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




                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-Q

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

            For the Quarterly Period Ended October 31, 1998

                                       or

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

            For the Transition Period from _________ to __________

                                  Commission File Number: 0-25716



                            FINLAY ENTERPRISES, INC.
            --------------------------------------------------------
             (Exact name of registrant as specified in its charter)


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



      529 Fifth Avenue, New York, NY                             10017
 ----------------------------------------                     ----------
 (Address of principal executive offices)                     (zip code)

                                 (212) 808-2800
                 ----------------------------------------------
              (Registrant's telephone number, including area code)

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

                      Yes   X                      No ____

As of December 11, 1998, there were 10,402,653 shares of common stock, par value
$.01 per share, of the Registrant outstanding.

<PAGE>
                                          

                             FINLAY ENTERPRISES, INC

                                    FORM 10-Q

                     QUARTERLY PERIOD ENDED OCTOBER 31, 1998

                                      INDEX


                                                                         PAGE(S)

PART I - FINANCIAL INFORMATION

 Item 1. Consolidated Financial Statements (Unaudited)

         Consolidated Statements of Operations for the thirteen weeks and
         thirty-nine weeks ended November 1, 1997 and October 31, 1998........1

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

         Consolidated Statements of Changes in Stockholders' Equity for 
         the year ended January 31, 1998 and thirty-nine weeks ended 
         October 31, 1998.....................................................4

         Consolidated Statements of Cash Flows for the thirteen weeks and
         thirty-nine weeks ended November 1, 1997 and October 31, 1998........5

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

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

PART II - OTHER INFORMATION

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

SIGNATURES...................................................................22

<PAGE>


PART 1 - FINANCIAL INFORMATION
  Item 1. Consolidated Financial Statements



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

<TABLE>
<CAPTION>

                                                                     Thirteen Weeks Ended
                                                                 -----------------------------
                                                                 November 1,       October 31,
                                                                    1997              1998
                                                                 ------------      -----------

<S>                                                              <C>               <C>       
Sales.......................................................     $   148,770       $  165,894
Cost of sales...............................................          71,663           81,207
                                                                 ------------      -----------
   Gross margin.............................................          77,107           84,687
Selling, general and administrative expenses................          70,086           78,927
Depreciation and amortization...............................           3,022            3,916
                                                                 ------------      -----------
   Income (loss) from operations............................           3,999            1,844
Interest expense, net.......................................           9,149            8,153
                                                                 ------------      -----------
   Income (loss) before income taxes........................          (5,150)          (6,309)
Provision (credit) for income taxes.........................          (1,900)          (2,458)
                                                                 ------------      -----------
   Net income (loss)........................................     $    (3,250)      $   (3,851)
                                                                 ============      ===========
Net income (loss) per share applicable to common shares:
   Basic net income (loss) per share........................     $     (0.42)      $   (0.37)
                                                                 ============      ===========
   Diluted net income (loss) per share......................     $     (0.42)      $   (0.37)
                                                                 ============      ===========
Weighted average shares and share equivalents outstanding...       7,806,614       10,402,653
                                                                 ============      ===========

</TABLE>





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

                                       1
<PAGE>
                                          


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


<TABLE>
<CAPTION>
                                                                   Thirty-Nine Weeks Ended
                                                                 -----------------------------
                                                                 November 1,       October 31,
                                                                    1997              1998
                                                                 ------------      -----------

<S>                                                              <C>               <C>       
Sales.......................................................     $   431,422       $  504,252
Cost of sales...............................................         209,497          246,620
                                                                 ------------      -----------
   Gross margin.............................................         221,925          257,632
Selling, general and administrative expenses................         201,677          235,874
Depreciation and amortization...............................           8,714           11,617
                                                                 ------------      -----------
   Income (loss) from operations............................          11,534           10,141
Interest expense, net.......................................          25,297           25,183
Nonrecurring interest associated with refinancing...........           -                  655
                                                                 ------------      -----------
   Income (loss) before income taxes and extraordinary charges       (13,763)         (15,697)
Provision (credit) for income taxes.........................          (4,909)          (5,927)
                                                                 ------------      -----------
   Income (loss) before extraordinary charges...............          (8,854)          (9,770)
Extraordinary charges from early extinguishment of debt,                            
     net of income tax benefit of $4,765....................           -                7,415
                                                                 ------------      -----------
   Net income (loss)........................................     $    (8,854)      $  (17,185)
                                                                 ============      ===========

Net income (loss) per share applicable to common shares:
   Basic net income (loss) per share:
      Before extraordinary charges..........................     $     (1.18)      $    (0.96)
                                                                 ============      ===========
      Extraordinary charges from early extinguishment of debt    $      -          $    (0.73)
                                                                 ============      ===========
      Net income (loss).....................................     $     (1.18)      $    (1.69)
                                                                 ============      ===========
   Diluted net income (loss) per share:
      Before extraordinary charges..........................     $     (1.16)      $    (0.96)
                                                                 ============      ===========
      Extraordinary charges from early extinguishment of debt    $      -          $    (0.73)
                                                                 ============      ===========
      Net income (loss).....................................     $     (1.16)       $   (1.69)
                                                                 ============      ===========
Weighted average shares and share equivalents outstanding...       7,601,036       10,171,712
                                                                 ============      ===========
</TABLE>








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


                                       2

                                          
<PAGE>

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

                                                                                  (unaudited)
                                                                    January 31,    October 31,
                                                                       1998           1998
                                                                    -----------    -----------
                               ASSETS
Current assets
<S>                                                                 <C>            <C>      
  Cash and cash equivalents......................................   $  13,588      $   3,434
  Accounts receivable - department stores........................      20,772         36,750
  Other receivables..............................................       6,862         34,513
  Merchandise inventories........................................     279,766        325,756
  Prepaid expenses and other.....................................       1,781          4,919
                                                                    -----------    -----------
    Total current assets.........................................     322,769        405,372
                                                                    -----------    -----------
Fixed assets
  Equipment, fixtures and leasehold improvements.................      95,257        106,869
  Less - accumulated depreciation and amortization...............      28,249         36,399
                                                                    -----------    -----------
    Fixed assets, net............................................      67,008         70,470
                                                                    -----------    -----------
Deferred charges and other assets................................      14,188         14,872
Goodwill.........................................................     104,271        101,451
                                                                    -----------    -----------
    Total assets.................................................   $ 508,236      $ 592,165
                                                                    ===========    ===========

