`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

               For the Quarterly Period Ended July 30, 2005

                                       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
                             ---                     ---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

                        Yes   X                   No
                             ---                     ---

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

                        Yes                       No  X
                             ---                     ---

As of September 2, 2005, there were 9,006,710 shares of common stock, par value
$.01 per share, of the registrant outstanding.





                            FINLAY ENTERPRISES, INC.

                                    FORM 10-Q

                      QUARTERLY PERIOD ENDED JULY 30, 2005

                                      INDEX

<TABLE>


                                                                                              PAGE(S)
                                                                                              -------

PART I - FINANCIAL INFORMATION

    Item 1.  Consolidated Financial Statements (Unaudited)

             Consolidated Statements of Operations for the thirteen weeks and
             twenty-six weeks ended July 30, 2005 and July 31, 2004..............................1

             Consolidated Balance Sheets as of July 30, 2005 and
             January 29, 2005....................................................................3

             Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
             Income (Loss) for the year ended January 29, 2005 and the twenty-six weeks
             ended July 30, 2005.................................................................4

             Consolidated Statements of Cash Flows for the thirteen weeks and
             twenty-six weeks ended July 30, 2005 and July 31, 2004..............................5

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

    Item 2.  Management's Discussion and Analysis of
             Financial Condition and Results of Operations......................................21

    Item 3.  Quantitative and Qualitative Disclosures about Market Risk.........................44

    Item 4.  Controls and Procedures............................................................44

PART II - OTHER INFORMATION

    Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds........................46

    Item 4.  Submission of Matters to a Vote of Security Holders................................46

    Item 6.  Exhibits...........................................................................46


SIGNATURES......................................................................................48

</TABLE>




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
                                                   -----------------------------
                                                                     JULY 31,
                                                      JULY 30,         2004
                                                        2005       (AS RESTATED)
                                                    -----------    -------------

Sales ............................................   $  199,735    $   188,638
Cost of sales ....................................       99,556         92,474
                                                     ----------    -----------
    Gross margin .................................      100,179         96,164
Selling, general and administrative expenses .....       93,305         87,286
Depreciation and amortization ....................        4,209          4,374
Impairment of goodwill ...........................       77,288           --
                                                     ----------    -----------
    Income (loss) from operations ................      (74,623)         4,504
Interest expense, net ............................        6,089          5,802
Other expense - debt extinguishment costs ........         --            9,090
                                                     ----------    -----------
    Loss before income taxes .....................      (80,712)       (10,388)
Benefit for income taxes .........................       (5,919)        (4,676)
                                                     ----------    -----------
    Net loss .....................................   $  (74,793)   $    (5,712)
                                                     ==========    ===========

Net loss per share applicable to common shares:
          Basic net loss per share ...............   $    (8.33)   $     (0.66)
                                                     ==========    ===========
          Diluted net loss per share .............   $    (8.33)   $     (0.66)
                                                     ==========    ===========

Weighted average shares outstanding -
         basic and diluted .......................    8,981,710      8,644,967
                                                     ==========    ===========







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




                                       1





                            FINLAY ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                   (UNAUDITED)


                                                       TWENTY-SIX WEEKS ENDED
                                                     ---------------------------
                                                                     JULY 31,
                                                      JULY 30,         2004
                                                        2005       (AS RESTATED)
                                                     ----------    -------------

Sales ............................................   $  385,464    $   376,210
Cost of sales ....................................      191,855        184,317
                                                     ----------    -----------
    Gross margin .................................      193,609        191,893
Selling, general and administrative expenses .....      182,214        175,467
Depreciation and amortization ....................        8,329          8,763
Impairment of goodwill ...........................       77,288           --
                                                     ----------    -----------
    Income (loss) from operations ................      (74,222)         7,663
Interest expense, net ............................       11,142         11,513
Other expense -debt extinguishment costs .........         --            9,090
                                                     ----------    -----------
    Loss before income taxes .....................      (85,364)       (12,940)
Benefit for income taxes .........................       (7,757)        (5,671)
                                                     ----------    -----------
    Net loss .....................................   $  (77,607)   $    (7,269)
                                                     ==========    ===========

Net loss per share applicable to common shares:
          Basic net loss per share ...............   $    (8.64)   $     (0.83)
                                                     ==========    ===========
          Diluted net loss per share .............   $    (8.64)   $     (0.83)
                                                     ==========    ===========

Weighted average shares outstanding -
         basic and diluted .......................    8,979,532      8,719,645
                                                     ==========    ===========







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



                                       2






                            FINLAY ENTERPRISES, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>

                                                                                  JULY 30,    JANUARY 29,
                                                                                    2005         2005
                                                                                 ---------    ----------
                                      ASSETS

Current assets:
  Cash and cash equivalents ..................................................   $   2,517    $  64,443
  Accounts receivable - department stores ....................................      40,451       22,598
  Other receivables ..........................................................      45,456       35,692
  Merchandise inventories ....................................................     354,435      278,589
  Prepaid expenses and other .................................................       4,998        2,958
                                                                                 ---------    ---------
     Total current assets ....................................................     447,857      404,280
                                                                                 ---------    ---------
Fixed assets:
  Building, equipment, fixtures and leasehold improvements ...................     117,618      113,039
  Less - accumulated depreciation and amortization ...........................      56,667       50,558
                                                                                 ---------    ---------
     Fixed assets, net .......................................................      60,951       62,481
                                                                                 ---------    ---------
Deferred charges and other assets, net .......................................      20,957       16,859
Goodwill .....................................................................        --         77,288
                                                                                 ---------    ---------
     Total assets ............................................................   $ 529,765    $ 560,908
                                                                                 =========    =========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Short-term borrowings ......................................................   $  88,428    $    --
  Accounts payable - trade ...................................................      66,979      102,994
  Accrued liabilities:
     Accrued salaries and benefits ...........................................      12,216       14,654
     Accrued miscellaneous taxes .............................................       7,377        7,242
     Accrued interest ........................................................       3,341        3,120
     Deferred income .........................................................       7,881        8,449
     Deferred income taxes ...................................................      10,405        6,593
     Other ...................................................................      14,566       10,539
  Income taxes payable .......................................................       7,833       16,479
                                                                                 ---------    ---------
     Total current liabilities ...............................................     219,026      170,070
Long-term debt ...............................................................     200,000      200,000
Deferred income taxes ........................................................      16,142       21,070
Other non-current liabilities ................................................       1,204          587
                                                                                 ---------    ---------
     Total liabilities .......................................................     436,372      391,727
                                                                                 ---------    ---------
Commitments and contingencies (see Note 10)

  Stockholders' equity:
     Common Stock, par value $.01 per share; authorized 25,000,000 shares;
       issued 11,214,614 and 11,197,281 shares, at July 30, 2005 and
       January 29, 2005, respectively ........................................         112          112
  Additional paid-in capital .................................................      92,312       90,048
  Retained earnings ..........................................................      30,425      108,032
  Unamortized restricted stock compensation ..................................      (2,154)      (1,500)
  Accumulated other comprehensive income (loss) ..............................          97         (112)
  Less treasury stock of 2,207,904 shares, at both July 30, 2005 and
             January 29, 2005, at cost .......................................     (27,399)     (27,399)
                                                                                 ---------    ---------
     Total stockholders' equity ..............................................      93,393      169,181
                                                                                 ---------    ---------
     Total liabilities and stockholders' equity ..............................   $ 529,765    $ 560,908
                                                                                 =========    =========
</TABLE>


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



                                       3




                            FINLAY ENTERPRISES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                         AND COMPREHENSIVE INCOME (LOSS)
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                   (UNAUDITED)


<TABLE>

                                                                              ACCUMULATED
                                                                                 OTHER
                                                                              COMPREHENSIVE
                                                                              INCOME (LOSS)/
                                        COMMON STOCK                           UNAMORTIZED
                                   ------------------   ADDITIONAL             RESTRICTED                 TOTAL
                                     NUMBER              PAID-IN    RETAINED     STOCK       TREASURY  STOCKHOLDERS'  COMPREHENSIVE
                                   OF SHARES   AMOUNT    CAPITAL    EARNINGS  COMPENSATION     STOCK      EQUITY       INCOME/(LOSS)
                                   ---------   ------    -------    --------  -------------  --------- ------------    ------------

Balance, January 31, 2004 .......  9,017,921  $   108    $82,808    $ 92,007  $(1,490)       $(20,537)   $152,896
    Net income ..................       --       --         --        16,025     --              --        16,025        $ 16,025
    Change in fair value of gold
       forward contracts, net of
       tax ......................       --       --         --          --        (27)           --           (27)            (27)
                                                                                                                         --------
    Comprehensive income ........                                                                                        $ 15,998
                                                                                                                         ========
    Exercise of stock options
      and related tax benefit ...    364,201        4      4,964        --       --              --         4,968

    Issuance of restricted stock
      and restricted stock units        --       --        2,276        --     (1,453)           --           823

    Amortization of restricted
      stock and restricted stock
      units .....................       --       --         --          --      1,358            --         1,358
    Purchase of treasury stock ..   (392,745)    --         --          --       --            (6,862)     (6,862)
                                   ---------   -------    --------   -------   -------        --------    --------
Balance, January 29, 2005 .......  8,989,377      112     90,048     108,032   (1,612)        (27,399)    169,181
    Net loss ....................       --       --         --       (77,607)    --              --       (77,607)       $(77,607)
    Change in fair value of gold
       forward contracts, net of
       tax ......................       --       --         --          --        209            --           209             209
                                                                                                                         --------
    Comprehensive loss ..........                                                                                        $(77,398)
                                                                                                                         ========
    Exercise of stock options
       and related tax benefits .     17,333     --          209        --       --              --           209
    Issuance of restricted stock
      and restricted stock units        --       --        2,055        --     (1,215)           --           840
    Amortization of restricted
      stock and restricted stock
      units .....................       --       --         --          --        561            --           561
                                   ---------  -------    -------    --------  -------        --------    --------
Balance, July 30, 2005 ..........  9,006,710  $   112    $92,312    $ 30,425  $(2,057)       $(27,399)   $ 93,393
                                   =========  =======    =======    ========  =======        ========    ========
</TABLE>





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


                                       4




                            FINLAY ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>

                                                                                        THIRTEEN WEEKS ENDED
                                                                                   -------------------------------
                                                                                                       JULY 31,
                                                                                     JULY 30,            2004
                                                                                       2005          (AS RESTATED)
                                                                                   -----------       ------------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss .....................................................................   $ (74,793)         $  (5,712)
  Adjustments to reconcile net loss to net cash used in operating activities:
   Impairment of goodwill ......................................................      77,288               --
   Depreciation and amortization ...............................................       4,209              4,374
   Amortization of deferred financing costs ....................................         311                279
   Amortization of restricted stock compensation and
        restricted stock units .................................................         326                371
   Loss on extinguishment of debt ..............................................        --                9,090
   Deferred income tax provision ...............................................      (5,945)            11,334
   Other, net ..................................................................         373                483
    Changes in operating assets and liabilities, net of effects from purchase of
        Carlyle (Note 11):
     Increase in accounts and other receivables ................................      (4,826)           (10,540)
     (Increase) decrease in merchandise inventories ............................      (3,348)            14,501
     Decrease in prepaid expenses and other ....................................       1,238              1,059
     Decrease in accounts payable and accrued liabilities ......................     (39,864)           (39,925)
                                                                                   ---------          ---------
         NET CASH USED IN OPERATING ACTIVITIES .................................     (45,031)           (14,686)
                                                                                   ---------          ---------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of equipment, fixtures and leasehold improvements ..................      (1,731)            (2,515)
  Acquisition of Carlyle .......................................................     (29,641)              --
                                                                                   ---------          ---------
        NET CASH USED IN INVESTING ACTIVITIES ..................................     (31,372)            (2,515)
                                                                                   ---------          ---------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from revolving credit facility ......................................     237,093            199,679
  Principal payments on revolving credit facility ..............................    (159,752)          (153,249)
  Proceeds from issuance of New Senior Notes ...................................        --              200,000
  Purchase and redemption of Senior Debentures and Senior Notes ................        --             (231,971)
  Capitalized financing costs ..................................................        --               (4,771)
  Bank overdraft ...............................................................      (3,182)             2,698
  Stock options exercised ......................................................        --                1,445
                                                                                   ---------          ---------
           NET CASH PROVIDED FROM FINANCING ACTIVITIES .........................      74,159             13,831
                                                                                   ---------          ---------
           DECREASE IN CASH AND CASH EQUIVALENTS ...............................      (2,241)            (3,370)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................................       4,761              5,172
                                                                                   ---------          ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................................   $   2,517          $   1,802
                                                                                   =========          =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Interest paid ..............................................................   $   9,699          $  12,334
                                                                                   =========          =========
    Income taxes paid (refunded) ...............................................   $   1,824          $  (1,096)
                                                                                   =========          =========
</TABLE>



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




                                       5




                            FINLAY ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>

                                                                                        TWENTY-SIX WEEKS ENDED
                                                                                   -------------------------------
                                                                                                       JULY 31,
                                                                                     JULY 30,            2004
                                                                                       2005          (AS RESTATED)
                                                                                   -----------       -------------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss .....................................................................   $ (77,607)         $  (7,269)
  Adjustments to reconcile net loss to net cash used in
      operating activities:
  Impairment of goodwill .......................................................      77,288               --
  Depreciation and amortization ................................................       8,329              8,763
  Amortization of deferred financing costs .....................................         623                537
  Amortization of restricted stock compensation and
       restricted stock units ..................................................         561                606
  Loss on extinguishment of debt ...............................................        --                9,090
  Deferred income tax provision ................................................      (6,630)            11,715
  Other, net ...................................................................       1,514                518
    Changes in operating assets and liabilities, net of effects from purchase of
        Carlyle (Note 11):
     Increase in accounts and other receivables ................................     (26,727)           (33,855)
     Increase in merchandise inventories .......................................     (20,511)            (7,480)
     Increase in prepaid expenses and other ....................................      (1,028)            (1,126)
     Decrease in accounts payable and accrued liabilities ......................     (85,927)           (96,543)
                                                                                   ---------          ---------
         NET CASH USED IN OPERATING ACTIVITIES .................................    (130,115)          (115,044)
                                                                                   ---------          ---------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of equipment, fixtures and leasehold improvements ..................      (3,883)            (5,635)
  Acquisition of Carlyle .......................................................     (29,641)              --
                                                                                   ---------          ---------
        NET CASH USED IN INVESTING ACTIVITIES ..................................     (33,524)            (5,635)
                                                                                   ---------          ---------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from revolving credit facility ......................................     366,370            329,516
  Principal payments on revolving credit facility ..............................    (277,942)          (269,548)
  Proceeds from issuance of New Senior Notes ...................................        --              200,000
  Purchase and redemption of Senior Debentures and Senior Notes ................        --             (231,971)
  Capitalized financing costs ..................................................        (123)            (4,771)
  Bank overdraft ...............................................................      13,262             12,220
  Purchase of treasury stock ...................................................        --               (6,862)
  Stock options exercised ......................................................         146              2,595
                                                                                   ---------          ---------
           NET CASH PROVIDED FROM FINANCING ACTIVITIES .........................     101,713             31,179
                                                                                   ---------          ---------
           DECREASE IN CASH AND CASH EQUIVALENTS ...............................     (61,926)           (89,500)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................................      64,443             91,302
                                                                                   ---------          ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................................   $   2,517          $   1,802
                                                                                   =========          =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Interest paid ..............................................................   $  10,298          $  12,911
                                                                                   =========          =========
    Income taxes paid ..........................................................   $   6,899          $   3,274
                                                                                   =========          =========
</TABLE>



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




                                       6




                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - BASIS OF ACCOUNTING AND PRESENTATION

     The accompanying unaudited consolidated financial statements of Finlay
Enterprises, Inc. (the "Company," the "Registrant," "we," "us" and "our"), and
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 July 30, 2005, and our results of
operations and cash flows for the thirteen weeks and twenty-six weeks ended July
30, 2005 and July 31, 2004. 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 29, 2005
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 January 29, 2005 ("Form
10-K") previously filed with the Commission.

