**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-Q**


x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT
                  OF 1934For
                  the quarterly period endedAugust
                  2, 2008or ̈
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT
                  OF 1934For
                  the transition period from _________ to
                  __________




Commission
      File Number: 0-25716





FINLAY
      ENTERPRISES, INC.


(Exact
      name of registrant as specified in its charter)





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





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





(212)
      808-2800


(Registrant’s
      telephone number, including area code)





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





Yesx
            No ̈





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





Large
                accelerated filer ̈
            Accelerated
                filer ̈Non-accelerated
                filer ̈(Do not check if a smaller reporting company)
            Smaller
                reporting companyx





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





Yes ̈
            Nox





As
      of
      September 5, 2008, there were 9,319,567 shares of Common Stock, par value $0.01
      per share, of the registrant outstanding.











**FINLAY
      ENTERPRISES, INC.**





**FORM
      10-Q**





**QUARTERLY
      PERIOD ENDED AUGUST 2, 2008**





**INDEX**





**PAGE(S)****PART
                I - FINANCIAL INFORMATION**Item
                1.
            Consolidated
                Financial Statements (Unaudited)Consolidated
                  Statements of Operations for the thirteen weeks ended August 2,
                  2008 and
                  August 4, 2007
            3Consolidated
                  Statements of Operations for the twenty-six weeks ended August
                  2, 2008 and
                  August 4, 2007
            4Consolidated
                Balance Sheets as of August 2, 2008 and February 2, 2008
            5Consolidated
                Statements of Changes in Stockholders’ Equity and Comprehensive Loss for
                the twenty-six weeks ended August 2, 2008
            6Consolidated
                  Statements of Cash Flows for the twenty-six weeks ended August
                  2, 2008 and
                  August 4, 2007
            7Notes
                to Consolidated Financial Statements
            8Item
                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
            35Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            36Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            36Item
                6.
            Exhibits
            37**SIGNATURES**
            38




2


**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 2,****2008**
            
            **August 4,****2007**Sales
            
            $
            190,558
            
            $
            148,004Cost
                of sales
            
            
            105,746
            
            
            79,628Gross
                margin
            
            
            84,812
            
            
            68,376Selling,
                general and administrative expenses
            
            
            91,868
            
            
            70,274Depreciation
                and amortization
            
            
            4,449
            
            
            3,704Loss
                from operations
            
            
            (11,505
            )
            
            (5,602
            )Interest
                expense, net
            
            
            8,797
            
            
            6,412Loss
                from continuing operations before income taxes
            
            
            (20,302
            )
            
            (12,014
            )Benefit
                for income taxes
            
            
            (8,020
            )
            
            (3,559
            )Loss
                from continuing operations
            
            
            (12,282
            )
            
            (8,455
            )Discontinued
                operations, net of tax
            
            
            -
            
            
            87Net
                loss
            
            $
            (12,282
            )
            $
            (8,368
            )Net
                income (loss) per share applicable to common shares – Basic and
                Diluted:Loss
                from continuing operations
            
            $
            (1.32
            )
            $
            (0.93
            )Discontinued
                operations, net of tax
            
            $
            -
            
            $
            0.01Net
                loss
            
            $
            (1.32
            )
            $
            (0.92
            )Weighted
                average shares outstanding - Basic and Diluted
            
            
            9,317,490
            
            
            9,094,353





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




3




**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


**(unaudited)**





**Twenty-Six Weeks Ended****August 2,**
              **2008**
            
            **August 4,**
              **2007**Sales
            
            $
            395,670
            
            $
            310,875Cost
                of sales
            
            
            218,728
            
            
            166,133Gross
                margin
            
            
            176,942
            
            
            144,742Selling,
                general and administrative expenses
            
            
            187,891
            
            
            148,053Depreciation
                and amortization
            
            
            9,427
            
            
            7,247Loss
                from operations
            
            
            (20,376
            )
            
            (10,558
            )Interest
                expense, net
            
            
            17,572
            
            
            12,490Loss
                from continuing operations before income taxes
            
            
            (37,948
            )
            
            (23,048
            )Benefit
                for income taxes
            
            
            (14,655
            )
            
            (6,840
            )Loss
                from continuing operations
            
            
            (23,293
            )
            
            (16,208
            )Discontinued
                operations, net of tax
            
            
            -
            
            
            236Net
                loss
            
            $
            (23,293
            )
            $
            (15,972
            )Net
                income (loss) per share applicable to common shares – Basic and
                Diluted:Loss
                from continuing operations
            
            $
            (2.51
            )
            $
            (1.79
            )Discontinued
                operations, net of tax
            
            $
            -
            
            $
            0.03Net
                loss
            
            $
            (2.51
            )
            $
            (1.76
            )Weighted
                average shares outstanding - Basic and Diluted
            
            
            9,270,127
            
            
            9,073,415





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


4


**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


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





**August 2,****2008**
              **(unaudited)**
            
            **February 2,**
              **2008**
              **(audited)****ASSETS**Current
                   assets:Cash
                and cash equivalents
            
            $
            4,902
            
            $
            5,358Accounts
                receivable
            
            
            24,890
            
            
            13,793Other
                receivables
            
            
            8,583
            
            
            1,590Merchandise
                inventories
            
            
            580,305
            
            
            611,488Prepaid
                expenses and other
            
            
            8,938
            
            
            7,236Total
                current assets
            
            
            627,618
            
            
            639,465Fixed
                assets:Building,
                equipment, fixtures and leasehold improvements
            
            
            121,868
            
            
            112,079Less
                – accumulated depreciation and amortization
            
            
            50,150
            
            
            41,887Fixed
                assets, net
            
            
            71,718
            
            
            70,192Deferred
                charges and other assets, net
            
            
            25,715
            
            
            27,431Total
                assets
            
            $
            725,051
            
            $
            737,088**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Short-term
                borrowings
            
            $
            307,448
            
            $
            224,231Accounts
                payable – trade (including cash overdraft of $15,556 and $7,209 at August
                2, 2008 and February 2, 2008, respectively)
            
            
            46,954
            
            
            110,475Accrued
                liabilities:Accrued
                salaries and benefits
            
            
            14,081
            
            
            15,799Accrued
                miscellaneous taxes
            
            
            8,652
            
            
            7,162Accrued
                interest
            
            
            3,497
            
            
            3,494Deferred
                income
            
            
            3,770
            
            
            4,364Deferred
                income taxes
            
            
            16,641
            
            
            16,009Other
            
            
            22,921
            
            
            29,515Income
                taxes payable
            
            
            -
            
            
            5,660Total
                current liabilities
            
            
            423,964
            
            
            416,709Long-term
                debt
            
            
            200,000
            
            
            200,000Deferred
                income taxes
            
            
            6,276
            
            
            3,593Other
                non-current liabilities
            
            
            4,136
            
            
            3,278Total
                liabilities
            
            
            634,376
            
            
            623,580Commitments
                and contingencies (Note 14)Stockholders’
                equity:Common
                Stock, par value $0.01 per share; authorized 25,000,000 shares; issued
                11,647,669 and 11,514,359 shares, at August 2, 2008 and February
                2, 2008,
                respectively
            
            
            116
            
            
            114Additional
                paid-in capital
            
            
            96,083
            
            
            95,613Retained
                earnings
            
            
            22,339
            
            
            45,632Less
                treasury stock of 2,330,154 and 2,302,597 shares, at August 2, 2008
                and
                February 2, 2008, respectively, at cost
            
            
            (27,863
            )
            
            (27,851
            )Total
                stockholders’ equity
            
            
            90,675
            
            
            113,508Total
                liabilities and stockholders’ equity
            
            $
            725,051
            
            $
            737,088





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




5


**FINLAY
      ENTERPRISES, INC.**


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


**AND
      COMPREHENSIVE LOSS**


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




**Common Stock**
            
            **Additional**
            
            
            
            
            
            **Total****Number**
            
            
            
            **Paid-in**
            
            **Retained**
            
            **Treasury**
            
            **Stockholders’**
            
            **Comprehensive****of Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Stock**
            
            **Equity**
            
            **Loss**Balance,
                February 2, 2008
            
            
            9,211,762
            
            $
            114
            
            $
            95,613
            
            $
            45,632
            
            $
            (27,851
            )
            $
            113,508Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (23,293
            )
            
            -
            
            
            (23,293
            )
            $
            (23,293
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (23,293
            )Issuance
                of common stock
            
            
            133,310
            
            
            2
            
            
            -
            
            
            -
            
            
            -
            
            
            2Award
                of restricted stock units
            
            
            -
            
            
            -
            
            
            57
            
            
            -
            
            
            -
            
            
            57Amortization
                of restricted stock compensation and restricted stock
                units
            
            
            -
            
            
            -
            
            
            413
            
            
            -
            
            
            -
            
            
            413Purchase
                of treasury stock
            
            
            (27,557
            )
            
            -
            
            
            -
            
            
            -
            
            
            (12
            )
            
            (12
            )Balance,
                August 2, 2008 (unaudited)
            
            
            9,317,515
            
            $
            116
            
            $
            96,083
            
            $
            22,339
            
            $
            (27,863
            )
            $
            90,675





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




6


**FINLAY
      ENTERPRISES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**


**(unaudited)**





**Twenty-Six Weeks Ended****August 2,**
              **2008**
            
            **August 4,**
              **2007**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (23,293
            )
            $
            (15,972
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            9,427
            
            
            7,420Amortization
                of deferred financing costs
            
            
            1,015
            
            
            472Amortization
                of restricted stock compensation, stock options and restricted stock
                units
            
            
            413
            
            
            1,090Deferred
                income taxes
            
            
            3,315
            
            
            (5,307
            )Other,
                net
            
            
            911
            
            
            491Changes
                in operating assets and liabilities:(Increase)
                decrease in accounts and other receivables
            
            
            (18,090
            )
            
            719Decrease
                in merchandise inventories
            
            
            31,183
            
            
            16,110Increase
                in prepaid expenses and other
            
            
            (1,887
            )
            
            (1,433
            )Decrease
                in accounts payable and accrued liabilities
            
            
            (79,090
            )
            
            (58,481
            )NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (76,096
            )
            
            (54,891
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of equipment, fixtures and leasehold improvements
            
            
            (10,303
            )
            
            (5,133
            )Acquisition
                of Bailey Banks & Biddle
            
            
            (5,559
            )
            
            -Deferred
                charges and other assets
            
            
            (50
            )
            