                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
  Notes payable..................................................   $    -        $   150,122
  Accounts payable - trade.......................................      160,434         87,207
  Accrued liabilities:
    Accrued salaries and benefits................................       12,694         11,761
    Accrued miscellaneous taxes..................................        5,014          4,584
    Accrued insurance............................................          215            993
    Accrued interest.............................................        3,902         10,520
    Accrued management transition and consulting.................        1,092            742
    Other........................................................       15,558         15,526
  Income taxes payable...........................................       14,246          -
  Deferred income taxes..........................................        1,219          1,702
                                                                    -----------    -----------
    Total current liabilities....................................      214,374        283,157
Long-term debt...................................................      221,026        225,000
Other non-current liabilities....................................          497          9,073
                                                                    -----------    -----------
    Total liabilities............................................      435,897        517,230
                                                                    -----------    -----------
Stockholders' equity 
 Common Stock, par value $.01 per share; authorized 25,000,000 
   shares; issued and outstanding 9,779,050 and 10,402,653 
   shares, respectively..........................................           98            104
 Additional paid-in capital .....................................       86,135        101,442
 Distributions to investor group in excess of carryover basis....      (24,390)       (24,390)
 Note receivable from stock sale.................................       (1,001)         -
 Retained earnings (deficit).....................................       18,340          1,155
 Foreign currency translation adjustment.........................       (6,843)        (3,376)
                                                                    -----------    -----------
    Total stockholders' equity...................................       72,339         74,935
                                                                    -----------    -----------
    Total liabilities and stockholders' equity...................   $  508,236      $ 592,165
                                                                    ===========    ===========
</TABLE>


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

                                       3

<PAGE>

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

<TABLE>
<CAPTION>


                                                               Distributions      
                                                                    to
                               Common Stock                    investor group      Note                     Foreign 
                           -------------------   Additional         in          Receivable    Retained     Currency        Total
                             Number               Paid-in        excess of         from       Earnings   Translation   Stockholders'
                            of shares   Amount    Capital     carryover basis   Stock Sale    (Deficit)   Adjustment      Equity
                           -----------  ------  -----------   ----------------  -----------  ----------- ------------ --------------
<S>              <C>        <C>         <C>     <C>           <C>               <C>          <C>         <C>           <C>       
Balance, February 1, 1997.. 7,558,838   $  76   $   47,725    $      (24,390)   $ (1,001)    $    3,145  $   (3,050)   $   22,505
 Net income (loss).........     -           -        -                -            -             15,195       -            15,195
 Foreign currency 
  translation adjustment...     -           -        -                -            -              -          (3,793)       (3,793)
 Issuance of Common Stock.. 2,196,971      22       38,102            -            -              -           -            38,124
 Exercise of stock options.    23,241       -          308            -            -              -           -               308
                           ----------   -----   -----------   ----------------  -----------  -----------  -----------  -------------
Balance, January 31, 1998.. 9,779,050      98       86,135           (24,390)     (1,001)        18,340      (6,843)       72,339
 Net income (loss).........     -           -        -                -            -            (17,185)      -           (17,185)
 Foreign currency 
  translation adjustment...     -           -        -                -            -              -           3,467         3,467
 Issuance of Common Stock..   567,310       6       13,753            -            -              -           -            13,759
 Note receivable repayment      -           -        -                -            1,001          -           -             1,001
 Exercise of stock options.    56,293       -        1,554            -            -              -           -             1,554
                           ----------   -----   -----------   ----------------  -----------  -----------  -----------  -------------
Balance, October 31, 1998
 (unaudited).............. 10,402,653   $ 104   $  101,442    $      (24,390)   $  -         $    1,155   $  (3,376)   $   74,935
                           ==========   =====   ===========   ================  ===========  ===========  ===========  =============
</TABLE>
                                                                            










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




                                       4
<PAGE>
                                     

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


<TABLE>
<CAPTION>

                                                                       Thirteen Weeks Ended
                                                                     -------------------------
                                                                     November 1,   October 31,
                                                                       1997           1998
                                                                     -----------   -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                  <C>           <C>        
  Net income (loss)................................................  $   (3,250)   $   (3,851)
  Adjustments to reconcile net income (loss) to net cash used in
    operating activities:
  Depreciation and amortization....................................       3,336         4,216
  Imputed interest on debentures...................................       2,385          -
  Other, net.......................................................        (510)         (398)
  Changes in operating assets and liabilities, net of effects from
   purchase of Diamond Park assets (Note 6):
    Increase in accounts and other receivables.....................      (6,313)      (12,742)
    Increase in merchandise inventories............................     (44,811)      (16,478)
    Increase in prepaid expenses and other.........................         (49)       (1,203)
    Increase in accounts payable and accrued liabilities...........      26,574        16,125
                                                                      ----------   -----------
       NET CASH USED IN OPERATING ACTIVITIES.......................     (22,638)      (14,331)
                                                                      ----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of equipment, fixtures and leasehold improvements......      (6,829)       (4,483)
  Payment for purchase of Diamond Park assets......................     (57,642)        -
  Deferred charges and other, net..................................         (90)       (3,088)
                                                                      ----------   -----------
       NET CASH USED IN INVESTING ACTIVITIES.......................     (64,561)       (7,571)
                                                                      ----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from revolving credit facility..........................     162,478       139,894
  Principal payments on revolving credit facility..................    (103,804)     (118,467)
  Capitalized financing costs......................................      (1,954)          (36)
  Net proceeds from public offering of Common Stock................      38,124         -
  Other, net.......................................................          (1)          775
                                                                      ----------   -----------
       NET CASH PROVIDED FROM FINANCING ACTIVITIES.................      94,843        22,166
                                                                      ----------   -----------
       EFFECT OF EXCHANGE RATE CHANGES ON CASH.....................         237           280
                                                                      ----------   -----------
       INCREASE IN CASH AND CASH EQUIVALENTS.......................       7,881           544
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.....................       3,453         2,890
                                                                      ----------   -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD...........................   $  11,334    $    3,434
                                                                      ==========   ===========
Supplemental disclosure of cash flow information:
  Interest paid....................................................   $   2,462    $    2,989
  Income taxes paid................................................       1,136          (811)
</TABLE>



