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




                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K


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

                   For the Fiscal Year Ended February 1, 1997

            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: 33-59380

                            FINLAY FINE JEWELRY CORPORATION
              -----------------------------------------------------
             (Exact name of registrant as specified in its charter)


            Delaware                                           13-3287757
----------------------------------                        -------------------
  (State or other jurisdiction                              (I.R.S. Employer
 of incorporation or organization)                         Identification No.)


           521 Fifth Avenue, New York, NY                   10175
       ------------------------------------------         ----------
       (Address of principal executive offices)           (Zip code)


                                  212-808-2060
                  --------------------------------------------
              (Registrant's telephone number, including area code)

  
        Securities registered pursuant to Section 12(b) of the Act: None
        Securities registered pursuant to Section 12(g) of the Act: None

     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 if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant'  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

     As of April 1, 1997,  there were 1,000  shares of common  stock,  par value
$.01 per share,  of the registrant  outstanding.  As of such date, all shares of
common stock were owned by the Registrant' parent, Finlay Enterprises,  Inc., a
Delaware corporation.

     *The Registrant is not subject to the filing  requirements of Section 13 or
15(d) of the  Securities  Exchange  Act of 1934 and is  voluntarily  filing this
Annual Report on Form 10-K.




<PAGE>


                         FINLAY FINE JEWELRY CORPORATION

                                    FORM 10-K

                   FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997

                                      INDEX


PART I                                                                   PAGE(S)

 Item 1.   Business.........................................................  3
 Item 2.   Properties....................................................... 16
 Item 3.   Legal Proceedings................................................ 16
 Item 4.   Submission of Matters to a Vote of Security Holders.............. 16

PART II

 Item 5.   Market for the Registrant's Common Equity and Related 
             Stockholder Matters............................................ 17
 Item 6.   Selected Financial Data.......................................... 17
 Item 7.   Management's Discussion and Analysis of Financial 
             Condition and Results of Operations............................ 19
 Item 8.   Financial Statements and Supplementary Data...................... 25
 Item 9.   Changes in and Disagreements with Accountants on 
             Accounting and Financial Disclosure............................ 25

PART III

 Item 10.  Directors and Executive Officers of the Registrant............... 26
 Item 11.  Executive Compensation........................................... 29
 Item 12.  Security Ownership of Certain Beneficial Owners and 
             Management..................................................... 37
 Item 13.  Certain Relationships and Related Transactions................... 38

PART IV

 Item 14.  Exhibits, Financial Statement Schedules and Reports 
             on Form 8-K.................................................... 42

SIGNATURES.................................................................. 49


                                        2
<PAGE>

                                     PART I

Item 1.  Business

The Company

     Finlay Fine Jewelry Corporation, a Delaware corporation ("Finlay Jewelry"),
is a wholly owned subsidiary of Finlay Enterprises, Inc., a Delaware corporation
(the "Holding Company").  References to "Finlay" mean, collectively, the Holding
Company, Finlay Jewelry and all predecessor businesses.

     Finlay  is  the  largest  operator  of  leased  fine  jewelry   departments
("Departments")  in the United States and France. As of February 1, 1997, Finlay
operated a total of 927  Departments  in many of the  leading  department  store
chains in the United States and Europe.  Since  opening its first  Department in
1942,  Finlay  has  grown  by  adding  host  stores  and  increasing  sales  per
Department,  achieving  sales of over $685 million in 1996.  Finlay  entered the
international fine jewelry retailing market in October 1994 by acquiring Societe
Nouvelle d'Achat de Bijouterie ("Sonab"), a French company that as of the end of
1996  operated  139  Departments  and three  stand- alone stores in locations in
Europe.  Finlay  sells a broad  selection  of  moderately  priced  fine  jewelry
products such as necklaces,  earrings,  bracelets, rings and watches and markets
these products principally as fashion accessories. In 1996, the average price of
the items sold  domestically  by Finlay was $151 per item.  Other than  watches,
substantially  all of the fine  jewelry  items  sold by  Finlay  are  made  from
precious  metals  and many also  contain  diamonds  or  colored  gemstones.  All
references herein to leased  Departments refer to Departments  operated pursuant
to license agreements or other arrangements with host department stores.

     Finlay's sales have increased from $473.7 million in 1992 to $685.3 million
in 1996, a compound annual growth rate of 9.7%. Income from operations of Finlay
Jewelry has increased from $37.1 million to $55.0 million in the same period,  a
compound  annual  growth rate of 10.3%.  Finlay has  increased  in size from 662
Departments  at the  beginning  of 1992 to 927  Departments  and 12  stand-alone
stores, for a total of 939 locations at the end of 1996.

     Domestically, as of February 1, 1997, Finlay operated 788 Departments in 22
host store groups,  located in 42 states and the District of Columbia.  Finlay's
largest  host  store  relationship  is with The May  Department  Stores  Company
("May"),  for which  Finlay  operated all 359  Departments  located in May-owned
department stores,  such as Lord & Taylor and Filene's.  Finlay's second largest
host store relationship is with Federated Department Stores, Inc. ("Federated"),
for which Finlay  operated 153 of the  Departments  located in Federated-  owned
department  stores,   including  Rich's  and  Burdines.   Finlay  also  operates
Departments in numerous  independent  host store groups,  such as Liberty House,
Belk and  Carson  Pirie  Scott.  Finlay  believes  that it  maintains  excellent
relations  with its host store  groups,  19 of which have had leases with Finlay
for more than five years (representing 87.4% of Finlay's domestic sales in 1996)
and  15  of  which  have  had  leases  with  Finlay  for  more  than  ten  years
(representing 78.6% of Finlay's domestic sales in 1996).

     In 1996,  Finlay  continued its expansion into two additional areas of fine
jewelry  retailing:  the  international  market and outlet  stores.  Through its
French  subsidiary,  Sonab,  Finlay is the largest  operator of  Departments  in
France,  operating  its 131  French  Departments  in  five  host  store  groups,
including Galeries Lafayette and Nouvelles Galeries. During October 1996, Finlay
expanded  into  Berlin,  Germany  with the opening of a new  Galeries  Lafayette
store.  In  addition,  in  April  1996,  Finlay  signed a lease  agreement  with
Debenhams,  P.L.C., a department store chain which operates 90 stores throughout
the United  Kingdom and Ireland  ("Debenhams"),  and  operated  seven  Debenbams
Departments  in the United  Kingdom at the end of 1996.  As of February 1, 1997,
Finlay  operated nine outlet stores at  nonmetropolitan  outlet  shopping center
locations in Ohio, New York, Florida, South Carolina, Pennsylvania,  Georgia and
California under the name "New York Jewelry Outlet." The

                                        3

<PAGE>


outlet stores provide Finlay with a channel to sell discontinued,  close-out and
other selected merchandise.

     Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1992,  1993,  1994,  1995,  1996 and 1997 relate to the fiscal years ended on
January 30, 1993, January 29, 1994, January 28, 1995, February 3, 1996, February
1, 1997, and January 31, 1998,  respectively.  Each of the fiscal years includes
52 weeks except 1995, which includes 53 weeks.

     Finlay  Jewelry is a wholly owned  subsidiary of the Holding  Company.  The
principal  executive  offices of Finlay Jewelry are located at 521 Fifth Avenue,
New York,  New York  10175 and its  telephone  number at this  address  is (212)
808-2060.
 
     On April 6, 1995, the Holding Company  completed an initial public offering
(the  "Offering")  of 2,500,000  shares of its common stock,  par value $.01 per
share  ("Common  Stock") at a price of $14.00 per share.  An additional  115,000
shares were sold by non-management  selling stockholders.  Net proceeds from the
Offering after deducting the underwriting discount of $2,300,000 and expenses of
approximately   $2,500,000  incurred  in  connection  with  the  Offering,  were
$30,200,000.  The net  proceeds  were  used to  repurchase  $6,103,000  accreted
balance of the Holding  Company's 12% Senior  Discount  Debentures due 2005 (the
"Debentures")  at a price  equal  to  $5,789,000,  or  approximately  95% of the
accreted  amount.  The balance of the net proceeds were used to reduce a portion
of the outstanding  indebtedness  under Finlay's  $135,000,000  Revolving Credit
Facility  (the  "Revolving  Credit  Facility")  with  General  Electric  Capital
Corporation ("G.E. Capital").

     Immediately prior to completion of the Offering, the holders of the Holding
Company's 10% Series C Cumulative  Preferred Stock ("Series C Preferred  Stock")
exchanged all  outstanding  shares of Series C Preferred  Stock with the Holding
Company for  2,581,784  shares of Common  Stock (the "Series C  Exchange").  For
purposes of the Series C Exchange,  the outstanding Series C Preferred Stock was
(i) valued at its  liquidation  value of $30,000,000  plus $6,145,000 of accrued
dividends through the date of completion of the Series C Exchange,  paid in kind
at a quarterly  rate of 2.5% and (ii)  exchanged for Common Stock at the initial
public  offering  price of $14.00 per share.  In  conjunction  with the Series C
Exchange, a $10,000,000  nonrecurring noncash charge representing the difference
between the  liquidation  value and the carrying value of the Series C Preferred
Stock was recorded.

     In May 1993,  an  affiliate  of Thomas H. Lee  Company  (together  with its
affiliate  transferees,  the "Lee Investors") and partnerships  managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors"),  acquired
36.8% and 24.5%,  respectively,  of the  outstanding  voting  securities  of the
Holding  Company in a series of  transactions  which  recapitalized  the Holding
Company (the  "Recapitalization  Transactions").  Following the Recapitalization
Transactions,  certain  members of management  (the  "Management  Stockholders")
maintained a substantial  equity interest in the Holding Company.  Following the
completion  of the Offering  and the Series C Exchange,  the Lee  Investors  and
Desai Investors  beneficially  owned 33.1% and 22.1% of the  outstanding  voting
securities, respectively, and 14.8% was held by the Management Stockholders. For
information   regarding   the   Recapitalization   Transactions,   see  "Certain
Relationships and Related Transactions - The 1993  Recapitalization,"  Note 1 to
the  Consolidated  Financial  Statements  and  "Security  Ownership  of  Certain
Beneficial Owners and Management."

General

     Overview.  Many department stores  traditionally  have engaged  specialized
lessees, such as Finlay, to operate their fine jewelry departments.  The lessees
furnish specialized expertise in management,  merchandising, selling, marketing,
inventory  control  and  security.   By  engaging  lessees,  host  stores  avoid
investment of working  capital and devotion of  management  attention in an area
outside their core apparel and home furnishings businesses.

                                        4

<PAGE>


Finlay  also  believes  that,  as a  specialized  retailer,  a lessee  is better
equipped than a department  store to establish  close  relationships  within the
fragmented fine jewelry vendor community. Such relationships offer advantages in
coordinating purchasing,  merchandising and marketing with vendors. Accordingly,
host stores can realize higher sales  productivity and greater  profitability by
leasing their fine jewelry operations to third parties such as Finlay.

     Finlay believes certain aspects of its business differentiate it from other
retailers.  First, as a lessee operating within host department  stores,  Finlay
benefits  from the host stores'  reputation,  advertising,  credit  services and
established customer base. Finlay also avoids the substantial capital investment
typical of stand-alone  retailing  formats,  enabling  Finlay's new  Departments
generally to achieve  profitability  within their first 12 months of operations.
Second,  Finlay  believes that its working capital  requirements  are lower than
those for many  other  retailers  and  Finlay's  exposure  to changes in fashion
trends is reduced because  approximately 50% of Finlay's domestic merchandise is
carried on consignment.  In addition,  net sales proceeds (whether  generated by
cash or on  credit)  are  generally  remitted  to Finlay by each host store on a
monthly basis.  Third,  substantially  all consumer  credit risk is borne by the
host store rather than by Finlay  because  substantially  all sales proceeds are
remitted to Finlay by each store  whether or not  collected,  provided  that the
proper credit  approvals have been obtained in accordance  with the host store's
policy. Fourth, Finlay has developed a sophisticated  management information and
inventory control system which enables Finlay to monitor  merchandise trends and
control inventory.

     Industry.  Finlay  believes  that  during the past ten years  trends in the
retail  jewelry  industry have  contributed to Finlay's  growth.  Total personal
consumption  expenditures for jewelry  (including both fine and costume jewelry)
in the United States in 1996 were $41.3 billion,  according to the United States
Department  of Commerce.  This  represents  an increase of  approximately  $16.5
billion in annual  expenditures  since 1986 and a compound annual growth rate of
5.2% from 1986 through 1996. Finlay believes that demographic  factors,  such as
the maturing of the "baby boom"  generation and an increase in the population of
working women, have contributed to the industry's growth.

     The fine  jewelry  business  has also  developed  in certain ways that have
aided Finlay's growth. Traditionally, consumers purchased fine jewelry primarily
as a gift, keepsake or other special occasion item. Finlay believes that today's
jewelry  consumers  have  accepted  fine jewelry as a fashion  accessory and are
increasingly  making fine jewelry an impulse  purchase item. These factors have,
in Finlay's view,  increased fine jewelry sales in the department  store format.
Fine jewelry has become an integral part of the department  store  merchandising
scheme and is now  marketed by  department  stores as a separate  fashion  item.
Finlay believes that these factors have made the Departments  operated by Finlay
an  independent  attraction to department  store  customers,  less  dependent on
general store traffic.

     The retail  jewelry  industry is highly  fragmented  and includes  numerous
local  jewelers.  However,  Finlay has benefited from  consolidation  within the
Department  segment of the industry by adding host store groups which previously
leased the operation of their jewelry departments to competitors of Finlay. As a
consequence  of  consolidations  of  department  stores  which leased their fine
jewelry  operations  and the  difficulties  of  certain  of  Finlay's  principal
competitors, Finlay added five host store groups in 1992, which accounted for 94
of a total 124 new Departments  opened in that year (exclusive of closings).  In
1993,  1994,  1995 and 1996,  Finlay  opened  17, 8, 20 and 13 new  Departments,
respectively, as the result of host department store consolidations.

     Growth Strategy.  Finlay's future growth strategy is based on six principal
objectives:  (i)  increases in  comparable  Department  sales,  (ii) addition of
Departments within existing host store groups,  (iii)  establishment of new host
store  relationships,  (iv) expansion of Department selling space, (v) continued
international  expansion and (vi)  development  of its retail outlet format as a
channel to sell discontinued, close-out and certain other merchandise.