            (62
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (15,912
            )
            
            (5,195
            )CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from revolving credit facility
            
            
            435,802
            
            
            322,205Principal
                payments on revolving credit facility
            
            
            (352,585
            )
            
            (265,997
            )Capitalized
                financing costs
            
            
            -
            
            
            (358
            )Bank
                overdraft
            
            
            8,347
            
            
            4,991Purchase
                of treasury stock
            
            
            (12
            )
            
            (160
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            91,552
            
            
            60,681INCREASE
                (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (456
            )
            
            595CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            5,358
            
            
            2,415CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            4,902
            
            $
            3,010SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Interest
                paid
            
            $
            16,556
            
            $
            11,817Income
                taxes paid (refunded)
            
            $
            (4,806
            )
            $
            2,091SUPPLEMENTAL
                DISCLOSURE OF NON-CASH ACTIVITIES:Award
                of vested participant restricted stock units
            
            $
            57
            
            $
            770Accrual
                for purchases of fixed assets
            
            $
            1,055
            
            $
            3,223




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




7


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





The
      accompanying unaudited consolidated financial statements of Finlay Enterprises,
      Inc. (the “Company,” the “Registrant,” “we,” “us” and “our”), and its
      wholly-owned subsidiary, Finlay Fine Jewelry Corporation and its wholly-owned
      subsidiaries (“Finlay Jewelry”), have been prepared in accordance with
      accounting principles generally accepted in the United States of America for
      interim financial information. References to “Finlay” mean collectively, the
      Company and Finlay Jewelry. In the opinion of management, the accompanying
      unaudited consolidated financial statements contain all adjustments necessary
      to
      present fairly our financial position as of August 2, 2008, and our results
      of
      operations for the thirteen weeks and twenty-six weeks ended August 2, 2008
      and
      August 4, 2007 and cash flows for the twenty-six weeks ended August 2, 2008
      and
      August 4, 2007. 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 2, 2008 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 2, 2008 (“Form 10-K”)
      previously filed with the Commission.




Results
      from the prior year period ended August 4, 2007 exclude from continuing
      operations the results from Parisian stores that closed in fiscal 2007, which
      have been classified as discontinued operations in accordance with Statement
      of
      Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment
      or Disposal of Long-Lived Assets.”





Our
      fiscal year ends on the Saturday closest to January 31. References to 2008,
      2007
      and 2006 relate to the fiscal year ending on January 31, 2009 and the fiscal
      years ended on February 2, 2008 and February 3, 2007, respectively. Each of
      the
      fiscal years includes 52 weeks except 2006, which includes 53 weeks.





**NOTE
      2 - SIGNIFICANT ACCOUNTING POLICIES**





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





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





***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.


8


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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




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





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





As
      of
      August 2, 2008 and February 2, 2008, deferred vendor allowances totaled (i)
      $6.5
      million and $7.1 million, respectively, for owned merchandise, which allowances
      are included as an offset to merchandise inventories on the Consolidated Balance
      Sheets, and (ii) $3.8 million and $4.4 million, respectively, for merchandise
      received on consignment, which allowances are included as deferred income on
      the
      Consolidated Balance Sheets.




**** ***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 stock 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 2, 2008 and August 4, 2007, 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 1,337,092 and 1,300,885 at August 2, 2008 and August 4, 2007,
      respectively, at prices ranging from $2.71 to $24.31 per share in each period.




***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.





***Intangible
      Assets:*** As
      a
      result of our acquisitions in recent years, 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, “Goodwill and Other
      Intangible Assets”.




9


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





***Accounting
      Standards Adopted in 2008:*** On
      February 3, 2008, we adopted certain provisions of SFAS No. 157, “Fair Value
      Measurements” (“SFAS No. 157”), which establishes a single authoritative
      definition of fair value, sets a framework for measuring fair value and expands
      on required disclosures about fair value measurement. The provisions of SFAS
      No.
      157, adopted on February 3, 2008, relate to financial assets and liabilities
      as
      well as other assets and liabilities carried at fair value on a recurring basis
      and did not have any effect on our consolidated financial statements. The
      provisions of SFAS No. 157 related to other nonfinancial assets and liabilities
      will be effective for the Company on February 1, 2009, and will be applied
      prospectively. We are currently evaluating the impact that these additional
      SFAS
      No. 157 provisions will have on our consolidated financial
      statements.





**NOTE
      3 - DESCRIPTION OF BUSINESS**





We
      conduct business through our wholly-owned subsidiary, Finlay Jewelry. We are
      a
      retailer of fine jewelry products and operate licensed fine jewelry departments
      in department stores throughout the United States. Additionally, we operate
      luxury stand-alone jewelry stores on a national basis. All references herein
      to
“departments” refer to fine jewelry departments operated pursuant to license
      agreements with host stores and all references herein to “stand-alone jewelry
      stores” refer to our specialty jewelry stores, consisting of Carlyle & Co.
      Jewelers LLC (“Carlyle”), L. Congress, Inc. (“Congress”) and Bailey Banks &
Biddle. Due to the seasonality of the retail jewelry industry, the fourth
      quarter of 2007 accounted for approximately 46.0% of our sales. During 2007,
      licensed departments in Macy’s accounted for 52.0% of our sales.





In
      November 2007, Finlay Jewelry completed the acquisition of substantially all
      of
      the assets and specified liabilities of the Bailey Banks & Biddle division
      of Zale Corporation. Finlay Jewelry currently operates 67 Bailey Banks &
Biddle specialty jewelry stores (including one Zell Bros. store) in 24 states
      with a focus on the luxury market offering jewelry and watches under high-end
      brand 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.





In
      May
      2005, Finlay Jewelry completed the acquisition of Carlyle. Carlyle currently
      operates 35 specialty jewelry stores which sell luxury priced jewelry in nine
      states under the Carlyle & Co., J.E. Caldwell & Co. and Park Promenade
      tradenames.





Results
      of operations of acquired businesses are included in the accompanying
      Consolidated Statements of Operations since the date of
      acquisition.





**NOTE
      4 – BAILEY BANKS & BIDDLE ACQUISITION**





In
      November 2007, Finlay Jewelry completed the acquisition of substantially
      all of the assets and specified liabilities of Bailey Banks & Biddle. The
      purchase price was approximately $200.0 million, plus transaction fees of
      approximately $4.1 million, and was financed with borrowings under the
      Revolving Credit Agreement with General Electric Capital Corporation and certain
      other lenders (the “Revolving Credit Agreement”). A post-closing inventory
      adjustment of approximately $31.6 million was also financed under the Revolving
      Credit Agreement, with $26.0 million paid in November 2007 and the balance
      paid
      in February 2008. The acquisition was undertaken to complement and diversify
      our
      existing business and provides us with the opportunity to increase our presence
      in the specialty jewelry store and high-end sector.


10


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      4 – BAILEY BANKS & BIDDLE ACQUISITION (continued)**





The
      Bailey Banks & Biddle acquisition has been accounted for as a purchase, and
      accordingly, the operating results of Bailey Banks & Biddle have been
      included in our consolidated financial statements since the date of acquisition.





The
      following consolidated unaudited pro forma information presents our sales and
      net loss as if the Bailey Banks & Biddle acquisition had taken place at the
      beginning of 2007:





**August 4, 2007****Thirteen Weeks**
              **Ended**
            
            **Twenty-Six Weeks**
              **Ended****(in thousands, except per share data)**Sales
            
            $
            206,284
            
            $
            432,096Loss
                from continuing operations
            
            
            (10,643
            )
            
            (20,290
            )Net
                loss
            
            
            (10,556
            )
            
            (20,054
            )Basic
                and Diluted net loss per share
            
            
            (1.18
            )
            
            (2.24
            )





Pro
      forma
      adjustments have been made to reflect depreciation and amortization using the
      asset values recognized after applying purchase accounting adjustments and
      interest expense on borrowings used to finance the acquisition. This pro forma
      information is presented for informational purposes only and is not necessarily
      indicative of actual results had the acquisition been effected at the beginning
      of the respective periods presented. It also is not necessarily indicative
      of
      future results, and does not reflect potential synergies, integration costs
      or
      other such costs or savings.





**NOTE
      5** **–
      CONSOLIDATION OF HOST STORE GROUPS AND OTHER**





In
      February 2008, Macy’s announced corporate restructuring initiatives impacting
      three divisional changes including the consolidation of Macy's North into Macy's
      East, Macy's Northwest into Macy's West, and Macy's Midwest into Macy's South.
      The consolidation of Macy's North as well as that of Macy's Northwest will
      result in the non-renewal of these license agreements with Finlay Jewelry and
      the loss of 57 departments and 36 departments, respectively, on January 31,
      2009. In March 2008, Macy’s signed a two-year extension of Finlay Jewelry’s
      license agreement for Macy’s Central (the newly-merged division of Macy’s
      Midwest and Macy’s South), which consists of 214 departments. The amended
      license agreement extends Finlay Jewelry’s current contract until January 29,
      2011. As of August 2, 2008, we operated a total of 341 departments in five
      of
      Macy’s eight divisions, as follows:





Macy’s
                South
            
            
            119Macy’s
                Midwest
            
            
            95Macy’s
                North (a)
            
            
            57Macy’s
                Northwest (a)
            
            
            36Bloomingdale’s
            
            
            34Total
            
            
            341





(a)
            Finlay
                Jewelry will close 93 Macy’s departments at the end of
                2008.




In
      October 2006, Macy’s sold its Lord & Taylor division to NRDC Equity Partners
      LLC (“NRDC”). In February 2008, we received notification from NRDC that Finlay
      Jewelry’s license agreement would not be renewed upon expiration on January 31,
      2009, and Finlay Jewelry will close a total of 47 Lord & Taylor departments
      at the end of 2008.





We
      will
      account for Macy’s and Lord & Taylor department store closings as
      discontinued operations upon the closing of these departments at the end of
      2008.


11


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      5** **–
      CONSOLIDATION OF HOST STORE GROUPS AND OTHER (continued)**




Further,
      as a result of Belk, Inc.’s (“Belk”) acquisition of Parisian from Saks, Inc.
      (“Saks”) in October 2006, 33 Parisian departments closed in July 2007. In 2007,
      we generated sales of approximately $9.8 million from these Parisian
      departments. For the thirteen weeks and twenty-six weeks ended August 4, 2007,
      the results of operations for these closed stores have been classified as
      discontinued operations in accordance with SFAS No. 144.