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



                                       5

<PAGE>



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

<TABLE>
<CAPTION>

                                                                     Thirty-Nine Weeks Ended
                                                                     -------------------------
                                                                     November 1,   October 31,
                                                                        1997          1998
                                                                     -----------   -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                  <C>           <C>        
  Net income (loss)................................................  $   (8,854)   $  (17,185)
  Adjustments to reconcile net income (loss) to net cash used in
    operating activities:
  Depreciation and amortization....................................       9,651        12,575
  Imputed interest on debentures...................................       7,019         2,527
  Write-off of deferred financing costs and debt discount..........       -             3,900
  Redemption premiums..............................................       -             7,102
  Other extraordinary charges from early extinguishment of debt....       -             1,178
  Other, net.......................................................      (1,461)          (83)
  Changes in operating assets and liabilities, net of effects from    
   purchase of Diamond Park assets (Note 6):
    Increase in accounts and other receivables.....................     (24,580)      (43,130)
    Increase in merchandise inventories............................     (46,957)      (43,302)
    Increase in prepaid expenses and other.........................        (724)       (3,079)
    Decrease in accounts payable and accrued liabilities...........     (75,079)      (67,982)
                                                                     -----------   -----------
       NET CASH USED IN OPERATING ACTIVITIES.......................    (140,985)     (147,479)
                                                                     -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of equipment, fixtures and leasehold improvements......     (15,306)      (11,661)
  Payment for purchase of Diamond Park assets......................     (57,642)        -
  Deferred charges and other, net..................................      (1,808)       (3,830)
                                                                     -----------   -----------
       NET CASH USED IN INVESTING ACTIVITIES.......................     (74,756)      (15,491)
                                                                     -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from revolving credit facility..........................     459,587       643,436
  Principal payments on revolving credit facility..................    (289,391)     (493,314)
  Prepayment of notes..............................................       -          (135,000)
  Prepayment of debentures.........................................       -           (89,293)
  Payment of redemption premiums...................................       -            (7,102)
  Net proceeds from public offering of Common Stock................      38,124        13,759
  Proceeds from senior note offering...............................       -           150,000
  Proceeds from senior debenture offering..........................       -            75,000
  Proceeds from repayment of note receivable.......................       -             1,001
  Capitalized financing costs......................................      (1,954)       (6,180)
  Other, net.......................................................         125           378
                                                                     -----------   -----------
       NET CASH PROVIDED FROM FINANCING ACTIVITIES.................     206,491       152,685
                                                                     -----------   -----------
       EFFECT OF EXCHANGE RATE CHANGES ON CASH.....................        (262)          131
                                                                     -----------   -----------
       DECREASE IN CASH AND CASH EQUIVALENTS.......................      (9,512)      (10,154)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.....................      20,846        13,588
                                                                     -----------   -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD...........................  $   11,334    $    3,434
                                                                     ===========   ===========
Supplemental disclosure of cash flow information:
  Interest paid....................................................  $   13,010    $   15,735
  Income taxes paid................................................       9,149           300
</TABLE>

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

                                       6


<PAGE>

                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

     The  accompanying  unaudited  consolidated  financial  statements of Finlay
Enterprises,  Inc.  (the  "Company" or the  "Registrant"),  and its wholly owned
subsidiary,  Finlay Fine Jewelry  Corporation and its wholly owned  subsidiaries
("Finlay  Jewelry"),  have been prepared in accordance  with generally  accepted
accounting principles for interim financial information.  References to "Finlay"
mean collectively, the Company and Finlay Jewelry. In the opinion of management,
the  accompanying   unaudited  consolidated  financial  statements  contain  all
adjustments necessary to present fairly the financial position of the Company as
of  October  31,  1998,  and the  results of  operations  and cash flows for the
thirteen  weeks and  thirty-nine  weeks  ended  November 1, 1997 and October 31,
1998. Due to the seasonal  nature of the business,  results for interim  periods
are not  indicative  of annual  results.  The unaudited  consolidated  financial
statements  have been  prepared on a basis  consistent  with that of the audited
consolidated  financial  statements  as of January 31,  1998  referred to below.
Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed  or omitted  pursuant to the rules and  regulations  of the
Securities and Exchange Commission (the "Commission").

     These consolidated  financial statements should be read in conjunction with
the audited consolidated  financial statements and notes thereto included in the
Company's  annual report on Form 10-K for the fiscal year ended January 31, 1998
("Form 10-K") previously filed with the Commission.

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

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

                                                Thirteen Weeks Ended                          Thirty-Nine Weeks Ended
                                    -------------------------------------------    ------------------------------------------------
                                      November 1, 1997       October 31, 1998         November 1, 1997        October 31, 1998
                                    --------------------  ---------------------    ----------------------   -----------------------
Weighted average shares
<S>                                  <C>        <C>        <C>         <C>          <C>         <C>          <C>         <C>      
 outstanding............             7,720,663  $ (0.42)   10,402,653  $ (0.37)     7,521,391   $ (1.18)     10,171,712  $  (1.69)
Dilutive stock options                  85,951     -         -            -            79,645     0.02        -              -
                                    ----------- --------  ------------ --------    -----------  ---------   ------------ ----------
Weighted average shares
 and share equivalents..             7,806,614  $ (0.42)   10,402,653  $ (0.37)     7,601,036   $ (1.16)     10,171,712  $ (1.69)
                                    =========== ========  ============ ========    ===========  =========   ============ ==========
</TABLE>


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


                                       7

<PAGE>

                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION (continued)

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

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

                                                     Thirteen Weeks Ended         Thirty-Nine Weeks Ended
                                                 ----------------------------    --------------------------
                                                 November 1,      October 31,     November 1,   October 31,
                                                    1997             1998            1997          1998
                                                 ------------    ------------    -----------    -----------
<S>                                              <C>             <C>             <C>            <C>        
Net income (loss).............................   $   (3,250)     $   (3,851)     $   (8,854)    $  (17,185)
Foreign currency translation adjustment, net..        1,718           1,850          (1,015)         2,063
                                                 ------------    ------------    -----------    -----------
Comprehensive income (loss)...................   $   (1,532)     $   (2,001)     $   (9,869)    $  (15,122)
                                                 ============    ============    ===========    ===========
</TABLE>

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative  Instruments and Hedging  Activities".  The Statement
establishes  accounting  and reporting  standards  requiring that all derivative
instruments  be recorded in the  balance  sheet as either an asset or  liability
measured at its fair value and that  changes in the  derivative's  fair value be
recognized currently in earnings.  At October 31, 1998, the Company did not have
any open positions in futures contracts for gold or other outstanding derivative
instruments. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999 and is not expected to have a material  impact on the  Company's  financial
position or results of operations.

NOTE 2 - DESCRIPTION OF BUSINESS

     The Company conducts business through its wholly owned  subsidiary,  Finlay
Jewelry.  Finlay is a retailer of fine jewelry  products and primarily  operates
leased fine jewelry  department  stores throughout the United States and France.
Over the past three fiscal years, the fourth quarter accounted for an average of
42%  of  Finlay's  sales  due  to  the  seasonality  of  the  retail   industry.
Approximately 72% of Finlay's domestic sales in 1997 were from operations in May
Department  Stores  ("May") and  departments  operated in store  groups owned by
Federated Departments Stores, of which 49% represents Finlay's domestic sales in
May.