     Our fiscal year ends on the Saturday closest to January 31. References to
2005, 2004, 2003 and 2002 relate to the fiscal years ending January 28, 2006,
January 29, 2005, January 31, 2004 and February 1, 2003, respectively. Each of
the fiscal years includes 52 weeks.


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

     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 as well as the reported
amounts of revenues and expenses during the reporting period. Significant
estimates include merchandise inventories, finite-lived assets, 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. See Note
5 for information regarding our change in method of determining price indices
used in the valuation of LIFO inventories from external indices published by the
Bureau of Labor Statistics ("BLS") to an internally developed index in 2004.
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.

     The cost to us of gold merchandise sold on consignment, which typically
varies with the price of gold, is not fixed until the merchandise is sold. We,
at times, enter into forward contracts based upon the anticipated sales of gold
product. Such contracts typically have durations ranging from one to nine



                                       7



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

months. At both July 30, 2005 and January 29, 2005, we had several open
positions in gold forward contracts totaling 17,000 fine troy ounces and 37,000
fine troy ounces, respectively, to purchase gold for $7.3 million and $16.1
million, respectively. The fair value of gold under such contracts was $7.4
million and $15.8 million at July 30, 2005 and January 29, 2005, respectively.

      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 02-16"). EITF
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 July 30, 2005 and January 29, 2005, deferred vendor allowances
totaled (i) $13.4 million and $14.8 million, respectively, for owned
merchandise, which allowances are included as an offset to merchandise
inventories on the Consolidated Balance Sheets, and (ii) $7.9 million and $8.4
million, respectively, for merchandise received on consignment, which allowances
are included as deferred income on the Consolidated Balance Sheets.

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

     We have designated our existing derivative instruments, consisting of gold
forward contracts, as cash flow hedges. For derivative instruments designated as
cash flow hedges, the effective portion of the change in the fair value of the
derivative is recorded in accumulated other comprehensive income, a separate
component of stockholders' equity, and is reclassified into cost of sales when
the offsetting effects of the hedged transaction impact earnings. Changes in the
fair value of the derivative attributable to hedge ineffectiveness are recorded
in earnings immediately. At July 30, 2005, the fair value of the gold forward
contracts resulted in the recognition of an asset of $0.2 million. At January
29, 2005, the fair value of the gold forward contracts resulted in the
recognition of a liability of $0.2 million. The amount recorded in accumulated
other comprehensive income at July 30, 2005 of $0.1 million, net of tax, is



                                       8


                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

expected to be reclassified into earnings during the remainder of 2005. The
amount recorded in accumulated other comprehensive loss at January 29, 2005 of
$0.1 million, net of tax, was reclassified into earnings in the first quarter of
2005.

     We have documented all relationships between hedging instruments and hedged
items, as well as our risk management objectives and strategy for undertaking
various hedge transactions. We also assess, both at the hedge's inception and on
an ongoing basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in cash flows of hedged items. We
believe that the designated hedges will be highly effective.

     NET INCOME (LOSS) PER SHARE: Net loss per share has been computed in
accordance with SFAS No. 128, "Earnings per Share". Basic and diluted net 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 per share, using the treasury stock method, to
the extent that such options, restricted stock and restricted stock units were
dilutive. As we had a net loss for the thirteen weeks and twenty-six weeks ended
July 30, 2005 and July 31, 2004, the stock options, restricted stock and
restricted stock units are not considered in the calculation of diluted net 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 loss per
share calculations was the same. Total stock options, restricted stock and
restricted stock units outstanding were 1,403,854 and 1,535,998 at July 30, 2005
and July 31, 2004, respectively, at prices ranging from $7.05 to $24.31 per
share in each period. For the twenty-six weeks ended July 30, 2005, 137,050
shares of restricted stock and 198,170 restricted stock units were excluded from
the computation of diluted earnings per share. For the twenty-six weeks ended
July 31, 2004, 213,750 shares of restricted stock and 89,346 restricted stock
units were excluded from the computation of diluted earnings per share. See Note
7.

     FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
Consolidated Financial Statements at fair value due to the short-term maturity
of these instruments.

     STOCK-BASED COMPENSATION: SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" amends SFAS No. 123 "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for an
entity that voluntarily changes to the fair value method of accounting for stock
options. As permitted by SFAS No. 123, we have elected to account for stock
options using the intrinsic value method. In accordance with the provisions of
SFAS No. 148 and APB No. 25, we have not recognized compensation expense related
to our stock options. However, deferred stock-based compensation is amortized
using the straight-line method over the vesting period. Had the fair value
method of accounting been applied to our stock option plans, which requires
recognition of compensation cost ratably over the vesting period of the stock
options, net loss and net loss per share would be as follows:




                                       9



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

<TABLE>

                                                              THIRTEEN WEEKS ENDED            TWENTY-SIX WEEKS ENDED
                                                          ------------------------------   ------------------------------
                                                                              JULY 31,                        JULY 31,
                                                            JULY 30,            2004         JULY 30,           2004
                                                              2005         (AS RESTATED)       2005         (AS RESTATED)
                                                          -------------    -------------   -------------   --------------
                                                                  (IN THOUSANDS)                   (IN THOUSANDS)

Reported net loss ...................................     $  (74,793)      $   (5,712)      $ (77,607)      $  (7,269)
Add: Stock-based employee compensation expense
     determined under the fair value method,
     net of tax .....................................           (253)            (256)           (477)           (557)

Deduct: Stock-based employee compensation
     expense included in reported net loss,
     net of tax......................................           218              175             408             397
                                                           ---------        ---------       ---------       ---------
Pro forma net loss...................................      $ (74,828)       $  (5,793)      $ (77,676)      $  (7,429)
                                                           =========        =========       =========       =========

Basic and diluted net loss per share:
Reported net loss per share..........................     $    (8.33)      $    (0.66)     $    (8.64)     $    (0.83)
                                                           =========        =========       =========       =========
Pro forma net loss per share .......................      $    (8.33)      $    (0.67)     $    (8.65)     $    (0.85)
                                                           =========        =========       =========       =========
</TABLE>

       In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation". This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123(R) requires that the fair value of such equity
instruments be recognized as expense in the historical financial statements as
services are performed. Currently, only certain pro forma disclosures of fair
value are required. Although we are in the process of determining the impact of
this Statement on our results of operations, the historical impact for the
thirteen weeks and twenty-six weeks ended July 30, 2005 and July 31, 2004,
respectively, under SFAS No. 123 is shown in the table above.

       In March 2005, the Commission issued Staff Accounting Bulletin ("SAB")
No. 107 "Share-Based Payment." SAB No. 107 expresses views of the Commission
staff regarding the interaction between SFAS No. 123(R) and certain Commission
rules and regulations and provide the staff's views regarding the valuation of
share-based payment arrangements. Subsequently, the Commission decided to delay
the required implementation of SFAS No. 123(R) to years beginning after June 15,
2005. We will adopt SFAS No. 123(R) for the first quarter of fiscal 2006.

       INCOME TAXES: The income tax benefit for 2005 and 2004 reflects effective
tax rates of 39.5% (before reflecting the impairment of goodwill) and 39%,
respectively. During the second quarter of 2005, a benefit of approximately $4.4
million was recorded resulting from the impairment of goodwill and a benefit of
approximately $0.2 million was recorded associated with the reversal of tax
accruals no longer required as a result of a decrease in state tax rates. During
the second quarter of 2004, a benefit of approximately $0.6 million was recorded
associated with the reversal of tax accruals no longer required. Further, during
the second quarter of 2004, net current deferred tax assets decreased by
approximately $10.1 million, primarily as a result of the utilization of
deferred tax assets related to the approval from the Internal Revenue Service of
a favorable change of accounting method regarding vendor allowances.

        NEW ACCOUNTING PRONOUNCEMENT: In May 2005, the FASB issued SFAS No. 154,
"Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20
and FASB Statement No. 3". SFAS No. 154 changes the requirements with respect to
the accounting for, and reporting of, a change in accounting principle.
Previously, voluntary changes in accounting principle were required to be




                                       10



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

recognized, by including in net income of the period of change, the cumulative
effect of changing to the new accounting principle. SFAS No. 154 requires
retrospective application to prior period financial statements, unless it is
impractical to do so. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 is not expected to have a material effect on our
Consolidated Financial Statements.


NOTE 3 - DESCRIPTION OF BUSINESS

       We conduct business through our wholly-owned subsidiary, Finlay Fine
Jewelry Corporation. We are a retailer of fine jewelry products and primarily
operate licensed fine jewelry departments in department stores throughout the
United States. The fourth quarter of 2004 accounted for approximately 41% of our
sales and approximately 90% of our income from operations, due to the
seasonality of the retail jewelry industry. During 2004, store groups owned by
The May Department Stores Company ("May") and Federated Department Stores, Inc.
("Federated") accounted for 59% (including Marshall Field's for the 2004 fiscal
year) and 19%, respectively, of our sales.

        On May 19, 2005, we completed the acquisition of Carlyle & Co. Jewelers
and its subsidiaries ("Carlyle"). Carlyle is located primarily in the
southeastern United States, and operates 34 specialty jewelry stores under the
Carlyle & Co., J.E. Caldwell & Co. and Park Promenade trade names. Carlyle had
annual sales of $86.0 million during its last fiscal year. Carlyle's results of
operations are included in the accompanying Consolidated Statements of
Operations since the date of acquisition.


NOTE 4 - SHORT AND LONG-TERM DEBT

         Our revolving credit agreement with General Electric Capital
Corporation ("GECC") and certain other lenders (the "Revolving Credit
Agreement"), which matures in January 2008, provides Finlay Jewelry with a
senior secured revolving line of credit up to $225.0 million (the "Revolving
Credit Facility"). At July 30, 2005, $88.4 million was outstanding under this
facility, at which point the available borrowings were $124.0 million. The
average amounts outstanding under the Revolving Credit Agreement were $48.9
million and $34.0 million for the twenty-six weeks ended July 30, 2005 and July
31, 2004, respectively. The maximum amount outstanding for the twenty-six weeks
ended July 30, 2005 was $119.4 million, at which point the available borrowings
were an additional $93.0 million. Amounts outstanding under the Revolving Credit
Agreement bear interest at a rate equal to, at our option, (i) the prime rate
plus a margin ranging from zero to 1.0% or (ii) the adjusted Eurodollar rate
plus a margin ranging from 1.0% to 2.0%, in each case depending on our financial
performance. The weighted average interest rate was 5.4% and 3.6% for the
twenty-six weeks ended July 30, 2005 and July 31, 2004, respectively.

      During 2004, we and Finlay Jewelry each commenced an offer to purchase for
cash any and all of our 9% Senior Debentures, due May 1, 2008, having an
aggregate principal amount of $75.0 million (the "Senior Debentures") and Finlay
Jewelry's 8-3/8% Senior Notes, due May 1, 2008, having an aggregate principal
amount of $150.0 million (the "Senior Notes"), respectively. Holders of
approximately 79% and 98% of the outstanding Senior Debentures and the
outstanding Senior Notes, respectively, tendered their securities and consented
to the proposed amendments to the related indentures. Additionally, during 2004,
Finlay Jewelry completed the sale of 8-3/8% Senior Notes, due June 1, 2012,
having an aggregate




                                       11



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - SHORT AND LONG-TERM DEBT (CONTINUED)

principal amount of $200.0 million (the "New Senior Notes"). Interest on the New
Senior Notes is payable semi-annually on June 1 and December 1 of each year and
commenced on December 1, 2004.

     Finlay Jewelry incurred approximately $5.2 million in costs, including $5.0
million associated with the sale of the New Senior Notes, which have been
deferred and are being amortized over the term of the New Senior Notes. In June
2004, we recorded pre-tax charges of approximately $9.1 million, including $6.7
million for redemption premiums paid on the Senior Debentures and the Senior
Notes, $2.1 million to write-off deferred financing costs related to the
refinancing of the Senior Debentures and the Senior Notes and $0.3 million for
other expenses. These costs are included in other expense - debt extinguishment
costs in the accompanying Consolidated Statements of Operations for the thirteen
weeks and twenty-six weeks ended July 31, 2004.

        The New 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 New Senior Notes. The New Senior
Notes are effectively subordinated to (a) Finlay Jewelry's secured indebtedness,
including obligations under its Revolving Credit Agreement and its Gold
Consignment Agreement (as defined herein), to the extent of the value of the
assets securing such indebtedness, and (b) the indebtedness and other
liabilities (including trade payables) of its subsidiaries. Finlay Jewelry may
redeem the New Senior Notes, in whole or in part, at any time on or after June
1, 2008 at specified redemption prices plus accrued and unpaid interest, if any,
to the date of the redemption. In addition, before June 1, 2007, Finlay Jewelry
may redeem up to 35% of the aggregate principal amount of the New Senior Notes
with the net proceeds of certain equity offerings at 108.375% of the principal
amount thereof, plus accrued interest to the redemption date. Upon certain
change of control events, each holder of the New Senior Notes may require Finlay
Jewelry to purchase all or a portion of such holder's New Senior Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued
interest to the purchase date.

     The indenture governing the New 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.


