales, for the twenty-six weeks ended August 4, 2007 and $64.1 million, or
      47.7%
      as a percentage of sales, for the twenty-six weeks ended July 29, 2006. The
      net
      income from discontinued operations for the twenty-six weeks ended August 4,
      2007 and July 29, 2006 was $0.2 million and $8.0 million,
      respectively.





***Net
      loss.*** Net
      loss
      of $16.0 million for the 2007 period compares to net loss of $3.9 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 August 4, 2007 and February 3, 2007 is
      presented in the following table:




**August
                4,**
              **2007**
            
            **February
                3,**
              **2007****(dollars
                in thousands)**Cash
                and cash equivalents
            
            $
            3,010
            
            $
            2,415Short-term
                borrowings
            
            
            102,084
            
            
            45,876Working
                capital
            
            
            248,114
            
            
            259,473Long-term
                debt
            
            
            200,000
            
            
            200,000Stockholders’
                equity
            
            
            106,921
            
            
            122,229




26




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.





Cash
      flows provided from (used in) operating, investing and financing activities
      for
      the twenty-six weeks ended August 4, 2007 and July 29, 2006 were as
      follows:





**Twenty-Six
                Weeks Ended****August
                4,**
            
            **July
                29,****2007**
            
            **2006****(dollars
                in thousands)**Operating
                activities
            
            $
            (54,891
            )
            $
            (79,061
            )Investing
                activities
            
            
            (5,195
            )
            
            (6,459
            )Financing
                activities
            
            
            60,681
            
            
            60,211Net
                increase (decrease) in cash and cash equivalents
            
            $
            595
            
            $
            (25,309
            )




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 $54.9 million and $79.1
      million for the twenty-six weeks ended August 4, 2007 and July 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 $248.1 million at August 4, 2007, a decrease of $11.4
      million from February 3, 2007.




27





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 August 4, 2007 decreased
      by
      $16.1 million, or 3.7%, as compared to February 3, 2007.





***Investing
      Activities***





Net
      cash
      used in investing activities, consisting primarily of payments for capital
      expenditures, was $5.2 million and $6.5 million for the twenty-six weeks ended
      August 4, 2007 and July 29, 2006, respectively. Capital expenditures during
      each
      period related primarily to expenditures for opening new locations and
      renovating existing locations.





***Financing
      Activities***





Net
      cash
      provided from financing activities was $60.7 million for the twenty-six weeks
      ended August 4, 2007, consisting primarily of proceeds from, and principal
      repayments on, the Revolving Credit Facility. Net cash provided from financing
      activities was $60.2 million for the twenty-six weeks ended July 29,
      2006.





Our
      Revolving Credit Agreement provides us with a line of credit of up to $300.0
      million to finance working capital needs and matures in January 2011. The
      Revolving Credit Facility was increased from $225.0 million to $300.0 million
      in
      June 2007 as a result of the conversion to owned merchandise of the gold
      consignment merchandise under the former Gold Consignment Agreement, which
      increased Finlay Jewelry’s collateral base. 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 7.4% for the twenty-six weeks ended August 4, 2007 and July 29, 2006,
      respectively.





Borrowings
      under the Revolving Credit Agreement were $102.1 million at August 4, 2007,
      compared to $45.9 million at February 3, 2007 and $50.0 million at July 29,
      2006. The average amounts outstanding under the Revolving Credit Agreement
      were
      $100.2 million and $53.0 million for the twenty-six weeks ended August 4, 2007
      and July 29, 2006, respectively. The maximum amount outstanding for the
      twenty-six weeks ended August 4, 2007 was $121.7 million, **** at
      which
      point the available borrowings were an additional $145.5 million. At August
      4,
      2007, we had letters of credit outstanding totaling $6.2 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. The
      purchase price was $6.0 million plus transaction fees and the assumption of
      debt, and was financed with additional borrowings under the Revolving Credit
      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.




28





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 August 4, 2007, our outstanding borrowings were $302.1 million,
      which included a $200.0 million balance under the Senior Notes and a $102.1
      million balance under the Revolving Credit Agreement, compared to $250.0 million
      as of July 29, 2006.





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 August 4, 2007. We also expect Finlay
      Jewelry to be in compliance with all of its covenants during the balance of
      2007. Because compliance is based, in part, on management’s estimates, and
      actual results can differ from those estimates, there can be no assurance that
      Finlay Jewelry will be in compliance with those covenants in the future or
      that
      Finlay Jewelry’s lenders will waive or amend any of the covenants should Finlay
      Jewelry be in violation thereof. However, we do believe the assumptions used
      are
      appropriate.





The
      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 only financial covenant
      is to maintain a certain fixed charge coverage ratio at certain times. 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. No assurances, however, can be given that Finlay Jewelry’s
      current level of operating results will continue or improve or that Finlay
      Jewelry will continue to be able to meet its debt service and other obligations.
      The amounts required to satisfy the aggregate of Finlay Jewelry’s interest
      expense totaled $11.8 million and $10.6 million for the twenty-six weeks ended
      August 4, 2007 and July 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 August 4, 2007, $187.6 million of
      consignment merchandise from approximately 300 vendors was on hand as compared
      to $289.2 million at July 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.