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 February
                3, 2007
            
            $
            585Payments
            
            
            (398
            )Reversal
                of accrual
            
            
            (70
            )Balance
                at February 2, 2008
            
            
            117Charges
            
            
            1,221Payments
            
            
            (148
            )Balance
                at August 2, 2008
            
            $
            1,190





**NOTE
      6 - MERCHANDISE INVENTORIES**





Merchandise
      inventories consisted of the following:




**August
                2,**
              **2008**
            
            **February
                2,**
              **2008****(in
                thousands)**Jewelry
                  goods – rings, watches and other fine jewelry(first-in, first-out
                  (“FIFO”) basis)
            
            $
            623,883
            
            $
            649,960Less:
                Excess of FIFO cost over LIFO inventory value
            
            
            43,578
            
            
            38,472$
            580,305
            
            $
            611,488





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 2, 2008 and August
      4,
      2007 by $2.9 million and $1.8 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 2, 2008 and August 4, 2007 by $5.1 million
      and
      $2.8 million, respectively.





Approximately
      $191.9 million and $217.9 million at August 2, 2008 and February 2, 2008,
      respectively, of merchandise received on consignment is not included in
      merchandise inventories and accounts payable-trade in the accompanying
      Consolidated Balance Sheets.





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





The
      Revolving Credit Agreement, which matures in November 2012, provides Finlay
      Jewelry with a senior secured revolving line of credit up to $550.0 million
      (the
“Revolving Credit Facility”). The Revolving Credit Facility provides a five-year
      $512.5 million (“Tranche A”) and $37.5 million (“Tranche B”) Revolving Credit
      Facility. At August 2, 2008 and February 2, 2008, $307.4 million and $224.2
      million was outstanding under this facility, at which point the available
      borrowings were $104.3 million and $174.2 million, respectively ($74.3 million
      and $144.2 million, respectively, of excess availability after taking into
      consideration the $30.0 million minimum unused balance requirement discussed
      below). The average amounts outstanding under the Revolving Credit Agreement
      were $297.4 million and $100.2 million for the twenty-six weeks ended August
      2,
      2008 and August 4, 2007, respectively. Our lowest level of excess availability
      during the twenty-six weeks ended August 2, 2008 was $97.3 million, at which
      point outstanding borrowings under the Revolving Credit Agreement were $322.9
      million ($67.3 million of excess availability after taking into consideration
      the $30.0 million minimum unused balance requirement discussed
      below).


12


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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




At
      Finlay
      Jewelry’s option, Tranche A bears interest at a floating rate equal to a margin
      of 0.25% over the Index Rate or 2.00% over the LIBOR (London Interbank Offer
      Rate) from November 9, 2007 through January 1, 2009. After January 1, 2009,
      the
      loans under Tranche A will bear interest in accordance with a graduated pricing
      matrix based on the average excess availability under the facility for the
      previous quarter. Tranche B bears interest at a floating rate equal to a margin
      of 2.75% over the Index Rate or 4.50% over LIBOR. The Index Rate is equal to
      the
      higher of (i) the federal funds rate plus 50 basis points and (ii) the publicly
      quoted rate as published by the Wall Street Journal as the “prime rate”. The
      Revolving Credit Agreement has a $75.0 million letter of credit sub-limit,
      which
      reduces availability when utilized. The weighted average interest rate was
      5.2%
      and 7.0% for the twenty-six weeks ended August 2, 2008 and August 4, 2007,
      respectively.





The
      Revolving Credit Agreement is limited by a borrowing base computed primarily
      on
      the balance of Finlay Jewelry’s inventory and accounts receivable and is secured
      by a first priority perfected security interest in all of Finlay Jewelry’s (and
      any subsidiary’s) present and future tangible and intangible assets. The
      Revolving Credit Agreement contains customary covenants, including limitations
      on, or relating to, liens, indebtedness, investments, mergers, acquisitions,
      affiliate transactions, management compensation and the payment of dividends
      and
      other restricted payments. Additionally, the Revolving Credit Agreement includes
      a requirement to maintain a minimum unused balance of not less than $30.0
      million at all times. As of August 2, 2008, Finlay Jewelry was in compliance
      with this requirement and expects to be in compliance during the remainder
      of
      2008.





At
      August
      2, 2008 and February 2, 2008, we had letters of credit outstanding totaling
      $6.6
      million and $6.2 million, respectively, which guarantee various trade
      activities. The contract amounts of the letters of credit approximate their
      fair
      value.





Long-term
      debt consisted of the following:




**August
                2,**
              **2008**
            
            **February
                2,**
              **2008****(in
                thousands)**Senior
                Notes (a)
            
            $
            200,000
            
            $
            200,000





(a)
            The
                fair value of the Senior Notes, determined based on market quotes,
                was
                approximately $79.3 million at August 2, 2008 and $103.8 million
                at
                February 2, 2008.





Finlay
      Jewelry’s 8-3/8% Senior Notes due June 1, 2012 (the “Senior Notes”), comprise 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 Finlay Jewelry’s secured indebtedness, including obligations
      under the Revolving Credit Agreement, to the extent of the value of the assets
      securing such indebtedness, and effectively subordinated to 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 beginning 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.


13


**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      7 – SHORT AND LONG-TERM DEBT (continued)**




The
      indenture governing the Senior Notes contains restrictions relating to, among
      other things, the payment of dividends, redemptions or repurchases of capital
      stock, the incurrence of additional indebtedness, the making of certain
      investments, the creation of certain liens, the sale of certain assets, entering
      into transactions with affiliates, engaging in mergers and consolidations and
      the transfer of all or substantially all assets. Finlay Jewelry was in
      compliance with all of its covenants as of and for the twenty-six weeks ended
      August 2, 2008 and expects to be in compliance during the remainder of
      2008.





**NOTE
      8 – INCOME TAXES**





In
      compliance with the Financial Accounting Standards Board (“FASB”) Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of
      FASB Statement No. 109” (“FIN 48”), the Company had unrecognized tax benefits of
      approximately $1.4 million as of August 2, 2008 and approximately $1.7 million
      as of February 2, 2008. Included in the balance are $1.2 million and $1.5
      million as of August 2, 2008 and February 2, 2008, respectively, of unrecognized
      tax benefits that, if recognized, would affect the annual effective income
      tax
      rate.





For
      income tax reporting purposes, we have an October 31 year end. The Company
      files
      a consolidated federal income tax return with Finlay Jewelry and its
      wholly-owned subsidiaries and numerous consolidated and separate income tax
      returns in many state and local jurisdictions. The tax years 2003 through 2007
      remain open to examination by the major taxing jurisdictions to which we are
      subject. The Company recognizes accrued interest and penalties related to
      unrecognized tax benefits in income tax expense, which is a continuation of
      the
      Company’s historical accounting policy. Approximately $0.3 million in potential
      interest and penalties are included as a component of both the $1.4 million
      and
      $1.7 million unrecognized tax benefits at August 2, 2008 and February 2, 2008,
      respectively. During the quarter ended August 2, 2008, the Company released
      $0.4
      million of reserves as a result of the expiration of certain statutes of
      limitations. The Company anticipates $0.3 million of unrecognized tax benefits
      will be recognized as a result of the settlement of audits and the expiration
      of
      the statute of limitations prior to August 2, 2009.





**NOTE
      9 – 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 three or five years and expire no later than ten years after the
      grant
      date. During the twenty-six weeks ended August 2, 2008 and August 4, 2007,
      we
      recognized approximately $72,000 and $0, respectively, in stock-based
      compensation expense.





There
      were 139,500 options cancelled and no options were granted or exercised during
      the twenty-six weeks ended August 2, 2008. The following table summarizes the
      changes in stock options outstanding during the twenty-six weeks ended August
      2,
      2008 and stock options exercisable at August 2, 2008:





14




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





**Options Outstanding****Number**
              **Outstanding**
            
            **Wtd. Avg.**
              **Remaining**
              **Contractual Life**
            
            **Wtd. Avg.**
              **Ex. Price**
            
            **Aggregate**
              **Intrinsic**
              **Value (000’s)**Outstanding at February
                2, 2008
            
            
            863,200
            
            
            4.94
            
            $
            8.07
            
            $
            -Cancelled
            
            
            (139,500
            )
            
            -
            
            $
            11.03
            
            $
            -Outstanding
                at August 2, 2008
            
            
            723,700
            
            
            4.91
            
            $
            7.50
            
            $
            -Exercisable
                at August 2, 2008
            
            
            463,700
            
            
            2.42
            
            $
            10.19
            
            $
            -





The
      following table summarizes the changes in restricted stock outstanding during
      the twenty-six weeks ended August 2, 2008:




**Restricted**
              **Stock**
            
            **Wtd. Avg. Grant DateFair Value**Balance
                at February 2, 2008
            
            
            48,367
            
            $
            11.78Vested
            
            
            (47,321
            )
            
            11.85Balance
                at August 2, 2008
            
            
            1,046
            
            $
            8.70





During
      the twenty-six weeks ended August 2, 2008 and August 4, 2007, total amortization
      expense of restricted stock was $0.1 million and $0.8 million,
      respectively.





The
      following table summarizes the changes in restricted stock units (“RSUs”)
      outstanding, including nonvested RSUs, during the twenty-six weeks ended August
      2, 2008:




**RSUs****(1)**
            
            **Wtd.
                Avg.Grant Date****Fair
                Value****Per
                Award**Balance
                at February 2, 2008
            
            
            530,051
            
            $
            8.29Granted
            
            
            168,284
            
            
            0.80Shares
                issued
            
            
            (85,989
            )
            
            12.63Balance
                at August 2, 2008
            
            
            612,346
            
            $
            5.60


(1)
        Refer to Note 10 for additional information regarding RSUs.





During
      each of the twenty-six weeks ended August 2, 2008 and August 4, 2007, total
      amortization expense of restricted stock units was $0.3 million.





**NOTE
      10** **–
      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 RSUs. An RSU
      is
      a unit of measurement equivalent to one share of Common Stock, but with none
      of
      the attendant rights of a share of Common Stock. Two types of RSUs are awarded
      under the RSU Plans: (i) participant RSUs, where a plan participant may elect
      to
      defer, in the case of an executive employee, a portion of his or her actual
      or
      target bonus, and in the case of a non-employee director, his or her retainer
      fees and Committee chairmanship fees and receive RSUs in lieu thereof, and
      (ii)
      matching RSUs, where we will 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 2, 2008, 612,346 RSUs were outstanding under the
      RSU
      Plans.