                                       8
<PAGE>

                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - MERCHANDISE INVENTORIES

    Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
                                                                                 (unaudited)
                                                                 January 31,     October 31,
                                                                    1998            1998
                                                                 -----------    ------------
                                                                        (in thousands)
  Jewelry goods - rings, watches and other fine jewelry
<S>                                                              <C>            <C>        
     (specific identification basis).......................      $  286,289     $   331,756
  Less:  Excess of specific identification cost over LIFO
      inventory value......................................           6,523           6,000
                                                                 -----------    ------------
                                                                 $  279,766     $   325,756
                                                                 ===========    ============
</TABLE>

     The LIFO method had the effect of  decreasing  the loss before income taxes
for the thirteen  weeks ended  November 1, 1997 and October 31, 1998 by $655,000
and  $177,000,  respectively.  The effect of  applying  the LIFO  method for the
thirty-nine  weeks  ended  November 1, 1997 and October 31, 1998 was to decrease
the loss before  income taxes by $655,000  and  $523,000,  respectively.  Finlay
determines its LIFO inventory value by utilizing selected producer price indices
published for jewelry and watches by the Bureau of Labor Statistics.

     Approximately $219,822,000 and $315,730,000 at January 31, 1998 and October
31, 1998, respectively, of merchandise received on consignment has been excluded
from  Merchandise  inventories and Accounts  payable-trade  in the  accompanying
Consolidated Balance Sheets.

     Finlay  Jewelry  is  party  to a  gold  consignment  agreement  (the  "Gold
Consignment   Agreement"),   which  expires  on  December  31,  2001.  The  Gold
Consignment Agreement enables Finlay Jewelry to receive merchandise by providing
gold, or otherwise  making  payment,  to certain  vendors who supply Finlay with
merchandise on consignment . While the merchandise  involved remains  consigned,
title to the gold content of the  merchandise  transfers from the vendors to the
gold  consignor.  Finlay  Jewelry can obtain,  pursuant to the Gold  Consignment
Agreement,  up to the lesser of (i) 85,000 fine troy ounces or (ii)  $32,000,000
worth of gold,  subject  to a  formula  as  prescribed  by the Gold  Consignment
Agreement.  At October 31, 1998, amounts  outstanding under the Gold Consignment
Agreement  totaled  64,313  fine  troy  ounces,  valued at  approximately  $18.8
million. For financial statement purposes, the consigned gold is not included in
Merchandise  inventories  on the  Company's  Consolidated  Balance  Sheets  and,
therefore, no related liability has been recorded.

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


                                       9

<PAGE>

                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - LEASE AGREEMENTS

     Finlay conducts  substantially all of its operations as leased  departments
in department  stores.  All of these leases, as well as rentals for office space
and equipment,  are accounted for as operating leases. The department  operating
leases  expire on various  dates through 2003 and the office space and equipment
operating leases expire on various dates through 2008. All references  herein to
leased departments refer to departments  operated pursuant to license agreements
or other arrangements with host department stores.

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

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

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

                                       Thirteen Weeks Ended         Thirty-Nine Weeks Ended
                                     --------------------------    ---------------------------
                                     November 1,    October 31,     November 1,    October 31,
                                        1997           1998            1997           1998
                                     -----------    -----------    ------------    -----------
<S>                                  <C>            <C>            <C>             <C>       
  Minimum fees...................    $    1,935     $    5,911     $     5,745     $   15,567
  Contingent fees................        22,201         21,248          63,906         66,499
                                     -----------    -----------    ------------    -----------
    Total........................    $   24,136     $   27,159     $    69,651     $   82,066
                                     ===========    ===========    ============    ===========
</TABLE>

NOTE 5 - STOCKHOLDERS' EQUITY

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

     On March 6, 1997,  the Board of Directors  of the Company  adopted the 1997
Long Term Incentive Plan (the "1997 Plan"),  which was approved by the Company's
stockholders in June 1997. The 1997 Plan,  which is similar to the 1993 Plan, is
intended as a successor  to the 1993 Plan and provides for the grant of the same
types of awards as are  currently  available  under the 1993 Plan.  The Board of
Directors  adopted an  amendment  to the 1997 Plan,  which was  approved  by the
Company's  stockholders  in June 1998,  pursuant to which options  available for
issuance under the 1997 Plan were increased to 850,000. Of the 850,000 shares of
the Company's Common Stock that have been reserved for issuance  pursuant to the
1997 Plan, a total of 481,915  shares,  as of October 31,  1998,  are subject to
options granted to certain senior management,  key employees and directors.  The
exercise  prices of such  options  range from  $13.875  per share to $24.313 per
share.


                                       10
<PAGE>

                               FINLAY ENTERPRISES,
                INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - STOCKHOLDERS' EQUITY (continued)

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

     On December 1, 1998, the  Compensation  Committee of the Board of Directors
of the Company  approved the repricing of 292,103 of the  Company's  outstanding
stock  options at an  exercise  price of $8.25,  which  excludes  stock  options
previously  granted to certain  senior  executives  and  members of the Board of
Directors.  Shares acquired upon the excercise of such repriced  options may not
be sold for a period of one year. On December 1, 1998, 60,000 stock options were
granted to three senior  executives at an exercise price of $8.25.  Such options
vest over a period of three years, in the second and third years.

NOTE 6 - OTHER TRANSACTIONS

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

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

     On May 26, 1998, the net proceeds to the Company from the Equity  Offering,
the  sale of the  Senior  Debentures,  the  Note  Receivable  Repayment  and the
repayment of approximately  $1.0 million of an intercompany  liability by Finlay
Jewelry (the  "Intercompany  Repayment")  were used to redeem the  Company's Old
Debentures, including associated premiums. Also, on May 26, 1998, Finlay Jewelry
used the net  proceeds  from  the sale of the  Senior  Notes  to  redeem  Finlay
Jewelry's 10-5/8% Senior Notes due 2003 (the "Old Notes"),  including associated
premiums,  and to make  the  Intercompany  Repayment.  The  above  transactions,
excluding the Equity Offering, are referred to herein as the "Refinancing".  The
Company  recorded,  in the second  quarter,  a pre-tax  extraordinary  charge of
approximately $12.2 million,  including $7.1 million for redemption premiums and
approximately  $3.9  million  to write  off  deferred  


                                      11
<PAGE>


                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - OTHER TRANSACTIONS (continued)

financing costs and debt discount associated with the Old Debentures and the Old
Notes.  As a  result  of  certain  call  requirements  associated  with  the Old
Debentures  and the Old Notes,  the debt could not be repaid until May 26, 1998.
Thus,  for  twenty-five  days in the  second  quarter,  Finlay was  required  to
maintain  as  outstanding  both the new debt issued on April 24, 1998 as well as
the old debt retired on May 26, 1998. The net effect of carrying the new and old
debt,  offset by reduced  interest  expense on the  Company's  revolving  credit
facility  and  interest  income on excess  cash  balances,  was an  increase  to
interest expense of $0.7 million.