29




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 August 4, 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
            
            $
            -
            
            $
            -
            
            $
            200,000
            
            $
            -Interest
                payments on Senior Notes
            
            
            83,750
            
            
            16,750
            
            
            33,500
            
            
            33,500
            
            
            -Operating
                lease obligations (1)
            
            
            33,746
            
            
            7,426
            
            
            10,792
            
            
            7,666
            
            
            7,862Revolving
                Credit Agreement (due 2011) (2)
            
            
            102,084
            
            
            102,084
            
            
            -
            
            
            -
            
            
            -Employment
                agreements
            
            
            4,163
            
            
            3,285
            
            
            878
            
            
            -
            
            
            -Contractual
                bonuses (3)
            
            
            862
            
            
            690
            
            
            172
            
            
            -
            
            
            -Letters
                of credit
            
            
            6,174
            
            
            5,540
            
            
            634
            
            
            -
            
            
            -Total
            
            $
            430,779
            
            $
            135,775
            
            $
            45,976
            
            $
            241,166
            
            $
            7,862







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


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


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





The
      operating leases included in the above table do not include contingent rent
      based upon sales volume, which amounted to approximately $43.7 million for
      the
      twenty-six weeks ended August 4, 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 August 4, 2007 other than as disclosed in the
      table above, nor have we provided any third-party financial guarantees as of
      and
      for the twenty-six weeks ended August 4, 2007.




***Off-Balance
      Sheet Arrangements***





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





***Other
      Activities Affecting Liquidity***





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





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





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




30





**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, except for the impact of LIFO discussed above.





**Critical
      Accounting Policies and Estimates**





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





**Special
      Note Regarding Forward-Looking Statements**





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





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




31




·
            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;





·
            Our
                compliance with applicable contractual covenants;





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





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





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





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




32





**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.





**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 August 4, 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 August 4, 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
      4.6% and 3.9%, respectively, of the related consolidated financial statement
      amounts as of and for the twenty-six weeks ended August 4, 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.




33


**PART
      II - OTHER INFORMATION**





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





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





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





**Issuer
      Purchases of Equity Securities**





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





**Period**
            
            **Total
                Number of Shares Purchased (1)**
            
            **Average
                Price Paid per Share**
            
            **Total
                Number of Shares Purchased as Part of Publicly Announced Plans
                (2)**
            
            **Maximum
                Number of Shares that May Yet Be Purchased Under the Plans
                (2)**May
                6 - June 2, 2007
            
            
            -
            
            $
            -
            
            
            -
            
            
            -June
                3 - July 7, 2007
            
            
            12,295
            
            $
            5.35
            
            
            -
            
            
            -July
                8 - August 4, 2007
            
            
            185
            
            $
            4.99
            
            
            -
            
            
            -Total
            
            
            12,480
            
            $
            5.35
            
            
            -
            
            
            -







(1)
            We
                purchased 12,480 shares from certain executives for approximately
                $67,000
                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
              second quarter of 2007 pursuant to a stock repurchase program.




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





The
      Annual Meeting of the Stockholders of the Company was held on June 19, 2007.
      Below are the details of the matters voted upon at the meeting.





**Proposal
      1:** Ms.
      Ellen
      R. Levine and Messrs. Norman S. Matthews and Charles E. McCarthy were re-elected
      as directors of the Company to serve a three-year term in the class of directors
      whose term expires in 2010. These members have been elected to serve until
      the
      expiration of their respective terms of office and until their successors are
      duly elected and qualified. Votes for the election of directors were cast as
      follows:





**Votes
                For**
            
            **Votes
                Withheld**Ellen
                R. Levine
            
            7,480,776
            
            354,250Norman
                S. Matthews
            
            7,480,776
            
            354,250Charles
                E. McCarthy
            
            7,554,138
            
            280,888





Messrs.
      David B. Cornstein, Rohit M. Desai, Thomas M. Murnane, Louis Lipschitz and
      Arthur E. Reiner continued to serve as members of the Company’s Board of
      Directors after the meeting.




34





**Proposal
      2:** The
      extension of the Finlay Enterprises, Inc. 1997 Long Term Incentive Plan (“1997
      Plan”) and the merger of the 1997 Plan (as extended) and the Finlay Enterprises,
      Inc. Long Term Incentive Plan (adopted in 1993) to form the Finlay Enterprises,
      Inc. 2007 Long Term Incentive Plan was approved, with the following
      votes:





**For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                Non-Vote**5,164,504
            
            
            1,703,844
            
            
            75
            
            
            986,538





**Proposal
      3:** The
      new
      Finlay Enterprises, Inc. Cash Bonus Plan, to replace the 2004 Finlay
      Enterprises, Inc. Cash Bonus Plan, was approved, with the following
      votes:





**For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                Non-Vote**6,191,068
            
            
            675,755
            
            
            1,600
            
            
            986,538




No
      other
      matters were voted on during the meeting.




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).10.8(f)
              
              Amendment
                  No. 5, dated June 20, 2007, to the Third Amended and Restated Credit
                  Agreement, among Finlay Fine Jewelry Corporation, Carlyle & Co.
                  Jewelers, the Company and General Electric Capital Corporation,
                  individually and in its capacity as administrative agent, and certain
                  other banks and financial institutions party thereto.10.23
              
              Finlay
                  Enterprises, Inc. 2007 Long Term Incentive Plan (incorporated by
                  reference
                  to Annex B to the Company’s Proxy Statement filed May 22,
                  2007).10.24
              
              Finlay
                  Enterprises, Inc. Cash Bonus Plan, effective as of June 19, 2007
                  (incorporated by reference to Annex C to the Company’s Proxy Statement
                  filed May 22, 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.




Date:
              September 13, 2007
            **FINLAY ENTERPRISES,
              INC.**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