15




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      10** **–
      EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION AND STOCK** **PURCHASE
      PLANS (continued)**





The
      shares issued upon distribution of RSUs under the RSU Plans are provided by
      the
      Company’s 2007 Long Term Incentive Plan (the “2007 Plan”). As a result of the
      unavailability of shares of the Company’s Common Stock under the 2007 Plan and
      in order to facilitate the satisfaction of our obligations to make awards of
      RSUs, on May 22, 2008, the Board of Directors authorized the repurchase of
      one
      senior officer’s options to acquire 40,000 shares of Common Stock with a per
      share exercise price of $12.75, subject to the execution of a repurchase
      agreement. The agreement was executed on June 5, 2008 following which, the
      repurchase consideration of $40.00, or $0.001 per share, was paid.





As
      a
      result of the unavailability of shares under the 2007 Plan to satisfy the
      Company’s obligations under the RSU Plans, each of the RSU Plans was also
      amended effective as of May 22, 2008 to permit delayed crediting of RSUs under
      the RSU Plans until the requisite number of shares of Common Stock become
      available. Pursuant to these amendments, no new deferral agreements may be
      entered into under the RSU Plans, and any existing deferral agreements will
      remain in full force and effect, except that: (1) with respect to the Executive
      Plan, deferral agreements regarding the 2008 bonus payable on April 25, 2009,
      will be effectively cancelled, and such bonus amounts will be paid to the
      participants on April 25, 2009 in cash; and (2) with respect to the Director
      Plan, cash (rather than RSUs), will be paid for eligible director's fees
      deferred with respect to the third and fourth quarters of 2008, and such cash
      amounts will be paid to the directors on February 2, 2009. Effective as of
      May
      22, 2008, no more matching awards will be made under the RSU Plans.





**NOTE
      11 – SEGMENT INFORMATION**





In
      accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
      Related Information”, we have two reporting segments: department store based
      fine jewelry departments and stand-alone specialty jewelry stores. The
      accounting policies of the segments are generally the same as those described
      in
      Note 2. There are no intercompany sales between the segments.




The
      following table provides segment level financial information for the thirteen
      weeks and twenty-six weeks ended August 2, 2008 and August 4, 2007 (in
      thousands):




**Thirteen Weeks Ended****August 2, 2008**
            
            **August 4, 2007****Department StoreBased Fine JewelryDepartments (1)**
            
            **Stand-alone**
              **Jewelry**
              **Stores (2)**
            
            **Total**
            
            **Department StoreBased Fine JewelryDepartments (1)**
            
            **Stand-alone**
              **Jewelry**
              **Stores**
            
            **Total**Sales
            
            $
            115,642
            
            $
            74,916
            
            $
            190,558
            
            $
            120,975
            
            $
            27,029
            
            $
            148,004Depreciation
                and amortization
            
            
            3,077
            
            
            1,372
            
            
            4,449
            
            
            3,303
            
            
            401
            
            
            3,704Income
                (loss) from operations
            
            
            (8,713
            )
            
            (2,792
            )
            
            (11,505
            )
            
            (6,051
            )
            
            449
            
            
            (5,602
            )Interest
                expense, net
            
            
            5,826
            
            
            2,971
            
            
            8,797
            
            
            5,740
            
            
            672
            
            
            6,412Benefit
                for income taxes
            
            
            (5,852
            )
            
            (2,168
            )
            
            (8,020
            )
            
            (3,471
            )
            
            (88
            )
            
            (3,559
            )Total
                assets
            
            
            366,049
            
            
            359,002
            
            
            725,051
            
            
            422,639
            
            
            97,114
            
            
            519,753Capital
                expenditures
            
            
            984
            
            
            3,166
            
            
            4,150
            
            
            1,266
            
            
            158
            
            
            1,424


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


(2)  Reflects
      operating results of Bailey Banks & Biddle acquired in November
      2007.





16




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





**Twenty-Six Weeks Ended****August 2, 2008**
            
            **August 4, 2007****Department StoreBased Fine JewelryDepartments (1)**
            
            **Stand-alone****Jewelry****Stores (2)**
            
            **Total**
            
            **Department StoreBased Fine JewelryDepartments (1)**
            
            **Stand-alone****Jewelry****Stores**
            
            **Total**Sales
            
            $
            243,091
            
            $
            152,579
            
            $
            395,670
            
            $
            256,613
            
            $
            54,262
            
            $
            310,875Depreciation
                and amortization
            
            
            6,690
            
            
            2,737
            
            
            9,427
            
            
            6,477
            
            
            770
            
            
            7,247Income
                (loss) from operations
            
            
            (16,249
            )
            
            (4,127
            )
            
            (20,376
            )
            
            (11,562
            )
            
            1,004
            
            
            (10,558
            )Interest
                expense, net
            
            
            11,605
            
            
            5,967
            
            
            17,572
            
            
            11,160
            
            
            1,330
            
            
            12,490Benefit
                for income taxes
            
            
            (10,859
            )
            
            (3,796
            )
            
            (14,655
            )
            
            (6,713
            )
            
            (127
            )
            
            (6,840
            )Total
                assets
            
            
            366,049
            
            
            359,002
            
            
            725,051
            
            
            422,639
            
            
            97,114
            
            
            519,753Capital
                expenditures
            
            
            3,314
            
            
            6,989
            
            
            10,303
            
            
            4,796
            
            
            337
            
            
            5,133


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


(2)  Reflects
      operating results of Bailey Banks & Biddle acquired in November
      2007.





Additionally,
      our sales mix by merchandise category was as follows for the twenty-six weeks
      ended August 2, 2008 and August 4, 2007 (dollars in thousands):




**Twenty-Six Weeks Ended****August 2, 2008**
            
            **August 4, 2007****Department Store Based****Fine Jewelry Departments**
            
            **Stand-alone****Jewelry Stores**
            
            **Department Store Based****Fine Jewelry Departments**
            
            **Stand-alone****Jewelry Stores****Sales**
            
            **% of**
              **Sales**
            
            **Sales**
            
            **% of**
              **Sales**
            
            **Sales**
            
            **% of**
              **Sales**
            
            **Sales**
            
            **% of**
              **Sales**Diamonds
            
            $
            58,336
            
            
            24%
            
            $
            53,170
            
            
            35%
            
            $
            60,931
            
            
            24%
            
            $
            15,193
            
            
            28%Gemstones
            
            
            43,604
            
            
            18
            
            
            11,402
            
            
            7
            
            
            47,106
            
            
            18
            
            
            5,960
            
            
            11Gold
            
            
            42,588
            
            
            18
            
            
            1,992
            
            
            1
            
            
            44,117
            
            
            17
            
            
            1,226
            
            
            2Watches
            
            
            36,856
            
            
            15
            
            
            49,626
            
            
            33
            
            
            37,866
            
            
            15
            
            
            22,751
            
            
            42Designer
            
            
            27,411
            
            
            11
            
            
            19,870
            
            
            13
            
            
            26,931
            
            
            11
            
            
            5,860
            
            
            11Other
                (1)
            
            
            34,296
            
            
            14
            
            
            16,519
            
            
            11
            
            
            39,662
            
            
            15
            
            
            3,272
            
            
            6Total
                Sales
            
            $
            243,091
            
            
            100%
            
            $
            152,579
            
            
            100%
            
            $
            256,613
            
            
            100%
            
            $
            54,262
            
            
            100%


(1)
              Includes
                  special promotional items, remounts, estate jewelry, pearls, beads,
                  cubic
                  zirconia, sterling silver and men’s jewelry, as well as repair services
                  and accommodation sales to our
                  employees.





**NOTE
      12** **–
      DISCONTINUED OPERATIONS**





As
      a
      result of the 33 Parisian store closings in July 2007, the results of operations
      for these departments have been segregated from those of continuing operations,
      net of tax, and classified as discontinued operations for all periods presented.
      All of the closed stores were operated in our department store based fine
      jewelry departments segment.





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





**August
                4, 2007****ThirteenWeeks
                Ended**
            
            **Twenty-SixWeeks
                Ended**Sales
            
            $
            6,266
            
            $
            9,833Income
                before income taxes
            
            
            145
            
            
            393Discontinued
                operations, net of tax
            
            
            87
            
            
            236





17




**FINLAY
      ENTERPRISES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





We
      conduct a substantial part 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 value of such fixed assets is recorded at the inception of the license
      arrangement as well as upon department renovations, and is reflected in
      the **** accompanying
      Consolidated Balance Sheets.





Our
      operating leases consist primarily of office space rentals and the stand-alone
      specialty jewelry store locations, which leases expire on various dates through
      2023. 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 specialty 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 2,**
              **2008**
            
            **August 4,**
              **2007**
            
            **August 2,**
              **2008**
            
            **August 4,**
              **2007****(in thousands)**
            
            **(in thousands)**Base
                rent
            
            $
            9,800
            
            $
            2,282
            
            $
            19,696
            
            $
            4,543Contingent
                fees
            
            
            19,934
            
            
            20,550
            
            
            41,858
            
            
            43,656Total
            
            $
            29,734
            
            $
            22,832
            
            $
            61,554
            
            $
            48,199





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





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




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





Our
      concentration of credit risk consists principally of accounts receivable. In
      the
      department store based fine jewelry departments, substantially all consumer
      credit risk is borne by the host store rather than by us. During 2007, jewelry
      departments in store groups owned by Macy’s accounted for approximately 52% of
      our sales. We believe that the inability of Macy’s to pay its receivables could
      have a material adverse effect on our financial position, results of operations
      and liquidity.





In
      2007,
      approximately 43.3% of sales were generated by merchandise obtained from our
      ten
      largest vendors and approximately 6.7% of sales were generated by merchandise
      obtained from our largest vendor.





We
      have
      not provided any third-party financial guarantees as of August 2, 2008 and
      February 2, 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 restating our financial statements
      for Parisian stores which have been treated as discontinued operations for
      2007.





In
      November 2007, Finlay Jewelry completed the acquisition of Bailey Banks &
Biddle. The purchase price of approximately $200.0 million plus transaction
      fees
      was financed with borrowings under the Revolving Credit Agreement. Additionally,
      a post-closing inventory adjustment of $31.6 million was financed under the
      Revolving Credit Agreement. Bailey Banks & Biddle’s results of operations
      are included in the accompanying Consolidated Statements of Operations since
      the
      date of acquisition.