                                        5

<PAGE>



 .    Increase Comparable  Department Sales.  Increases in comparable  Department
     sales represent  Finlay's most profitable  means of growth.  In addition to
     its continued emphasis on broad fashion assortments,  timely promotions and
     extensive  advertising,  Finlay has continued to focus on three  strategies
     for improving  comparable  Department  sales growth:  (i) a more aggressive
     pricing  strategy  and  increased  inventory  levels on select  best  value
     merchandise,   (ii)  holiday  and  event  related  promotions  as  well  as
     participating  in host store  special  promotions  and (iii)  technological
     advances and  refinements to operating  procedures at the Department  level
     designed to improve  customer  service.  During 1996,  Finlay  continued to
     intensify  its  promotion  of key items and best value  programs as well as
     increase  Department  stock  positions  of such  key  items.  In  addition,
     Finlay's  advertising and promotional planning are closely coordinated with
     this pricing  strategy.  During 1996,  Finlay  focused on holiday and event
     related  promotions  such  as  Mother's  Day  and  November's  Extravaganza
     promotion as well as participating in host store special  promotions,  such
     as one- day sales.  Finlay  intends  to  continue  the use of such  special
     marketing promotions as a means of improving  comparable  Department sales.
     In  addition,   Finlay  has  streamlined   administrative  tasks  including
     implementing  new  procedures  for  the  daily  set-up  and  close-down  of
     Departments and establishing an interface  between store cash registers and
     Finlay's central office that reduces sales processing time.  Finlay is also
     exploring  ways to make  the  receipt  and  transfer  of  merchandise  more
     efficient.  Finlay  believes  that these  improvements  have allowed  sales
     personnel to spend more time  servicing  customers and selling  merchandise
     and therefore have increased  sales. In  management's  view, such operating
     changes  and  methods  provide  the  necessary  infrastructure  to  support
     continued  growth  without  a  commensurate   increase  in   administrative
     expenses.

 .    Add  Departments  Within  Existing Host Store Groups.  Finlay has generally
     been able to open  Departments in new stores opened or acquired by existing
     host stores.  Host store  expansion has added,  through  1996,  114 net new
     Departments   since  the  beginning  of  1992.  Based  on  expansion  plans
     previously  announced by May and Federated,  Finlay has identified over 100
     locations  (without  regard  to  possible  closings)  at which it has added
     Departments or expects to have the  opportunity  to add  Departments in the
     future. In addition,  Finlay has historically  benefited from, and believes
     it is  well-positioned  to continue to capitalize on,  consolidation in the
     department  store  industry.  During 1995,  Finlay  opened 61 and closed 23
     domestic  Departments  and  during  1996  Finlay  opened  32 and  closed 30
     domestic Departments within existing host store groups.

 .    Establish  New Host Store  Relationships.  Finlay  seeks to  establish  new
     relationships with department stores that currently either lease their fine
     jewelry  departments  to  Finlay's  competitors  or operate  their own fine
     jewelry  businesses by  demonstrating to store management the potential for
     improved  financial  performance.  Since the beginning of 1992,  Finlay has
     added such host store groups as  Burdines,  Bon Marche,  Elder  Beerman and
     Stern's.

 .    Expansion of Departments  Selling Space.  During 1996,  Finlay continued to
     expand  the  linear  footage  of  display  cases  in  certain  high  volume
     Departments.  The expanded  Departments  have enabled Finlay to enhance the
     depth of the merchandise  assortment resulting in increased sales volume in
     these  Departments.  Although  Finlay's  average  sales per linear foot was
     $11,600 in 1996, these Departments may produce results significantly higher
     than Finlay's average.  Furthermore,  these incremental sales increases are
     achieved  without  having to incur  proportionate  increases in selling and
     administrative expenses. Finlay views this as an opportunity for growth and
     will continue to identify such Departments.





                                        6

<PAGE>


 .    Continue International Expansion. In October 1994, Finlay acquired Sonab, a
     French company which operated 131 Departments and three stand-alone  stores
     in France at the end of 1996.  Sonab operates its  Departments  within five
     host store groups,  including  Galeries  Lafayette and Nouvelles  Galeries.
     During October 1996, Finlay expanded into Berlin,  Germany with the opening
     of a new Galeries  Lafayette store. As a continuation of Finlay's  on-going
     international  expansion,  in April 1996,  Finlay signed a lease  agreement
     with  Debenhams,   a  department  store  chain  which  operates  90  stores
     throughout  the United Kingdom and Ireland,  and operated  seven  Debenhams
     Departments in the United Kingdom at the end of 1996.  Finlay believes that
     fine jewelry retailing  outside of the United States is highly  fragmented,
     consisting  primarily of small  regional and local  operators.  In Finlay's
     view, its specialized expertise has enabled it to strengthen the marketing,
     merchandising,  inventory  control and  personnel  training  methods of its
     French operation. Finlay also believes that its expertise and critical mass
     will  allow it to  capitalize  on the  fragmentation  of the  international
     jewelry retail market to expand in France and into other foreign markets.

 .    Develop  Outlet Store  Business.  Management  believes  that outlet  stores
     represent a potential  opportunity  beyond Finlay's core leased  Department
     business.  Finlay opened two outlet stores in 1994, five stores in 1995 and
     an additional  two stores in 1996.  The outlet stores provide Finlay with a
     channel to sell  discontinued,  close-out  and certain  other  merchandise.
     Outlet  centers are  generally  located in  nonmetropolitan  areas so as to
     avoid  direct  competition  with  traditional  retail  shopping  areas that
     typically include department stores.

     Merchandising  Strategy.  Finlay seeks to maximize sales and  profitability
through a participatory  merchandising  strategy known as the "Finlay Triangle,"
which integrates Finlay's store group management, central office and vendors. By
coordinating  efforts  and sharing  on-line  access to  information  each Finlay
Triangle  participant plays a role which emphasizes its area of expertise in the
merchandising process, thereby increasing productivity.  Finlay's central office
functions as a service organization, assembling an assortment of merchandise for
selection by Finlay's store group management.  Within pricing  guidelines set by
the central office, Finlay's store group management contributes to the selection
of the specific  merchandise  most  appropriate to the demographics and customer
tastes within their particular  geographical  area.  Vendors  participate in the
decision  making  process  and are made  partners  with  respect to  merchandise
assortment, including the testing of new products, marketing, advertising, stock
levels and pricing  strategy.  Through the Finlay  Triangle,  opportunities  are
created  for  the  vendor  to  assist  in  improving   inventory   turnover  and
profitability,  both for the vendor and Finlay.  Through this  strategy,  Finlay
believes  it  capitalizes  on  economies  of  scale  by   centralizing   certain
activities,  such as vendor selection,  advertising and planning, while allowing
Finlay's  store group  management  the  flexibility  to implement  merchandising
programs tailored to their host store environments and clientele.

                               The Finlay Triangle
                                [GRAPHIC OMITTED]











 



                                        7

<PAGE>


     Finlay has structured its  relationships  with vendors to encourage sharing
of responsibility for marketing and merchandise management.  Finlay furnishes to
vendors, through on-line access to Finlay's information systems, the same sales,
stock and gross margin  information  that is  available to Finlay's  store group
management  and  central  office  for each of the  vendor's  styles in  Finlay's
merchandise assortment. Using this information,  vendors are able to participate
in  decisions  to  replenish  inventory  which  has been  sold and to  return or
exchange  slower - moving  merchandise.  In  addition,  vendors  may input order
recommendations  through Finlay's data processing system for approval by Finlay.
New items are tested in specially selected  "predictor"  Departments where sales
experience  can  indicate  an  item's  future   performance  in  Finlay's  other
Departments. Finlay believes that the access and input which vendors have in the
merchandising  process  results in a better  assortment,  timely  replenishment,
higher  turnover  and higher  sales of  inventory.  Finlay  believes  that these
elements of its approach differentiate Finlay from its competitors.

     Since  many of the host store  groups in which  Finlay  operates  differ in
fashion  image  and  customer   demographics,   Finlay's  flexible  approach  to
merchandising   is  designed  to   complement   each  host  store   group's  own
merchandising  philosophy.  Finlay emphasizes a "fashion  accessory" approach to
fine jewelry and watches,  and seeks to provide items that  coordinate  with the
host store's  fashion focus as well as maintain  stocks of traditional  and gift
merchandise.

Store Relationships

     Host Store  Relationships.  Domestically,  as of February  1, 1997,  Finlay
operated 788  Departments in 22 host store groups,  located in 42 states and the
District of Columbia.  Finlay's largest host store relationship is with May, for
which  Finlay  operates  all 359  Departments  located in  May-owned  department
stores,  such as Lord & Taylor and Filene's.  Finlay's second largest host store
relationship is with Federated, for which Finlay operates 153 of the Departments
located in  Federated-owned  department  stores,  including Rich's and Burdines.
Finlay also operates Departments in numerous independent host store groups, such
as Liberty House, Belk and Carson Pirie Scott. Finlay believes that it maintains
excellent relations with its host store groups, 19 of which have had leases with
Finlay for more than five years  (representing  87.4% of Finlay's domestic sales
in 1996) and 15 of which  have had  leases  with  Finlay for more than ten years
(representing 78.6% of Finlay's domestic sales in 1996). As a consequence of the
strong and, in many instances,  long-term relationships,  host store groups have
routinely  renewed  Finlay's  lease  agreements at their renewal  dates.  Finlay
believes that the majority of its lease  agreements  will continue to be renewed
routinely.

     Store groups owned by May and Federated accounted for an average of 49% and
23%, respectively, of Finlay's domestic annual sales for 1994, 1995 and 1996.

     The  following  table  identifies  the host  store  groups in which  Finlay
operated   Departments   at  February  1,  1997,  the  year  in  which  Finlay's
relationship  with each host store group commenced and the number of Departments
in each host store group.  The table also identifies  Finlay's outlet and French
stand-alone locations and the date on which such locations opened.


                                        8

<PAGE>



                                              Inception of         Number of
Host Store Group/Location                     Relationship    Departments/Stores

May
L.S. Ayres/Famous Barr.....................      1979                31
Filene's...................................      1977                38
Foley's....................................      1986                53
Hecht's/Strawbridge's......................      1986                70
Kaufmann's.................................      1979                47
Lord & Taylor..............................      1978                59
Meier & Frank..............................      1988                 8
Robinsons - May............................      1948                53
                                                                    ---
                                                                    359
                                                                    ---
Federated
The Bon Marche.............................      1993                18
Burdines...................................      1992                44
Lazarus/Rich's/Goldsmith's.................      1983                71
Stern's....................................      1994                20
                                                                    ---
                                                                    153
                                                                    ---
Other Domestic Departments
Belk/Leggett...............................      1975                50
Bergner's/Boston Store/Carson 
  Pirie Scott..............................      1977                51
The Bon-Ton/AM&A's.........................      1986                34
Crowley's/Steinbach........................      1968                19
Dillard's..................................      1988                 5
Elder Beerman..............................      1992                35
Gottschalks................................      1969                30
Liberty House..............................      1983                11
Proffitt's.................................      1991                 9
Younkers...................................      1973                32
                                                                    ---
                                                                    276
                                                                    ---

 Total Domestic Departments.................                        788

Domestic Stand-Alone Stores
New York Jewelry Outlet....................      1994                 9

International Departments (Sonab)
Bazar de l'Hotel de Ville..................      1994(1)              6
Debenhams..................................      1996                 7
Galeries Lafayette.........................      1994(1)             30
Monoprix/Inno/Baze.........................      1994(1)             36
Nouvelles Galeries.........................      1994(1)             59
Jeanteur...................................      1996                 1
                                                                    ---
                                                                    139
                                                                    ---

Sonab Stand-Alone Stores
New Gold...................................      1994(1)              3
                                                                    ---

Total......................................                         939
                                                                    ===

---------------------------
(1)  Year of Finlay's acquisition of Sonab (which occurred on October 28, 1994).



                                        9

<PAGE>


     Terms of Domestic Lease  Agreements.  Finlay's  domestic  lease  agreements
typically have an initial term of one to five years. Finlay has, where possible,
entered into  five-year  lease  agreements  and expects to continue this policy.
Finlay's  domestic lease  agreements  contain  renewal options or provisions for
automatic  renewal  absent prior notice of  termination  by either party.  Lease
renewals are for one to five year periods.  In exchange for the right to operate
a  Department  within the host store,  Finlay pays each host store group a lease
fee,  calculated as a percentage of sales  (subject to a minimum annual fee in a
limited  number of cases).  The host store is generally  responsible  for paying
utility  costs,  maintenance  and certain  other  expenses  associated  with the
operation of the Departments.

     Finlay's  domestic lease agreements  generally 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 Finlay  approximately three weeks after
the end of such month. However, during the months of November and December, most
host store groups remit to Finlay 75% of the estimated months' sales prior to or
shortly  following the end of that month.  Each host store group  withholds from
the  remittance of sales  proceeds a lease fee and other  expenditures,  such as
advertising costs, which the host store group may have made on Finlay's behalf.

     Finlay is usually  responsible  for providing and  maintaining any fixtures
and other equipment  necessary to operate its Departments,  while the host store
is typically  required to provide clean space for  installation of any necessary
fixtures.   All  of  the  domestic  lease  agreements  provide  that  Finlay  is
responsible  for the hiring (subject to the suitability of such employees to the
host store) and discharge of its sales and Department  supervisory personnel and
substantially all domestic lease agreements provide that Finlay must furnish its
employees with salaries and certain benefits comparable to those received by the
host store's employees.  Many of Finlay's domestic lease agreements provide that
Finlay may operate the  Departments  in any new stores  opened by the host store
group. In certain  instances,  Finlay is operating  Departments  without written
agreements,  although  the  arrangements  in  respect  of such  Departments  are
generally in accordance with the terms described herein.

     In many cases,  Finlay is subject to  limitations  under its domestic lease
agreements  which prohibit Finlay from operating  Departments for competing host
store groups within a certain  geographical radius of the host stores (typically
five to ten miles). Such limitations restrain Finlay from further expanding into
areas where it currently operates Departments. However, certain lease agreements
make an exception for adding  Departments  in stores  established by groups with
which Finlay has a preexisting lease arrangement.  In addition, Finlay has, from
time to time, obtained the consent of an existing host store group to operate in
another host store group within the  prohibited  area. May has granted to Finlay
this type of consent  with respect to Federated  host stores and  Federated  has
granted this type of consent with  respect to May host stores.  In addition,  in
certain  cases,  Finlay  has found  that,  notwithstanding  the  absence  of any
geographical  limitation  in a lease  agreement,  it is limited  as a  practical
matter  from  opening  Departments  for  competing  host  store  groups in close
proximity to each other because of the adverse  effect such openings  might have
on its overall host store group relationships.

     Credit.  Substantially  all consumer credit risk is borne by the host store
rather than by Finlay.  Purchasers of Finlay's  merchandise  at a host store are
entitled to the use of the host store's  credit  facilities on the same basis as
all of the host store's customers.  Payment of credit card or check transactions
is generally  guaranteed  to Finlay by the host store,  provided that the proper
credit  approvals have been obtained in accordance with the host store's policy.
Accordingly, payment to Finlay in respect of its sales proceeds is generally not
dependent on when (or if) payment is received by the host store.