NOTE  5 - MERCHANDISE INVENTORIES

   Merchandise inventories consisted of the following:

<TABLE>

                                                                JULY 30,      JANUARY 29,
                                                                2005 (A)         2005
                                                               ----------     ---------
                                                                   (IN THOUSANDS)

Jewelry goods - rings, watches and other fine jewelry
    (first-in, first-out ("FIFO")  basis)....................  $ 374,007      $ 297,266
Less:  Excess of FIFO cost over LIFO inventory value.........     19,572         18,677
                                                               ---------      ---------
                                                               $ 354,435      $ 278,589
                                                               =========      =========
</TABLE>


-------------
(a)  Merchandise inventories as of July 30, 2005 includes approximately $55.5
     million of inventory related to Carlyle.



                                       12


                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 - MERCHANDISE INVENTORIES (CONTINUED)

       During the third quarter of 2004, we changed our method of determining
price indices used in the valuation of LIFO inventories from selected producer
price indices published for jewelry and watches by the BLS to internally
developed indices. We believe that this change in accounting method is
preferable since the internal indices are representative of our actual
merchandise mix of inventory, as opposed to the producer price indices, which
are broader, more general inflation indices. Further, our current merchandising
and inventory system provides more readily available information to calculate
the internal indices than our previous system, thus, facilitating our ability to
calculate the index internally.

      This change has been accounted for as a change in accounting principle. A
change in accounting principle results from the adoption of a generally accepted
accounting principle different than the one used previously for reporting
purposes. The net loss and net loss per share for the thirteen weeks and
twenty-six weeks ended July 31, 2004 have been restated to reflect this change
in accordance with SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements" ("SFAS No. 3"). The LIFO charge for the thirteen weeks and
twenty-six weeks ended July 30, 2005 was approximately $0.5 million and $0.9
million, respectively. The LIFO charge for the thirteen weeks and twenty-six
weeks ended July 31, 2004, was approximately $0.3 million and $0.6 million,
respectively, compared to $1.0 million and $1.8 million, respectively, as
previously reported. The following table presents the net loss and net loss per
share for the thirteen weeks and twenty-six weeks ended July 31, 2004, as
restated:

<TABLE>

                                                          THIRTEEN WEEKS      TWENTY-SIX
                                                               ENDED         WEEKS ENDED
                                                              JULY 31,         JULY 31,
                                                                2004             2004
                                                         ---------------    ------------
                                                                  (IN THOUSANDS)

 NET LOSS:
 Net loss, as reported................................       $(6,141)         $(7,998)
 Impact of change in LIFO inventory valuation
      method, net of tax .............................           429              729
                                                             -------          -------
 Net loss to reflect change in accounting principle...       $(5,712)         $(7,269)
                                                             =======          =======
 BASIC AND DILUTED NET LOSS PER SHARE:
 Basic and diluted net loss per share, as reported....       $ (0.71)         $ (0.91)
  Impact of change in LIFO inventory valuation
      method, net of tax..............................          0.05             0.08
 Basic and diluted net loss per share to reflect
                                                             -------          -------
       change in accounting principle ................       $ (0.66)         $ (0.83)
                                                             =======          =======
</TABLE>

     Approximately $356.2 million and $349.7 million at July 30, 2005 and
January 29, 2005, respectively, of merchandise received on consignment is not
included in merchandise inventories and accounts payable-trade in the
accompanying Consolidated Balance Sheets.

      Finlay Jewelry is a party to an amended and restated gold consignment
agreement (as amended, the "Gold Consignment Agreement"), which enables Finlay
Jewelry to receive consignment merchandise by providing gold, or otherwise
making payment, to certain vendors. While the merchandise involved remains
consigned, title to the gold content of the merchandise transfers from the
vendors to the gold consignor.




                                       13



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 - MERCHANDISE INVENTORIES (CONTINUED)

     On July 29, 2005, Finlay Jewelry amended the Gold Consignment Agreement, to
among other things, extend the maturity date to October 31, 2007, and to
establish financial covenants (including minimum earnings and fixed charge
coverage ratio requirements and certain maximum debt limitations). The Gold
Consignment Agreement permits Finlay Jewelry to consign up to the lesser of (i)
165,000 fine troy ounces or (ii) $50.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement. In the event this
agreement is terminated, Finlay Jewelry would be required to return the gold or
purchase the outstanding gold at the prevailing gold rate in effect on that
date. At July 30, 2005 and January 29, 2005, amounts outstanding under the Gold
Consignment Agreement totaled 115,489 and 116,687 fine troy ounces,
respectively, valued at $49.5 million and $49.8 million, respectively. For
financial statement purposes, the consigned gold is not included in merchandise
inventories on the Consolidated Balance Sheets and, therefore, no related
liability has been recorded.


NOTE 6 - LICENSE AGREEMENTS WITH DEPARTMENT STORES AND LEASE AGREEMENTS

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

     In several cases, we are subject to limitations under our license
agreements with host department stores which prohibit us from operating
departments for other store groups within a certain geographical radius of the
host store.

     Our operating leases consist primarily of office space rentals and the
Carlyle retail store locations, which leases expire on various dates through
2016. Minimum fees, in the table below, represent the rent paid on these
operating leases. The department store license agreements provide for the
payment of fees based on sales (i.e., contingent fees in the table below), plus,
in some instances, installment payments for fixed assets. Additionally, certain
of the Carlyle leases require payment of contingent rent based on a percentage
of the store's sales in excess of a specified threshold. License fees and lease
expense, included in Selling, general and administrative expenses, are as
follows (in thousands):

                         THIRTEEN WEEKS ENDED      TWENTY-SIX WEEKS ENDED
                       ------------------------   ------------------------
                        JULY 30,       JULY 31,    JULY 30,       JULY 31,
                          2005          2004         2005          2004
                       ---------      ---------   ----------     ---------
                            (IN THOUSANDS)              (IN THOUSANDS)
Minimum fees ......     $ 1,513        $   444     $ 1,958        $   889
Contingent fees....      31,240         31,394      62,413         62,746
                        -------        -------     -------        -------
  Total ...........     $32,753        $31,838     $64,371        $63,635
                        =======        =======     =======        =======





                                       14



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK AWARDS

      Pursuant to our stock repurchase program, we may, at the discretion of
management, purchase up to $12.6 million of our Common Stock, from time to time
through September 30, 2005. The extent and timing of repurchases will depend
upon general business and market conditions, stock prices, availability under
the Revolving Credit Facility, compliance with certain restrictive covenants and
our cash position and requirements going forward. The repurchase program may be
modified, extended or terminated by the Board of Directors at any time. As of
July 30, 2005, and from inception of the program, we have repurchased a total of
2,207,904 shares for $27.4 million.

      In February 2001, an executive officer of the Company was issued 100,000
shares of Common Stock, subject to restrictions ("Restricted Stock"), pursuant
to a restricted stock agreement. The Restricted Stock became fully vested on
January 29, 2005 and was accounted for as a component of stockholders' equity.
Compensation expense of approximately $1.2 million has been amortized over four
years and totaled approximately $78,000 and $152,000, respectively, for the
thirteen weeks and twenty-six weeks ended July 31, 2004.

       In August 2003, an executive officer of the Company was issued an
additional 50,000 shares of Restricted Stock pursuant to a restricted stock
agreement. Fifty percent of the Restricted Stock became fully vested on January
29, 2005, and was accounted for as a component of stockholders' equity.
Compensation expense of approximately $0.4 million has been amortized over the
vesting period and totaled approximately $66,000 and $133,000, respectively, for
the thirteen weeks and twenty-six weeks ended July 31, 2004. The remaining 50%
of the Restricted Stock becomes fully vested on June 30, 2007 and has been
accounted for as a component of stockholders' equity. Compensation expense of
approximately $0.4 million is being amortized over the vesting period.
Amortization for each of the thirteen week periods ended July 30, 2005 and July
31, 2004 totaled approximately $25,000. Amortization for each of the twenty-six
week periods ended July 30, 2005 and July 31, 2004 totaled approximately
$50,000.

       In October 2003, certain executives of the Company were awarded a total
of 31,250 shares of Restricted Stock, pursuant to restricted stock agreements.
The Restricted Stock becomes fully vested after four years of continuous
employment with the Company and is accounted for as a component of stockholders'
equity with respect to unamortized restricted stock compensation. However, such
shares are not considered outstanding. Compensation expense of approximately
$0.5 million is being amortized over four years. Amortization for each of the
thirteen week periods ended July 30, 2005 and July 31, 2004 totaled
approximately $30,000. Amortization for each of the twenty-six week periods
ended July 30, 2005 and July 31, 2004 totaled approximately $60,000.

      In April 2004, certain executives of the Company were awarded a total of
32,500 shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after two years of continuous employment
with the Company and is accounted for as a component of stockholders' equity
with respect to unamortized restricted stock compensation. However, such shares
are not considered outstanding. Compensation expense of approximately $0.6
million is being amortized over two years. Amortization for each of the thirteen
week periods ended July 30, 2005 and July 31, 2004 totaled approximately
$79,000. Amortization for the twenty-six weeks ended July 30, 2005 and July 31,
2004 totaled approximately $157,000 and $79,000, respectively.



                                       15



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK AWARDS (CONTINUED)

     Commencing in February 2005, an executive officer of the Company became
entitled to receive stock incentive compensation based on the attainment of
financial objectives established by senior management and approved by the Board
of Directors. The maximum amount of stock incentive compensation payable in any
fiscal year is equal to the number of restricted shares of Common Stock having
an aggregate value nearest to $400,000. These shares are not considered
outstanding. Compensation expense is being recognized ratably over a one year
period and totaled approximately $0.1 million and $0.2 million for the thirteen
weeks and twenty-six weeks ended July 30, 2005, respectively.

     In April 2005, certain executives of the Company were awarded a total of
48,300 shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after three years of continuous employment
with the Company and is accounted for as a component of stockholders' equity
with respect to unamortized restricted stock compensation. However, such shares
are not considered outstanding. Compensation expense of approximately $0.6
million is being amortized over three years. Amortization for each of the
thirteen weeks and twenty-six weeks ended July 30, 2005 totaled approximately
$47,000.


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

       In April 2003, the Board of Directors adopted the Executive Deferred
Compensation and Stock Purchase Plan and the Director Deferred Compensation and
Stock Purchase Plan, which was approved by our stockholders on June 19, 2003
(the "RSU Plans"). Under the RSU Plans, key executives and our non-employee
directors as designated by our Compensation Committee, are eligible to acquire
restricted stock units ("RSUs"). An RSU is a unit of measurement equivalent to
one share of common stock, but with none of the attendant rights of a
stockholder of a share of common stock. Two types of RSUs are awarded under the
RSU Plans: (i) participant RSUs, where a plan participant may elect to defer, in
the case of an executive employee, a portion of his or her actual or target
bonus, and in the case of a non-employee director, his or her retainer fees and
Committee chairmanship fees, and receive RSUs in lieu thereof and (ii) matching
RSUs, where we credit a participant's plan account with one matching RSU for
each participant RSU that a participant elects to purchase. While participant
RSUs are fully vested at all times, matching RSUs are subject to vesting and
forfeiture as set forth in the RSU Plans. At the time of distribution under the
RSU Plans, RSUs are converted into actual shares of Common Stock. As of July 30,
2005, 198,170 restricted stock units have been awarded under the RSU Plans.
Amortization for the thirteen weeks ended July 30, 2005 and July 31, 2004
totaled approximately $145,000 and $96,000, respectively. Amortization for the
twenty-six weeks ended July 30, 2005 and July 31, 2004 totaled approximately
$248,000 and $134,000, respectively.


NOTE 9 - DEPARTMENT CLOSINGS

      On February 28, 2005, Federated and May announced that they had entered
into a merger agreement whereby Federated would acquire May. On August 30, 2005,
Federated announced that it had completed the merger with May. Finlay's license
agreements with May are terminable at various dates over the next three years.
Finlay's license agreements with Federated are terminable at various dates over
the next two years.



                                       16



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - DEPARTMENT CLOSINGS (CONTINUED)

     On July 28, 2005, Federated announced its intention to divest 42 stores,
beginning in 2006, for which we currently operate the fine jewelry departments.
We generated sales of approximately $49.0 million from these departments in
2004. At this time, Federated has not announced a specific timeline for when
these stores will close. During the second quarter of 2005, we recorded charges
of approximately $0.1 million related to the accelerated depreciation of fixed
assets. Additionally, we intend to record charges associated with accelerated
depreciation of fixed assets, losses on disposal of fixed assets and severance
totaling approximately $1.2 million related to these departments over the
balance of 2005 and 2006.

     Additionally, on August 30, 2005, Federated announced its intention to
divest an additional three stores, beginning in 2006, for which we currently
operate the fine jewelry departments. We generated sales of approximately $3.0
million from these departments in 2004. At this time, Federated has not
announced a specific timeline for when these stores will close.

       In July 2003, May announced its intention to divest 32 Lord & Taylor
stores, as well as two other stores in its Famous-Barr division resulting in the
closure of four departments during the twenty-six weeks ended July 30, 2005. For
the twenty-six weeks ended July 30, 2005 and July 31, 2004, we recorded charges
of approximately $31,000 and $0.7 million, respectively, relating to the
accelerated depreciation of fixed assets and the loss on disposal of fixed
assets.


NOTE 10 - COMMITMENTS AND CONTINGENCIES

      From time to time, we are involved in litigation arising out of our
operations in the normal course of business. As of September 2, 2005, 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.

     In November 2004, we entered into a new employment agreement with a senior
executive. The new employment agreement has a term of four years commencing on
January 30, 2005 and ending on January 31, 2009, unless earlier terminated in
accordance with the provisions of the employment agreement. The agreement
provides an annual salary level of approximately $1.0 million as well as
incentive compensation based on meeting specific financial goals.

     During 2005, we entered into employment agreements with certain executives
of the Company. Each of the employment agreements has a term of three years,
unless earlier terminated in accordance with the provisions of the employment
agreements. The agreements provide for salary levels totaling approximately $1.8
million as well as incentive compensation based on meeting specific financial
goals.

       The New Senior Notes, the Revolving Credit Agreement and the Gold
Consignment Agreement currently restrict the amount of annual distributions,
including those required to fund stock repurchases, from Finlay Jewelry to us.

       Our concentration of credit risk consists principally of accounts
receivable. Over the past three years, store groups owned by May and Federated
accounted for 54% (including Marshall Field's for the 2004





                                       17



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

fiscal year) and 18%, respectively, of our sales. We believe that the risk
associated with these receivables, other than those from department store groups
indicated above, would not have a material adverse effect on our financial
position or results of operations.

       We have not provided any third-party financial guarantees as of July 30,
2005 and January 29, 2005.