**Executive
      Overview**





**Our
      Business**





We
      have
      two operating segments – licensed department store based fine jewelry
      departments and stand-alone specialty jewelry stores. We 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
      $272
      per item in 2007. Our stand-alone specialty jewelry stores sell luxury priced
      jewelry at an average sales price of approximately $1,300 per item in 2007.
      As
      of August 2, 2008, we operated a total of 781 locations, including 674
      department store based fine jewelry departments in nine host store groups,
      in 41
      states and the District of Columbia, as well as 107 stand-alone jewelry stores
      operating as 67 Bailey Banks & Biddle stores in 24 states, 35 Carlyle stores
      in nine states located principally in the southeastern United States and five
      Congress 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 superior 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. 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 2007,
      approximately 25% of our merchandise was held on consignment, which enables
      us
      to pay for the merchandise after it is sold to our customer and reduces our
      inventory exposure to changing fashion trends.





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





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





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





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





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





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




20


**Second
      Quarter Highlights**





Total
      sales were $190.6 million for the thirteen weeks ended August 2, 2008 compared
      to $148.0 million for the thirteen weeks ended August 4, 2007, an increase
      of
      28.8%. Total sales for the second quarter of 2008 included $74.9 million of
      sales generated by our stand-alone jewelry stores compared to $27.0 million
      in
      the second quarter of 2007. The increase primarily relates to the acquisition
      of
      Bailey Banks & Biddle in November 2007. Comparable store sales decreased
      4.8%, as a result of decreased consumer spending in a continued weak economic
      environment in the second quarter of 2008. Gross margin increased by $16.4
      million compared to 2007, and, as a percentage of sales, gross margin decreased
      by 1.7% from 46.2% to 44.5%. The decrease in gross margin, as a percentage
      of
      sales, primarily relates to increased volume from the stand-alone jewelry stores
      at lower margins, as well as lower margins at the Macy’s and Lord & Taylor
      departments scheduled to close at the end of 2008, as we liquidate inventory,
      and a higher LIFO provision. SG&A increased $21.6 million, and, as a
      percentage of sales, increased 0.7%, from 47.5% to 48.2%, primarily due to
      the
      impact of the stand-alone jewelry store leases at higher lease fees coupled
      with
      lower than anticipated sales levels as compared with the prior year period.
      Our
      continued efforts to reduce corporate overhead costs and our ability to leverage
      administrative costs associated with the integration of Bailey Banks &
Biddle slightly offset this increase. SG&A expenses also include severance
      costs of $0.4 million for field personnel associated with the Macy’s and Lord
& Taylor anticipated store closings, scheduled to close at the end of the
      current fiscal year. Borrowings under the Revolving Credit Agreement increased
      by $83.2 million at August 2, 2008 as compared to February 2, 2008, which
      reflects additional borrowings for working capital requirements. Our lowest
      level of excess availability during the twenty-six weeks ended August 2, 2008
      was $97.3 million, at which point the outstanding borrowings under the Revolving
      Credit Agreement were $322.9 million ($67.3 million of excess availability
      after
      taking into consideration the $30.0 million minimum unused balance requirement
      under Finlay Jewelry’s Revolving Credit Agreement). Refer to Note 7 of Notes to
      the Consolidated Financial Statements.





**Opportunities**





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





With
      the
      November 2007 acquisition of Bailey Banks & Biddle, a premier luxury brand,
      we have a significantly higher portion of our business dedicated to the
      specialty jewelry store and high-end sector. The Bailey Banks & Biddle
      stand-alone jewelry stores provide us with a national presence in addition
      to
      further diversifying our revenue stream between the department store based
      fine
      jewelry business and the stand-alone jewelry store business.





In
      March
      2008, Finlay Jewelry signed a two-year extension with Macy’s for the newly
      formed consolidated Macy’s Central division formerly known as the Macy’s South
      and Macy’s Midwest divisions. The amended license agreement extends Finlay
      Jewelry’s current contract until January 29, 2011, and covers 214 departments.
      The agreement has no impact on the Bloomingdale’s division whose license
      agreement, covering 34 departments, currently runs through January 30, 2010.





During
      the twenty-six weeks ended August 2, 2008, we opened four new Carlyle stores.
      Through the Bailey Banks & Biddle acquisition as well as opening new
      stand-alone jewelry stores and Bloomingdale’s departments, we have a larger
      portion of our business dedicated to the luxury sector. We currently plan to
      open seven new locations during the remainder of the year, including three
      Bailey Banks & Biddle stand-alone stores and four department store based
      fine jewelry departments.





21




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





·
            Increase
                comparable store sales;





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





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





·
            Capitalize
                on developing fashion trends and emerging merchandise
                categories;





·
            Create
                new marketing initiatives to expand our customer
                base;





·
            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;





·
            Host
                store consolidation; and





·
            Substantial
                debt leverage.





We
      operate licensed fine jewelry departments in major department stores and, as
      such, this segment of our business is substantially dependent on our
      relationships with our host store groups, especially Macy’s. A decision by
      Macy’s, or certain of our other host store groups, to terminate existing
      relationships, transfer the operation of some or all of their departments to
      a
      competitor, assume the operation of those departments themselves, or close
      a
      significant number of stores, would have a material adverse effect on our
      business and financial condition.





As
      of
      August 2, 2008, we operated a total of 341 departments in five of Macy’s eight
      divisions. In February 2008, Macy’s announced corporate restructuring
      initiatives impacting three divisional changes including the consolidation
      of
      Macy's North into Macy's East, Macy's Northwest into Macy's West, and Macy's
      Midwest into Macy's South. The consolidation of Macy's North as well as that
      of
      Macy's Northwest will result in the non-renewal of these license agreements
      with
      Finlay Jewelry and the loss of 57 departments and 36 departments, respectively,
      on January 31, 2009. In March 2008, Macy's signed a two-year extension of Finlay
      Jewelry’s license agreement for Macy’s Central (the newly-merged division of
      Macy's Midwest and Macy's South), which consists of 214 departments. The amended
      license agreement extends Finlay Jewelry’s current contract until January 29,
      2011. In 2007, our department store based fine jewelry sales were 73% of our
      total sales, and approximately 52% of our total sales were generated by
      departments operated in store groups owned by Macy’s. In 2007, the Macy's North
      and Macy's Northwest locations generated approximately $120.0 million in
      combined revenue. We expect that Macy’s will comprise approximately 43% and 36%
      of our total sales over the next two years (after factoring in projected full
      year results for Bailey Banks & Biddle and the loss of the two Macy’s groups
      in 2009).





22




In
      February 2008, we received notification from NRDC that Finlay Jewelry’s license
      agreement would not be renewed with Lord & Taylor upon its expiration on
      January 31, 2009. We will close a total of 47 Lord & Taylor locations at the
      end of 2008. In 2007, the Lord & Taylor locations generated approximately
      $44.0 million in sales.




As
      a
      result of Belk’s decision not to renew Finlay Jewelry’s license agreement and
      acquisition of the Parisian departments from Saks, we closed 33 Parisian
      departments at the end of July 2007. In 2007, we generated sales of
      approximately $9.8 million from our Parisian departments.




We
      currently have a significant amount of debt. As of August 2, 2008, we had $200.0
      million of debt outstanding under our Senior Notes. Additionally, at August
      2,
      2008, borrowings under the Revolving Credit Agreement were $307.4 million.




**Results
      of Operations**





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





**Thirteen Weeks Ended**
            
            **Twenty-Six Weeks Ended****August 2,**
              **2008**
            
            **August 4,**
              **2007**
            
            **August 2,**
              **2008**
            
            **August 4,**
              **2007****Statement
                of Operations Data:**Sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            55.5
            
            
            53.8
            
            
            55.3
            
            
            53.5Gross
                margin
            
            
            44.5
            
            
            46.2
            
            
            44.7
            
            
            46.5Selling,
                general and administrative expenses
            
            
            48.2
            
            
            47.5
            
            
            47.5
            
            
            47.6Depreciation
                and amortization
            
            
            2.3
            
            
            2.5
            
            
            2.4
            
            
            2.3Loss
                from operations
            
            
            (6.0
            )
            
            (3.8
            )
            
            (5.2
            )
            
            (3.4
            )Interest
                expense, net
            
            
            4.6
            
            
            4.3
            
            
            4.4
            
            
            4.0Loss
                    from continuing operations before income taxes
            
            
            (10.6
            )
            
            (8.1
            )
            
            (9.6
            )
            
            (7.4
            )Benefit
                for income taxes
            
            
            (4.2
            )
            
            (2.4
            )
            
            (3.7
            )
            
            (2.2
            )Loss
                from continuing operations
            
            
            (6.4
            )
            
            (5.7
            )
            
            (5.9
            )
            
            (5.2
            )Discontinued
                operations, net of tax
            
            
            -
            
            
            0.1
            
            
            -
            
            
            0.1Net
                loss
            
            
            (6.4
            )%
            
            (5.6
            )%
            
            (5.9
            )%
            
            (5.1
            )%




23


**Thirteen
      Weeks Ended August 2, 2008 Compared with Thirteen Weeks Ended August 4,
      2007**





***Sales.*** Sales
      for the thirteen weeks ended August 2, 2008 increased $42.6 million, or 28.8%,
      compared to the 2007 second quarter. Sales include $115.6 million from the
      department store based fine jewelry departments for the thirteen weeks ended
      August 2, 2008, which represented a 4.4% decrease compared to sales of $121.0
      million for the thirteen weeks ended August 4, 2007. Sales also include $74.9
      million in sales generated by our stand-alone jewelry stores in 2008 compared
      to
      $27.0 million in 2007, an increase which primarily relates to the acquisition
      of
      Bailey Banks & Biddle in November 2007. Comparable store sales decreased
      4.8% as a result of decreased consumer spending in a continued weak economic
      environment in the second quarter of 2008.





During
      the thirteen weeks ended August 2, 2008, we opened one and closed one department
      store based fine jewelry department. The results of operations for this closed
      location was not material for the current or prior quarter.