                                       10

<PAGE>


     Departments  Opened/Closed.  During  1996,  Department  openings  offset by
closings  resulted in a net decrease of two Departments.  There were 36 openings
within  existing  store  groups.  In addition,  Department  openings  include 13
Departments in the Hecht's division of May, as a result of May's  acquisition of
the Strawbridge's stores, 26 Departments in Monoprix S.A., a department store in
France  ("Monoprix"),  the opening of seven  Departments  in  Debenhams  and the
opening  of  two  additional  outlet  stores.  These  openings  were  offset  by
Department closings including 29 Departments in the Emporium/Weinstock's  chain,
eight  Departments  in The Jones Store Inc.  ("Jones") and 17 Departments in the
Maison  Blanche/Gayfers  chain.  In addition,  there were 32 Departments  closed
within existing host store groups. See "Management's  Discussion and Analysis of
Financial Condition and Results of Operations - 1996 Compared with 1995."

     The following table sets forth data regarding the number of Departments and
stand-alone stores which Finlay has operated from the beginning of 1992:

<TABLE>
<CAPTION>

                                                              Fiscal Year Ended
                                        ----------------------------------------------------------------
                                          Jan. 30,      Jan. 29,      Jan. 28,     Feb. 3,     Feb. 1,
                                            1993          1994          1995         1996        1997
                                        ------------  ------------  -----------  ----------  -----------
Departments/Stores:
<S>                                            <C>          <C>          <C>          <C>          <C>
Open at beginning of period...........         662          746          757          903          941
Opened during period..................         124           69          159           70           84
Closed during period..................         (40)         (58)         (13)         (32)         (86)
                                        ------------  -----------  -----------   ----------  -----------
Open at end of period.................         746          757          903          941          939
                                        ------------  -----------  -----------   ----------  -----------
      Net increase (decrease).........          84           11          146           38           (2)
                                        ------------  -----------  -----------   ----------  -----------
</TABLE>

     For the periods  presented in the table  above,  Department  closings  were
primarily   attributable   to:  the   bankruptcy  of  host  store  groups;   the
consolidation  of, or  ownership  changes  in,  certain  host store  groups,  in
particular internal  consolidation within May; the closing or sale by host store
groups of individual stores; the closing of Departments in a host store group as
a result of the opening of Departments in another host store group that competes
in the same geographic  market;  the host store group's decisions to consolidate
with one lessee;  and Finlay's decision to close  unprofitable  Departments.  To
management's  knowledge,  none of the  Department  closings  during the  periods
presented in the table above resulted from dissatisfaction of a host store group
with Finlay's performance.

Products and Pricing

     Each  of  Finlay's  domestic   Departments  offers  a  broad  selection  of
necklaces,   earrings,   bracelets,  rings  and  watches.  Other  than  watches,
substantially  all of the fine  jewelry  items  sold by  Finlay  are  made  from
precious metals and many also contain diamonds or colored gemstones. Finlay also
provides  jewelry and watch repair  services.  Finlay does not carry  costume or
gold-filled  jewelry.  Specific brand  identification is generally not important
within the fine jewelry business,  except for watches.  With respect to watches,
Finlay  emphasizes  brand name  vendors,  including  Gucci,  Seiko,  Citizen and
Movado. Many of Finlay's lease agreements with host store groups restrict Finlay
from  selling  certain  brand name items or, in some cases,  set price  minimums
below which  Finlay may not sell  particular  items.  In France,  Sonab's  watch
selection is limited to private label watches  marketed under Sonab's "New Gold"
and "Gold Line" names. All other watch brands are sold by the host stores, which
in France have historically retained the fine watch business for themselves.



                                       11

<PAGE>


     The following  table sets forth the domestic  sales and percentage of sales
by category of merchandise for 1992, 1993, 1994, 1995 and 1996:
<TABLE>
<CAPTION>

                                                           Fiscal Year Ended
                 ------------------------------------------------------------------------------------------------------
                    Jan. 30, 1993         Jan. 29, 1994       Jan. 28, 1995        Feb. 3, 1996        Feb. 1, 1997
                 -------------------  ------------------    -----------------    ---------------     ------------------
                            % of                  % of                 % of                % of                 % of
Category:          Sales    Sales       Sales     Sales       Sales    Sales       Sales    Sales      Sales    Sales
                 --------  -------    --------  --------    --------  --------   -------- --------   --------  --------
                                                         (dollars in millions)
<S>              <C>         <C>      <C>          <C>      <C>          <C>     <C>         <C>     <C>          <C>  
Gemstones.....   $ 114.7     24.2%    $ 119.0      23.6%    $ 132.3      24.5%   $ 148.6     24.4%   $ 153.1      24.1%
Gold..........     105.4     22.2       113.3      22.4       123.7      22.9      142.8     23.5      144.8      22.8
Watches.......      87.8     18.5        96.0      19.0       105.1      19.5      115.2     19.0      114.3      18.0
Diamonds......      95.4     20.2       101.3      20.0       102.7      19.1      118.3     19.5      129.2      20.3
Other (1).....      70.4     14.9        76.0      15.0        75.5      14.0       82.8     13.6       93.5      14.8
                 --------   ------    --------  --------    --------  --------   -------- --------   --------  --------
Total Sales...   $ 473.7    100.0%    $ 505.6     100.0%    $ 539.3      100.0%  $ 607.7    100.0%   $ 634.9     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 Finlay employees.

See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations."

     Finlay  sells its  merchandise  at  prices  generally  ranging  from $50 to
$1,000.  In 1996, the average price of the items sold domestically by Finlay was
$151 per item. An average  Department has over 4,000 items in stock.  Consistent
with fine jewelry retailing in general, a substantial  portion of Finlay's sales
are made at prices  discounted from listed retail prices.  Finlay's  advertising
and  promotional  planning are closely  coordinated  with its pricing  strategy.
Publicized sales events are an important part of Finlay's  marketing  efforts. A
substantial  portion of Finlay's sales occur during such promotional events. The
amount of time during  which  merchandise  may be offered at discount  prices is
limited by applicable laws and regulations. See "Legal Proceedings."

Purchasing and Inventory

     General. A key element of Finlay's strategy  domestically has been to lower
the capital  investment  required for  operating  its existing  Departments  and
opening new Departments. At any one time, Finlay typically is required to pay in
advance  of sale  for less  than  half of its  inventory  because,  on  average,
approximately  50% of Finlay's  domestic  merchandise is obtained on consignment
and certain  additional  inventory is purchased with extended  payment terms. In
1996,  Finlay's net monthly  investment  in inventory  (i.e.,  the total cost of
inventory  owned and paid for)  averaged  33% of the total  cost of its  on-hand
merchandise.  Finlay is  frequently  granted  exchange  privileges  which permit
Finlay to return or exchange unsold merchandise for new products at any time. In
addition,  Finlay structures its  relationships  with vendors to encourage their
participation in and  responsibility for merchandise  management.  By making the
vendor a  participant  in Finlay's  merchandising  strategy,  Finlay has created
opportunities  for the  vendor to assist in  improving  inventory  turnover  and
profitability.  As a result, Finlay's direct capital investment in inventory has
been reduced to levels which it believes are low for the retail jewelry industry
and Finlay's sensitivity to changes in fashion trends is reduced.

     Finlay  believes the willingness of vendors to participate in the inventory
management  process is due, in part,  to the large volume of  merchandise  which
Finlay sells in its  Departments  and the desire of vendors to take advantage of
the nationwide  distribution  network which  Finlay's  Departments  provide.  By
offering their  merchandise  through Finlay's  Departments,  vendors are able to
reach a broad  spectrum of the  marketplace  in  coordination  with  national or
regional  advertising  campaigns  conducted  by the  vendors  or  their  service
organizations.


 

                                       12

<PAGE>


     In 1996, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately  400 vendors)  generated  approximately 78% of domestic
sales,   and  merchandise   obtained  from  Finlay's  largest  vendor  generated
approximately  12% of domestic sales.  Finlay acquires  substantially all of its
merchandise from domestic  vendors,  although these vendors source a substantial
number of products from foreign  suppliers.  Finlay does not believe the loss of
any one of its vendors would have a material adverse effect on its business.

     Gold Consignment  Agreement.  In August 1995, Finlay Jewelry  consummated a
gold consignment agreement (the "Gold Consignment  Agreement") with Rhode Island
Hospital Trust  National Bank ("RIHT"),  which matures on February 28, 1998. The
Gold  Consignment  Agreement  enables Finlay to pay for merchandise by providing
gold, or otherwise  making  payment,  to certain  vendors who  currently  supply
Finlay with merchandise on consignment.  While the merchandise  involved remains
consigned,  the  consignor  and  title to the gold  content  of the  merchandise
changes from the vendors to RIHT.  As a result,  such vendors have reduced their
working  capital  requirements  and associated  financing  costs.  Consequently,
Finlay has  negotiated  more  favorable  terms with the  participating  vendors.
Finlay can obtain,  pursuant to the Gold Consignment Agreement, up to the lesser
of (i) 85,000 fine troy ounces or (ii) $25.0 million worth of gold, subject to a
formula as prescribed by the Gold  Consignment  Agreement.  At February 1, 1997,
amounts  outstanding under the Gold Consignment  Agreement  totalled 36,916 fine
troy ounces, valued at approximately $12.8 million.

     RIHT charges Finlay a daily  consignment fee on the dollar equivalent value
of ounces  outstanding,  a floating  rate which,  as of  February  1, 1997,  was
approximately  4.5% per annum. In addition,  Finlay is required to pay an unused
line fee of 0.5% if the amount of gold  consigned  has a value equal to or below
$10.0  million.  In  conjunction  with the Gold  Consignment  Agreement,  Finlay
granted RIHT,  subject to the terms of an intercreditor  agreement  between RIHT
and G.E.  Capital,  a first priority  perfected lien on, and a security interest
in,  specified  gold jewelry of  participating  vendors  approved under the Gold
Consignment  Agreement and certain cash on deposit with the consignor and a lien
on proceeds and products of such jewelry and cash deposits.

Operations

     General.  Most of Finlay's  Departments have between 30 and 150 linear feet
of display  cases (with an average of  approximately  60 linear feet)  generally
located  in high  traffic  areas on the main  floor  of the  host  stores.  Each
Department is supervised by a manager  whose  primary  duties  include  customer
sales and service,  scheduling and training of personnel,  maintaining  security
controls and merchandise presentation.  Most of the Departments utilize from 105
to 260 staff hours per week on a permanent basis,  depending on the Department's
sales volume,  and employ additional sales staff hours during the peak Christmas
selling season.  Each Department is kept open for business during the same hours
as its host store. Subject to the terms of the applicable host store group lease
agreement,  Finlay is  generally  responsible  for its own  operating  decisions
within each of its Department operations,  including the hiring and compensation
of sales staff in each of its Departments.

     To  parallel  host store  operations,  Finlay  establishes  separate  group
service  organizations  responsible for managing  Departments  operated for each
host  store.  Staffing  for each group  organization  varies  with the number of
Departments in each group. Typically, Finlay services each host store group with
a group manager,  an assistant group manager,  one or more group buyers,  one or
more regional  supervisors who oversee the individual  Department managers and a
number of clerical  employees.  Each group  manager  reports to a regional  vice
president,  who is responsible for supervision of up to seven host store groups.
In its continued efforts to improve comparable Department sales through improved
operating efficiency, Finlay has taken steps to minimize administrative tasks at
the Department  level by introducing  advanced  technology  such as an interface
between  store cash  registers  and  Finlay's  central  office.  These steps are
designed to reduce administrative time requirements,  thereby improving customer
service and, as a result, sales.


                                       13

<PAGE>


     Finlay had average sales per linear foot of approximately  $11,200 in 1994,
$11,800  in 1995 and  $11,600 in 1996.  The  decrease  in sales per linear  foot
during 1996 is attributed to more European  Departments,  which on average, have
lower sales per linear foot as compared to the domestic Departments.  Finlay had
average sales per Department of approximately $674,000, $710,000 and $729,000 in
1994, 1995 and 1996,  respectively.  Finlay determines  average sales per linear
foot by dividing its sales by the aggregate estimated  measurements of the outer
perimeters of the display cases of Finlay's Departments.

     Management Information and Inventory Control Systems.  Finlay believes that
its management  information systems provide a significant advantage in competing
with other fine  jewelry  retailers.  Finlay and its  vendors use this system to
monitor sales, gross margin and inventory  performance by location,  merchandise
category,  style number and vendor.  Using this  information,  Finlay is able to
monitor merchandise trends, variances in performance, and improve the efficiency
of its inventory management.  Finlay also measures the productivity of its sales
force by  maintaining  current  statistics  for each  employee such as sales per
hour, transactions per hour and transaction size.

     Personnel  and  Training.  Finlay  considers  its  employees  an  important
component of its  operations and devotes  substantial  resources to training and
improving  the  quality  of sales  and  management  personnel.  Finlay  seeks to
motivate its employees by linking a substantial percentage of their compensation
to  performance  standards.  In  most  cases,  individual  sales  personnel  are
compensated  on an hourly  basis  and paid a  commission  on  sales.  Department
managers are generally compensated on the basis of a salary plus a percentage of
their  Department's  sales.  Group  managers and regional  vice  presidents  are
eligible  to  earn  bonuses  of up to  50%  of  their  base  salaries  upon  the
achievement of specified goals.

     As of the end of 1996, Finlay employed  approximately  6,000 persons in the
United States and  approximately  500 persons in France,  the United Kingdom and
Germany, approximately 90% of whom were regional and local sales and supervisory
personnel and the balance of whom were employed in  administrative  or executive
capacities.  Of  Finlay's  6,000  domestic  employees  as of the  end  of  1996,
approximately  2,400 were  part-time  employees,  working less than 20 hours per
week.  Finlay's labor  requirements  fluctuate because of the seasonal nature of
Finlay's business.  See "- Seasonality." Finlay believes that its relations with
its  employees  are good.  Fewer  than 1% of  Finlay's  domestic  employees  are
unionized.  Substantially all of Finlay's employees in France are unionized. The
average length of service for Finlay's  domestic  employees at the group manager
level and above is approximately  12 years,  which in Finlay's view represents a
low turnover rate in the jewelry retailing industry.

     Advertising.  Finlay promotes its products through  four-color  direct mail
catalogs and newspaper advertising of the host store groups. Finlay maintains an
in-house  advertising  staff  responsible  for  preparing a majority of Finlay's
advertisements  and  for  coordinating  the  finished  advertisements  with  the
promotional   activities  of  the  host  stores.   Finlay's  gross   advertising
expenditures over the past five fiscal years have consistently been in excess of
6% of sales, a level which is consistent with the jewelry industry's reliance on
promotional  efforts to generate sales. The majority of Finlay's  domestic lease
agreements require Finlay to expend certain specified minimum percentages of its
annual sales on advertising and promotional activities.