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

NOTE 7 - UNAUDITED PRO FORMA FINANCIAL INFORMATION

     The following  table  presents the  calculation  of pro forma  earnings per
share data for the  thirty-nine  weeks  ended  October 31,  1998.  The pro forma
consolidated  financial  information  excludes the extraordinary charge of $12.2
million, on a pre-tax basis,  including $7.1 million for redemption premiums and
approximately  $3.9 million to write off deferred  financing  and debt  discount
costs  associated  with the Old  Debentures  and the Old  Notes.  The income tax
benefit on the extraordinary charges totaled $4.8 million. In addition,  the pro
forma  consolidated  financial  information  excludes the nonrecurring  interest
associated with refinancing of $ 0.7 million, on a pre-tax basis, as a result of
certain call requirements on the debt retired.
 
In thousands, except share and
per share amounts

<TABLE>
<CAPTION>
                                                                  Thirty-Nine
                                                                  Weeks Ended
                                                                   October 31,
                                                                      1998
                                                                  ------------
<S>                                                               <C>         
Net income (loss) per Consolidated Statements of Operations..     $   (17,185)
Add:  Extraordinary charges from early extinguishment of
      debt, net of income tax benefit........................           7,415
Add:  Nonrecurring interest associated with refinancing,
      net of income tax benefit..............................             400
                                                                  -------------
Pro Forma net income (loss)..................................     $     (9,370)
                                                                  =============

Pro Forma net income (loss) per share applicable to
   common shares:
   Basic net income (loss) per share.........................     $      (0.92)
                                                                  =============
   Diluted net income (loss) per share.......................     $      (0.92)
                                                                  =============
Weighted average shares and share equivalents outstanding....       10,171,712
                                                                  =============
</TABLE>



                                       12
<PAGE>

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

Results of Operations

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

Statements of Operations Data
(unaudited)
<TABLE>
<CAPTION>

                                                        Thirteen Weeks Ended        Thirty-Nine Weeks Ended
                                                      -------------------------    -------------------------
                                                      November 1,   October 31,    November 1,   October 31,
                                                         1997           1998          1997          1998
                                                      -----------   -----------    -----------   -----------
<S>                                                      <C>           <C>            <C>          <C>   
Sales............................................        100.0%        100.0%         100.0%       100.0%
Cost of sales....................................         48.2          49.0           48.6         48.9
                                                      -----------   -----------    -----------   -----------
   Gross margin..................................         51.8          51.0           51.4         51.1
Selling, general and administrative expenses.....         47.1          47.6           46.7         46.8
Depreciation and amortization....................          2.0           2.3            2.0          2.3
                                                      -----------   -----------    -----------   -----------
   Income (loss) from operations.................          2.7           1.1            2.7          2.0
Interest expense, net............................          6.2           4.9            5.9          5.0
Nonrecurring interest associated with refinancing          -              -             -            0.1
                                                      -----------   -----------    -----------   -----------
   Income (loss) before income taxes and
     extraordinary charges.......................         (3.5)         (3.8)          (3.2)        (3.1)
Provision (credit) for income taxes..............         (1.3)         (1.5)          (1.1)        (1.2)
                                                      -----------   -----------    -----------   -----------
   Income (loss) before extraordinary charges....         (2.2)         (2.3)          (2.1)        (1.9)
Extraordinary charges from early extinguishment
     of debt, net of income tax benefit..........          -              -             -            1.5
                                                      -----------   -----------    -----------   -----------
   Net income (loss).............................         (2.2)%        (2.3)%         (2.1)%       (3.4)%
                                                      ===========   ===========    ===========   ===========
</TABLE>

Thirteen  Weeks Ended  October  31,  1998  Compared  with  Thirteen  Weeks Ended
November 1, 1997

     Sales.  Sales for the thirteen weeks ended October 31, 1998 increased $17.1
million, or 11.5%, over the comparable period in 1997.  Consolidated  comparable
department  sales  (departments  open  for the  same  months  during  comparable
periods) increased 0.9% and domestic comparable department sales increased 1.8%.
During the third  quarter  of 1998,  Sonab,  the  Company's  French  subsidiary,
continued  to  experience  lower  sales  trends  due  to the  transition  from a
promotional pricing strategy to an everyday low price strategy.  This change was
made as a result of Sonab reassessing its pricing policy following certain local
French  court  decisions  and the  adverse  impact of such change is expected to
continue  at  least  until  mid-1999.  Sales  from  the  operation  of  net  new
departments   (departments   not  included  in  comparable   department   sales)
contributed $15.8 million,  which included $14.4 million from the former Diamond
Park  departments.  During the thirteen  weeks ended  October 31,  1998,  Finlay
opened nine departments and closed eight departments.  The openings and closings
were all within  existing  store  groups.  As a result of Dillard's  purchase of
Mercantile  Stores in August 1998 and the subsequent  sale of 31 of these stores
to other Finlay host department stores,  department  openings in such stores are
considered  to be  replacement  stores and are  excluded  from the  openings and
closings above.

     Gross  margin.  Gross  margin for the  period  increased  by $7.6  million,
primarily as a result of the sales  increase.  As a percentage  of sales,  gross
margin  decreased by 0.8%,  which is primarily  attributed 


                                       13

<PAGE>


to (i) a $0.5  million  lower LIFO  benefit in the 1998  period  versus the 1997
period,  (ii)  lower  gross  margins  experienced  by the  former  Diamond  Park
departments,  particularly  as the  merchandise  acquired as part of the Diamond
Park Acquisition continues to be sold and (iii) management's efforts to increase
market penetration and market share through its competitive pricing strategy.

     Selling,  general  and  administrative   expenses.   Selling,  general  and
administrative expenses ("SG&A") increased $8.8 million, or 12.6%, due primarily
to payroll  expense and lease fees associated with the increase in the Company's
sales.  In  addition,  the  favorable  leveraging  of SG&A that the  Company has
experienced  in past  quarters  has been  adversely  impacted by the slowdown of
sales,  particularly in Europe, and expenses relating to the Company's Year 2000
remediation  project,  which totaled  approximately $0.9 million. As a result of
these factors, SG&A as a percentage of sales increased by 0.5%.