***Gross
      margin.*** Gross
      margin increased by $16.4 million in the second quarter of 2008 compared to
      2007. As a percentage of sales, gross margin decreased by 1.7% from 46.2% to
      44.5%. The components of this net decrease in gross margin are as
      follows:





**Component**
            
            **%**
            
            **Reason**Merchandise
                cost of sales
            
            (0.9
            )%
            Increase
                in cost of sales is due to increased volume from the stand-alone
                jewelry
                segment at lower gross margins as well as lower margins at the Macy’s and
                Lord & Taylor departments scheduled to close at the end of 2008, as we
                liquidate inventory.LIFO
            
            (0.3
            )
            Increase
                in the LIFO provision is due to increases in our internal price indices
                as
                well as increased owned inventory as a result of the Bailey Banks
&
                Biddle acquisition.Other
            
            (0.5
            )
            Increase
                in various other components of cost of sales.Total
                decrease
            
            (1.7
            )%





***Selling,
      general and administrative expenses.*** The
      components of SG&A include payroll expense, license fees, rent expense, net
      advertising expenditures and other field and administrative expenses. SG&A
      increased $21.6 million, or 30.7%, and increased by 0.7%, as a percentage of
      sales, from 47.5% to 48.2%. The components of this net increase in SG&A are
      as follows:





**Component**
            
            **%**
            
            **Reason**License
                and lease fees
            
            1.0
            %
            Increase
                is primarily due to the impact of additional stand-alone jewelry
                store
                leases at higher lease fees as a percentage of sales, as a result
                of the
                Bailey Banks & Biddle acquisition.Net
                advertising expenditures
            
            (0.2
            )
            Decrease
                is primarily due to reduced advertising expenditures in the department
                store based fine jewelry segment as a percentage of
                sales.Other
            
            (0.1
            )
            Decrease
                is due to our continued efforts to reduce corporate overhead costs
                and our
                ability to leverage administrative costs associated with the integration
                of Bailey Banks & Biddle.Total
                increase
            
            0.7
            %




***Depreciation
      and amortization.*** Depreciation and amortization for the thirteen weeks ended August 2, 2008 and
      August 4, 2007 totaled $4.4 million and $3.7 million, respectively. Included
      in
      the second quarter of 2008 is approximately $0.5 million for accelerated
      depreciation charges associated with the Macy’s and Lord & Taylor
      anticipated store closings at the end of the current fiscal year.





***Interest
      expense, net.*** Net
      interest expense increased by $2.4 million primarily as a result of higher
      average borrowings under the Revolving Credit Agreement used to finance the
      acquisition of Bailey Banks & Biddle in 2007. The weighted average interest
      rate on all outstanding borrowings was approximately 6.3% for the second quarter
      in 2008 compared with 7.9% for the comparable period in 2007.




***Benefit
      for income taxes.*** The
      income tax benefit for the second quarter of 2008 reflects an effective tax
      rate
      of 39.5% compared to 29.6% for the same period in the prior year. The effective
      tax rate is expected to be significantly higher in 2008 due to the projected
      higher-level of pre-tax loss in relation to non-deductible permanent
      differences.





24




***Discontinued
      operations.*** Discontinued operations for the thirteen weeks ended August 4, 2007 includes
      the
      results of operations for the Parisian departments which closed in July 2007.
      Sales related to these operations totaled $6.3 million for the thirteen weeks
      ended August 4, 2007. Gross margin related to the discontinued departments
      totaled $2.5 million, or 40.3% as a percentage of sales. Net income from
      discontinued operations for the thirteen weeks ended August 4, 2007 was $0.1
      million.





***Net
      loss.*** Net
      loss
      of $12.3 million for the 2008 period compares to a net loss of $8.4 million
      in
      the prior year period as a result of the factors discussed above.





**Twenty-Six
      Weeks Ended August 2, 2008 Compared with Twenty-Six Weeks Ended August 4,
      2007**





***Sales.*** Sales
      for the twenty-six weeks ended August 2, 2008 increased $84.8 million, or 27.3%,
      compared to 2007. Sales include $243.1 million in sales from the department
      store based fine jewelry departments for the twenty-six weeks ended August
      2,
      2008, which represented a 5.3% decrease compared to the $256.6 million in sales
      for the twenty-six weeks ended August 4, 2007. Sales also include $152.6 million
      in sales generated by our stand-alone jewelry stores in 2008 compared to $54.3
      million in 2007, an increase which primarily relates to the acquisition of
      Bailey Banks & Biddle in November 2007. Comparable store sales decreased
      4.6%.





During
      the twenty-six weeks ended August 2, 2008, we opened four stand-alone specialty
      jewelry stores within Carlyle and one department store based fine jewelry
      department. Additionally, during the twenty-six weeks ended August 2, 2008,
      we
      closed 14 department store based fine jewelry departments and three stand-alone
      specialty jewelry stores. The closings were comprised of the
      following:





**Store Group**
            
            **Number of**
              **Locations**Macy’s
            
            
            10Dillard’s
            
            
            2Bailey Banks
                & Biddle
            
            
            2Carlyle
            
            
            1Other
            
            
            2Total
            
            
            17





***Gross
      margin.*** Gross
      margin increased by $32.2 million in the first half of 2008 compared to 2007.
      As
      a percentage of sales, gross margin decreased by 1.8% from 46.5% to 44.7%.
      The
      components of this net decrease in gross margin are as follows:





**Component**
            
            **%**
            
            **Reason**Merchandise
                cost of sales
            
            (1.0
            )%
            Increase
                in cost of sales is due to increased volume from the stand-alone
                jewelry
                segment at lower gross margins, as well as lower margins at the Macy’s and
                Lord & Taylor departments scheduled to close at the end of 2008, as we
                liquidate inventory.LIFO
            
            (0.4
            )
            Increase
                in the LIFO provision is due to increases in our internal price indices
                as
                well as increased owned inventory as a result of the Bailey Banks
&
                Biddle acquisition.Other
            
            (0.4
            )
            Increase
                in various other components of cost of sales.Total
                decrease
            
            (1.8
            )%





***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 $39.8 million, or 26.9%. As a percentage of sales, SG&A
      decreased by 0.1% from 47.6% to 47.5%. The components of this net decrease
      in
      SG&A are as follows:




**Component**
            
            **%**
            
            **Reason**License
                and lease fees
            
            0.9
            %
            Increase
                is primarily due to the impact of additional stand-alone jewelry
                store
                leases at higher lease fees as a percentage of sales, as a result
                of the
                Bailey Banks & Biddle acquisition.Net
                advertising expenditures
            
            (0.2
            )
            Decrease
                is primarily due to reduced advertising expenditures in the department
                store based fine jewelry segment as a percentage of
                sales.Other
            
            (0.8
            )
            Decrease
                is due to our continued efforts to reduce corporate overhead costs
                and our
                ability to leverage administrative costs associated with the integration
                of Bailey Banks & Biddle.Total
                decrease
            
            (0.1
            )%




25




***Depreciation
      and amortization.*** Depreciation and amortization for the twenty-six weeks ended August 2, 2008
      and
      August 4, 2007, totaled $9.4 million and $7.2 million, respectively. Included
      in
      the first half of 2008 is approximately $1.1 million for accelerated
      depreciation charges associated with the Macy’s and Lord & Taylor
      anticipated store closings at the end of the current fiscal year.





***Interest
      expense, net.*** Net
      interest expense increased by $5.1 million primarily as a result of higher
      average borrowings under the Revolving Credit Agreement used to finance the
      acquisition of Bailey Banks & Biddle in 2007. The weighted average interest
      rate on all outstanding borrowings was approximately 6.5% for the first half
      of
      2008, compared with 7.9% for the comparable period in 2007.





***Benefit
      for income taxes.*** The
      income tax benefit for the first half of 2008 reflects an effective tax rate
      of
      38.6% compared to 29.7% for the same period in the prior year, as discussed
      above.





***Discontinued
      operations.*** Discontinued operations for the twenty-six weeks ended August 4, 2007 includes
      the results of operations of the Parisian departments which closed in July
      2007.
      Sales related to these operations totaled $9.8 million for the twenty-six weeks
      ended August 4, 2007. 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. Net income from discontinued operations for the
      twenty-six weeks ended August 2, 2008 was $0.2 million.





***Net
      loss.*** Net
      loss
      of $23.3 million for the 2008 period compares to a net loss of $16.0 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 2, 2008 and February 2, 2008 is
      presented in the following table:




**August 2,**
              **2008**
            
            **February 2,**
              **2008****(dollars
                in thousands)**Cash
                and cash equivalents
            
            $
            4,902
            
            $
            5,358Working
                capital
            
            
            203,654
            
            
            222,756Short-term
                debt
            
            
            307,448
            
            
            224,231Long-term
                debt
            
            
            200,000
            
            
            200,000Stockholders’
                equity
            
            
            90,675
            
            
            113,508




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,
      capital expenditures for opening new locations, renovating existing locations,
      information technology investments and funding acquisitions. For the twenty-six
      weeks ended August 2, 2008, capital expenditures totaled $10.3 million and
      for
      2008 are estimated to be in the range of $18.0 million to $20.0 million.


26


****** Cash
      flows provided by (used in) operating, investing and financing activities for
      the twenty-six weeks ended August 2, 2008 and August 4, 2007 were as
      follows:





**Twenty-Six Weeks Ended****August 2,**
            
            **August 4,****2008**
            
            **2007****(dollars in thousands)**Operating
                activities
            
            $
            (76,096
            )
            $
            (54,891
            )Investing
                activities
            
            
            (15,912
            )
            
            (5,195
            )Financing
                activities
            
            
            91,552
            
            
            60,681Net
                increase (decrease) in cash and cash equivalents
            
            $
            (456
            )
            $
            595




We
      currently expect to fund capital expenditure requirements as well as liquidity
      needs from a combination of cash, internally generated funds, vendor credit
      and
      borrowings under Finlay Jewelry’s Revolving Credit Agreement. Our current
      priorities for the use of cash or borrowings under Finlay Jewelry’s Revolving
      Credit Agreement, are:





·
            Investment
                in inventory and for working capital;





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





·
            Investments
                in technology; and





·
            Strategic
                acquisitions.




In
      order
      to improve our financing flexibility and in conjunction with our acquisition
      of
      Bailey Banks & Biddle, we amended and restated the Revolving Credit
      Agreement in November 2007, increasing our borrowing capacity to $550.0 million
      with a senior secured revolving line of credit. In converting to an asset-based
      loan, all financial covenants were eliminated with the exception of a
      requirement to maintain an unused balance of at least $30.0 million at all
      times.