     Inventory  Loss  Prevention and Insurance.  Finlay  undertakes  substantial
efforts  to  safeguard  its  merchandise  from  loss  or  theft,  including  the
installation of security alarm systems and safes at each location and the taking
of a daily  diamond  inventory.  During 1996,  inventory  shrinkage  amounted to
approximately  0.8% of sales.  Finlay maintains  insurance  covering the risk of
loss of  merchandise  in transit or on Finlay's  premises  (whether  owned or on
consignment) in amounts that Finlay believes are reasonable and adequate for the
types and amounts of merchandise carried by Finlay.

 


                                       14

<PAGE>


     Gold Hedging. The cost to Finlay of gold merchandise sold on consignment in
some cases is not fixed  until the sale is reported to the vendor or RIHT in the
case of merchandise  sold pursuant to the Gold  Consignment  Agreement.  In such
cases,  the cost of  merchandise  varies  with the  price of gold and  Finlay is
exposed to the risk of fluctuations in the price of gold between the time Finlay
establishes  the  advertised  or  other  retail  price of a  particular  item of
merchandise  and the date on  which  the  sale of the  item is  reported  to the
vendor.  In order to hedge  against this risk and to enable  Finlay to determine
the cost of such goods  prior to their sale,  Finlay  must  lock-in the price of
gold prior to the sale of such merchandise.  Accordingly, Finlay at times enters
into futures  contracts,  such as options or forwards or a combination  thereof.
The  value of gold  hedged  under  such  contracts  represented  less than 1% of
Finlay's cost of goods sold in 1996.  Under such  contracts,  Finlay obtains the
right to purchase a fixed number of troy ounces of gold at a specified price per
ounce for a specified  period.  Such contracts  typically have durations ranging
from one to six  months,  generally  priced at the spot gold rate plus an amount
based on prevailing interest rates plus customary transactions costs. When sales
of such merchandise are reported to the consignment vendors and the cost of such
merchandise becomes fixed, Finlay sells its related hedge position.

     The primary effect on liquidity from using futures  contracts is associated
with the  related  margin  requirements.  Historically,  cash  flows  related to
futures  margin  requirements  have not been material to Finlay's  total working
capital  requirements.  Finlay  manages  the  purchase of futures  contracts  by
estimating  and  monitoring  the  quantity of gold that it  anticipates  it will
require in connection  with its  anticipated  level of consignment  sales of the
type described  above.  Finlay's gold hedging  transactions  are entered into by
Finlay in the ordinary course of its business.  Finlay's gold hedging strategies
are determined,  implemented and monitored on a regular basis by Finlay's senior
management.  Finlay Jewelry did not have any open positions in futures contracts
for gold at February 3, 1996 or February 1, 1997.

Competition

     Finlay  faces  competition  for  retail  jewelry  sales from  national  and
regional jewelry chains,  other department  stores,  local  independently  owned
jewelry stores and chains, mass merchandisers,  catalog showrooms,  discounters,
direct mail suppliers and televised home shopping.  Certain of such  competitors
are  substantially  larger and have  greater  financial  resources  than Finlay.
Finlay  believes  that  competition  in the  retail  jewelry  industry  is based
primarily  on the price,  quality,  fashion  appeal and  perceived  value of the
product offered and on the reputation, integrity and service of the retailer.

     To operate Departments in host store groups, Finlay competes with a limited
number of other  established  Department  lessees and  department  store chains.
Finlay  believes  that  competition  for the operation of  Departments  is based
principally on the  reputation of the operator for integrity,  the expertise and
experience of the operator in offering an attractive selection of merchandise at
competitive  prices,  and the operator's  ability to generate lease fees for the
host stores.  Finlay's principal  competitors in this market include the Diamond
Park Division of Zale Corporation and J.B.  Rudolph.  Zale Corporation is larger
and may have greater financial resources than Finlay.

Seasonality

     The  retail  jewelry  business  is  highly  seasonal.   See   "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Seasonality."







                                       15

<PAGE>


Item 2.  Properties

     The only real estate owned by Finlay is the recently acquired  distribution
and warehouse  facility,  totalling  75,000  square feet, at 205 Edison  Avenue,
Orange, Connecticut. Finlay leases approximately 18,000 square feet at 521 Fifth
Avenue,  New York, New York for its executive and  administrative  offices.  The
lease  for  such  space  expires   September   30,  2008.   Finlay  also  leases
approximately 49,000 square feet at 529 Fifth Avenue, New York, New York for its
accounting,  advertising,  the majority of its data  processing  operations  and
other administrative  functions.  The lease for such space expires September 30,
2008. For certain  operations at 500 Eighth Avenue,  New York, New York,  Finlay
has leased  approximately  8,000 square feet under a lease which expires January
31, 2000.  Finlay also leases  retail space for its New York Jewelry  Outlet and
French  stand-alone  stores and office  space in France  for  Sonab's  corporate
operations.  Generally,  as part of Finlay's domestic lease  arrangements,  host
stores  provide office space to Finlay's host store group  management  personnel
without charging any additional amount.

Item 3.  Legal Proceedings

     Finlay is involved in certain legal actions  arising in the ordinary course
of business.  Management believes none of these actions,  either individually or
in the  aggregate,  will have a material  adverse  effect on Finlay's  business,
financial position or results of operations.

     Commonly  in  the  retail  jewelry  industry,   a  substantial   amount  of
merchandise is sold at a discount to the "regular" or "original" price. Finlay's
experience  is  consistent  with this  practice.  See  "Business - Products  and
Pricing." A number of states in which Finlay  operates  have  regulations  which
require  retailers  who  offer  merchandise  at  discounted  prices to offer the
merchandise  at the "regular" or "original"  prices for stated  periods of time.
Finlay has received inquiries and has been subject to investigation from time to
time by various states with respect to its compliance with such regulations.  In
1987 and 1989,  Finlay entered into consent decrees with the states of Wisconsin
and Georgia,  respectively,  in connection with Finlay's past sales  discounting
and other practices and paid nominal fines to both states.  In addition,  one of
Finlay's  store groups entered into a consent decree with the state of Oregon in
1988 and two  others  are  subject to  standing  injunctions,  one issued at the
request of the state of  California  in 1988 and the other issued at the request
of the state of Colorado in 1990,  regarding the sales discounting  practices of
the host store groups in the  respective  states.  As a lessee of the host store
groups, Finlay is obligated to comply with the consent decree and injunctions in
effect with respect to the host store groups.  To Finlay's  knowledge,  no other
state is currently conducting an investigation of its pricing practices.  Finlay
believes it is in substantial  compliance with all applicable  Federal and state
laws with respect to such practices.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 1996.













                                       16

<PAGE>


                                     PART II

     Item 5. Market for the Registrant's  Common Equity and Related  Stockholder
Matters

     Finlay  Jewelry  is a  wholly  owned  subsidiary  of the  Holding  Company.
Accordingly,  there is no established public trading market for Finlay Jewelry's
common stock.

     During 1996, cash dividends of $818,000 were  distributed by Finlay Jewelry
to the Holding Company.  The distributions were utilized to pay certain expenses
of the Holding Company such as legal, accounting and directors' fees. The amount
of cash dividends  Finlay Jewelry can distribute to the Holding  Company may not
exceed 0.25% of Finlay  Jewelry's net sales for the preceding fiscal year by the
terms of the credit  agreement (the  "Revolving  Credit  Agreement")  related to
Finlay's  Revolving  Credit  Facility with G.E.  Capital,  the Gold  Consignment
Agreement  with RIHT and the  indenture  relating to the 105/8% Senior Notes due
2003 (the "Notes").

     There was one record  holder of Finlay  Jewelry's  common stock at April 1,
1997.

Item 6.  Selected Financial Data

     The selected  consolidated  financial  information  below should be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" and the Consolidated  Financial  Statements and Notes
thereto. See "Index to Consolidated Financial Statements."

<TABLE>
<CAPTION>


                                                                          Fiscal Year Ended (1)
                                                    -------------------------------------------------------------------------
                                                    Jan. 30, 1993  Jan. 29, 1994  Jan. 28, 1995   Feb. 3, 1996   Feb. 1, 1997
                                                    -------------  -------------  -------------   ------------   ------------
                                                                 (dollars in thousands, except per share data)
Statement of Operations Data:
<S>                                                 <C>            <C>            <C>             <C>            <C>        
Sales.............................................  $   473,746    $   505,639    $   552,090     $   654,491    $   685,274
Cost of sales.....................................      220,352        237,864        261,263         314,029        330,300
                                                    -------------  ------------   -------------   ------------   ------------
Gross margin (2)..................................      253,394        267,775        290,827         340,462        354,974
Selling, general and administrative expenses......      209,245        222,789        239,281         281,693        289,145
Depreciation and amortization.....................        7,037          8,761          8,910           9,659         10,840
Management transition and consulting expense (3)         -             -                5,144          -               -
Nonrecurring expenses associated with                                                                                       
   recapitalization (4)...........................       -               1,915          -              -               -
                                                    -------------  -------------  -------------   ------------   ------------
Income (loss) from operations.....................       37,112         34,310         37,492          49,110         54,989
Other nonrecurring (income) expense (5)...........        2,100         15,995          -              (5,000)         -
Interest expense, net.............................       23,841         20,753         20,927          21,844         22,526
                                                    -------------  -------------  -------------   ------------   ------------
Income (loss) before income taxes and                                                                             
   cumulative effect of accounting change.........       11,171         (2,438)        16,565          32,266         32,463
Provision (credit) for income taxes...............        5,608          2,204          8,349          12,527         14,501
                                                    -------------  -------------  -------------   ------------   ------------
Income (loss) before cumulative effect of                                                                         
   accounting change..............................        5,563         (4,642)         8,216          19,739         17,962
Cumulative effect of accounting change (6)........          465         -               -              -               -
                                                    -------------  -------------  -------------   ------------   ------------
Net income (loss).................................  $     6,028    $    (4,642)   $     8,216     $    19,739    $    17,962
                                                    =============  =============  =============   ============   ============
</TABLE>


                                       17

<PAGE>
<TABLE>
<CAPTION>
                                                                         Fiscal Year Ended (1)
                                                    -------------------------------------------------------------------------
                                                    Jan. 30, 1993  Jan. 29, 1994  Jan. 28, 1995   Feb. 3, 1996   Feb. 1, 1997
                                                    -------------  -------------  -------------   ------------   ------------
                                                                 (dollars in thousands, except per share data)
Operating and Financial Data:
<S>                                   <C>                   <C>             <C>           <C>             <C>            <C>
Number of Departments (end of period) (7).........          746             757           903             941            939
Percentage increase in sales......................         16.1%            6.7%          9.2%           18.5%           4.7%
Percentage increase (decrease) in comparable                                                                                
   Department sales (7)(8)........................          1.9%            0.7%          4.5%            5.7%           5.9%
Average sales per Department (7)(9)...............  $       673    $        673   $       674     $       710    $       729
EBITDA (10).......................................  $    44,149    $     43,071   $    46,402     $    58,769    $    65,829
EBITDA-FIFO (as adjusted) (11)....................  $    43,579    $     46,915   $    52,391     $    59,712    $    67,748

Balance Sheet Data - End of Period:
Working capital...................................  $     5,789    $     21,771   $    26,864     $    65,309   $     75,692
Total assets......................................      273,018         290,248       338,129         393,057        416,808
Long-term debt, excluding current portion.........      132,221         135,412       135,004         135,002        135,000
Stockholder's equity (deficit)....................        1,553          20,808        27,706          72,387         86,410
</TABLE>
---------------------------
(1)  Each of the fiscal years for which  information  is  presented  includes 52
     weeks except 1995, which includes 53 weeks.

(2)  Finlay  utilizes the LIFO method of accounting for  inventories.  If Finlay
     had valued  inventories  at actual cost,  as would have  resulted  from the
     specific identification  inventory valuation method, the gross margin would
     have increased  (decreased) as follows:  $(0.6) million, $1.9 million, $0.8
     million, $0.9 million and $1.9 million for 1992, 1993, 1994, 1995 and 1996,
     respectively.

(3)  Included  in  1994  in  connection  with  certain  management  changes  are
     compensation  and benefits for a former  senior  executive  totalling  $3.1
     million as a result of the  termination  of his  employment  agreement  and
     other management transition expenses totalling $1.0 million. See "Executive
     Compensation - Employment  Agreements and Change of Control  Arrangements."
     In addition,  included in 1994,  are  consulting  expenses  totalling  $1.0
     million  in  connection  with  a  program   undertaken  with  a  management
     consulting  firm  to  increase  comparable  Department  sales  and  improve
     operating efficiencies.

(4)  Included in 1993 in connection  with the  Recapitalization  Transactions is
     the redemption of the outstanding equity  participation units in accordance
     with the  terms and  conditions  of the  Holding  Company's  former  equity
     participation  plan (the "Equity Plan")  totalling $0.9 million as a result
     of the Lee Investment and the Desai Investment, as defined in Note 1 to the
     Consolidated Financial Statements, and bonuses totalling $1.0 million.

(5)  Included in 1992 are $2.1 million of nonrecurring  expenses associated with
     a withdrawn  initial public  offering.  Included in 1993 in connection with
     the  Recapitalization  Transactions is the write-off of deferred  financing
     costs totalling $4.0 million,  the elimination of the remaining discount on
     the  subordinated  WCC Term Loans, as defined in Note 1 to the Consolidated
     Financial  Statements,  of $6.7 million and other  expenses  totalling $5.3
     million.  Included  in  1995  are  proceeds  of  $5.0  million  from a life
     insurance policy Finlay maintained on a senior executive.

(6)  This item  represents  the  cumulative  effect of change in accounting  for
     income taxes in 1992.

(7)  Includes, beginning in 1994, Departments and stand-alone locations.

(8)  Comparable  Department  sales are  calculated  by comparing  the sales from
     Departments open for the same months in the comparable periods.

(9)  Average sales per Department is determined by dividing sales by the average
     of the number of  Departments  open at the beginning and at the end of each
     period.  For 1994, the effect of the  acquisition of Sonab,  and subsequent
     Department openings by Sonab, was prorated in determining average sales per
     Department.

(10) EBITDA   represents   income  from  operations   before   depreciation  and
     amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
     expenses  totalling  $1.9  million  described in Note 4 above and for 1994,
     EBITDA includes the effect of management  transition and consulting expense
     totalling $5.1 million  described in Note 3 above.  Finlay Jewelry believes
     EBITDA provides additional  information for determining its ability to meet
     future debt service requirements.

(11) EBITDA-FIFO (as adjusted)  represents  EBITDA before the LIFO provision and
     before nonrecurring expenses of $1.9 million deducted in arriving at income
     from operations for 1993 and management  transition and consulting  expense
     of $5.1 million deducted in arriving at income from operations for 1994.

                                       18

<PAGE>


     Item 7.  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations

     The following should be read in conjunction with "Selected  Financial Data"
and the Consolidated  Financial  Statements and Notes thereto included elsewhere
in this Form 10-K.