     Depreciation and amortization.  Depreciation and amortization  increased by
$0.9 million, reflecting an increase in capital expenditures for the most recent
twelve months,  depreciation on Finlay's new central  distribution  facility and
amortization  related to the Diamond Park  Acquisition,  offset by the effect of
certain assets becoming fully depreciated.  The increase in fixed assets was due
to  the  addition  of  new  departments,   including  the  former  Diamond  Park
departments, and the renovation of existing departments.

     Interest   expense,   net.  Interest  expense  decreased  by  $1.0  million
reflecting  a lower  weighted  average  interest  rate (8.1% for the 1998 period
compared  to 9.8% for the  comparable  period  in 1997)  relating  to the  lower
interest rates on the Senior  Debentures and the Senior Notes as compared to the
Old  Debentures  and the Old Notes  offset by an increase in average  borrowings
($375.0  million  for the  period in 1998  compared  to $355.8  million  for the
comparable  period in 1997).  The increase in average  borrowings is primarily a
result  of  additional  indebtedness  outstanding  under  the  Revolving  Credit
Agreement.
 
     Provision  (credit) for income taxes. The income tax provision for the 1998
and 1997 periods reflects effective tax rates of 40.5% and 41.5%, respectively.

     Net income  (loss).  The net loss of $3.9  million  for the 1998 period was
$0.6 million higher than the net loss of $3.3 million for the comparable  period
as a result of the factors discussed above.

Thirty-Nine  Weeks Ended October 31, 1998 Compared with Thirty-Nine  Weeks Ended
November 1, 1997

     Sales.  Sales for the  thirty-nine  weeks ended October 31, 1998  increased
$72.8  million,  or 16.9%,  over the  comparable  period  in 1997.  Consolidated
comparable  department sales increased 2.3% and domestic  comparable  department
sales  increased  3.4%.   Management  attributes  this  increase  in  comparable
department sales to the following Company initiatives:  (i) emphasizing its "Key
Item"  and  "Best  Value"  merchandising  programs,  which  provide  a  targeted
assortment of items at competitive  prices; (ii) increasing focus on holiday and
event-driven  promotions  as  well  as  host  store  marketing  programs;  (iii)
positioning  the  Company's  departments  as a  "destination  location" for fine
jewelry,  and (iv) continuing project PRISM (Promptly Reduce  Inefficiencies and
Sales Multiply), a program designed to allow Finlay's sales associates more time
for  customer  sales and  service.  During  the  third  quarter  of 1998,  Sonab
continued  to  experience  lower  sales  trends  due  to the  transition  from a
promotional pricing strategy to an everyday low price strategy.  This change was
made as a result of Sonab reassessing its pricing policy following certain local
French  court  decisions  and the  adverse  impact of such change is 

                                       14

<PAGE>

expected to continue at least until  mid-1999.  Sales from the  operation of net
new departments contributed $62.9 million, which included $60.4 million from the
former Diamond Park departments.  During the thirty-nine weeks ended October 31,
1998, Finlay opened 31 departments and closed 35 departments.  The openings were
all within existing store groups,  with the exception of two departments  opened
in new store  groups in the  United  Kingdom.  The  closings  included  all five
departments  in  Dillard's  and all seven  departments  in  Debenhams,  with the
remaining 23 departments  closed within  existing  store groups.  As a result of
Dillard's  purchase of Mercantile  Stores in August 1998 and the subsequent sale
of 31 of these  stores  to  other  Finlay  host  department  stores,  department
openings in such stores are considered to be replacement stores and are excluded
from the openings and closings above.

     Gross  margin.  Gross  margin for the period  increased  by $35.7  million,
primarily as a result of the sales  increase.  As a percentage  of sales,  gross
margin  decreased  by 0.3%,  which is  primarily  attributed  to (i) lower gross
margins experienced by the former Diamond Park departments,  particularly as the
merchandise  acquired as part of the Diamond  Park  Acquisition  continues to be
sold and (ii)  management's  efforts to increase  market  penetration and market
share through its "Key Item" and "Best Value"  programs,  which  produce  higher
sales  volume  and a  slightly  lower  gross  margin,  on  average,  than  other
merchandise.

     Selling, general and administrative expenses. SG&A increased $34.2 million,
or 17.0%,  due primarily to payroll  expense and lease fees  associated with the
increase in the Company's  sales. In addition,  the Company  experienced  higher
than  anticipated  expenses  relating  to  the  central  distribution  facility,
increased medical expenses  associated with the  implementation of a new medical
benefit  plan and  expenses  relating  to the  Company's  Year 2000  remediation
project,  which totaled approximately $0.9 million,  offset by lower advertising
expenditures as a percentage of sales.  As a result of these factors,  SG&A as a
percentage of sales increased by 0.1%.

     Depreciation and amortization.  Depreciation and amortization  increased by
$2.9 million, reflecting an increase in capital expenditures for the most recent
twelve months,  depreciation on Finlay's new central  distribution  facility and
amortization  related to the Diamond Park  Acquisition,  offset by the effect of
certain assets becoming fully depreciated.  The increase in fixed assets was due
to  the  addition  of  new  departments,   including  the  former  Diamond  Park
departments and the renovation of existing departments.

     Interest   expense,   net.  Interest  expense  decreased  by  $0.1  million
reflecting  a lower  weighted  average  interest  rate (8.8% for the 1998 period
compared  to 10.0%  for the  comparable  period in 1997)  relating  to the lower
interest rates on the Senior  Debentures and the Senior Notes as compared to the
Old  Debentures  and the Old Notes  offset by an increase in average  borrowings
($360.7  million  for the  period in 1998  compared  to $325.9  million  for the
comparable period in 1997). The increase in average borrowings is a result of an
increase in the  outstanding  balance of the Old Debentures due to the accretion
of interest and additional  indebtedness  outstanding under the Revolving Credit
Agreement (adjusted to exclude the timing impact of the call requirements on the
Old Debentures and the Old Notes, discussed below).

     Nonrecurring  interest associated with refinancing.  As a result of certain
call requirements associated with the Old Debentures and the Old Notes, the debt
could not be repaid until May 26, 1998. Thus, for twenty-five days in the second
quarter, Finlay was required to maintain as outstanding both the new debt issued
on April  24,  1998 as well as the old debt  retired  on May 26,  1998.  The net
effect of carrying the new and old debt,  offset by reduced  interest expense on
the  Company's  revolving  credit  


                                       15

<PAGE>

facility  and  interest  income on excess  cash  balances,  was an  increase  to
interest expense of $0.7 million, on a pre-tax basis.

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

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

     Net income  (loss).  The net loss of $17.2  million for the 1998 period was
$8.3 million higher than the net loss of $8.9 million for the comparable  period
as a result of the factors discussed above.