NOTE 11 - CARLYLE & CO. JEWELERS ACQUISITION

     On May 19, 2005, we completed the acquisition of Carlyle. The purchase
price was approximately $29.0 million, plus estimated transaction fees of
approximately $1.6 million, and was financed with additional borrowings under
the Revolving Credit Agreement. In connection with the acquisition, Carlyle's
revolving credit facility was terminated and paid in full at the closing and,
since the date of the acquisition, Carlyle's cash requirements have been, and
will continue to be, funded under Finlay's Revolving Credit Agreement. In
connection with the acquisition, we replaced the existing Revolving Credit
Agreement and entered into an amended and restated credit agreement (the
"Restated Credit Agreement") with GECC and certain other lenders and Finlay
Jewelry entered into a consent and amendment to the Gold Consignment Agreement
(the "Gold Consignment Amendment"), to, among other things, permit the
acquisition transaction. In addition, Carlyle and its subsidiaries, together
with Finlay Jewelry, entered into supplemental indentures and guarantees (the
"Supplemental Indentures") to guarantee obligations of Finlay Jewelry under the
New Senior Notes.

      The Carlyle acquisition has been accounted for as a purchase, and,
accordingly, the operating results of Carlyle have been included in our
consolidated financial statements since the date of acquisition. Our July 30,
2005 consolidated balance sheet reflects the Carlyle acquisition using a
preliminary purchase price allocation. The purchase price allocation is based on
preliminary estimates and is subject to a final independent appraisal. The
following table summarizes the estimated fair values of the assets and
liabilities at the date of acquisition (dollars in thousands):

              Cash..............................     $   1,695
              Merchandise inventories...........        55,335
              Prepaid expenses and
                other current assets............         1,902
              Property and equipment............         1,424
              Other assets......................         6,243
              Liabilities assumed...............        36,288
                                                      --------
              Net assets acquired...............      $ 30,311
                                                      ========

      The following pro forma information presents our sales, net loss and basic
and diluted net loss per share as if the Carlyle acquisition had taken place at
the beginning of the respective periods presented:



                                       18



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - CARLYLE & CO. JEWELERS ACQUISITION (CONTINUED)

                                                      TWENTY-SIX WEEKS ENDED
                                                    --------------------------
                                                     JULY 30,        JULY 31,
                                                       2005            2004
                                                    ----------      ---------
                                                         (IN THOUSANDS)
     Sales.....................................     $408,914        $408,989
     Net loss (a)..............................     $(80,006)       $ (9,122)
     Basic and diluted net loss per share (a)..     $  (8.91)       $  (1.05)

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

(a)  The net loss and net loss per share for the twenty-six weeks ended
     July 30, 2005 includes a charge of approximately $72.9 million, net of
     tax, related to the impairment of goodwill. See Note 13.


     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, is not
necessarily indicative of future results, and does not reflect potential
synergies, integration costs or other such costs or savings.


NOTE 12 - SEGMENT INFORMATION

      Prior to the acquisition of Carlyle in May 2005, we operated in a single
reportable segment, the operation of department store based fine jewelry
departments, in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Since the acquisition of Carlyle, we now
have two operating segments - department store based fine jewelry departments
and stand-alone 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 July 30, 2005 (dollars in thousands):

<TABLE>

                                          THIRTEEN WEEKS ENDED                   TWENTY-SIX WEEKS ENDED
                                              JULY 30, 2005                           JULY 30, 2005
                          -----------------------------------------       ---------------------------------------
                            FINLAY         CARLYLE          TOTAL           FINLAY        CARLYLE        TOTAL
                          ----------      ---------       ---------       ---------      ----------    ----------

Sales ..............      $ 185,808       $  13,927       $ 199,735       $ 371,537       $  13,927     $ 385,464
Income (loss) from
    operations (a) .        (74,736)            113         (74,623)        (74,335)            113       (74,222)
Total assets .......        463,348          66,417         529,765         463,348          66,417       529,765
Capital expenditures          1,731             618           2,349           3,883             618         4,501
</TABLE>

----------------
(a)   The income (loss) from operations for the thirteen weeks and twenty-six
      weeks ended July 30, 2005 for Finlay includes a charge of approximately
      $77.3 million related to the impairment of goodwill. See Note 13.

      Additionally, our sales mix by merchandise category was as follows for the
thirteen weeks and twenty-six weeks ended July 30, 2005 and July 31, 2004:



                                       19




                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - SEGMENT INFORMATION (CONTINUED)

<TABLE>

                                        THIRTEEN WEEKS ENDED                                  TWENTY-SIX WEEKS ENDED
                          --------------------------------------------------    ---------------------------------------------------
                                 JULY 30,                   JULY 31,                   JULY 30,                    JULY 31,
                                   2005                       2004                       2005                        2004
                          -----------------------    -----------------------    ------------------------    -----------------------
                                       (DOLLARS IN THOUSANDS)                               (DOLLARS IN THOUSANDS)
                                           % OF                       % OF                        % OF                       % OF
                             SALES        SALES         SALES         SALES        SALES         SALES         SALES         SALES
                          ----------    ---------    ----------    ---------    ----------     ---------    ----------    ---------

Diamonds................   $  50,548      25.3%       $  44,790        23.7%     $ 100,107         26.0%     $  93,610       24.9%
Gemstones...............      40,074      20.1           40,305        21.4         79,146         20.5         82,996       22.1
Gold......................    37,761      18.9           40,940        21.7         74,349         19.3         79,827       21.2
Watches.................      32,888      16.5           28,948        15.3         55,733         14.5         51,861       13.8
Designer................      11,104       5.6            9,638         5.1         24,906          6.5         20,955        5.6
Other (1)...............      27,360      13.6           24,017        12.8         51,223         13.2         46,961       12.4
                          ----------    ---------    ----------    ---------    ----------     ---------    ----------    ---------
Total Sales.............   $ 199,735     100.0%       $ 188,638       100.0%     $ 385,464        100.0%     $ 376,210      100.0%
                          ==========    =========    ==========    =========    ==========     =========    ==========    =========
</TABLE>
-------------
(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 13 - GOODWILL IMPAIRMENT

        SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142")
requires an impairment-only approach to accounting for goodwill. Absent any
prior indicators of impairment, we perform our required annual impairment test
during the fourth quarter of our fiscal year, and perform additional impairment
tests whenever events or changes in circumstances indicate that the carrying
value of goodwill may not be recoverable. We performed our annual assessment for
2004 and concluded that our goodwill was not impaired.

       During the quarter ended July 30, 2005, Federated announced their
intention to divest 42 stores for which we currently operate the fine jewelry
departments. Based upon this business indicator we utilized our SFAS No. 142
model to evaluate the carrying value of the goodwill recorded on our department
store based fine jewelry departments segment as of July 30, 2005.

       The goodwill impairment analysis took into consideration our results for
the first half of the year and estimates for the balance of the year and beyond,
as well as Federated's recently announced intention to divest the 42 stores. We
performed our impairment analysis in accordance with SFAS No. 142, the
provisions of which require, similar to the recognition of goodwill in a
business combination, an allocation of the fair value to all of our assets and
liabilities (excluding Carlyle) (including any unrecognized intangible assets)
as if the Company had been acquired in a business combination and the fair value
of the Company was the price paid to acquire the Company. As a result of this
analysis, an impairment of goodwill of $77.3 million was recorded as a component
of loss from operations in the accompanying Consolidated Statements of
Operations, which eliminated all of the goodwill that was on our balance sheet.





                                       20



PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        Our Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is provided as a supplement to the accompanying
consolidated financial statements and notes thereto contained in Item 1 of this
report. This MD&A is organized as follows:

        o  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.

        o  RESULTS OF OPERATIONS - This section provides an analysis of the
           significant line items on the consolidated statements of operations.

        o  LIQUIDITY AND CAPITAL RESOURCES - This section provides an analysis
           of liquidity, cash flows, sources and uses of cash, contractual
           obligations and financial position.

        o  SEASONALITY - This section describes the effects of seasonality on
           our business.

        o  CRITICAL ACCOUNTING POLICIES AND ESTIMATES - This section discusses
           those accounting policies that are considered both important to our
           financial condition and results of operations, and require us to
           exercise subjective or complex judgments in their application. In
           addition, all of our significant accounting policies, including
           critical accounting policies, are summarized in Note 2 to the
           consolidated financial statements included in our Form 10-K.

        o  FORWARD-LOOKING INFORMATION AND RISK FACTORS THAT MAY AFFECT FUTURE
           RESULTS - 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.

        On May 19, 2005, we completed the acquisition of Carlyle and its
subsidiaries. The purchase price was approximately $29.0 million, plus estimated
transaction fees of approximately $1.6 million, and was financed with additional
borrowings under the Revolving Credit Agreement. Carlyle is located primarily in
the southeastern United States and operates 34 specialty jewelry stores under
the Carlyle & Co., J.E. Caldwell & Co. and Park Promenade trade names. Carlyle
had annual sales of $86.0 million during its last fiscal year. Carlyle's results
of operations are included in the accompanying Consolidated Statements of
Operations since the date of acquisition.


EXECUTIVE OVERVIEW


OUR BUSINESS

       We are one of the leading retailers of fine jewelry in the United States
and primarily operate fine jewelry departments in major department stores for
retailers where we sell a broad selection of moderately priced jewelry, with an
average sales price of approximately $201 per item. As of July 30, 2005, we
operated a total of 993 locations, including 959 Finlay departments in 16 host
store groups, in 46 states and the District of Columbia, as well as 34 Carlyle
specialty jewelry stores, located primarily in the southeastern United States,
which sell luxury priced jewelry, with an average sales price of approximately
$1,200 per item.




                                       21



     Our primary focus is to offer desirable and competitively priced products,
a breadth of merchandise assortments and to provide exceptional 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 operations, we believe that we
are an important contributor to each of our host store groups and we continue to
seek opportunities to penetrate the department store segment. By outsourcing
their fine jewelry departments to us, host store groups gain our expertise in
merchandising, selling and marketing jewelry and customer service. Additionally,
by avoiding high working capital investments typically required of the
traditional retail jewelry business, host stores improve their return on
investment and increase their profitability. As a licensee, we benefit from the
host stores' reputation, customer traffic, credit services and established
customer base. We also avoid the substantial capital investment in fixed assets
typical of a stand-alone retail format. In recent years, on average,
approximately 50% of our merchandise has been carried on consignment, which
reduces our inventory exposure to changing fashion trends. These factors have
generally led our new departments to achieve profitability within the first
twelve months of operation.

     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:

      o  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;

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

      o  Total sales growth (current period total sales minus prior period total
         sales divided by prior period total 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

      o  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.


SECOND QUARTER HIGHLIGHTS

     Total sales were $199.7 million for the thirteen weeks ended July 30, 2005
compared to $188.6 million for the thirteen weeks ended July 31, 2004, an
increase of 5.9%. Total sales for the second quarter of 2005 included $13.9
million of sales generated by Carlyle. Comparable department sales increased
0.1%. Our comparable store sales were impacted by softer sales in May Company
stores. Gross margin increased by $4.0 million compared to 2004, and, as a
percentage of sales, gross margin decreased by 0.8% from 51.0% to 50.2%. SG&A
increased $6.0 million and, as a percentage of sales, SG&A increased 0.4% from
46.3% to 46.7%. Borrowings under the Revolving Credit Agreement increased by
$28.5 million at July 30, 2005 as compared to July 31, 2004, which reflects
additional borrowings to complete the Carlyle acquisition as well as to fund
Carlyle's working capital requirements. Maximum outstanding borrowings during
the thirteen weeks ended July 30, 2005 were $119.4 million, at which point the
available borrowings under the Revolving Credit Agreement were an additional
$93.0 million.



                                       22



OPPORTUNITIES

     We believe that current trends in jewelry retailing provide a significant
opportunity for our future growth. Consumers spent approximately $57.0 billion
on jewelry (including both fine jewelry and costume jewelry) in the United
States in calendar year 2004, an increase of approximately $21.0 billion over
1994, according to the United States Department of Commerce. In the department
store sector in which we operate the majority of our business, consumers spent
an estimated $4.1 billion on fine jewelry in calendar year 2003.

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

     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. As discussed above, we completed the acquisition of
Carlyle in May 2005.

     In 2004, we tested moissanite merchandise (moissanite is a lab-created
stone with greater brilliance and luster than a diamond) in certain departments.
This new category of merchandise has been expanded to additional departments
during 2005 and is estimated to generate sales of $10-$15 million on an annual
basis.

     Additional growth opportunities exist with respect to opening departments
within existing host store groups that do not currently operate jewelry
departments. Such opportunities exist within Dillard's and Belk's. During 2003
and 2004, we added a total of 24 new departments in Dillard's and Belks. During
the twenty-six weeks ended July 30, 2005, we added a total of three new
departments in Dillard's and Belk's and plan to add seven more departments
within these host store groups during the remainder of 2005.

     Since November 2003, we have been selling fine jewelry on the SmartBargains
internet site and fulfilling this e-business through our distribution center.
Sales generated during 2004 totaled approximately $8.0 million.

          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:

        o  Increase comparable department sales;

        o  Add departments within existing host store groups;

        o  Add new Carlyle stores;

        o  Expand our most productive departments;

        o  Identify and acquire new businesses which diversify our business and
           provide additional growth opportunities;




                                       23



        o  Open new channels of distribution;

        o  Capitalize on developing fashion trends and emerging merchandise
           categories;

        o  Add new host store relationships;

        o  Continue to raise customer service standards;

        o  Strengthen selling teams through training programs;

        o  Continue to improve operating leverage; and

        o  De-leverage the balance sheet.


RISKS AND UNCERTAINTIES

      The risks and challenges facing our business include:

        o  Host store consolidation, particularly in light of the Federated/May
           merger; and

        o  Dependence on or loss of certain host store relationships.

       During 2004, approximately 59% (including Marshall Field's for the 2004
fiscal year) and 19% of our sales were generated by departments operated in
store groups owned by May and Federated, respectively. We have operated
departments with May since 1948 and with Federated since 1983. We believe that
our relationships with these host stores are excellent. Nevertheless, a decision
by Federated or certain of our other host store groups, to terminate existing
relationships, to assume the operation of those departments themselves, or to
close significant number of stores would have a material adverse effect on our
business and financial condition.

      On February 28, 2005, Federated and May announced that they had entered
into a merger agreement whereby Federated would acquire May. On August 30, 2005,
Federated announced that it had completed the merger with May. Finlay's license
agreements with May are terminable as follows: Robinsons-May/Meier & Frank,
Filene's/Kaufmann's and Famous Barr/L.S. Ayres/Jones on January 28, 2006,
Foley's, Hecht's/Strawbridge's and Lord & Taylor on February 3, 2007 and
Marshall Field's on April 2, 2008. Finlay's license agreements with Federated
are terminable as follows: Macy's Central (formerly the
Rich's-Macy's/Lazarus-Macy's/Goldsmith's-Macy's division) and Macy's Northwest
(formerly the Bon-Macy's division) on January 28, 2006 and Bloomingdale's on
February 3, 2007. We cannot anticipate the impact of the merger on our future
results of operations and there is no assurance that we will not be adversely
impacted.