General

     On April 6, 1995, the Holding  Company  completed the Offering of 2,500,000
shares of its Common Stock at a price of $14.00 per share. Net proceeds from the
Offering were $30.2 million and were used to  repurchase  $6.1 million  accreted
balance of the Holding Company's Debentures with the balance of the net proceeds
used to reduce a portion of the  outstanding  indebtedness  under the  Revolving
Credit Facility with G.E. Capital.

     Finlay entered the  international  fine jewelry retailing market in October
1994 by acquiring  Sonab,  a French  company that as of the end of 1996 operated
139 Departments and three stand-alone stores in locations in Europe.  Results of
operations for 1995 reflect the first full year of Sonab's operations.  In 1996,
Finlay  expanded its  international  operations into the United Kingdom with the
opening of seven Departments in the Debenhams  department store chain as well as
into Germany with the opening of a Galeries Lafayette store in Berlin.

Results of Operations

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


                                                                    Fiscal Year Ended
                                                       ------------------------------------
                                                        Jan. 28,      Feb. 3,      Feb. 1,
                                                          1995         1996         1997
                                                       ----------    ---------    ---------
Statement of Operations Data:
<S>                                                       <C>           <C>          <C>   
Sales...............................................      100.0%        100.0%       100.0%
Cost of sales.......................................       47.3          48.0         48.2
                                                       ----------    ---------    ---------
   Gross margin.....................................       52.7          52.0         51.8
Selling, general and administrative expenses........       43.3          43.0         42.2
Depreciation and amortization.......................        1.6           1.5          1.6
Management transition and consulting expense (1)....        1.0            -          -
                                                       ----------    ---------    ---------
Income (loss) from operations.......................        6.8           7.5          8.0
Other nonrecurring income (2).......................       -             (0.7)        -
Interest expense, net...............................        3.8           3.3          3.3
                                                       ----------    ---------    ---------
Income (loss) before income taxes...................        3.0           4.9          4.7
Provision (credit) for income taxes.................        1.5           1.9          2.1
                                                       ----------    ---------    ---------
Net income (loss)...................................        1.5%          3.0%         2.6%
                                                       ==========    =========    =========

Other Supplemental Data:
EBITDA (3)..........................................        8.4%          9.0%         9.6%
EBITDA-FIFO (as adjusted) (4).......................        9.5%          9.1%         9.9%
</TABLE>

---------------------------
(1)  Included  in  1994  in  connection  with  certain  management  changes  are
     compensation  and benefits for a former  senior  executive  totalling  $3.1
     million as a result of the  termination  of his  employment  agreement  and
     other management  transition  expenses totalling $1.0 million. In addition,
     included  in  1994  are  consulting  expenses  totalling  $1.0  million  in
     connection with a program  undertaken with a management  consulting firm to
     increase comparable Department sales and improve operating efficiencies.

(2)  Included in Other nonrecurring income for 1995 are proceeds of $5.0 million
     from a life insurance policy Finlay maintained on a senior executive.







                                       19

<PAGE>


(3)  EBITDA   represents   income  from  operations   before   depreciation  and
     amortization  expenses.  For 1994, EBITDA includes the effect of management
     transition and consulting  expense totalling $5.1 million described in Note
     1 above. Finlay Jewelry believes EBITDA provides additional information for
     determining its ability to meet future debt service requirements.

(4)  EBITDA-FIFO (as adjusted)  represents  EBITDA before the LIFO provision and
     before  management  transition  and  consulting  expense  of  $5.1  million
     deducted in arriving at income from operations in 1994.

1996 Compared with 1995

     Sales.  Sales increased  $30.8 million,  or 4.7%, in 1996 compared to 1995.
Comparable  Department  sales  (Departments  open  for the  same  months  during
comparable  periods)  increased  5.9%.  Management  attributes  this increase in
comparable  Department sales primarily to intensified promotion of key items and
best value programs,  increased emphasis on holiday and event related promotions
as well as participating in host store special promotions.  Sales decreased $7.8
million  as a result of the net  effect of new  store  openings  offset by store
closings as well as the timing of such department openings and closings.  During
1996, Finlay opened 84 Departments and closed 86 Departments.  The openings were
comprised of the following:


                            Number of
                           Departments/
     Store Group              Stores                     Reason
------------------------  -------------  ---------------------------------------
Hecht's                        13        May's acquisition of the Strawbridge's 
                                           stores.
Monoprix                       26        Expansion in France.
Debenhams                       7        Initial Departments in the United 
                                           Kingdom.
New York Jewelry Outlet         2        Additional outlet stores.
Other                          36        Department openings within existing 
                               --          store groups.
                               84
                               ==

The closings were comprised of the following:


                            Number of
                           Departments/
     Store Group              Stores                     Reason
------------------------  -------------  ---------------------------------------
Emporium/Weinstock's           29        Acquired by Federated and will operate 
                                           under the Macy's name.
Jones                           8        Lessor consolidated with one lessee.
Maison Blanche/Gayfers         17        Lessor consolidated with one lessee.
Other                          32        Department closings within existing 
                               --          store groups.
                               86
                               ==    


     Gross margin.  Gross margin for the period  increased by $14.5 million but,
as a percentage  of sales,  gross margin  decreased by 0.2%  primarily due to an
increase  in  the  LIFO  provision  and  to  a  lesser  extent  as a  result  of
management's  efforts to increase market  penetration and market share through a
more aggressive pricing strategy.

     Selling,  general  and  administrative   expenses.   Selling,  general  and
administrative  expenses  ("SG&A") as a percentage  of sales  decreased by 0.8%.
SG&A increased  $7.5 million,  or 2.6%,  due to additional  expenses,  primarily
payroll and lease fees,  associated with increased sales volume.  Although these
expenses grew, the growth was at a slower rate than sales.

     Depreciation and amortization.  Depreciation and amortization  increased by
$1.2  million,  reflecting  $17.5 million in capital  expenditures  for the most
recent  12  months,  offset by the  effect  of  certain  assets  becoming  fully
depreciated.  The  increase  in  fixed  assets  was due to the  addition  of new
Departments and the renovation of existing Departments.

                                       20

<PAGE>


     Other  nonrecurring  (income)  expense.  Finlay Jewelry received during the
second quarter of 1995,  proceeds of $5.0 million from a life  insurance  policy
maintained on a senior executive.
 
     Interest  expense,   net.  Interest  expense  increased  by  $0.7  million,
reflecting an increase in average borrowings ($210.4 million for the 1996 period
compared to $203.4 million for the comparable  period in 1995) partially  offset
by a lower weighted  average interest rate (9.7% for the 1996 period compared to
10.0% for the comparable period in 1995).

     Provision  (credit) for income taxes. The income tax provision for the 1995
and 1996 periods reflects the effective tax rate of 41.5%.

     Net  income  (loss).  Net income of $18.0  million  for 1996  represents  a
decrease of $1.7 million as compared to the net income of $19.7  million in 1995
as a result of the factors discussed above.  Excluding the effect of the receipt
of life  insurance  proceeds  in  1995,  net  income  of $18.0  million  in 1996
represents  an increase of $3.3 million above the net income of $14.7 million in
1995.

1995 Compared with 1994

     Sales. Sales increased $102.4 million,  or 18.5%, in 1995 compared to 1994.
Comparable  Department sales increased 5.7%. Management attributes this increase
in comparable  Department sales primarily to joint marketing efforts coordinated
with several host store groups and  intensified  promotion of key items and best
value  programs.  Sonab had total sales of $46.8 million and accounted for $34.0
million  of the  total  sales  increase.  Sales  from the  operation  of net new
Departments contributed $70.9 million. During 1995, Finlay opened 70 Departments
and closed 32  Departments.  The new  openings  included 14  Departments  in the
Hecht's  division of May, as a result of May's  acquisition  of the  Wanamaker's
stores, four Departments in Sonab and five additional outlet stores. The balance
of openings  consisted of  Departments  within  existing host store groups.  The
closings  consisted of four  Departments  in Lamonts as a result of  bankruptcy,
four  Departments  due to the sale by The  Popular  and the  balance of closings
consisted of Departments within existing host store groups.

     Gross margin.  Gross margin for the period  increased by $49.6 million but,
as a  percentage  of  sales,  gross  margin  decreased  by 0.7% as a  result  of
management's  efforts to increase market  penetration and market share through a
pricing  strategy that has become more  competitive.  Sonab  accounted for $17.3
million of the total increase in gross margin  primarily due to the full year of
operation of Sonab as part of Finlay in 1995.

     Selling, general and administrative expenses. SG&A as a percentage of sales
decreased by 0.3%.  SG&A increased  $42.4 million,  or 17.7%,  due to additional
expenses,  primarily  payroll and lease fees,  associated  with increased  sales
volume.  Although  these  expenses  grew,  the growth was at a slower  rate than
sales. Sonab accounted for $13.7 million of the total increase in SG&A.

     Depreciation and amortization.  Depreciation and amortization  increased by
$0.7  million,  reflecting  $14.9 million in capital  expenditures  for the most
recent  12  months,  offset by the  effect  of  certain  assets  becoming  fully
depreciated.  The  increase  in  fixed  assets  was due to the  addition  of new
Departments and the renovation of existing  Departments,  including $0.9 million
in opening additional outlet stores.

     Management   transition  and  consulting  expense.   Included  in  1994  in
connection with certain  management  changes are compensation and benefits for a
former senior executive totalling $3.1 million as a result of the termination of
his employment agreement and other management transition expenses totalling $1.0
million.  In addition,  included in 1994 are consulting  expenses totalling $1.0
million in connection  with a program  undertaken  with a management  consulting
firm to increase comparable Department sales and improve operating efficiencies.

                                       21

<PAGE>


     Other  nonrecurring  (income)  expense.  Finlay Jewelry received during the
second quarter of 1995,  proceeds of $5.0 million from a life  insurance  policy
maintained on a senior executive.

     Interest  expense,   net.  Interest  expense  increased  by  $0.9  million,
reflecting a higher  weighted  average  interest rate (10.0% for the 1995 period
compared  to 9.6% for the  comparable  period  in 1994)  partially  offset  by a
decrease in average  borrowings  ($203.4 million for the 1995 period compared to
$204.3 million for the comparable period in 1994).

     Provision  (credit) for income taxes. The income tax provision for the 1994
and 1995 periods reflects the effective tax rate of 41.5%.

     Net income  (loss).  Net income of $19.7  million  for 1995  represents  an
increase  of $11.5  million  above the net  income of $8.2  million in 1994 as a
result of the factors discussed above.

Liquidity and Capital Resources

     Finlay's capital requirements are primarily for funding working capital for
new Departments and for working capital growth of existing Departments and, to a
lesser extent,  capital  expenditures for opening new Departments and renovating
existing Departments.  In addition, future working capital requirements would be
increased by further  international  expansion.  For 1996, capital  expenditures
totalled $17.5 million and in 1995 totalled $14.9 million.  Capital expenditures
are estimated to be approximately  $12.0 million in 1997.  Capital  expenditures
are limited by the terms of the Revolving Credit Facility.

     Finlay's  operations   substantially   preclude  consumer  receivables  and
approximately  50% of Finlay's  domestic  merchandise is carried on consignment.
Accordingly,  Finlay believes that  relatively  modest levels of working capital
are required in comparison to many other  retailers.  Finlay  Jewelry's  working
capital  balance was $75.7  million at  February  1, 1997,  an increase of $10.4
million from February 3, 1996. The increase  resulted  primarily from the impact
of 1996's net income  exclusive  of  depreciation  and  amortization,  partially
offset  by  capital  expenditures.  Based on the  seasonal  nature  of  Finlay's
business, working capital levels can be expected to decrease on an interim basis
during the first three quarters of a year. See "- Seasonality."

     The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October and November in  anticipation
of the holiday shopping season.  Accordingly,  Finlay experiences  seasonal cash
needs as inventory  levels peak. The Revolving Credit Facility with G.E. Capital
provides Finlay with a line of credit of up to $135.0 million which is available
to finance  seasonal cash and other working capital needs.  The Revolving Credit
Facility  bears interest at a rate equal to, at Finlay's  option,  (i) the Index
Rate (as defined in the Revolving  Credit  Facility)  plus 1.0% or (ii) adjusted
LIBOR plus 2.0%.  Pursuant to the Debenture  indenture,  the Holding Company has
pledged  all of the issued  and  outstanding  shares of capital  stock of Finlay
Jewelry  for the benefit of the  Debenture  holders.  Pursuant to the  Revolving
Credit  Facility,  Finlay Jewelry has pledged or caused to be pledged all of the
issued and outstanding capital stock (or other equity securities) of each of its
direct  and  indirect  subsidiaries  (including  Sonab  Holdings,   Inc.,  Sonab
International,  Inc.  and  Sonab)  for the  benefit  of the  lenders  under  the
Revolving Credit Facility.

     Finlay is required to reduce the balance of the Revolving  Credit  Facility
in each year to $10.0  million  or less for a 20  consecutive  day  period,  and
immediately  thereafter  to zero for an  additional  10  consecutive  days  (the
"Balance Reduction  Requirement").  There were no borrowings under the Revolving
Credit  Facility at February 3, 1996 or at February 1, 1997 in  accordance  with
the Balance Reduction Requirement.  The average amounts outstanding for 1995 and
1996 were $68.4  million and $75.4  million,  respectively.  The maximum  amount
outstanding under the Revolving Credit Facility in 1996 was $114.1 million.

                                       22
<PAGE>

     Simultaneously  with the  acquisition  of Sonab on October 28,  1994,  G.E.
Capital  agreed to provide  additional  financing by  increasing  the  Revolving
Credit Facility from $110.0 million to $135.0 million.  Finlay Jewelry  believes
that, with the increased borrowing capacity under the Revolving Credit Facility,
it  has  sufficient  liquidity  to  meet  Sonab's  anticipated  working  capital
requirements.

     Finlay's  long-term needs for external financing will depend on its rate of
growth,  the level of  internally  generated  funds and the  ability to continue
obtaining  substantial amounts of merchandise on advantageous  terms,  including
consignment  arrangements  with its  vendors.  For 1996,  Finlay  had an average
balance of  consignment  merchandise  of $201.8 million from over 200 vendors as
compared to an average  balance of $208.5  million in 1995.  At the end of 1996,
$194.3  million of consignment  merchandise  was on hand as compared with $199.1
million at the end of 1995. See "Business - Store Relationships" and "Business -
Purchasing and Inventory."

     A  substantial  amount  of  operating  cash  flow of  Finlay  is or will be
required to pay, directly or indirectly,  interest with respect to the Notes and
the  Debentures  and  amounts due under the  Revolving  Credit  Facility.  As of
February 1, 1997,  Finlay  Jewelry's  outstanding  borrowings  included a $135.0
million balance under the Notes.