Borrowings
      under the Revolving Credit Agreement were $307.4 million at August 2, 2008,
      compared with $102.1 million at August 4, 2007, reflecting the impact of the
      acquisition of Bailey Banks & Biddle. At August 2, 2008, available
      borrowings were $104.3 million ($74.3 million of excess availability after
      taking into consideration the $30.0 million minimum unused balance requirement).
      During the twenty-six weeks ended August 2, 2008, our lowest level of excess
      availability was $97.3 million, before considering the $30.0 million minimum
      unused balance requirement.





Although
      we have been and intend to continue to work closely with our vendors, several
      factors have impacted our ability to continue our historical credit terms,
      including our Common Stock being delisted from NASDAQ and the downgrade of
      our
      credit rating, coupled with the increase in our debt in conjunction with the
      acquisition of Bailey Banks & Biddle and recent bankruptcies in the jewelry
      industry.





The
      retail environment continued to be challenging in the second quarter of 2008,
      and our sales were below our original projections. Based on the current economic
      outlook, we anticipate that the remainder of 2008 will continue to be
      challenging. We expect that these factors will have a negative impact on our
      liquidity during 2008, but we believe that we will, for the foreseeable future,
      be able to meet our liquidity needs.




As
      a
      result, although we currently have somewhat less unused availability than
      originally anticipated at February 3, 2008, we believe that we will, for the
      foreseeable future, be able to meet our debt service obligations, fund our
      working capital requirements and be in compliance with the $30.0 million minimum
      unused balance as required by the Revolving Credit Agreement. At both February
      2, 2008 and August 2, 2008, we were in compliance with this requirement, and
      we
      expect to be in compliance during the balance of 2008.





27




We
      are
      working closely with our Board of Directors and financial advisors to explore
      alternative financing options to improve our liquidity position.





***Operating
      Activities***





The
      primary source of our liquidity is cash flows from 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 $76.1
      million and $54.9 million for the twenty-six weeks ended August 2, 2008 and
      August 4, 2007, respectively. Inventory levels at August 2, 2008 decreased
      by
      $31.2 million, or 5%, as compared to February 2, 2008, primarily related to
      a
      decrease in inventory of $47.8 million in our licensed fine jewelry departments
      in anticipation of certain department closings at the end of the current fiscal
      year, offset by an increase in inventory of $16.6 million in our stand-alone
      jewelry store segment. At the end of 2008, we will close a total of 140
      departments in Macy’s North, Macy’s Northwest and Lord & Taylor. Our
      strategy during 2008 is to reduce asset receipts and liquidate inventory in
      these departments in an effort to reduce the on hand inventory levels and thus
      positively impact cash. Since February 2, 2008, inventory in these departments
      has decreased by $27.3 million. Accounts receivable increased to $24.9 million
      from $13.8 million primarily related to the higher sales volume in July 2008
      as
      compared with January 2008 in our licensed fine jewelry department store
      business. Additionally, the decrease in accounts payable to $47.0 million from
      $110.5 million reflects vendor payments for inventory receipts and consignment
      sales associated with the 2007 holiday season.





Our
      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 2007, approximately
      25%
      of our merchandise was held on consignment, which enables us to pay for the
      merchandise after it is sold to our customer and reduces our inventory exposure
      to changing fashion trends. Our working capital balance was $203.7 million
      at
      August 2, 2008, a decrease of $19.1 million from February 2, 2008.





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. Moreover, 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.





***Investing
      Activities***





Net
      cash
      used in investing activities totaled $15.9 million and $5.2 million for the
      twenty-six weeks ended August 2, 2008 and August 4, 2007, respectively. The
      first half of 2008 included a post-closing inventory adjustment of $5.6 million
      in connection with the acquisition of Bailey Banks & Biddle. Capital
      expenditures for the current and prior year periods totaled $10.3 million and
      $5.2 million, respectively, related primarily to expenditures for opening new
      locations and renovating existing locations.


28


***Financing
      Activities***





Net
      cash
      provided by financing activities was $91.6 million for the twenty-six weeks
      ended August 2, 2008, consisting primarily of proceeds from, and principal
      repayments on, the Revolving Credit Facility. Net cash provided by financing
      activities was $60.7 million for the twenty-six weeks ended August 4,
      2007.





The
      Revolving Credit Agreement provides Finlay Jewelry with a line of credit up
      to
      $550.0 million to finance working capital needs. At Finlay Jewelry’s option,
      Tranche A (up to $512.5 million) bears interest at a floating rate equal to
      a
      margin of 0.25% over the Index Rate or 2.00% over the LIBOR (London Interbank
      Offer Rate) from November 9, 2007 through January 1, 2009. After January 1,
      2009, the loans under Tranche A will bear interest in accordance with a
      graduated pricing matrix based on the average excess availability under the
      facility for the previous quarter. Tranche B (up to $37.5 million) bears
      interest at a floating rate equal to a margin of 2.75% over the Index Rate
      or
      4.50% over LIBOR. The Index Rate is equal to the higher of (i) the federal
      funds
      rate plus 50 basis points and (ii) the publicly quoted rate as published by
      the
      Wall Street Journal as the “prime rate”. The weighted average interest rate was
      5.2% and 7.0% for the twenty-six weeks ended August 2, 2008 and August 4, 2007,
      respectively.





Borrowings
      under the Revolving Credit Agreement were $307.4 million at August 2, 2008,
      compared to $224.2 million at February 2, 2008 and $102.1 million at August
      4,
      2007. The average amounts outstanding under the Revolving Credit Agreement
      were
      $297.4 million and $100.2 million for the twenty-six weeks ended August 2,
      2008
      and August 4, 2007, respectively. During the twenty-six weeks ended August
      2,
      2008, our lowest level of excess availability was $97.3 million, at which point
      outstanding borrowings under the Revolving Credit Agreement were $322.9 million
      ($67.3 million of excess availability after taking into consideration the $30.0
      million minimum unused balance requirement under Finlay Jewelry’s Revolving
      Credit Agreement). At August 2, 2008, we had $104.3 million of excess
      availability ($74.3 million of excess availability after taking into
      consideration the $30.0 million minimum used balance requirement). At August
      2,
      2008, we had letters of credit outstanding totaling $6.6 million, which
      guarantee various trade activities.





**** In
      November 2007, Finlay Jewelry completed the acquisition of substantially all
      of
      the assets and specified liabilities that comprised the Bailey Banks &
Biddle division of Zale Corporation, a chain of 67 stand-alone retail stores
      in
      24 states with a focus on the luxury market, offering jewelry and watches under
      high-end name brands. The purchase price of approximately $200.0 million,
      plus transaction fees of approximately $4.1 million, was financed with
      borrowings under the Revolving Credit Agreement. A post-closing inventory
      adjustment of $31.6 million was also financed through borrowings under our
      Revolving Credit Agreement, with $26.0 million paid in November 2007 and the
      balance paid in February 2008. Since the date of acquisition, Bailey Banks
&
Biddle’s cash requirements have been, and will continue to be, funded under the
      Revolving Credit Agreement.





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 2, 2008, our outstanding borrowings were $507.4 million,
      which included a $200.0 million balance under the Senior Notes and a $307.4
      million balance under the Revolving Credit Agreement. This compares to $302.1
      million as of August 4, 2007, including a $200.0 million balance under the
      Senior Notes and a $102.1 million balance under the Revolving Credit Agreement.




The
      Revolving Credit Agreement contains customary covenants, including limitations
      on, or relating to, liens, indebtedness, investments, mergers, acquisitions,
      affiliate transactions, management compensation and the payment of dividends
      and
      other restricted payments. The only financial covenant is the maintenance of
      a
      minimum of $30.0 million of availability under the facility. The indenture
      related to the Senior Notes contains restrictions relating to, among other
      things, the payment of dividends, redemptions or repurchases of capital stock,
      the incurrence of additional indebtedness, the making of certain investments,
      the creation of certain liens, the sale of certain assets, entering into
      transactions with affiliates, engaging in mergers and consolidations and the
      transfer of all or substantially all assets. We were in compliance with all
      such
      covenants as of August 2, 2008 and expect to be in compliance during the balance
      of 2008. Refer to Note 7 of Notes to the Consolidated Financial
      Statements.





29




We
      believe that, based upon current operations, anticipated growth and continued
      availability under the Revolving Credit Agreement, Finlay Jewelry will, for
      the
      foreseeable future, be able to meet its debt service and anticipated working
      capital obligations and to make distributions sufficient to permit us to pay
      expenses as they come due. No assurances, however, can be given 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 $16.6 million and $11.8 million for the twenty-six weeks ended
      August 2, 2008 and August 4, 2007, respectively.





Our
      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 2, 2008, $191.9 million of
      consignment merchandise from approximately 300 vendors was on hand as compared
      to $217.9 million at February 2, 2008.





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 2, 2008 (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
            
            
            67,000
            
            
            16,750
            
            
            33,500
            
            
            16,750
            
            
            -Operating
                lease obligations (1)
            
            
            160,879
            
            
            26,524
            
            
            43,431
            
            
            28,580
            
            
            62,344Revolving
                Credit Agreement (due 2012) (2)
            
            
            307,448
            
            
            307,448
            
            
            -
            
            
            -
            
            
            -Employment
                agreements
            
            
            683
            
            
            683
            
            
            -
            
            
            -
            
            
            -Contractual
                bonus (3)
            
            
            171
            
            
            171
            
            
            -
            
            
            -
            
            
            -Letters
                of credit
            
            
            6,584
            
            
            6,584
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            742,765
            
            $
            358,160
            
            $
            76,931
            
            $
            245,330
            
            $
            62,344





(1)
            Represents
                future minimum payments under noncancellable operating leases as
                of
                February 2, 2008.


(2)
            The
                above table excludes interest due under the Revolving Credit Agreement.
                Refer to Note 7 of Notes to the Consolidated Financial
                Statements.


(3)
            Represents
                a special bonus for a senior executive equal to 50% of the executive’s
                salary if employed by Finlay Jewelry on the date specified in the
                executive’s employment agreement.





The
      operating leases included in the above table do not include contingent rent
      based upon sales volume, which amounted to approximately $41.9 million for
      the
      twenty-six weeks ended August 2, 2008, or variable costs such as maintenance,
      insurance and taxes. Our open purchase orders are cancelable without penalty
      and
      were excluded from the above table. There were no commercial commitments
      outstanding as of August 2, 2008 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 2, 2008.