        On July 28, 2005, Federated announced its intention to divest 42 stores,
beginning in 2006, for which we currently operate the fine jewelry departments.
We generated sales of approximately $49.0 million from these departments in
2004. At this time, Federated has not announced a specific timeline for when
these stores will close. It is possible that some of these stores could
potentially be sold to department store hosts with which we currently have
active relationships or to potential new hosts. During the second quarter of
2005, we recorded charges of approximately $0.1 million related to the
accelerated depreciation of fixed assets. Additionally, we intend to record
charges associated with accelerated depreciation of fixed assets, losses on
disposal of fixed assets and severance totaling approximately $1.2 million
related to these departments over the balance of 2005 and 2006.




                                       24



   On August 30, 2005, Federated announced its intention to divest an additional
three stores, beginning in 2006, for which we currently operate the fine jewelry
departments. We generated sales of approximately $3.0 from these departments in
2004. At this time, Federated has not announced a specific timeline for when
these stores will close.

      During 2003, May announced its intention to close certain of its smaller,
less profitable stores, including 32 Lord & Taylor stores, as well as two stores
in its Famous-Barr division, resulting in the closure of four departments during
the twenty-six weeks ended July 30, 2005. Through July 30, 2005, a total of 31
stores have closed.

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:

STATEMENTS OF OPERATIONS DATA

<TABLE>

                                                   THIRTEEN WEEKS ENDED       TWENTY-SIX WEEKS ENDED
                                                  ------------------------   ------------------------
                                                                 JULY 31,                  JULY 31,
                                                    JULY 30,       2004      JULY 30,       2004
                                                     2005     (AS RESTATED)    2005     (AS RESTATED)
                                                  ---------   -------------  --------   -------------

Sales ......................................        100.0%       100.0%       100.0%       100.0%
Cost of sales ..............................         49.8         49.0         49.8         49.0
                                                   ------       ------       ------        -----
    Gross margin ...........................         50.2         51.0         50.2         51.0
Selling, general and administrative expenses         46.7         46.3         47.3         46.6
Depreciation and amortization ..............          2.1          2.3          2.1          2.4
Impairment of goodwill .....................         38.7           --         20.0           --
                                                   ------       ------       ------        -----
    Income (loss) from operations ..........        (37.3)         2.4        (19.2)         2.0
Interest expense, net ......................          3.1          3.1          2.9          3.0
Other expense - debt extinguishment costs ..           --          4.8           --          2.4
                                                   ------       ------       ------        -----
    Loss before income taxes ...............        (40.4)        (5.5)       (22.1)        (3.4)
Benefit for income taxes ...................         (3.0)        (2.5)        (2.0)        (1.5)
                                                   ------       ------       ------        -----
    Net loss ...............................        (37.4)%       (3.0)%      (20.1)%       (1.9)%
                                                   =======      ======       ======        =====
</TABLE>


THIRTEEN WEEKS ENDED JULY 30, 2005 COMPARED WITH THIRTEEN WEEKS ENDED
JULY 31, 2004

     SALES. Sales for the thirteen weeks ended July 30, 2005 increased $11.1
million, or 5.9%, over the comparable period in 2004. Comparable department
sales (departments open for the same months during the comparable periods)
increased 0.1%. Sales include $185.8 million in sales from the Finlay
departments, which represented a 1.5% decrease over the $188.6 million in sales
reported in the thirteen weeks ended July 31, 2004, and $13.9 million in sales
from the Carlyle division.

     During the thirteen weeks ended July 30, 2005, we opened one department,
and closed four departments. The openings and closings were all within existing
store groups.

     GROSS MARGIN. Gross margin increased by $4.0 million in 2005 compared to
2004, and, as a percentage of sales, gross margin decreased by 0.8%. The
components of this 0.8% net decrease in gross margin are as follows:








                                       25



<TABLE>

             COMPONENT                      %                              REASON
 -----------------------------------     --------     --------------------------------------------------

 Merchandise cost of sales.........       (0.4)%      Increase in  merchandise  cost of sales is due to
                                                      the impact of Carlyle's lower gross margins as a
                                                      result of the strong emphasis on the watch
                                                      category.
 LIFO..............................       (0.1)       Increase  in  LIFO is due to our  estimate  using
                                                      internal indices.
 Other ............................       (0.3)       Increase in various  other  components of cost of
                                                      sales.
                                         --------
              Total ...............       (0.8)%
                                         ========
</TABLE>

     During the third quarter of 2004, we changed our method of determining
price indices used in the valuation of LIFO inventories from selected producer
price indices published for jewelry and watches by the BLS to internally
developed indices. We believe that this change in accounting method is
preferable since the internal indices are representative of our actual
merchandise mix of inventory, as opposed to the producer price indices, which
are broader, more general inflation indices. Further, our current merchandising
and inventory system provides more readily available information to calculate
the internal indices than our previous system, thus, facilitating our ability to
calculate the index internally.

     This change has been accounted for as a change in accounting principle. A
change in accounting principle results from the adoption of a generally accepted
accounting principle different than the one used previously for reporting
purposes. The net loss and net loss per share for the thirteen weeks and
twenty-six weeks ended July 31, 2004 have been restated to reflect this change
in accordance with SFAS No. 3. The LIFO charge for the thirteen weeks and
twenty-six weeks ended July 30, 2005 was approximately $0.5 million and $0.9
million, respectively. The LIFO charge for the thirteen weeks and twenty-six
weeks ended July 31, 2004, was approximately $0.3 million and $0.6 million,
respectively, compared to $1.0 million and $1.8 million, respectively, as
previously reported.

     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 $6.0
million, or 6.9%. As a percentage of sales, SG&A increased by 0.4%. The
components of this 0.4% net increase in SG&A are as follows:





                                       26



<TABLE>

            COMPONENT                    %                                 REASON
----------------------------------    ---------   ------------------------------------------------------------

Net advertising expenditures.....      (0.4)%     Decrease is primarily due to lower gross advertising
                                                  expenditures and increased vendor support.

License and lease fees...........      (0.5)      Decrease is primarily due to Carlyle's significantly lower
                                                  rent structure as a percentage of sales compared to Finlay's
                                                  licensed department business.

Payroll expense..................       0.4       Increase in payroll expense is due to lower than expected
                                                  same store sales negatively impacting the leveraging of
                                                  payroll expense.

Other expenses...................       0.9       Increase in other expenses is due to higher expenses for
                                                  credit card fees, telephone, utilities, security and
                                                  supplies as a result of Carlyle being a stand-alone retailer
                                                  as well as Carlyle's higher administrative costs as a
                                                  percentage of sales. Additionally, the increase is due to
                                                  Finlay's lower than expected same store sales negatively
                                                  impacting the leveraging of these expenses.
                                      ------
             Total ..............       0.4%
                                      ======
</TABLE>

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$0.2 million reflecting additional depreciation and amortization as a result of
capital expenditures for the most recent twelve months, offset by the effect of
certain assets becoming fully depreciated. Additionally, accelerated
depreciation costs totaling approximately $0.1 million, associated with the
closing of 42 stores announced by Federated, were recorded during the 2005
period.

     IMPAIRMENT OF GOODWILL. During the quarter ended July 30, 2005, Federated
announced its intention to divest 42 stores, beginning in 2006, for which we
currently operate the fine jewelry departments. Based upon this business
indicator, we utilized our SFAS No. 142 model to evaluate the carrying value of
goodwill as of July 30, 2005. As a result, we determined that goodwill was
impaired and an impairment of $77.3 million was recorded during the thirteen
weeks ended July 30, 2005.

     INTEREST EXPENSE, NET. Interest expense increased by $0.3 million primarily
due to an increase in average borrowings ($286.0 million for the period in 2005
compared to $274.4 million in 2004) as a result of additional borrowings to
finance the acquisition of Carlyle in May 2005 and to fund Carlyle's working
capital requirements, offset by the refinancing of the Senior Debentures and the
Senior Notes during 2004. The weighted average interest rate was approximately
7.4% for both the 2004 and 2005 periods.

     OTHER EXPENSE - DEBT EXTINGUISHMENT COSTS. Other expense - debt
extinguishment costs includes $6.7 million for redemption premiums paid on the
Senior Debentures and the Senior Notes, $2.1 million to write-off deferred
financing costs related to the refinancing of the Senior Debentures and the
Senior Notes and $0.3 million for other expenses.

      BENEFIT FOR INCOME TAXES. The income tax benefit for the 2005 and 2004
periods reflects effective tax rates of 39.5% (before reflecting the impairment
of goodwill) and 39.0%, respectively. Additionally, the 2005 period includes a
benefit of approximately $4.4 million associated with the impairment of goodwill
and a benefit of approximately $0.2 million associated with the reversal of tax
accruals no longer required as a result of a decrease in state tax rates. The
2004 period includes a benefit of approximately $0.6 million associated with the
reversal of tax accruals no longer required as a result of the closure of open
tax years.






                                       27



     NET LOSS. Net loss of $74.8 million for the 2005 period represents an
increased loss of $69.1 million as compared to the net loss of $5.7 million in
the prior period as a result of the factors discussed above.


TWENTY-SIX WEEKS ENDED JULY 30, 2005 COMPARED WITH TWENTY-SIX WEEKS ENDED JULY
31, 2004

     SALES. Sales for the twenty-six weeks ended July 30, 2005 increased $9.3
million, or 2.5%, over the comparable period in 2004. Comparable department
sales increased 0.3%. Sales include $371.5 million in sales from the Finlay
departments, which represented a 1.2% decrease over the $376.2 million in sales
reported in the twenty-six weeks ended July 31, 2004, and $13.9 million in sales
from the Carlyle division.

     During the twenty-six weeks ended July 30, 2005, we opened five departments
and closed eight departments. The openings and closings were all within existing
store groups.

     GROSS MARGIN. Gross margin decreased by $1.7 million in 2005 compared to
2004, and, as a percentage of sales, gross margin decreased by 0.8%. The
components of this 0.8% net decrease in gross margin are as follows:

<TABLE>

            COMPONENT                      %                              REASON
-----------------------------------     --------       -----------------------------------------------

Merchandise cost of sales.........      (0.4)%         Increase in merchandise cost of sales is due
                                                       to our efforts to increase market penetration
                                                       and market share through our pricing
                                                       strategy, the mix of sales with increased
                                                       sales in the diamond, designer and clearance
                                                       categories, which have lower margins than
                                                       other categories, as well as the increased
                                                       price of gold. Additionally, the increase is
                                                       due to the impact of Carlyle's lower gross
                                                       margins as a result of the strong emphasis on
                                                       the watch category.

LIFO..............................       (0.1)         Increase in LIFO is due to our estimate using
                                                       internal indices.

Other ............................       (0.3)         Increase in various other components of cost
                                                       of sales.
                                        -------
             Total ...............       (0.8)%
                                        =======
</TABLE>


     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 $6.7
million, or 3.8%. As a percentage of sales, SG&A increased by 0.7%. The
components of this 0.7% net increase in SG&A are as follows:















                                       28



<TABLE>

            COMPONENT              %                           REASON
------------------------------  ---------  -------------------------------------------------

Net advertising expenditures..   (0.4)%    Decrease is primarily due to lower gross
                                           advertising expenditures and increased vendor
                                           support.

License and lease fees........   (0.2)     Decrease is primarily due to Carlyle's
                                           significantly lower rent structure as a
                                           percentage of sales compared to Finlay's
                                           licensed department business.

Payroll expense...............    0.6      Increase in payroll expense is due to lower
                                           than expected same store sales negatively
                                           impacting the leveraging of payroll expense.

Other expenses................    0.7      Increase is due to Finlay's lower than
                                           expected same store sales negatively
                                           impacting the leveraging of these expenses as
                                           well as Carlyle's higher field and
                                           administrative expenses.
                                ------
             Total ...........    0.7%
                                ======
</TABLE>

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$0.4 million as a result of certain assets becoming fully depreciated offset by
additional depreciation and amortization as a result of capital expenditures for
the most recent twelve months. Additionally, accelerated depreciation costs
totaling approximately $0.1 million, associated with the closing of 42 stores
announced by Federated, were recorded in the period.

     IMPAIRMENT OF GOODWILL. During the quarter ended July 30, 2005, Federated
announced its intention to divest 42 stores, beginning in 2006, for which we
currently operate the fine jewelry departments. Based upon this business
indicator, we utilized our SFAS No. 142 model to evaluate the carrying value of
goodwill as of July 30, 2005. As a result, we determined that goodwill was
impaired and an impairment of $77.3 million was recorded during the twenty-six
weeks ended July 30, 2005.

     INTEREST EXPENSE, NET. Interest expense decreased by $0.4 million primarily
due to a decrease in average borrowings ($248.9 million for the period in 2005
compared to $252.9 million in 2004) as a result of the refinancing of the Senior
Debentures and the Senior Notes during 2004 offset by additional borrowings to
finance the acquisition of Carlyle in May 2005 and to fund Carlyle's working
capital requirements. The weighted average interest rate was approximately 7.8%
for the 2005 period compared to 7.9% for the comparable period in 2004.

     OTHER EXPENSE - DEBT EXTINGUISHMENT COSTS. Other expense - debt
extinguishment costs includes $6.7 million for redemption premiums paid on the
Senior Debentures and the Senior Notes, $2.1 million to write-off deferred
financing costs related to the refinancing of the Senior Debentures and the
Senior Notes and $0.3 million for other expenses.

      BENEFIT FOR INCOME TAXES. The income tax benefit for the 2005 and 2004
periods reflects effective tax rates of 39.5% (before reflecting the impairment
of goodwill) and 39.0%, respectively. Additionally, the 2005 period includes a
benefit of approximately $4.4 million associated with the impairment of goodwill
and a benefit of approximately $0.2 million associated with the reversal of tax
accruals no longer required as a result of a decrease in state tax rates. The
2004 period includes a benefit of approximately $0.6 million associated with the
reversal of tax accruals no longer required as a result of the closure of open
tax years.

     NET LOSS. Net loss of $77.6 million for the 2005 period represents an
increased loss of $70.3 million as compared to the net loss of $7.3 million in
the prior period as a result of the factors discussed above.






                                       29



LIQUIDITY AND CAPITAL RESOURCES

     Information about our financial position as of July 30, 2005 and January
29, 2005 is presented in the following table:

                                                 JULY 30,       JANUARY 29,
                                                   2005            2005
                                                ---------       -----------
                                                  (DOLLARS IN THOUSANDS)
        Cash and cash equivalents........       $  2,517        $ 64,443
        Working capital..................        228,831         234,210
        Long-term debt...................        200,000         200,000
        Stockholders' equity (a).........         93,393         169,181

---------------
(a)  The stockholders' equity balance at July 30, 2005 reflects a charge of
     approximately $72.9 million, net of tax, related to the impairment of
     goodwill.