     In August 1995, Finlay Jewelry  consummated the Gold Consignment  Agreement
with RIHT.  The Gold  Consignment  Agreement  enables  Finlay Jewelry to pay for
merchandise by providing gold, or otherwise making payment,  to certain vendors.
Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement, up to the
lesser of (i)  85,000  fine troy  ounces or (ii)  $25.0  million  worth of gold,
subject  to a  formula  as  prescribed  by the Gold  Consignment  Agreement.  At
February  1, 1997,  amounts  outstanding  under the Gold  Consignment  Agreement
totalled 36,916 fine troy ounces, valued at approximately $12.8 million.

     On April 13,  1995,  the Holding  Company  received  net  proceeds of $30.2
million as a result of the Offering of 2,500,000  shares of its Common Stock. Of
the net proceeds,  $5.8 million was utilized to repurchase $6.1 million accreted
balance of  Debentures.  The balance of the net  proceeds  were  contributed  to
Finlay Jewelry by reducing a portion of the outstanding  indebtedness  under the
Revolving Credit Facility.

     Finlay believes that, based upon current  operations,  anticipated  growth,
availability  under the Revolving Credit Facility  (including  availability as a
result of the  Offering) and the  anticipated  availability  of additional  debt
financing,  Finlay Jewelry will, for the foreseeable future, be able to meet its
debt  service  and  anticipated  working  capital   obligations,   and  to  make
distributions to the Holding Company sufficient to permit the Holding Company to
meet its debt service obligations and to pay certain other expenses as they come
due. No assurances, however, can be given that Finlay Jewelry's current level of
operating  results will continue or improve or that Finlay Jewelry's income from
operations  will  continue to be  sufficient  to permit  Finlay  Jewelry and the
Holding Company to meet their debt service and other obligations.  The Revolving
Credit Facility,  the Note indenture and the Gold Consignment Agreement restrict
distributions  from  Finlay  Jewelry to the  Holding  Company to 0.25% of Finlay
Jewelry's  net sales for the  preceding  fiscal  year.  The amounts  required to
satisfy  the  aggregate  of  Finlay  Jewelry's  interest  expense  and  required
amortization  payments  totalled  $21.0  million and $21.7  million for 1995 and
1996, respectively.

     Section 382 of the Internal  Revenue Code of 1986,  as amended (the "Code")
restricts  utilization  of net operating  loss  carryforwards  ("NOLs") after an
ownership   change   exceeding   50%.  As  a  result  of  the   Recapitalization
Transactions,  a change  in  ownership  of the  Holding  Company  exceeding  50%
occurred  within the  meaning of Section 382 of the Code.  Similar  restrictions
apply to other  carryforwards.  Consequently,  there is a material limitation on
Finlay Jewelry's annual  utilization of its NOLs and other  carryforwards  which
requires  a  deferral  or  loss  of  the  utilization  of  such  NOLs  or  other
carryforwards.  Finlay  Jewelry had, at October 31, 1996 (Finlay  Jewelry's  tax
year end),  a NOL for tax  purposes  of  approximately  $14.0  million  which is
subject to an


                                       23

<PAGE>


annual limit of  approximately  $2.0 million per year.  For financial  reporting
purposes,  no NOL exists as of February 1, 1997. See Note 8 to the  Consolidated
Financial Statements.

Seasonality

     Finlay's business is highly seasonal,  with peak sales occurring during the
fourth   quarter  of  each   year,   which   includes   the   Christmas   season
(November/December).  The  fourth  quarter  accounted  for an  average of 42% of
Finlay's  annual  sales and  approximately  86% of its  income  from  operations
(excluding  nonrecurring  charges)  for 1994,  1995 and 1996.  Accordingly,  the
results for any of the first three quarters of a year, taken  individually or in
the  aggregate,  are  not  indicative  of  annual  results.  See  Note 10 to the
Consolidated  Financial  Statements.  Generally,  Finlay's operations during the
first three  quarters of a year are financed by increased  borrowings  under the
Revolving Credit Facility.

     Finlay  Jewelry's  Sales and Income (loss) from operations for each quarter
of 1994, 1995 and 1996 were as follows:

<TABLE>
<CAPTION>


                                                                         Fiscal Quarter
                                                 --------------------------------------------------------------
                                                 First Quarter   Second Quarter   Third Quarter  Fourth Quarter
                                                 -------------   --------------   -------------  --------------
                                                                       (dollars in thousands)
1994:
<S>                                              <C>             <C>              <C>            <C>            
   Sales.....................................    $  93,858       $      109,209   $     109,657  $       239,366
   Income (loss) from operations (1).........       (1,987)               2,481           2,724           34,274
1995:
   Sales.....................................      112,716              135,428         132,058          274,289
   Income (loss) from operations ............       (1,071)               5,249           3,672           41,260
1996:
   Sales.....................................      130,719              137,188         136,140          281,227
   Income (loss) from operations.............          596                6,371           4,606           43,416
</TABLE>

--------------------------
(1)  The fourth  quarter of 1994  includes  $5.1  million  (pre-tax) of expenses
     related to the management transition and consulting expense.

Inflation

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

Forward-Looking Information

     This  Annual   Report  on  Form  10-K  contains   certain   forward-looking
statements,  including  statements  concerning expected capital expenditures and
the  adequacy  of  Finlay's  sources of cash to finance  its  current and future
operations   as  well  as  its  debt  service  and  other   obligations.   These
forward-looking  statements  involve a number of risks  and  uncertainties  that
could cause  actual  results to differ  materially,  including  such factors as:
trends in the general economy;  competition in the retail jewelry business;  the
seasonality of the retail  business;  the ability to increase  comparable  store
sales  and to open  new  Departments;  the  dependence  on  certain  host  store
relationships  due to the  concentration of sales generated by such host stores;
the  availability of alternate  sources of merchandise  supply in the case of an
abrupt  loss of any  significant  supplier;  the  ability to  continue to obtain
substantial  amounts  of  merchandise  on  consignment;  the  dependence  on key
officers; and changes in regulatory  requirements which are applicable to Finlay
Jewelry's business.





                                       24

<PAGE>


Item 8.    Financial Statements and Supplementary Data

 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 Report of Independent Public Accountants...................................F-2

 Consolidated Statements of Operations for the years ended 
  January 28, 1995, February 3, 1996 and February 1, 1997...................F-3

 Consolidated Balance Sheets as of February 3, 1996 and 
  February 1, 1997..........................................................F-4

 Consolidated Statements of Changes in Stockholder's Equity for the 
  years ended January 28, 1995, February 3, 1996 and February 1, 1997.......F-5

 Consolidated Statements of Cash Flows for the years ended 
  January 28, 1995, February 3, 1996 and February 1, 1997...................F-6

 Notes to Consolidated Financial Statements.................................F-7

     Item 9. Changes in and  Disagreements  with  Accountants  on Accounting and
Financial Disclosure

     There  have been no  changes  in or  disagreements  with  Finlay  Jewelry's
accountants on matters of accounting or financial disclosure.


                                       25

<PAGE>


                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

     Set forth below is certain  information with respect to each of the current
executive officers and directors of the Holding Company and Finlay Jewelry. Each
of the  persons  listed as a director is a member of the Board of  Directors  of
both the Holding Company and Finlay Jewelry.


       Name               Age                    Position Held
-----------------------  -----  -----------------------------------------------
David B. Cornstein        58    Chairman of the Holding Company and Director
Arthur E. Reiner          56    President, Chief Executive Officer and Vice 
                                  Chairman of the Holding Company, Chairman and
                                  Cheif Executive Officer of Finlay Jewelry 
                                  and Director
Leslie A. Philip          50    Executive Vice President - Merchandising and 
                                  Sales Promotion of Finlay Jewelry
Barry D. Scheckner        48    Senior Vice President and Chief Financial 
                                  Officer of Finlay Jewelry and the Holding
                                  Company
Edward Stein              52    Senior Vice President and Director of Stores 
                                  of Finlay Jewelry
Rohit M. Desai            58    Director
James Martin Kaplan       52    Director
Thomas H. Lee             53    Director
Norman S. Matthews        64    Director
Warren C. Smith, Jr.      40    Director

 
     The Lee Investors,  the Desai  Investors,  the Management  Stockholders and
certain third parties are parties to a Stockholders'  Agreement that was amended
prior to completion of the Offering (the "Amended Stockholders' Agreement"). The
Amended Stockholders'  Agreement provides,  among other things, that all parties
thereto,  subject to certain conditions,  vote their shares to fix the number of
members of the Board of Directors  of the Holding  Company at ten and to vote in
favor of seven directors who will be nominated as follows: two will be nominated
by the Lee Investors,  two may be nominated by the Desai Investors,  two will be
nominated  by Mr.  Cornstein  and  one  will by  nominated  by Mr.  Reiner.  The
nomination and election of the remaining  three directors is not governed by the
Amended Stockholders' Agreement.  Such directors may be nominated by the Holding
Company and elected by the  stockholders of the Holding Company and at least two
will be independent directors.

     Notwithstanding  the foregoing,  the right of various  persons to designate
directors  will be  reduced  or  eliminated  at such  time as they own less than
certain  specified  percentages of the shares of Common Stock then  outstanding.
Pursuant  to a  predecessor  agreement  to the Amended  Stockholders'  Agreement
entered into in May 1993 (the "1993 Stockholders'  Agreement"),  (i) Messrs. Lee
and Smith were  nominated to the Board of Directors as the  designees of the Lee
Investors;  (ii)  Messrs.  Desai and  Damon  Ball  were  nominated  by the Desai
Investors;  (iii) Messrs.  Cornstein and Kaplan were nominated by Mr. Cornstein;
and (iv) Mr.  Reiner  nominated  himself.  During 1996,  Mr. Ball  resigned as a
director.



                                       26
<PAGE>

     The  Amended  Stockholders'  Agreement  also  provides  that the  executive
committee of the Board of Directors  will consist of five  directors,  including
one  independent  director  selected  by the  Board  of  Directors,  one  member
designated by Mr. Lee (so long as the Lee Investors  have the right to designate
a nominee for director),  one member  designated by the Desai Investors (so long
as the Desai  Investors  have the right to designate a nominee for director) and
two members  designated by Mr. Cornstein (which number will be reduced to one if
Mr. Cornstein is only entitled to designate one nominee for director and none if
Mr. Cornstein ceases to have the right to designate a nominee for director). The
executive  committee for the Holding Company presently consists of Messrs.  Lee,
Desai,  Matthews,  Cornstein and Kaplan. See "Certain  Relationships and Related
Transactions - Stockholders' Agreement."

     Under the Holding  Company's  Restated  Certificate of  Incorporation,  the
Holding  Company's  Board of Directors is  classified  into three  classes.  The
members of each class will serve staggered  three-year terms.  Messrs. Desai and
Lee are Class I  directors;  Messrs.  Cornstein,  Kaplan and Reiner are Class II
directors;  and Messrs. Matthews and Smith are Class III directors. The terms of
the Class II,  Class III and Class I directors  expire at the annual  meeting of
stockholders to be held in 1997, 1998 and 1999, respectively.  Officers serve at
the discretion of the Board of Directors. Directors who are employees receive no
additional compensation for serving as members of the Board. Messrs. Lee, Desai,
Smith and Kaplan receive no compensation for serving as directors of the Holding
Company.  Affiliates  of Messrs.  Lee and Desai  receive  fees  pursuant  to the
Management  Agreements  (as defined in "Executive  Compensation  -  Compensation
Committee Interlocks and Insider  Participation").  Messrs. Cornstein and Reiner
have employment contracts with the Holding Company. See "Executive  Compensation
- Employment Agreements and Change of Control Arrangements."

     The business  experience,  principal  occupations and employment of each of
the executive  officers and directors of the Holding  Company and Finlay Jewelry
during the past five years,  together with their periods of service as directors
and executive officers of the Holding Company and Finlay Jewelry,  are set forth
below.

     David B. Cornstein has been Chairman of the Holding  Company since May 1993
and has been a director of the Holding  Company and Finlay  Jewelry  since their
inception in December 1988. Mr. Cornstein was named Chairman and Chief Executive
Officer of Finlay  International  in January 1996. From December 1988 to January
1996,  Mr.  Cornstein was President and Chief  Executive  Officer of the Holding
Company. From December 1985 to December 1988, Mr. Cornstein was President, Chief
Executive  Officer  and a  director  of SL  Holdings  (as  defined  in  "Certain
Transactions - 1985  Acquisition  and 1988 Leveraged  Recapitalization").  Prior
thereto,  Mr.  Cornstein  was the Chief  Executive  Officer of Tru-Run,  Inc., a
corporation  principally  owned  by  Mr.  Cornstein  which  was  engaged  in the
operation  of leased  jewelry  departments  and leased  jewelry and watch repair
departments.  Mr.  Cornstein  is a  director  of What A World!,  Inc.,  a public
specialty gift retailer, and a director of a privately-held corporation.

     Arthur E.  Reiner  became  President  and Chief  Executive  Officer  of the
Holding  Company  effective  January 30, 1996.  He has been Vice Chairman of the
Board of the  Holding  Company  and  Chairman  of the Board and Chief  Executive
Officer of Finlay  Jewelry since January 3, 1995.  From February 1992 to October
1994,  Mr.  Reiner was  Chairman and Chief  Executive  Officer of Macy's East, a
subsidiary of R.H.  Macy & Co., Inc. From 1988 to 1992,  Mr. Reiner was Chairman
and Chief Executive Officer of Macy's Northeast,  which was combined with Macy's
Atlanta  division to form Macy's East in 1992.  Mr. Reiner  became  Chairman and
Chief  Executive  Officer of Macy's New York (now part of Macy's  East) in 1980.
Prior to  joining  Finlay,  Mr.  Reiner  had spent over 25 years with the Macy's
organization.  In January 1992,  Macy's filed for protection under Chapter 11 of
the Bankruptcy Code. Mr. Reiner is also a director of Loehmann's, Inc.




                                       27
<PAGE>

     Leslie A. Philip has been  Executive  Vice  President -  Merchandising  and
Sales  Promotion of Finlay  Jewelry since May 1995.  From 1993 to May 1995,  Ms.
Philip was Senior Vice  President - Advertising  and Sales  Promotion of Macy's,
and from 1988 to 1993, Ms. Philip was Senior Vice President - Merchandise - Fine
Jewelry at Macy's.  Ms. Philip held various other  positions at Macy's from 1970
to 1988.

     Barry D.  Scheckner  has been Senior  Vice  President  and Chief  Financial
Officer of Finlay  Jewelry  since  December  1988.  Mr.  Scheckner has also been
Senior Vice President and Chief  Financial  Officer of the Holding Company since
September  1992.  Prior to  September  1992,  he was  Treasurer  of the  Holding
Company.  From December 1985 until December  1988,  Mr.  Scheckner was Corporate
Controller  of S&L  Acquisition  (as  defined in  "Certain  Transactions  - 1985
Acquisition  and 1988  Leveraged  Recapitalization"),  and from  October 1983 to
December 1985, he was Controller of the fine jewelry division of S&L (as defined
in   "Certain    Transactions   -   1985    Acquisition   and   1988   Leveraged
Recapitalization").  Mr.  Scheckner  joined  S&L  as  its  Manager  of  Internal
Consulting and Director of Internal Audit in February 1983. Mr.  Scheckner began
his career as a management consultant with Price Waterhouse in 1973.