Liquidity and Capital Resources

     Finlay's  primary capital  requirements are for funding working capital for
new departments and for working capital growth of existing departments and, to a
lesser extent,  capital  expenditures for opening new departments and renovating
existing departments and information technology investments. For the thirty-nine
weeks ended November 1, 1997 and October 31, 1998, capital  expenditures totaled
$15.3 million and $11.7 million,  respectively.  For 1997, capital  expenditures
totaled  $19.3  million,  which  included  construction  costs  related  to  the
Company's  central  distribution  facility,  and in 1996 totaled $17.5  million.
Total  capital  expenditures  for 1998 are estimated to be  approximately  $15.0
million. Although capital expenditures are limited by the terms of the Revolving
Credit  Agreement,  to date this  limitation  has not precluded the Company from
satisfying its capital expenditure requirements.

     Finlay's  operations  substantially  preclude  customer  receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment.  Accordingly,  management  believes that relatively
modest  levels of working  capital  are  required  in  comparison  to many other
retailers.  The Company's  working capital balance was $122.2 million at October
31, 1998,  an increase of $13.8  million  from  January 31,  1998.  The increase
resulted  primarily from the recording of an income tax  receivable  relating to
the  prepayment of accreted  interest on the Company's Old  Debentures,  the net
proceeds  to the  Company  from the Equity  Offering  and the sale of the Senior
Debentures and the Senior Notes, partially offset by the use of such proceeds to
prepay the Old Debentures and the Old Notes,  the impact of the interim net loss
exclusive of depreciation and amortization  and capital  expenditures.  Based on
the seasonal  nature of Finlay's  business,  working  capital  requirements  and
therefore  borrowings  under the Revolving  Credit  Agreement can be expected to
increase on an interim basis during the first three quarters of any given fiscal
year. See "-Seasonality".

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


                                       16

<PAGE>


(i) the Index  Rate  plus a margin  ranging  from zero to 1.0% or (ii)  adjusted
LIBOR plus a margin  ranging  from 1.0% to 2.0%,  in each case  depending on the
financial performance of the Company.

     In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit  balance  under the Revolving  Credit  Agreement to
$50.0  million  or less  and  $20.0  million  or  less,  respectively,  for a 30
consecutive  day period (the "Balance  Reduction  Requirement").  The indentures
relating  to the Senior  Debentures  and the Senior  Notes do not have a balance
reduction  requirement.  Borrowings  under the  Revolving  Credit  Agreement  at
October 31, 1998 were $150.1 million,  compared to a zero balance at January 31,
1998 and $170.2  million at November 1, 1997.  The average  amounts  outstanding
under the Revolving  Credit  Agreement  were $110.2  million and $131.4  million
(adjusted  for the  impact of the  temporary  paydown  of the  revolving  credit
facility due to certain call requirements associated with the Old Debentures and
the Old Notes) for the thirty-nine  weeks ended November 1, 1997 and October 31,
1998,  respectively.  The maximum amount  outstanding for the thirty-nine  weeks
ended October 31, 1998 was $162.9 million.

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

     Finlay's  long-term needs for external financing will depend on its rate of
growth,  the level of  internally  generated  funds and the  ability to continue
obtaining  substantial amounts of merchandise on advantageous  terms,  including
consignment  arrangements  with its  vendors.  For 1997,  Finlay  had an average
balance of  consignment  merchandise  of $216.5 million from over 200 vendors as
compared  to an average  balance of $201.8  million in 1996.  As of October  31,
1998,  $315.7  million of  consignment  merchandise  was on hand as  compared to
$219.8 million at January 31, 1998 and $237.7 million at November 1, 1997.

     A substantial  amount of Finlay's operating cash flow has been used or will
be required to pay,  directly or  indirectly,  interest  with respect to the Old
Notes and  amounts  due under the  Revolving  Credit  Agreement,  including  the
payments required pursuant to the Balance Reduction Requirement and, as a result
of the completion of the Equity Offering and Refinancing,  the Senior Debentures
and the Senior Notes. As of October 31, 1998,  Finlay's  outstanding  borrowings
were $375.1  million,  which  included a $75.0 million  balance under the Senior
Debentures, a $150.0 million balance under the Senior Notes and a $150.1 million
balance  under the  Revolving  Credit  Agreement.  On May 1, 1998,  the  Company
prepaid in accordance with the Old Debenture Indenture, all of the $39.0 million
of  accreted  interest  on the Old  Debentures  as of  such  date.  The  Company
exercised its option to prepay all such accreted interest to reduce  outstanding
indebtedness and to take advantage of the resulting tax benefits relating to the
deductibility  of such  prepayment  in 1998. In addition,  on May 26, 1998,  the
Company  redeemed  the  outstanding  principal  amounts,   including  associated
premiums,  of the Old Debentures and the Old Notes. Finlay funded the prepayment
and the redemptions  using the proceeds from the sale of the Senior  Debentures,
the  Equity  Offering  and the sale of the  Senior  Notes,  together  with other
available funds. In connection with the redemption of the Old Debentures and the
Old Notes, the Company recorded,  in the second quarter, a pre-tax  nonrecurring
charge of  approximately  $12.2  million,  including $7.1 million for 


                                       17

<PAGE>

redemption  premiums  and  approximately  $3.9  million  to write  off  deferred
financing and debt discount costs associated with the Old Debentures and the Old
Notes.

     Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
December 31, 2001.  The Gold  Consignment  Agreement  enables  Finlay Jewelry to
receive  merchandise by providing gold, or otherwise making payment,  to certain
vendors.  Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement,
up to the lesser of (i) 85,000 fine troy ounces or (ii) $32.0  million  worth of
gold, subject to a formula as prescribed by the Gold Consignment  Agreement.  At
October 31,  1998,  amounts  outstanding  under the Gold  Consignment  Agreement
totaled 64,313 fine troy ounces,  valued at  approximately  $18.8  million.  The
average  amount  outstanding  under  the Gold  Consignment  Agreement  was $14.3
million in 1997.

     "Year 2000"  computer  software and hardware  failures of internal  systems
and/or  third party  systems  could have a  significant,  adverse  impact on all
aspects of the Company's  operations.  The Company recognizes the need to ensure
that its operations and its relationship with its host stores, vendors and other
third parties will not be adversely affected. Consequently, a comprehensive plan
is being  executed to ensure that all systems  critical to the  operation of the
Company are Year 2000 compliant.