     Our primary capital requirements are for funding working capital for new
locations and for growth of existing locations, as well as debt service
obligations and license fees to host store groups, rent payments for the Carlyle
stores, funding potential acquisitions, and, to a lesser extent, capital
expenditures for opening new locations, renovating existing locations and
information technology investments. For 2004, capital expenditures totaled $12.7
million and for 2005 are estimated to be approximately $12 to $13 million,
including Carlyle. Although capital expenditures are limited by the terms of the
Revolving Credit Agreement, to date, this limitation has not precluded us from
satisfying our capital expenditure requirements.

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

     Cash flows provided from (used in) operating, investing and financing
activities for the twenty-six weeks ended July 30, 2005 and July 31, 2004 were
as follows:

                                               TWENTY-SIX WEEKS ENDED
                                          --------------------------------
                                                                JULY 31,
                                              JULY 30,           2004
                                                2005         (AS RESTATED)
                                          --------------     -------------
                                                (DOLLARS IN THOUSANDS)
Operating activities.....................  $ (130,115)        $  (115,044)
Investing activities.....................     (33,524)             (5,635)
Financing activities.....................     101,713              31,179
      Net decrease in cash and cash       -----------        --------------
            equivalents .................  $  (61,926)        $   (89,500)
                                          ===========         ===========

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

o    Investment in inventory and for working capital;

o    Strategic acquisitions;

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

                                       30




o    Investments in technology.

OPERATING ACTIVITIES

     The primary source of our liquidity is cash flows from operating
activities. The key component of operating cash flow is merchandise sales.
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 $130.1
million and $115.0 million for the twenty-six weeks ended July 30, 2005 and July
31, 2004, respectively.

     Our principal operations substantially preclude customer receivables as our
license agreements 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. However, we
cannot ensure the collection of sales proceeds from our host stores.
Additionally, on average, approximately 50% of our merchandise has been carried
on consignment. Our working capital balance was $228.8 million at July 30, 2005,
a decrease of $5.4 million from January 29, 2005.

     The seasonality of our business causes working capital requirements, and
therefore, borrowings under the Revolving Credit Agreement, to reach their
highest level in the months of October, November and December in anticipation of
the year-end holiday season. Accordingly, we experience seasonal cash needs as
inventory levels peak. Additionally, substantially all of our license agreements
provide for accelerated payments during the months of November and December,
which require the host store groups to remit to us 75% of the estimated months'
sales prior to or shortly following the end of that month. These proceeds result
in a significant increase in our cash, which is used to reduce our borrowings
under the Revolving Credit Agreement. Inventory levels increased by $75.8
million, or 27.2%, as compared to January 29, 2005, primarily as a result of the
acquisition of Carlyle, whose inventory levels were $55.5 million as of July 30,
2005, as well as seasonality.

INVESTING ACTIVITIES

      Net cash used in investing activities, consisting of payments for capital
expenditures as well as the purchase of Carlyle, was $33.5 million and $5.6
million for the twenty-six weeks ended July 30, 2005 and July 31, 2004,
respectively. Capital expenditures during each period related primarily to
expenditures for new department openings and renovations.

FINANCING ACTIVITIES

     Proceeds from, and principal payments on, the Revolving Credit Facility
have been our primary financing activities. Net cash provided from financing
activities was $101.7 million for the twenty-six weeks ended July 30, 2005,
consisting principally of proceeds from, and principal payments on, the
Revolving Credit Facility and funds received from stock option exercises. Net
cash provided from financing activities was $31.2 million for the twenty-six
weeks ended July 31, 2004.

     Our Revolving Credit Agreement, which expires in January 2008, provides us
with a line of credit of up to $225.0 million to finance working capital needs.
Amounts outstanding under the Revolving Credit Agreement bear interest at a rate
equal to, at our option, (i) the prime rate plus a margin ranging from zero to
1.0% or (ii) the adjusted Eurodollar rate plus a margin ranging from 1.0% to
2.0%, in each case depending on our financial performance. The weighted average
interest rate was 5.4% and 3.6% for the twenty-six weeks ended July 30, 2005 and
July 31, 2004, respectively.

      In each year, we are 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,

                                       31


respectively, for a 30 consecutive day period (the "Balance Reduction
Requirement"). Borrowings under the Revolving Credit Agreement were $88.4
million at July 30, 2005, compared to a zero balance at January 29, 2005 and
$60.0 million at July 31, 2004. The average amounts outstanding under the
Revolving Credit Agreement were $48.9 million and $34.0 million for the
twenty-six weeks ended July 30, 2005 and July 31, 2004, respectively. The
maximum amount outstanding for the twenty-six weeks ended July 30, 2005 was
$119.4 million, at which point the available borrowings were an additional $93.0
million.

     On May 19, 2005, we signed a definitive merger agreement and completed the
acquisition of Carlyle. The purchase price was approximately $29.0 million, plus
estimated transaction fees of approximately $1.6 million, and was financed with
additional borrowings under the Revolving Credit Agreement. In Carlyle's most
recent fiscal year, average borrowings under their revolving credit facility
were approximately $20.0 million. This facility was terminated and paid in full
at the closing and since the closing of the acquisition, Carlyle's cash
requirements have been, and will continue to be, funded under Finlay's Revolving
Credit Agreement. Borrowings under our Revolving Credit Agreement have increased
by approximately $52.4 million over last year as a result of the acquisition of
Carlyle in May 2005 as well as to fund Carlyle's working capital requirements.
In connection with the acquisition, we replaced the existing Revolving Credit
Agreement and entered into the Restated Credit Agreement with GECC and certain
other lenders and Finlay Jewelry entered into the Gold Consignment Amendment,
to, among other things, permit the acquisition transaction. In addition, Carlyle
and its subsidiaries, together with Finlay Jewelry, entered into the
Supplemental Indenture to guarantee obligations of Finlay Jewelry under the New
Senior Notes.

     During 2004, we and Finlay Jewelry each commenced an offer to purchase for
cash any and all of our Senior Debentures and Finlay Jewelry's Senior Notes,
respectively. Holders of approximately 79% and 98% of the outstanding Senior
Debentures and the outstanding Senior Notes, respectively, tendered their
securities and consented to the proposed amendments to the related indentures.
Additionally, during 2004, Finlay Jewelry completed the sale of the New Senior
Notes. Interest on the New Senior Notes is payable semi-annually on June 1 and
December 1 of each year and commenced on December 1, 2004.

     Finlay Jewelry incurred approximately $5.2 million in costs, including $5.0
million associated with the sale of the New Senior Notes, which have been
deferred and are being amortized over the term of the New Senior Notes. In June
2004, we recorded pre-tax charges of approximately $9.1 million, including $6.7
million for redemption premiums paid on the Senior Debentures and the Senior
Notes, $2.1 million to write-off deferred financing costs related to the
refinancing of the Senior Debentures and the Senior Notes and $0.3 million for
other expenses. These costs are included in other expense - debt extinguishment
costs in the accompanying Consolidated Statements of Operations for the thirteen
weeks and twenty-six weeks ended July 31, 2004.

     The tender offers, New Senior Notes offering and redemptions of the
outstanding Senior Debentures and Senior Notes were all undertaken to decrease
our overall interest rate, extend our debt maturities and decrease total
long-term debt as well as simplify our capital structure by eliminating debt at
the parent company level. As a result of the completion of the redemption of the
Senior Debentures in 2004, Finlay Jewelry is no longer required to provide the
funds necessary to pay the higher debt service costs associated with the Senior
Debentures.

      A significant amount of our operating cash flow will be used to pay
interest with respect to the New Senior Notes and amounts due under the
Revolving Credit Agreement, including the payments required pursuant to the
Balance Reduction Requirement. As of July 30, 2005, our outstanding borrowings
were $288.4 million, which included a $200.0 million balance under the New
Senior Notes and $88.4 million balance under the Revolving Credit Agreement,
compared to $260.0 million as of July 31, 2004.

                                       32




      Our agreements covering the Revolving Credit Agreement and the New Senior
Notes each require that we comply with certain restrictive and financial
covenants. In addition, Finlay Jewelry is a party to the Gold Consignment
Agreement, which also contains certain covenants. As of and for the twenty-six
weeks ended July 30, 2005, we are in compliance with all of our covenants. We
expect to be in compliance with all of our covenants through 2005. Because
compliance is based, in part, on our management's estimates and actual results
can differ from those estimates, there can be no assurance that we will be in
compliance with the covenants in the future or that the lenders will waive or
amend any of the covenants should we be in violation thereof. We believe the
assumptions used are appropriate.

       The Revolving Credit Agreement contains customary covenants, including
limitations on, or relating to, capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. The
Revolving Credit Agreement also contains various financial covenants, including
minimum earnings and fixed charge coverage ratio requirements and certain
maximum debt limitations.

       The indenture related to the New 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 believe that, based upon current operations, anticipated growth and
continued availability under the Revolving Credit Agreement, Finlay Jewelry
will, for the foreseeable future, be able to meet its debt service and
anticipated working capital obligations and to make distributions sufficient to
permit us to pay certain expenses as they come due. No assurances, however, can
be given that Finlay Jewelry's current level of operating results will continue
or improve or that Finlay Jewelry's income from operations will continue to be
sufficient to permit Finlay Jewelry to meet its debt service and other
obligations. Currently, Finlay Jewelry's principal financing arrangements
restrict the amount of annual distributions, including those required to fund
stock repurchases, from Finlay Jewelry to us. The amounts required to satisfy
the aggregate of Finlay Jewelry's interest expense totaled $10.4 million and
$8.8 million for the twenty-six weeks ended July 30, 2005 and July 31, 2004,
respectively.

     Our long-term needs for external financing will depend on our 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 our vendors. As of July 30, 2005, $356.2 million
of consignment merchandise from approximately 300 vendors was on hand as
compared to $347.6 million at July 31, 2004. For 2004, we had an average balance
of consignment merchandise of $365.2 million.

      The following table summarizes our contractual and commercial obligations
which may have an impact on future liquidity and the availability of capital
resources, as of July 30, 2005 (dollars in thousands):

                                       33





<TABLE>

                                                                     PAYMENTS DUE BY PERIOD
                                              ----------------------------------------------------------------------
                                                             LESS THAN                                 MORE THAN
     CONTRACTUAL OBLIGATIONS                     TOTAL        1 YEAR     1 - 3 YEARS   3 - 5 YEARS      5 YEARS
  ------------------------------------------- ------------- ------------ ------------- ------------- ---------------

  Long-Term Debt Obligations:
      New Senior Notes (due 2012) (1).......   $   200,000   $       -     $      -    $        -     $  200,000
  Interest payments on New Senior Notes.....       117,250      16,750       33,500        33,500         33,500
  Operating lease obligations (2)...........        33,951       5,841       11,229         7,680          9,201
  Revolving Credit Agreement (due 2008) (3).        88,428      88,428            -             -              -
  Gold Consignment Agreement (expires 2005).        49,545           -       49,545             -              -
  Gold forward contracts....................         7,277       7,277            -             -              -
  Employment agreements.....................         8,693       2,804        5,389           500              -
  Letters of credit.........................        12,590      12,340            -           250              -
                                              ------------- ------------ ------------- ------------- ---------------
     Total..................................   $   517,734   $ 133,440   $   99,663    $   41,930     $  242,701
                                              ============= ============ ============= ============= ===============
</TABLE>

----------------
(1)  On June 3, 2004, Finlay Jewelry issued $200.0 million of New Senior Notes
     due 2012. Refer to Note 4 of Notes to the Consolidated Financial
     Statements.

(2)  Represents future minimum payments under noncancellable operating leases as
     of January 29, 2005 and March 26, 2005 for Finlay and Carlyle,
     respectively.

(3)  The outstanding balance under the Revolving Credit Agreement at September
     2, 2005 was $130.1 million.

      The operating leases included in the above table do not include contingent
rent based upon sales volume or variable costs such as maintenance, insurance
and taxes. Our open purchase orders are cancelable without penalty and are
therefore not included in the above table. There were no commercial commitments
outstanding as of July 30, 2005, 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 July 30, 2005.

OFF-BALANCE SHEET ARRANGEMENTS

     Finlay Jewelry's Gold Consignment Agreement enables Finlay Jewelry to
receive consignment merchandise by providing gold, or otherwise making payment,
to certain vendors. While the merchandise involved remains consigned, title to
the gold content of the merchandise transfers from the vendors to the gold
consignor. On July 29, 2005, Finlay Jewelry amended the Gold Consignment
Agreement to among other things, extend the maturity date to October 31, 2007,
and to establish financial covenants (including minimum earnings and fixed
charge coverage ratio requirements and certain maximum debt limitations). The
Gold Consignment Agreement permits Finlay Jewelry to consign up to the lesser of
(i) 165,000 fine troy ounces or (ii) $50.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement. At July 30, 2005,
amounts outstanding under the Gold Consignment Agreement totaled 115,489 fine
troy ounces, valued at $49.5 million. The average amount outstanding under the
Gold Consignment Agreement was $48.9 million in 2004. In the event this
agreement is terminated, Finlay Jewelry would be required to return the gold or
purchase the outstanding gold at the prevailing gold rate in effect on that
date. For financial statement purposes, the consigned gold is not included in
merchandise inventories on the Consolidated Balance Sheets and, therefore, no
related liability has been recorded.

     The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the creation of liens, engaging in transactions with affiliates
and limitations on the payment of dividends. In addition, the Gold Consignment
Agreement also contains various financial covenants, including minimum earnings
and fixed charge coverage ratio requirements and certain maximum debt
limitations. At July 30, 2005, Finlay Jewelry was in compliance with all of its
covenants under the Gold Consignment Agreement.

                                       34



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

OTHER ACTIVITIES AFFECTING LIQUIDITY

     In November 2004, we entered into a new employment agreement with a senior
executive. The new employment agreement has a term of four years commencing on
January 30, 2005 and ending on January 31, 2009, unless earlier terminated in
accordance with the provisions of the employment agreement. The agreement
provides an annual salary level of approximately $1.0 million as well as
incentive compensation based on meeting specific financial goals.

     During 2005, we entered into employment agreements with certain executives
of the Company. Each of the employment agreements has a term of three years,
unless earlier terminated in accordance with the provisions of the employment
agreements. The agreements provide for annual salary levels totaling
approximately $1.8 million as well as incentive compensation based on meeting
specific financial goals.

     From time to time, we enter into forward contracts based upon the
anticipated sales of gold product in order to hedge against the risk arising
from our payment arrangements. At July 30, 2005, we had several open positions
in gold forward contracts totaling 17,000 fine troy ounces, to purchase gold for
$7.3 million. There can be no assurance that these hedging techniques will be
successful or that hedging transactions will not adversely affect our results of
operations or financial position.