     Edward Stein has been Senior Vice  President - Director of Stores of Finlay
Jewelry since July 1995.  From  December  1988 to June 1995,  Mr. Stein was Vice
President  -  Regional  Supervisor  of  Finlay  Jewelry,  and  occupied  similar
positions with S&L Acquisition  from December 1985 to December 1988 and with S&L
from 1983 to December  1985.  Mr. Stein held various  other  positions at Finlay
from 1965 to 1983.

     Rohit M.  Desai has been a  director  of the  Holding  Company  and  Finlay
Jewelry since May 1993.  Mr. Desai is the founder of and, since its formation in
1984, has been Chairman and President of Desai Capital Management  Incorporated,
a specialized  equity  investment  management firm in New York which manages the
assets of various  institutional  clients,  including  Equity-Linked  Investors,
L.P., Equity-Linked Investors-II and a public mutual fund. Mr. Desai is also the
managing  general  partner  of the  general  partners  of each of  Equity-Linked
Investors, L.P. and Equity-Linked  Investors-II.  Mr. Desai serves as a director
of the Rouse  Company,  Sunglass  Hut  International,  Incorporated  and several
privately-held companies.

     James Martin  Kaplan has been a director of the Holding  Company and Finlay
Jewelry since their inception in December 1988 and was a director of SL Holdings
from December 1985 to December  1988. Mr. Kaplan has been a partner with the law
firm of Zimet, Haines,  Friedman & Kaplan, counsel to the Holding Company, since
1977. Mr. Kaplan is also a director of What A World!, Inc.

     Thomas H. Lee has been a director of the Holding Company and Finlay Jewelry
since May 1993. Since 1974, Mr. Lee has been President of Thomas H. Lee Company.
He is a director of Autotote Corporation,  Livent Inc., Playtex Products,  Inc.,
Signature  Brands,  Inc. and Vail Resorts,  Inc. Mr. Lee is also a director of a
number of  privately-  held  companies.  Mr. Lee is a general  partner of ML-Lee
Acquisition Fund, L.P., ML-Lee  Acquisition Fund II, L.P. and ML-Lee Acquisition
Fund (Retirements Accounts) II, L.P. (collectively, the "ML-Lee Funds"). Mr. Lee
is  Chairman of Thomas H. Lee  Advisors I and  general  partner of Thomas H. Lee
Advisors  II,  L.P.,  the  investment  advisors to the ML-Lee  Funds.  He is the
general partner of THL Equity Advisors Limited Partnership,  the general partner
of and investment advisor to Thomas H. Lee Equity Partners, L.P., and an officer
and director of THL Equity Trust III, the general partner of THL Equity Advisors
III Limited Partnership, the general partner and investment advisor to Thomas H.
Lee Equity Fund III, L.P.

     Norman S.  Matthews  has been a director of the Holding  Company and Finlay
Jewelry since July 1993. Mr. Matthews has been a retail  consultant based in New
York for over six years. Prior to that time, Mr. Matthews served as President of
Federated.  He is  also a  director  of  Toys  "R"  Us,  Inc.,  The  Progressive
Corporation,  Loehmann's,  Inc. and Lechters, Inc. 



                                       28

<PAGE>


     Warren C. Smith,  Jr. has served as a director  of the Holding  Company and
Finlay Jewelry since May 1993. Mr. Smith is a Managing Director of Thomas H. Lee
Company and has been  employed by Thomas H. Lee Company since 1990. In addition,
Mr. Smith is Vice  President of Thomas H. Lee Advisors II. He is also a director
of Rayovac Corporation and various private corporations.

Item 11.  Executive Compensation

Summary Compensation Table

     The following table sets forth information with respect to the compensation
of  Finlay's  Chief  Executive  Officer  and each of the four other most  highly
compensated  executive  officers  of the  Holding  Company  or  Finlay  Jewelry,
including the Holding  Company's former Chief Executive  Officer,  in 1996, 1995
and 1994 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>

                                                                                         Long Term   
                                               Annual Compensation                      Compensation 
                               ------------------------------------------------   -----------------------
                                                                                               Number of                        
                                                                                              Securities                       
                                                                                  Restricted  Underlying                       
        Name and                                                 Other Annual       Stock      Options/      All Other
   Principal Position           Year      Salary      Bonuses   Compensation (1)     Awards     SARs (2)   Compensation (3)
   ------------------           ----     --------    ---------  ---------------    -------    ----------  ----------------
     
<S>              <C>            <C>      <C>         <C>                                                       <C>     
Arthur E. Reiner (4)            1996     $700,000    $253,750            -              -            -         $ 27,495
President, Chief Executive      1995      666,660     215,900            -              -            -           22,315
Officer and Vice Chairman       1994       55,555           -            -              -       69,263                -
of the Holding Company   
and Chairman and Chief 
Executive Officer of 
Finlay Jewelry 

David B. Cornstein              1996      600,000     137,500      $42,977              -            -           51,623
Chairman and former             1995      600,000      65,900       41,011              -       66,667           51,753
Chief Executive Officer of      1994      500,000     275,000       36,318              -            -           47,225
the Holding Company and
Chairman of Finlay
International

Leslie A. Philip (5)            1996      320,000     116,000            -              -            -            8,730
Executive Vice President -      1995      213,710      75,000            -              -       33,333            1,974
Merchandising and Sales         1994            -           -            -              -            -                -  
Promotion of Finlay
Jewelry

Barry D. Scheckner              1996      300,000     108,750            -              -            -            8,398
Senior Vice President and       1995      300,000      35,000            -              -       10,000            8,528
Chief Financial Officer of      1994      275,004          -             -              -            -          108,615
the Holding Company and  
Finlay Jewelry

Edward Stein                    1996      275,000     107,360            -              -            -            9,105
Senior Vice President and       1995      267,086      40,000            -              -        8,333            8,716
Director of Stores of           1994      183,500      62,500            -              -            -            8,686
Finlay Jewelry
</TABLE>
 
--------------------------------                                              
(1)  Represents tax equalization payments made in connection with life insurance
     premiums paid by Finlay on behalf of the Named Executive Officers.

(2)  See "- Option/SAR Grants in Fiscal 1996"

(3)  Includes for each Named Executive  Officer the sum of the following amounts
     earned in 1996, 1995 and 1994 for such Named Executive Officer:



                                       29

<PAGE>

                                         (i)       (ii)      (iii)      (iv)
                                    --------------------------------------------

 Arthur E. Reiner........      1996    $20,176    $5,375     $1,944          -
                               1995     20,176         -      2,139          -
                               1994          -         -          -          -
  
 David B. Cornstein......      1996     44,304     5,375      1,944          -
                               1995     44,304     5,310      2,139          -
                               1994     39,242     5,310      2,673          -

 Leslie A. Philip........      1996      1,786     5,000      1,944          -
                               1995        450         -      1,524          -
                               1994          -         -          -          -

 Barry D. Scheckner......      1996      1,079     5,375      1,944          -
                               1995      1,079     5,310      2,139          -
                               1994        632     5,310      2,673   $100,000

 Edward Stein............      1996      1,786     5,375      1,944          -
                               1995      1,267     5,310      2,139          -
                               1994        703     5,310      2,673          -

  (i)   Insurance premiums  paid by Finlay with respect to life insurance for 
        the benefit of the Named Executive Officer.

  (ii)  The dollar amount of all matching contributions  and  profit  sharing
        contributions  under Finlay's 401(k) profit sharing plan allocated to 
        the account of the Named Executive Officer.

  (iii) The insurance premiums paid in respect of the Named Executive Officer 
        under Finlay's Executive Medical Benefits Plan.

   (iv) Mr.  Scheckner received a bonus for his efforts in 1994 in connection
        with the Offering.

(4)  Mr.  Reiner  commenced  employment  with  Finlay on January 3, 1995 and the
     salary above for 1994 reflects only  compensation  for the month of January
     1995. See "- Employment Agreements and Change of Control Arrangements."

(5)  Ms. Philip commenced  employment with Finlay on May 15, 1995 and the salary
     above  for 1995  reflects  only  compensation  for the  period  from May 15
     through  February 3, 1996. Ms.  Philip's  annual salary for 1995 was at the
     rate of $300,000.

     On January 30,  1996,  Mr.  Reiner  became  President  and Chief  Executive
Officer of the Holding  Company.  He has also been Vice  Chairman of the Holding
Company and Chairman and Chief Executive Officer of Finlay Jewelry since January
3, 1995.  Mr.  Cornstein  continues as the  Chairman of the Holding  Company and
serves as Chairman of Finlay  International.  For a discussion of the employment
arrangements with Messrs. Reiner and Cornstein, see "- Employment Agreements and
Change of Control Arrangements."

Long Term Incentive Plan

     The Holding  Company's Long Term Incentive Plan, as amended (the "Incentive
Plan"),  permits the Holding  Company to grant to key  employees  of the Holding
Company and its  subsidiaries,  consultants  and other persons who are deemed to
render  significant  services to the Holding Company or its subsidiaries  and/or
who are deemed to have the potential to contribute to the future  success of the
Holding  Company and directors of the Holding Company (other than members of the
Compensation  Committee  of the  Holding  Company's  Board  of  Directors),  the
following:  (i) stock  options,  (ii) stock  appreciation  rights in tandem with
stock  options,  (iii)  limited stock  appreciation  rights in tandem with stock
options, (iv) restricted or nonrestricted stock awards subject to such terms and
conditions as the compensation committee shall determine,  (v) performance units
which are based upon attainment of performance goals during a period of not less
than two nor more than five  years and which may be settled in cash or in Common
Stock in the discretion of the Compensation  Committee (as hereinafter  defined)
or (vi) any combination of the foregoing.  Under the Incentive Plan, the Holding
Company may grant stock options which are either  incentive stock options within
the meaning of Section 422 of the Code, or non-  incentive  stock  options.  The
Holding Company's Board of Directors has reserved 663,486 shares of Common Stock
for  issuance  pursuant to the  Incentive  Plan.  In 1994,  72,262  options were
granted and 40,764 were cancelled. In 1995, an aggregate of 264,505 options were
granted,  74,208 were cancelled and 41,284 were exercised. In 1996, an aggregate
of 21,333 options were granted, 15,574 were cancelled and 27,826 were exercised.


                                       30

<PAGE>


     Incentive  stock options are designed to result in beneficial tax treatment
to the optionee,  but no tax deduction  for the Holding  Company.  Non-incentive
options will not give the optionee the tax benefits of incentive  stock options,
but generally  will entitle the Holding  Company to a tax deduction  when and to
the extent income is recognized by the optionee.

     The Incentive Plan is  administered  by the  Compensation  Committee of the
Holding Company's Board of Directors. Subject to the provisions of the Incentive
Plan,  the  Compensation  Committee  has  sole  discretion:  (i) to  select  the
individuals to participate in the Incentive Plan, (ii) to determine the form and
substance of grants made under the Incentive Plan to each  participant,  and the
conditions  and  restrictions,  if any,  subject to which such  grants are made,
(iii) to interpret the Incentive  Plan and (iv) to adopt,  amend or rescind such
rules  and  regulations  for  carrying  out the  Incentive  Plan as it may  deem
appropriate.

     The Incentive  Plan provides that the per share exercise price of an option
granted  under  the Plan  shall be  determined  by the  Compensation  Committee.
However,  the exercise  price of an incentive  stock option may not be less than
100% of the fair market value of the Common Stock of the Holding  Company on the
date the option is granted and the duration of an incentive stock option may not
exceed ten years from the date of grant. Options are nontransferable  (except by
will or intestacy on the death of the optionee) provided that an Incentive Stock
Option  that is granted to an  employee  who, at the time the option is granted,
owns stock  possessing  more than 10% of the total combined  voting power of all
classes of capital stock of the "employer  corporation" (as such term is used in
the Code) or any parent or subsidiary  thereof  shall have a per share  exercise
price which is at least 110% of the fair market value of the Common Stock of the
Holding  Company on the date the option is granted and the  duration of any such
option may not exceed five years from the date of grant.  Options  granted under
the Incentive Plan become  exercisable at such time or times as the Compensation
Committee may  determine at the time the option is granted.  In making grants to
employees under the Incentive Plan, the Holding Company has on occasion utilized
a uniform Agreement and Certificate of Option (the "Option Agreement"), pursuant
to which the Holding Company grants ten-year options,  20% of which vest on each
of the first five  anniversaries  of the grant date.  The Option  Agreement also
contains  transfer and certain other  restrictions and provides that options not
vested  may  expire,  or  shares  acquired  upon  exercise  of  options  may  be
repurchased at their exercise  price,  in the event of termination of employment
under certain circumstances. In addition, the Option Agreement provides that (i)
if an optionee's  employment is terminated for "Cause" (as defined in the Option
Agreement),  such  optionee's  options will  terminate  immediately,  (ii) if an
optionee's  employment is terminated due to death,  "Disability" or "Retirement"
(each as defined in the Incentive  Plan),  such optionee's  options become fully
vested and  exercisable  for a period of 21 days following such  termination and
(iii) if an  optionee's  employment is  terminated  for any other  reason,  such
optionee's  options  remain  exercisable to the extent vested for a period of 21
days following such termination.

     The  Incentive  Plan may be amended or terminated by the Board at any time,
but no such  termination or amendment may, without the consent of a participant,
adversely affect such  participant's  rights with respect to previously  granted
awards. In addition, the approval of the Holding Company's stockholders shall be
required to amend the  Incentive  Plan to (i)  increase  the  maximum  number of
shares  subject to awards  under the  Incentive  Plan,  (ii) change the class of
persons eligible to participate and/or receive incentive stock options under the
Incentive Plan,  (iii) change the  requirements  for serving on the Compensation
Committee or (iv)  materially  increase the  benefits  accruing to  participants
under the Incentive Plan.

     Subject to certain  limitations  set forth in the  Incentive  Plan,  in the
event the Compensation  Committee  determines that any corporate  transaction or
event  affects  the  shares of Common  Stock (or other  securities  or  property
subject  to an award  under  the  Incentive  Plan)  such that an  adjustment  is
determined by the  Compensation  Committee to be appropriate in order to prevent
dilution or  enlargement  of the benefits or potential  benefits  intended to be
made available under the Incentive Plan, then the Compensation  Committee shall,
in such

                                       31
<PAGE>

manner as it may deem equitable, adjust any or all of (i) the number and type of
shares (or other  securities  or  property)  with respect to which awards may be
granted under the Incentive  Plan,  (ii) the number and type of shares (or other
securities or property) subject to outstanding  awards under the Incentive Plan,
(iii)  the  grant or  exercise  price  with  respect  to any award or, if deemed
appropriate,  make  provision for a cash payment to the holder of an outstanding
award in consideration for the cancellation of such award (which, in the case of
an option, will be equal to the positive difference,  if any, between the Market
Value (as defined in the Incentive  Plan) of the shares  covered by such option,
as determined  immediately prior to such corporate transaction or event, and the
exercise price per share of such option).