30


** ***Off-Balance
      Sheet Arrangements***





We
      have
      not created, and are not party to, any off-balance sheet entities or
      arrangements 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***




We
      have
      entered into various employment agreements with certain senior executives which
      provide for future minimum compensation aggregating $0.7 million at August
      2,
      2008. These agreements, each expiring after a three year period, guarantee
      a
      minimum annual salary level and incentive compensation upon achieving specific
      financial goals.





During
      2007, jewelry departments in store groups owned by Macy’s accounted for
      approximately 52% of our sales. We expect that Macy’s will comprise
      approximately 43% and 36% of our total sales in 2009 and 2010, respectively
      (after factoring in projected full year results for Bailey Banks & Biddle
      and the loss of the two Macy’s groups in 2009). The inability of Macy’s to pay
      its receivables could have a material adverse effect on our liquidity by
      requiring us to increase our reliance on our Revolving Credit Agreement to
      meet
      our debt service obligations and fund our working capital needs.





**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 2007 accounted for an average
      of approximately 43.8% of our annual sales. We have typically experienced net
      losses in the first three quarters of our fiscal year. During these periods,
      working capital requirements have been funded by borrowings under the Revolving
      Credit Agreement. Accordingly, the results for any of the first three quarters
      of any given fiscal year, taken individually or in the aggregate, are not
      indicative of annual results.





**Inflation**





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





**Critical
      Accounting Policies and Estimates**





**** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires the appropriate application
      of
      certain accounting policies, many of which require us to make estimates and
      assumptions about future events and their impact on amounts reported in our
      financial statements and related notes. We believe the application of our
      accounting policies, and the estimates inherently required therein, are
      reasonable. These accounting policies and estimates are periodically
      re-evaluated, as appropriate, and adjustments are made when facts and
      circumstances dictate a change. However, since future events and their impact
      cannot be determined with certainty, actual results may differ from our
      estimates, and such differences could be material to the consolidated financial
      statements. Historically, we have found our application of accounting policies
      to be appropriate, and actual results have not differed materially from those
      determined using necessary estimates. There have been no changes in our
      accounting policies since February 2, 2008. 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 Note
      2
      of Notes to the Consolidated Financial Statements included in our Form 10-K
      for
      the year ended February 2, 2008.





31




**Special
      Note Regarding Forward-Looking Statements**





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





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





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





·
            The
                seasonality of the retail jewelry business;





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





·
            Our
                ability to continue to obtain merchandise from our vendors on favorable
                credit terms;





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





·
            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;





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





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





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





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





·
            Our
                dependence on key officers;


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




32




·
            Our
                compliance with applicable contractual covenants;





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





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





·
            Attacks
                or threats of attacks by terrorists or war which may negatively impact
                the
                economy and/or the financial markets and reduce discretionary spending;
                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 and in Part II of this
      report.





**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 2007,
      a 100
      basis point increase in interest rates would have resulted in an increase in
      interest expense of approximately $1.5 million in 2007. In seeking to minimize
      the risks from interest rate fluctuations, we manage exposures through our
      regular operating and financing activities.




***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 evaluated, with the participation of our Chief Executive Officer
      and
      Chief Financial Officer, the effectiveness of our disclosure controls and
      procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the
      end
      of the period covered by this report. Based on that evaluation, our Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures are effective as of the end of the period covered by
      this report to ensure that information required to be disclosed in the reports
      that we file or submit under the Exchange Act is recorded, processed, summarized
      and reported within the time periods specified in the Commission’s rules and
      forms, and that such information is accumulated and communicated to our
      management, including our Chief Executive Officer and Chief Financial Officer,
      as appropriate, to allow timely decisions regarding required
      disclosure.





33


Because
      of the inherent limitations in all control systems, no evaluation of controls
      can provide absolute assurance that our disclosure controls and procedures
      will
      detect or uncover every situation involving the failure of persons within the
      Company to disclose material information otherwise required to be set forth
      in
      our periodic reports.





**Changes
      in Internal Controls over Financial Reporting**





Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, 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 2, 2008 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 2, 2008.





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


34


**PART
      II – OTHER INFORMATION**





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





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Item 1A – “Risk Factors” in our Form 10-K
      for the year ended February 2, 2008, which could materially affect our business,
      financial condition or future results. 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.





There
      have been no material changes in the risks faced by us as disclosed in our
      Form
      10-K, except the following risks related to our Common Stock:





***The
      price and trading volume of our Common Stock may be adversely affected by our
      delisting from The Nasdaq Stock Market.***





On
      July
      11, 2008, our Common Stock ceased trading on The Nasdaq Global Market and began
      being quoted on the OTC Bulletin Board (the “OTCBB”), under the same symbol
“FNLY”. Our shares were delisted from The Nasdaq Global Market because the
      closing price of our Common Stock failed to satisfy a $1.00 per share minimum
      bid requirement. Shares trading on the OTCBB tend to be more volatile and trade
      at lower prices than shares traded on The Nasdaq Stock Market (“NASDAQ”). The
      OTCBB also tends to be highly illiquid, in part, because there is no national
      quotation system through which potential investors can track the market price
      of
      shares except through information received or generated by a limited number
      of
      broker-dealers that make markets in particular stocks. Other significant
      consequences that may result from our Common Stock trading on the OTCBB rather
      than being listed on NASDAQ include: (i) limited release of the market price
      of
      our Common Stock; (ii) limited news coverage; (iii) limited interest by
      investors in our Common Stock; (iv) our increased difficulty in selling our
      Common Stock in certain states due to “blue sky” restrictions; and (v) our
      limited ability to issue additional shares or to secure additional financing.





***Our
      Common Stock is considered a “penny stock” and may be difficult to
      sell.***





The
      Commission has adopted regulations generally defining a “penny stock” to be an
      equity security with a market price of less than $5.00 per share or an exercise
      price of less than $5.00 per share, subject to specific exemptions. The market
      price of our Common Stock is currently below $1.00 per share. The Commission’s
      penny stock rules generally require a broker-dealer to deliver a standardized
      risk disclosure document providing information about penny stocks and the risks
      in the penny stock market before a transaction in a penny stock can take place.
      The broker-dealer must also provide the customer with current bid and ask
      quotations for the penny stock, the compensation of the broker-dealer and the
      salesperson in the transaction, and monthly account statements showing the
      market value of each penny stock held in the customer’s account. In addition,
      the penny stock rules generally require that, before a transaction in a penny
      stock, the broker-dealer make a special written determination that the penny
      stock is a suitable investment for the purchaser and receive the purchaser’s
      agreement to the transaction. These rules may restrict the ability of
      brokers-dealers to sell our Common Stock and may affect the ability of investors
      to sell their shares.




35


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





**Issuer
      Purchases of Equity Securities**





There
      were no shares of Common Stock repurchased by the Company during the second
      quarter of 2008. 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 2008 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 17, 2008.
      The
      election of directors was the only matter voted upon at the
      meeting.





Messrs.
      Rohit M. Desai, Louis Lipschitz and Thomas M. Murnane were re-elected as Class
      I
      directors of the Company, each to serve a three-year term expiring in
      2011.  These directors have been elected to serve until the expiration of
      their 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**Rohit
                M. Desai
            
            7,047,053
            
            225,146Louis
                Lipschitz
            
            7,045,668
            
            226,531Thomas
                M. Murnane
            
            7,047,053
            
            225,146





Class
      II
      directors David B. Cornstein and Arthur E. Reiner, and Class III directors
      Ellen
      R. Levine, Norman S. Matthews and Charles E. McCarthy, continued to serve as
      members of the Company’s Board of Directors after the meeting, serving terms
      expiring in 2009 and 2010, respectively.


36


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


**Exhibit
                  No.**
              
              **Description**2.1
              
              Agreement
                  and Plan of Merger, dated May 19, 2005, by and among Finlay Jewelry,
                  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 on May 25, 2005).2.2(a)
              
              Asset
                  Purchase Agreement, dated September 27, 2007, by and among Zale
                  Corporation, Zale Delaware, Inc., TXDC, L.P., Finlay Jewelry and,
                  for
                  limited purposes, the Company (incorporated by reference to Exhibit
                  2.2(a)
                  to the Company’s Quarterly Report on Form 10-Q for the period ended
                  November 3, 2007 filed on December 13, 2007).2.2(b)
              
              Letter
                  Agreement, dated November 9, 2007, amending the Asset Purchase
                  Agreement,
                  dated September 27, 2007, by and among Zale Corporation, Zale Delaware,
                  Inc., TXDC, L.P., Finlay Jewelry and, for limited purposes, the
                  Company
                  (incorporated by reference to Exhibit 2.2(b) to the Company’s Quarterly
                  Report on Form 10-Q for the period ended November 3, 2007 filed
                  on
                  December 13, 2007).3.1
              
              Certificate
                  of Incorporation of the Company, as amended (incorporated by reference
                  to
                  Exhibit 3.1****to
                  the Company’s Annual Report on Form 10-K for the period ended January 28,
                  1995 filed on April 12, 1995).3.2
              
              Amended
                  and Restated By-Laws of the Company, dated as of December 4, 2007
                  (incorporated by reference to Exhibit 3.2 to the Company’s Current Report
                  on Form 8-K filed on December 10, 2007).10.6(e)
              
              Amendment
                  No. 4 to the Company’s Executive Deferred Compensation and Stock Purchase
                  Plan, effective May 22, 2008 (incorporated by reference to Exhibit
                  10.2 to
                  the Company’s Current Report on Form 8-K filed on June 9,
                  2008).10.7(c)
              
              Amendment
                  No. 1 to the Company’s Director Deferred Compensation and Stock Purchase
                  Plan, effective May 22, 2008 (incorporated by reference to Exhibit
                  10.3 to
                  the Company’s Current Report on Form 8-K filed on June 9,
                  2008).10.27
              
              Letter
                  agreement between the Company and Arthur E. Reiner, dated as of
                  June 5,
                  2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current
                  Report on Form 8-K filed on June 9, 2008).31.1
              
              Certification
                  of principal executive officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of principal financial officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Certification
                  of principal executive officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2
              
              Certification
                  of principal financial officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.




37




**SIGNATURES**




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


Date:
                  September 11, 2008
              
              **FINLAY
                  ENTERPRISES, INC.**By:
              /s/
                  Bruce E. ZurlnickBruce
                  E. ZurlnickSenior
                  Vice President, Treasurerand
                  Chief Financial Officer(As
                  both a duly authorized officer ofregistrant
                  and as principal financialofficer
                  of registrant)




38