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 2004 accounted
for approximately 41% of our sales and approximately 90% of our income from
operations. We have typically experienced net losses in the first three quarters
of our fiscal year. During these periods, working capital requirements have been
funded by borrowings under the Revolving Credit Agreement. Accordingly, the
results for any of the first three quarters of any given fiscal year, taken
individually or in the aggregate, are not indicative of annual results.

INFLATION

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

                                       35



critical may be found in Note 2 to the consolidated financial statements
included in our Form 10-K for the year ended January 29, 2005.

     MERCHANDISE INVENTORIES

     We value our inventories at the lower of cost or market. The cost is
determined by the LIFO method utilizing an internally generated index. We
determine the LIFO cost on an interim basis by estimating annual inflation
trends, annual purchases and ending inventory levels for the fiscal year. Actual
annual inflation rates and inventory balances as of the end of any fiscal year
may differ from interim estimates, and, as such, estimates are adjusted in the
fourth quarter of each year. Factors related to inventories, such as future
consumer demand and the economy's impact on consumer discretionary spending,
inventory aging, ability to return merchandise to vendors, merchandise condition
and anticipated markdowns, are analyzed to determine estimated net realizable
values. An adjustment is recorded to reduce the LIFO cost of inventories, if
required, to their estimated net realizable values. Any significant
unanticipated changes in the factors above could have a significant impact on
the value of the inventories and our reported operating results.

      During the third quarter of 2004, we changed our method of determining
price indices used in the valuation of LIFO inventories. Prior to the third
quarter of 2004, we determined our LIFO inventory value by utilizing selected
producer price indices published for jewelry and watches by the BLS. During the
third quarter of 2004, we began applying internally developed indices that we
believe more accurately measure inflation or deflation in the components of our
merchandise and our specific merchandise mix than the BLS producer price
indices. Additionally, we believe that this change in accounting principle is an
alternative accounting method that is preferable since the internal indices are
representative of our actual merchandise mix of inventory, as opposed to the
producer price indices, which are broader, more general inflation indices. The
net loss and net loss per share for the thirteen weeks and twenty-six weeks
ended July 31, 2004 have been restated to reflect this change in accordance with
SFAS No. 3. The LIFO charge for the thirteen weeks and twenty-six weeks ended
July 30, 2005 was approximately $0.5 million and $0.9 million, respectively. The
LIFO charge for the thirteen weeks and twenty-six weeks ended July 31, 2004, was
approximately $0.3 million and $0.6 million, respectively, compared to $1.0
million and $1.8 million, respectively, as previously reported. Adjustments to
earnings resulting from changes in historical loss trends have been
insignificant for the thirteen weeks and twenty-six weeks ended July 30, 2005
and July 31, 2004. Further, we do not anticipate any significant change in LIFO
that would cause a significant change in our earnings.

     We estimate inventory shrinkage for the period from the last inventory date
to the end of the reporting period on a store-by-store basis. Our inventory
shortage estimate can be affected by changes in merchandise mix and changes in
actual shortage trends. The shrinkage rate from the most recent physical
inventory, in combination with historical experience, is the basis for
estimating shrinkage. As of July 30, 2005, our shrink reserve totaled $0.5
million, compared to $1.8 million as of July 31, 2004.

      VENDOR ALLOWANCES

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

     Vendor allowances have been accounted for in accordance with EITF Issue No.
02-16, "Accounting by a Customer (Including a Reseller) for Cash Consideration
Received from a Vendor". Vendor allowances provided as a reimbursement of
specific, incremental and identifiable costs incurred to promote a

                                       36



vendor's products are recorded as an SG&A reduction when the cost is incurred.
All other vendor allowances are initially deferred with the deferred amounts
recognized as a reduction in cost of sales when the related product is sold. The
amounts recognized as a reduction in cost of sales has not differed
significantly over the past three fiscal years.

     As of July 30, 2005 and January 29, 2005, deferred vendor allowances
totaled (i) $13.4 million and $14.8 million, respectively, for owned
merchandise, which allowances are included as an offset to merchandise
inventories on the Consolidated Balance Sheets, and (ii) $7.9 million and $8.4
million, respectively, for merchandise received on consignment, which allowances
are included as deferred income on the Consolidated Balance Sheets.

      LONG-LIVED ASSETS AND GOODWILL

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

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

     o    Significant negative industry or economic trends; or

     o    Store closings, particularly in light of the recently announced store
          closings resulting from the Federated/May merger.

     When we determine that the carrying value of long-lived assets other than
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of impairment, we recognize an impairment loss at the time the
undiscounted estimated future net cash flows expected to be generated by an
asset (or group of assets) is less than its carrying value. We measure
impairment losses as the amount by which the asset's carrying value exceeds its
fair value. To the extent future cash flows are less than anticipated,
additional impairment charges may result. There have been no adjustments to
earnings resulting from the impairment of long-lived assets for the thirteen
weeks and twenty-six weeks ended July 30, 2005. We also review the estimated
useful lives of the assets and reduce such lives if necessary.

     SFAS No. 142, "Goodwill and Other Intangible Assets," requires an
impairment-only approach to accounting for goodwill. Absent any prior indicators
of impairment, we perform our required annual impairment test during the fourth
quarter of our fiscal year, and perform additional impairment tests whenever
events or changes in circumstances indicate that the carrying value of goodwill
may not be recoverable. We performed our annual assessment for 2004 and
concluded that our goodwill was not impaired. Determining the fair value of a
reporting unit, and determining the fair value of individual assets and
liabilities of a reporting unit (including unrecognized intangible assets) under
SFAS No. 142, is judgmental in nature and often involves the use of significant
estimates and assumptions. These estimates and assumptions could have a
significant impact on whether an impairment charge is recognized and the
magnitude of any such charge. Estimates of fair value are primarily determined
using projected discounted cash flows and are based on our best estimate of
future revenue and operating costs and general market conditions. These
estimates are subject to review and approval by senior management. This approach
uses significant assumptions, including projected future cash flows, the
discount rate reflecting the risk inherent in future cash flows, and a terminal
growth rate.

      In the quarter ended July 30, 2005, Federated announced their intention to
divest 42 stores for which we currently operate the fine jewelry departments.
Based upon this business indicator, we utilized our SFAS No. 142 model to
evaluate the carrying value of goodwill recorded on our department store based
fine jewelry departments segment as of July 30, 2005.

                                       37



       The goodwill impairment analysis took into consideration our results for
the first half of the year and estimates for the balance of the year and beyond,
as well as Federated's recently announced intention to divest 42 stores. We
performed our impairment analysis in accordance with SFAS No. 142, the
provisions of which require, similar to the recognition of goodwill in a
business combination, an allocation of the fair value to all of our assets and
liabilities (excluding Carlyle) (including any unrecognized intangible assets)
as if the Company had been acquired in a business combination and the fair value
of the Company was the price paid to acquire the Company. As a result of this
analysis, an impairment of goodwill of $77.3 million was recorded as a component
of loss from operations in the Consolidated Statements of Operations, which
eliminated all of the goodwill that was on our balance sheet.

     REVENUE RECOGNITION

     We recognize revenue upon the sale of merchandise, either owned or
consigned, to our customers, net of anticipated returns. The provision for sales
returns is based on historical evidence of our return rate. We recorded an
allowance for sales returns of $1.5 million for both the twenty-six weeks ended
July 30, 2005 and July 31, 2004. Adjustments to earnings resulting from
revisions to estimates on our sales return provision has been insignificant for
the thirteen weeks and twenty-six weeks ended July 30, 2005 and July 31, 2004.

     SELF-INSURANCE RESERVES

     Other than with respect to our Carlyle operations, we are self-insured for
medical and workers' compensation claims up to certain maximum liability
amounts. Although the amounts accrued are determined based on analysis of
historical trends of losses, settlements, litigation costs and other factors,
the amounts that we will ultimately disburse could differ materially from the
accrued amounts. Self-insurance reserves aggregated $7.1 million and $5.5
million at July 30, 2005 and July 31, 2004, respectively.

     INCOME TAXES

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

      The income tax provision for the 2005 period and the 2004 period reflects
effective tax rates of 39.5% (before reflecting the impairment of goodwill) and
39.0%, respectively. During the second quarter of 2005, a benefit of
approximately $4.4 million was recorded resulting from the impairment of
goodwill and a benefit of approximately $0.2 million was recorded associated
with the reversal of tax accruals no longer required as a result of a decrease
in state tax rates. During the second quarter of 2004, a benefit of
approximately $0.6 million was recorded associated with the reversal of tax
accruals no longer required, primarily as the result of the closing of open tax
years. Total current deferred tax assets decreased by approximately $10.1
million in the second quarter of 2004, primarily as a result of the utilization
of deferred tax assets related to the approval from the Internal Revenue Service
of a favorable change of accounting method regarding vendor allowances. Further,
in 2004, we recorded refunds claimed for foreign taxes originally paid in 1995
and 1996, together with an adjustment for foreign tax credits

                                       38



previously used to reduce U.S. income tax liability. This resulted in a net
recovery of foreign tax of approximately $0.6 million.

     ACCOUNTING FOR ACQUISITIONS

     In May 2005, we completed the acquisition of Carlyle. Carlyle operates 34
specialty jewelry stores, located primarily in the southeastern United States.
The acquisition of Carlyle is being accounted for under the purchase method of
accounting in accordance with SFAS No. 141, "Business Combinations". As such, we
have undertaken an analysis of the fair value of identified tangible and
intangible assets and liabilities, and determined the preliminary excess of fair
value of net assets acquired over cost. We will continue to monitor our
estimates of the fair value of the assets and liabilities as we may adjust these
amounts. We believe that any changes to these amounts will not have a material
impact on our financial condition or results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation". This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123(R) requires that the fair value of such equity
instruments be recognized as expense in the historical financial statements as
services are performed. Currently, only certain pro forma disclosures of fair
value are required. Although we are in the process of determining the impact of
this Statement on our results of operations, the historical impact under SFAS
No. 123 "Accounting for Stock-Based Compensation" is disclosed in Note 2 to the
Consolidated Financial Statements.

     In March 2005, the Commission issued Staff Accounting Bulletin ("SAB") No.
107 "Share-Based Payment." SAB No. 107 expresses views of the Commission staff
regarding the interaction between SFAS No. 123(R) and certain Commission rules
and regulations and provide the staff's views regarding the valuation of
share-based payment arrangements. Subsequently, the Commission decided to delay
the required implementation of SFAS No. 123(R) to years beginning after June 15,
2005. We will adopt SFAS No. 123(R) for the first quarter of fiscal 2006.

     In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3".
SFAS No. 154 changes the requirements for the accounting for, and reporting of,
a change in accounting principle. Previously, voluntary changes in accounting
principle were required to be recognized by including in net income of the
period of change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 requires retrospective application to prior periods
financial statements, unless it is impractical to do so. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected
to have a material effect on our Consolidated Financial Statements.

FORWARD-LOOKING INFORMATION AND RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

     This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. 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, performances or
achievements to differ materially from those reflected in, or implied by, the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of

                                       39



Operations". Important factors that could cause actual results to differ
materially include, but are not limited to:

       OUR SALES PRIMARILY DEPEND UPON OUR HOST STORE RELATIONSHIPS. THE LOSS OF
OUR RELATIONSHIP WITH FEDERATED, OR SIGNIFICANT STORE CLOSURES BY OUR HOST STORE
GROUPS, COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.

       On July 28, 2005, Federated announced its intention to divest 42 stores
for which we currently operate the fine jewelry departments. On August 30, 2005,
Federated announced that it had completed the merger with May and that it
planned to close an additional three stores for which we currently operate the
fine jewelry departments. The impact of the merger of May and Federated is
unknown. A decision by Federated, 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, could have a material
adverse effect on our business and financial condition. During 2004,
approximately 78% of our sales were generated by departments operated in store
groups owned by May and Federated.

       SEASONALITY OF THE RETAIL JEWELRY BUSINESS AND FLUCTUATIONS IN OUR
QUARTERLY RESULTS COULD ADVERSELY AFFECT OUR PROFITABILITY.

       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 2004 accounted
for 41% of our sales and 90% of our operating income. 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
our revolving credit facility. This pattern is expected to continue. A
substantial decrease in sales during the fourth quarter, whether resulting from
adverse weather conditions, natural disasters or any other cause, would have a
material adverse effect on our profitability.

       OUR LOCATIONS ARE HEAVILY DEPENDENT ON CUSTOMER TRAFFIC AND THE CONTINUED
POPULARITY OF OUR HOST STORES AND MALLS.

       The success of our locations depends, in part, on the ability of host
stores to generate consumer traffic in their stores, and the continuing
popularity of malls and department stores as shopping destinations. Sales volume
and customer traffic may be adversely affected by economic slowdowns in a
particular geographic area, the closing of anchor tenants, or competition from
retailers such as discount and mass merchandise stores and other department
stores where we do not have locations.

       WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, FINANCE, INTEGRATE OR MAKE
ACQUISITIONS OUTSIDE OF THE LICENSED JEWELRY DEPARTMENT BUSINESS.

       We may from time to time examine opportunities to acquire or invest in
companies or businesses that complement our existing core business, such as our
recent acquisition of Carlyle. There can be no assurance that the Carlyle
acquisition or any other future acquisitions by us will be successful or improve
our operating results. In addition, our ability to complete acquisitions will
depend on the availability of both suitable target businesses and acceptable
financing. Any acquisitions may result in a potentially dilutive issuance of
additional equity securities, the incurrence of additional debt or increased
working capital requirements. Such acquisitions could involve numerous
additional risks, including difficulties in the assimilation of the operations,
products, services and personnel of any acquired company, diversion of our
management's attention from other business concerns, and expansion into new
businesses with which we may have no prior experience.

                                       40



     OUR PROFITABILITY DEPENDS, IN PART, UPON OUR ABILITY TO CONTINUE TO OBTAIN
SUBSTANTIAL AMOUNTS OF MERCHANDISE ON CONSIGNMENT AND ON FINLAY JEWELRY'S
ABILITY TO CONTINUE ITS GOLD CONSIGNMENT AGREEMENT.

     In recent years, on average, approximately 50% of our merchandise has been
obtained on consignment. The willingness of vendors to enter into such
arrangements may vary substantially from time to time based on a number of
factors, including the merchandise involved, the financial resources of vendors,
interest rates, availability of financing, fluctuations in gem and gold prices,
inflation, our financial condition and a number of other economic or competitive
conditions in the jewelry business or generally. In addition, Finlay Jewelry's
Gold Consignment Agreement allows us to receive consignment merchandise by
providing gold, or otherwise making payment, to certain vendors. As the price of
gold increases, the amount of consigned gold that is available to us is reduced
pursuant to the limitations of the Gold Consignment Agreement. Additionally, in
the event that this agreement is terminated, Finlay Jewelry would be required to
return the gold or purchase the outstanding gold at the prevailing, and
potentially higher, gold price in effect on that date.