     The Year 2000 plan incorporates  various  information  technology  systems,
including the Company's core business systems, end user systems, non-information
technology  systems and significant third party systems.  The plan is structured
into five primary phases: identification,  assessment,  remediation, testing and
implementation.  In addition, management recognizes the importance of developing
a contingency plan in the event of a Year 2000 failure, the development of which
is in progress.  The Company has completed  the  identification  and  assessment
phases of all critical  components and is in the remediation  phase. The Company
expects that all internal  systems,  including  its  non-information  technology
systems,  will be Year 2000  compliant by August 1999.  In addition,  Finlay has
communicated,  and will  continue to  communicate,  with all of its host stores,
vendors and other third  parties to obtain Year 2000  compliance  certification.
Progress  reports on the Year 2000  project are  presented  regularly  to senior
management and the Company's Board of Directors.

     Finlay is using,  and will continue to use, a  combination  of internal and
external  resources.  The Company has estimated that the direct costs related to
its Year 2000 efforts total  approximately $4.0 million,  of which approximately
$0.9 million has been recorded in the third quarter. Finlay expects to incur the
balance of these costs  during  1998 and  through  1999 and expects to fund such
costs through operating cash flows.

     The  consequences  of a disruption  of the  Company's  operations,  whether
caused by the  Company's  internal  systems  or those of any  significant  third
party, could have a material adverse effect on the Company's  financial position
or results of operations.  The likely worst case scenario may be an inability to
distribute  merchandise to its departments and to process its daily business for
some period of time.  The lost  revenues,  if any,  resulting  from a worst case
scenario  would depend on the time period in which the failure goes  uncorrected
and the  difficulty to remediate such failure.  There can be no assurances  that
Finlay will not  experience  significant  cost  overruns or delays in addressing
this issue.  
 
     The  Company  is  in  the  process  of  implementing   several  information
technology   initiatives,   including  the  design  and  development  of  a  new
merchandising  system  and the  upgrade of  point-of-sale  systems  and  related
hardware in the majority of Finlay's  departments.  These projects will serve to
support  future growth of the Company as well as provide  improved  analysis and
reporting capabilities.  The cost associated with these projects is estimated to
be $11.0 million for software and implementation costs, to



                                       18
<PAGE>

be included in Deferred charges and other assets, and approximately $3.0 million
for  hardware  and related  equipment,  to be  included  as a  component  of the
Company's capital expenditures and reflected in Fixed assets.

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

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

     Finlay believes that, based upon current  operations,  anticipated  growth,
and availability under the Revolving Credit Agreement,  Finlay Jewelry will, for
the foreseeable future, be able to meet its debt service and anticipated working
capital  obligations,  and to make  distributions  to the Company  sufficient to
permit the Company to meet its debt service obligations and to pay certain other
expenses  as they come due.  No  assurances,  however,  can be given that Finlay
Jewelry's  current  level of operating  results will continue or improve or that
Finlay Jewelry's income from operations will continue to be sufficient to permit
Finlay Jewelry and the Company to meet their debt service and other obligations.
Currently,  Finlay Jewelry's  principal financing  arrangements  restrict annual
distributions  from Finlay  Jewelry to the Company to 0.25% of Finlay  Jewelry's
net sales for the  preceding  fiscal  year and also allow  distributions  to the
Company to enable it to make  interest  payments on the Senior  Debentures.  The
amounts  required to satisfy the  aggregate  of  Finlay's  interest  expense and
required  amortization  payments totaled $13.0 million and $15.7 million for the
thirty-nine weeks ended November 1, 1997 and October 31, 1998, respectively.

Seasonality
 
     Finlay's  business is highly  seasonal,  with a significant  portion of its
sales and income from  operations  generated  during the fourth  quarter of each
year, which includes the year-end holiday season.  The fourth quarter  accounted
for an average of 42% of Finlay's  sales and 82% of its income  from  operations
(excluding  nonrecurring  charges) for 1995, 1996 and 1997. Finlay has typically
experienced  net losses in the first three  quarters of its fiscal year.  During
these periods, working capital requirements have been funded by borrowings under
the Revolving Credit Agreement. Accordingly, the results for


                                       19

<PAGE>

any of the first three quarters of any given fiscal year, taken  individually or
in the aggregate, are not indicative of annual results.

Inflation

     The effect of  inflation  on Finlay's  results of  operations  has not been
material in the periods discussed.
                               
Special Note Regarding Forward-Looking Statements

     This Quarterly  Report on Form 10-Q includes  "forward-looking  statements"
within the meaning of Section 27A of the  Securities Act of 1993 and Section 21E
of the  Securities  Exchange Act of 1934 (the  "Exchange  Act").  All statements
other  than   statements  of   historical   information   provided   herein  are
forward-looking  statements and may contain information about financial results,
economic  conditions,  trends  and  known  uncertainties.   The  forward-looking
statements  contained herein are subject to certain risks and uncertainties that
could cause  actual  results to differ  materially  from those  reflected in the
forward-looking statements.  Factors that might cause such a difference include,
but are not limited to,  those  discussed  under  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operations', as well as trends in
the general  economy in the United States and France,  competition in the retail
jewelry business,  the seasonality of the retail jewelry business, the Company's
ability to increase comparable department sales and to open new departments, the
Company's  estimate of the cost to address Year 2000  compliance  issues and the
impact  on the  Company's  operations  of a Year  2000  failure,  the  Company's
dependence on certain host store relationships due to the concentration of sales
generated  by such host  stores,  the  availability  to the Company of alternate
sources of merchandise  supply in the case of an abrupt loss of any  significant
supplier,  the Company's  ability to continue to obtain  substantial  amounts of
merchandise  on  consignment,  the Company's  dependence  on key  officers,  the
Company's ability to integrate future  acquisitions into its existing  business,
the  Company's  high degree of leverage and the  availability  to the Company of
financing and credit on favorable  terms and changes in regulatory  requirements
which are applicable to the Company's business.

     Readers  are  cautioned  not to rely on these  forward-looking  statements,
which reflect management's analysis,  judgment, belief or expectation only as of
the date hereof.  The Company  undertakes no obligation to publicly revise these
forward-looking  statements to reflect events or circumstances  that arise after
the date hereof. In addition to the disclosure contained herein,  readers should
carefully  review any disclosure of risks and  uncertainties  contained in other
documents the Company  files or has filed from time to time with the  Commission
pursuant to the Exchange Act.












                                       20
<PAGE>


PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

     A.   Exhibits

        2      Not applicable.

        3      Not applicable.

        4      Not applicable.

       10      Not applicable.

       11      Not applicable.

       15      Not applicable.

       18      Not applicable.

       19      Not applicable.

       22      Not applicable.

       23      Not applicable.

       24      Not applicable.

       27      Financial Data Schedule.

       99      Not applicable.

     B.  Reports on Form 8-K

         None 



















                                       21
<PAGE>



                                   SIGNATURES


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



 
Date: December 11, 1998               FINLAY ENTERPRISES, INC.

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

















                                       22