     TERRORIST ATTACKS, ACTS OF WAR, OR OTHER FACTORS AFFECTING DISCRETIONARY
CONSUMER SPENDING MAY ADVERSELY AFFECT OUR INDUSTRY, OUR OPERATIONS AND OUR
PROFITABILITY.

     Terrorist activities, armed hostilities and other political instability, as
well as a decline in general economic conditions, including the country's
financial markets, a decline in consumer credit availability, or increases in
prevailing interest rates, could materially reduce discretionary consumer
spending particularly with respect to luxury items and, therefore, materially
adversely affect our business and financial condition, especially if such
changes were to occur in the fourth quarter of our fiscal year.

     VOLATILITY IN THE AVAILABILITY AND COST OF PRECIOUS METALS AND PRECIOUS AND
SEMI-PRECIOUS STONES COULD ADVERSELY AFFECT OUR BUSINESS.

     The jewelry industry in general is affected by fluctuations in the prices
of precious metals and precious and semi-precious stones. The availability and
prices of gold, diamonds and other precious metals and precious and
semi-precious stones may be influenced by cartels, political instability in
exporting countries and inflation. Shortages of these materials or sharp changes
in their prices could have a material adverse effect on our results of
operations or financial condition. Although we attempt to protect against such
fluctuations in the price of gold by entering into gold forward contracts, there
can be no assurance that these hedging practices will be successful or that
hedging transactions will not adversely affect our results of operations or
financial condition.

     THE RETAIL JEWELRY BUSINESS IS HIGHLY COMPETITIVE.

     We face competition for retail jewelry sales from national and regional
jewelry chains, other department stores, local independently owned jewelry
stores and chains, specialty stores, mass merchandisers, catalog showrooms,
discounters, direct mail suppliers, internet merchants and televised home
shopping. Some of our competitors are substantially larger and have greater
financial resources than our business.

     WE MAY NOT BE ABLE TO COLLECT PROCEEDS FROM OUR HOST STORES.

     Our license agreements typically require the host stores to remit the net
sales proceeds for each month to us approximately three weeks after the end of
such month. However, we cannot assure you that we will timely collect the net
sales proceeds due to us from our host stores. If one or more host stores fail
to remit the net sales proceeds for a substantial period of time or during the
fourth quarter of our fiscal year

                                       41




due to financial instability, insolvency or otherwise, this could have a
material adverse impact on our liquidity.

     WE ARE DEPENDENT ON SEVERAL KEY VENDORS AND OTHER SUPPLIERS.

     In 2004, merchandise obtained by us from our five largest vendors generated
approximately 31% of sales, and merchandise obtained from our largest vendor
generated approximately 10% of sales. Additionally, in Carlyle's most recent
fiscal year, merchandise obtained from its two largest vendors generated
approximately 20% of their sales. There can be no assurances that we can
identify, on a timely basis, alternate sources of merchandise supply in the case
of an abrupt loss of any of our significant suppliers. Additionally, we receive
allowances from our vendors through a variety of programs and arrangements,
including cooperative advertising. A significant reduction in the collection of
such allowances may negatively impact our future gross margins and/or increase
future SG&A, and may reduce future net income.

     OUR SUCCESS DEPENDS ON OUR ABILITY TO IDENTIFY AND RAPIDLY RESPOND TO
FASHION TRENDS.

     The jewelry industry is subject to rapidly changing fashion trends and
shifting consumer demands. Accordingly, our success depends on the priority that
our target customers place on fashion and our ability to anticipate, identify
and capitalize upon emerging fashion trends.

     WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND OUR BUSINESS OR INCREASE THE
NUMBER OF DEPARTMENTS WE OPERATE.

     A significant portion of our growth in sales and income from operations in
recent years has resulted from our ability to obtain licenses to operate
departments in new host store groups and the addition of new departments in
existing host store groups. We cannot predict the number of departments we will
operate in the future or whether our expansion, if any, will be at levels
comparable to that experienced to date. In a few cases, we are subject to
limitations under our license agreements which prohibit us from operating
departments for competing host store groups within a certain geographical radius
of the host stores (typically five to ten miles) without the host store's
permission. Such limitations restrict us from further expansion within areas
where we currently operate departments, including expansion through possible
acquisitions. If we cannot obtain required consents, we will be limited in our
ability to expand further in areas near our existing host stores.

     WE COULD BE MATERIALLY ADVERSELY AFFECTED IF OUR DISTRIBUTION OPERATIONS RE
DISRUPTED.

     In the event that our primary central distribution facility was to shut
down or otherwise become inoperable or inaccessible for any reason, we could
incur higher costs and longer lead times associated with the distribution of
merchandise to our stores during the time it takes to reopen or replace the
facility.

     WE ARE HEAVILY DEPENDENT ON OUR MANAGEMENT INFORMATION SYSTEMS.

     The efficient operation of our business is heavily dependent on our
fully-integrated management information systems. In particular, we rely on our
inventory and merchandising control system, which allows us to make better
decisions in the allocation and distribution of our merchandise. Our business
and operations could be materially and adversely affected if our systems were
inoperable or inaccessible or if we were not able, for any reason, to
successfully restore our systems and fully execute our disaster recovery plan.

                                       42



     WE DEPEND ON KEY PERSONNEL.

     Our success depends to a significant extent upon our ability to retain key
personnel, particularly Arthur E. Reiner, our Chairman and Chief Executive
Officer. The loss of Mr. Reiner's services or one or more of our current members
of senior management, or our failure to attract talented new employees, could
have a material adverse effect on our business.

     OUR SUBSTANTIAL DEBT AND DEBT SERVICE REQUIREMENTS COULD ADVERSELY AFFECT
OUR BUSINESS.

     We currently have a significant amount of debt. As of July 30, 2005, we had
$288.4 million of debt outstanding (not including $12.6 million in letters of
credit under our $225.0 million revolving credit facility). During the
twenty-six weeks ended July 30, 2005, our average revolver balance was $48.9
million and we peaked in usage at $119.4 million. In addition, as of July 30,
2005, the value of gold outstanding under the Gold Consignment Agreement totaled
$49.5 million. Subject to the terms of our indebtedness, we may incur additional
indebtedness, including secured debt, in the future.

     THE TERMS OF OUR DEBT INSTRUMENTS AND OTHER OBLIGATIONS IMPOSE FINANCIAL
AND OPERATING RESTRICTIONS.

     The Revolving Credit Agreement, Gold Consignment Agreement and the
indenture relating to the New Senior Notes contain restrictive covenants that
will limit our ability to engage in activities that may be in our long-term best
interests. These covenants include limitations on, or relating to, capital
expenditures, liens, indebtedness, investments, mergers, acquisitions,
affiliated transactions, management compensation and the payment of dividends
and other restricted payments.

     THE FUTURE IMPACT OF LEGAL AND REGULATORY ISSUES IS UNKNOWN.

     Our business is subject to government laws and regulations including, but
not limited to, employment laws and regulations, state advertising regulations,
quality standards imposed by federal law, and other laws and regulations. A
violation or change of these laws could have a material adverse effect on our
business, financial condition and results of operations. In addition, the future
impact of litigation arising in the ordinary course of business may have an
adverse effect on the financial results or reputation of the company.

     CARLYLE'S BUSINESS COULD BE ADVERSELY AFFECTED IF IT IS UNABLE TO
SUCCESSFULLY NEGOTIATE FAVORABLE LEASE TERMS.

     All of the Carlyle stores are leased. As of July 30, 2005, Carlyle had a
total of 34 leased stores. Carlyle's store leases are generally for a term of
ten years, with rent being a fixed minimum base plus for certain of the stores,
a percentage of the store's sales in excess of a specified threshold. Carlyle
has generally been successful in negotiating leases for new stores and lease
renewals as its current leases near expiration. However, Carlyle's business,
financial condition, and operating results could be adversely affected if
Carlyle is unable to continue to negotiate favorable lease and renewal terms.

     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. 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.

                                       43



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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
2004, a 100 basis point change in interest rates would have resulted in an
increase in interest expense of approximately $0.5 million in 2004. In seeking
to minimize the risks from interest rate fluctuations, we manage exposures
through our regular operating and financing activities. In addition, the
majority of our borrowings are under fixed rate arrangements, as described in
Note 4 of Notes to Consolidated Financial Statements.

     COMMODITY RISK

     We principally address commodity risk through retail price points. Our
commodity risk exposure to diamond, gold and other merchandise categories is
market price fluctuations and we do not fully hedge our current positions.

     In 2005, we entered into forward contracts for the purchase of a portion of
our gold in order to hedge the risk of gold price fluctuations. The table below
provides information about our derivative financial instruments that are
sensitive to gold prices as of July 30, 2005:

                   CONTRACT         FINE TROY      PREVAILING       CONTRACT
                  SETTLEMENT        OUNCES OF      GOLD PRICE      FAIR MARKET
 COMMODITY           DATE              GOLD         PER OUNCE         VALUE
-------------    -------------    ------------- -- ------------- --------------
Gold              11/30/2005         2,000         $  434.79     $    869,600
Gold              12/30/2005        15,000         $  436.24     $  6,543,600

     Based on the amount of sales of gold product, a $10 change in the price of
gold may have impacted gross margin by approximately $0.2 million and $0.4
million for the thirteen weeks and twenty-six weeks ended July 30, 2005,
respectively.

ITEM 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

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

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

     Our management, with the participation of our CEO and CFO, also conducted
an evaluation of our internal control over financial reporting, as defined in
Exchange Act Rule 13a-15(f), to determine whether any changes occurred during
the quarter ended July 30, 2005 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 July
30, 2005.

     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

                                       44



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.

     There have been no changes in our internal controls over financial
reporting that occurred during our last fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. We excluded from our
assessment any changes in internal control over financial reporting within the
Carlyle division, which was acquired on May 19, 2005, and whose financial
statements reflect total assets and net sales constituting 12.5% and 7.0%,
respectively, of the related consolidated financial statement amounts as of and
for the thirteen weeks ended July 30, 2005. We will include the Carlyle division
in our evaluation of the design and effectiveness of internal control over
financial reporting as of February 3, 2007.












                                       45





PART II - OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

     There were no repurchases of equity securities made by us during the second
quarter of 2005.

     Pursuant to our stock repurchase program, we may, at the discretion of
management, purchase up to $12.6 million of our Common Stock from time to time
through September 30, 2005. The extent and timing of repurchases will depend
upon general business and market conditions, stock prices, availability under
the Revolving Credit Facility, compliance with certain restrictive covenants and
our cash position and requirements going forward. As of July 30, 2005, and from
inception of the program, we have repurchased a total of 2,207,904 shares for
$27.4 million.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Annual Meeting of the Stockholders of the Company was held on June 16,
2005, at which Messrs. Rohit M. Desai, Michael Goldstein and Thomas M. Murnane
were re-elected as directors of the Company to serve a three-year term in the
class of directors whose term expires in 2008. Such members have been elected to
serve until the expiration of their respective terms of office and until their
successors are duly elected and qualified. At such meeting, votes were cast as
follows:

                                                     Votes Withheld
            Name                   Votes For           Or Against
-----------------------------    ---------------    ------------------
Rohit M. Desai                     7,782,129                -
Michael Goldstein                  7,026,514             755,615
Thomas M. Murnane                  7,762,878              19,251

     Messrs. David B. Cornstein, John D. Kerin, Arthur E. Reiner, Norman S.
Matthews and Richard E. Kroon and Ms. Ellen R. Levine continued to serve as
members of the Board of Directors after the meeting.

ITEM 6.  EXHIBITS

EXHIBIT NO.       DESCRIPTION

        2         Not Applicable.

        3         Not Applicable.

        4         Not Applicable.

       10.1       Employment Agreement dated as of June 16, 2005 between Joseph
                  M. Melvin and Finlay Jewelry (incorporated by reference to
                  Exhibit 10.1 filed as part of the Current Report on Form 8-K
                  filed by the Company on June 22, 2005).

       10.2       Employment Agreement dated as of June 16, 2005 between Leslie
                  A. Philip and Finlay Merchandising & Buying, Inc.
                  (incorporated by reference to Exhibit 10.2 filed as part of
                  the Current Report on Form 8-K filed by the Company on June
                  22, 2005).

                                       46




       10.3       Employment Agreement dated as of June 16, 2005 between Joyce
                  Manning Magrini and Finlay Jewelry (incorporated by reference
                  to Exhibit 10.3 filed as part of the Current Report on Form
                  8-K filed by the Company on June 22, 2005).

       10.4       Finlay Key  Employee  Special  Severance  Pay Plan
                  (incorporated  by  reference to Exhibit 10.4 filed as part of
                  the Current Report on Form 8-K filed by the Company on
                  June 22, 2005).

       10.5       Eighth Amendment dated as of July 29, 2005, among Sovereign
                  Bank, Sovereign Precious Metals, LLC (Sovereign Bank and
                  Sovereign Precious Metals, LLC individually and as agents),
                  Commerzbank International S.A., Finlay Jewelry, and eFinlay,
                  Inc. to the Amended and Restated Gold Consignment Agreement
                  dated as of March 30, 2001, as amended (incorporated by
                  reference to Exhibit 10.1 filed as part of the Current Report
                  on Form 8-K filed by the Company on August 4, 2005).

        11        Statement re: Computation of earnings per share (not required
                  because the relevant computation can be clearly determined
                  from material contained in the financial statements).

        15        Not applicable.

        18        Not applicable.

        19        Not applicable.

        22        Not applicable.

        23        Not applicable.

        24        Not applicable.

        31.1      Certification of principal executive officer pursuant to the
                  Sarbanes-Oxley Act of 2002, Section 302.

        31.2      Certification of principal financial officer pursuant to the
                  Sarbanes-Oxley Act of 2002, Section 302.

        32.1      Certification of principal executive officer pursuant to the
                  Sarbanes-Oxley Act of 2002, Section 906.

        32.2      Certification of principal financial officer pursuant to the
                  Sarbanes-Oxley Act of 2002, Section 906.

                                       47






                                   SIGNATURES


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



Date: September 2, 2005              FINLAY ENTERPRISES, INC.

                                     By: /s/ Bruce E. Zurlnick
                                     -----------------------------------------
                                         Bruce E. Zurlnick
                                         Senior Vice President, Treasurer
                                         and Chief Financial Officer
                                         (As both a duly authorized officer of
                                         Registrant and as principal financial
                                         officer of Registrant)























                                       48`