Option/SAR Grants in Fiscal 1996

     No options or stock appreciation  rights were issued by the Holding Company
to the Named Executive Officers during 1996.

Certain Information Concerning Stock Options/SARs

     The following  table sets forth certain  information  with respect to stock
options  exercised  in 1996 as well as the value of stock  options at the fiscal
year end. No stock appreciation rights were exercised during 1996.

                 Aggregated Option/SAR Exercises in Fiscal 1996,
                      and Fiscal Year-End Option/SAR Value

<TABLE>
<CAPTION>

                                                      Number of Securities                                    
                                                     Underlying Unexercised      Value of Unexercised In-the
                                                     Options/SARs at Fiscal      Money Options/SARs at Fiscal
                       Shares Acquired   Value             Year-End                      Year-End ($)
Name                     On Exercise    Realized  Exercisable/Unexercisable (1)  Exercisable/Unexercisable (2)
----                     -----------    --------  -----------------------------  -----------------------------
                                                   
<S>                                                   <C>      <C>                    <C>       <C>    
Arthur E. Reiner......       -            -           23,088 / 46,175                 $17,316 / $34,631
David B. Cornstein....       -            -           26,667 / 40,000                  20,000 /  30,000
Leslie A. Philip......       -            -            6,667 / 26,666                  23,750 /  94,999
Barry D. Scheckner....       -            -            9,200 / 12,800                  55,644 /  42,096
Edward Stein..........       -            -            7,067 / 10,266                  41,858 /  32,072
</TABLE>

-------------------                               
(1)  Represents for Mr. Reiner - 69,263 options  granted on January 3, 1995 (all
     at  an  exercise   price  of  $14.00  per  share),   of  which  34,631  are
     performance-based and 34,632 are time-based.  An aggregate of 23,088 of the
     time-based  options became  exercisable on February 3, 1996 and February 1,
     1997 and the balance of the time-based  options,  totalling 11,544, vest on
     January 31, 1998.  Represents for Mr. Cornstein,  66,667 options granted on
     March 30, 1995 (all at an exercise price of $14.00 per share),  of which an
     aggregate of 26,667 became  exercisable  on March 30, 1995 and 1996 and the
     balance of 40,000 vest and become exercisable at a rate of 13,333 per annum
     on each anniversary of the date of grant.  Represents for Ms. Philip 33,333
     time-based  options  granted on May 16, 1995 (all at an  exercise  price of
     $11.19 per share),  of which 6,667 became  exercisable  on May 16, 1996 and
     the  balance  become  exercisable  at a rate of  6,667  per  annum  on each
     anniversary of the date of grant. Represents for each of Messrs.  Scheckner
     and Stein -exercisable:  7,200 and 5,400 time-based options which vested on
     May 26,  1994,  1995 and 1996 at an  exercise  price of $7.23 per share for
     Messrs. Scheckner and Stein,  respectively,  and 2,000 and 1,667 time-based
     options  which  vested on April 5, 1996 at an exercise  price of $14.00 per
     share for Messrs. Scheckner and Stein,  respectively;  and - unexercisable:
     4,800 and 3,600 time-based options at an exercise price of $7.23 which vest
     and  become  exercisable  at a rate of 2,400 and 1,800,  respectively,  per
     annum for Messrs.  Scheckner and Stein,  respectively,  and 8,000 and 6,666
     time-based  options at an exercise price of $14.00 per share which vest and
     become  exercisable at a rate of 2,000 and 1,667,  respectively,  per annum
     for Messrs. Scheckner and Stein, respectively.

(2)  Represents  value of  options  based  on the  closing  market  price of the
     underlying security at the fiscal year end ($14.75).









                                       32

<PAGE>


Compensation Committee Interlocks and Insider Participation

     The Board of  Directors of each of the Holding  Company and Finlay  Jewelry
have established a Compensation Committee and an Audit Committee (to be referred
to  herein   collectively  as  the  "Compensation   Committee"  and  the  "Audit
Committee",  respectively). The Compensation Committee is presently comprised of
Rohit M. Desai and  Thomas H. Lee.  All  decisions  with  respect  to  executive
compensation  of both the Holding  Company and Finlay Jewelry are currently made
by  the  Compensation  Committee.   All  decisions  with  respect  to  executive
compensation  of both the Holding  Company and Finlay Jewelry are currently made
by the  Compensation  Committee.  The Audit Committee is presently  comprised of
Warren C. Smith, Jr. and James Martin Kaplan.  None of the present  Compensation
or Audit  Committee  members  were,  at any time,  an officer or employee of the
Holding Company or any of its  subsidiaries.  See "Directors'  Compensation"  in
regard to management and consulting agreements and other arrangements.

     In connection with the Recapitalization  Transactions, the Holding Company,
the Lee Investors  and the Desai  Investors,  the  Management  Stockholders  and
certain other stockholders entered into (i) a registration rights agreement (the
"Registration  Rights Agreement"),  which grants certain  registration rights to
the Lee Investors, the Desai Investors and the Management Stockholders, and (ii)
a stockholders'  agreement (the "1993 Stockholders'  Agreement"),  which granted
certain rights to, and imposed  certain  restrictions  on the rights of, the Lee
Investors,  the Desai Investors,  the Management  Stockholders and certain other
stockholders.  The 1993  Stockholders'  Agreement  was amended  and  restated in
connection with the Offering. See "Certain Transactions."

     In  connection  with the  Recapitalization  Transactions  in May 1993,  the
Holding Company and Finlay Jewelry entered into management  agreements with each
of Thomas H. Lee Company  (the "Lee  Management  Agreement")  and Desai  Capital
Management Incorporated (the "Desai Management Agreement" and, together with the
Lee Management Agreement,  the "Management  Agreements"),  affiliates of Mr. Lee
and Mr. Desai,  respectively.  Pursuant to the Management Agreements,  Thomas H.
Lee  Capital  LLC and Desai  Capital  Management  Incorporated  are  entitled to
receive  $180,000  and $60,000 per year plus  expenses,  respectively,  for five
years for  consulting  and  management  advisory  services to be rendered to the
Holding  Company and Finlay Jewelry.  After the initial  five-year term, each of
the Management  Agreements  will be  automatically  renewable on an annual basis
unless any party thereto  serves notice of termination at least 90 days prior to
the renewal date.

     In addition, Finlay had an agreement to engage Mr. Matthews as a consultant
at a per diem rate of $2,500 for each day he provided  services,  with such fees
in the aggregate not to exceed  $80,000 per year.  In 1996,  1995 and 1994,  Mr.
Matthews received a total of $20,000, $20,000 and $66,311, respectively, for his
services as a director and consultant.  The consulting  agreement between Finlay
and Mr. Matthews was terminated upon completion of the Offering, except that all
of the  provisions of the consulting  agreement  relating to options to purchase
Common Stock granted to Mr.  Matthews (as described  below)  remained in effect.
Mr. Matthews was granted, effective as of July 1993, options under the Incentive
Plan to purchase 33,333 shares of Common Stock, 16,667 of which have an exercise
price of $12.00 per share and 16,666 of which have an  exercise  price of $16.50
per  share.  Twenty  percent  of these  options  vest on each of the first  five
anniversaries  of the grant date with the unvested portion of such options fully
vesting on a "Change of Control" (as defined in the  consulting  agreement).  On
March 30, 1995, Mr. Matthews was granted  additional options under the Incentive
Plan to  purchase  16,667  shares of Common  Stock at a price of $14.00.  Twenty
percent of these options vested immediately, with twenty percent vesting on each
of the first four  anniversaries  of the grant date.  On January 30,  1996,  Mr.
Matthews was granted  additional  options under the  Incentive  Plan to purchase
10,000  shares of Common Stock at a price of $11.16 per share,  and such options
vested and became  exercisable in January 1997. All of Mr. Matthews' options are
subject to early  termination  under  certain  circumstances  and are subject to
various conditions.



                                       33

<PAGE>


     Each of the  Management  Agreements  described  above  contains  provisions
entitling the managing  company to  indemnification  for losses  incurred in the
course of  service  to the  Holding  Company or Finlay  Jewelry,  under  certain
circumstances.

     Any future  transactions  between  Finlay and the  officers,  directors and
affiliates  of the Holding  Company and Finlay  Jewelry will be on terms no less
favorable to the Holding  Company and Finlay  Jewelry than can be obtained  from
unaffiliated third parties, and any material transactions with such persons will
be approved by a majority of the disinterested  directors of the Holding Company
or Finlay Jewelry.

Employment Agreements and Change of Control Arrangements

     Effective May 26, 1993, Mr. Cornstein entered into an employment  agreement
with Finlay  providing  for his  continued  employment  as  President  and Chief
Executive Officer,  and his appointment as Chairman of the Board, of the Holding
Company for a term expiring on January 31, 1998. On January 30, 1996, Mr. Reiner
was appointed President and Chief Executive Officer of the Holding Company.  Mr.
Cornstein  continues  as the  Chairman  of the  Holding  Company  and  serves as
Chairman of Finlay International.

     Under his employment agreement, as amended, Mr. Cornstein is entitled to an
annual salary of $600,000 through the term of his agreement.  In addition to his
annual salary,  Mr.  Cornstein is entitled to receive an annual bonus payment up
to a maximum of  $250,000.  The payment of the bonus in respect of a  particular
year will be based on the achievement by Finlay of certain financial performance
criteria based on EBITA-FIFO (the "Target Level"), with 20% of the maximum bonus
payable if 90% of the Target Level is achieved,  increasing  incrementally  on a
pro rata basis to 60% of the maximum  bonus level  payable if 100% of the Target
Level is achieved,  and further increasing  incrementally on a pro rata basis to
100% of the maximum  bonus  payable if 120% of the Target Level is achieved.  In
addition, the Board may award bonus compensation outside of the bonus prescribed
under Mr. Cornstein's employment agreement.

     Under his employment agreement, Finlay is required to maintain insurance of
$10.0 million on the life of Mr. Cornstein,  payable to his  beneficiaries,  and
Mr.  Cornstein  is  entitled  to  reimbursement  for the  income  tax  liability
resulting from Finlay's payment of premiums for the insurance.  Furthermore, the
agreement  requires Finlay to procure and pay for catastrophic  health insurance
and the income tax liability related to such payments, if any.

     The agreement  provides that if Mr.  Cornstein is terminated other than for
"cause" (as defined therein) or if he elects,  as provided in the agreement,  to
treat certain acts or omissions of the employer as a  termination  of employment
without  "cause," Mr.  Cornstein  will, in addition to continuing to receive his
base salary, bonus and other benefits provided thereunder for the balance of the
term, also be entitled to receive a severance payment (the "Severance  Amount").
The  Severance  Amount  will equal the sum of one year's  base  salary  plus the
average of the annual  bonuses paid during the term of the agreement and will be
paid over a two-year period commencing at the scheduled  expiration of the term.
In  addition,  if Mr.  Cornstein's  agreement  is not extended or renewed at the
scheduled  expiration  of its term,  Mr.  Cornstein  will also be  entitled to a
severance payment equal to the Severance Amount.

     Under Mr. Cornstein's agreement,  in the event of a "Change of Control" (as
defined  therein) of the Holding  Company,  then if at any time within 12 months
following the "Change of Control" Mr.  Cornstein is no longer employed by Finlay
(or any entity which succeeds to the  obligations of Finlay under the employment
agreement  following the "Change of Control") for any reason other than death or
disability,  Mr.  Cornstein  will be entitled to a lump sum payment  ("Change of
Control  Payment")  equal to the net present  value of the base salary and bonus
payable to him over the  remainder of the term  (calculated,  in the case of the
bonus, assuming

                                       34

<PAGE>


the annual  bonuses  payable for each  remaining year shall equal the average of
the annual bonuses paid to him for preceding years during the term). However, if
the Change of Control Payment does not equal or exceed the lesser of (i) 299% of
the Severance Amount or (ii) the amount,  if any, by which the fair market value
of (A) equity  interests  in the Holding  Company and Finlay  Jewelry  which Mr.
Cornstein continues to hold after the Change of Control, (B) amounts which he is
entitled  to  receive in  exchange  for or as a  distribution  in respect of his
equity  interests in the Holding  Company and Finlay  Jewelry as a result of the
"Change of Control" and (C) any other consideration  received as a result of the
"Change of Control"  (other than pursuant to his  employment  agreement) is less
than $7.5 million,  then Mr.  Cornstein shall receive,  in lieu of the Change of
Control Payment, the lesser of (i) and (ii).

     Under the  agreement,  a "Change of  Control"  occurs  when (i) a person or
group other than certain of the Holding Company's existing  stockholders becomes
the beneficial owner of 50% or more of the aggregate voting power of the Holding
Company; or (ii) during any period of two consecutive  calendar years, there are
certain changes in the composition of the Holding Company's Board of Directors.

     A portion of any payments which may be made upon such a "Change of Control"
may be deemed an "excess  parachute  payment" within the meaning of the Code, in
which event such portion will not be a deductible expense for tax purposes.

     Effective January 3, 1995, Finlay entered into an employment agreement with
Arthur E. Reiner to employ Mr.  Reiner as Vice  Chairman of the Holding  Company
and Chairman and Chief  Executive  Officer of Finlay Jewelry for a term expiring
on January 31,  1998.  On January 30,  1996,  as  contemplated  by Mr.  Reiner's
employment  agreement,  the Holding  Company's Board of Directors  appointed Mr.
Reiner to the office of  President  and Chief  Executive  Officer of the Holding
Company.  Pursuant to the employment agreement,  Mr. Reiner received annual base
salary of approximately $666,660 in 1995, which was increased to $700,000 on the
first  day of fiscal  1996 and to  $750,000  on the  first  day of fiscal  1997.
Thereafter,  further  increases  will  be at  the  discretion  of the  Board  of
Directors of the Holding  Company.  In addition to his annual base  salary,  Mr.
Reiner will be entitled to an annual bonus payment  based on a target  incentive
amount  equal to  one-half  of his base  salary  for the  applicable  year  (the
"Incentive  Amount").  The payment of the bonus in respect of a particular  year
will be based on the achievement by Finlay of the Target Level,  with 20% of the
Incentive  Amount  payable if 90% of the Target  Level is  achieved,  increasing
incrementally on a pro rata basis to 80% of the Incentive Amount payable if 100%
of the Target Level is achieved,  increasing further incrementally on a pro rata
basis to 160% of the  Incentive  Amount  payable if 140% of the Target  Level is
achieved,  and if over 140% of the Target  Level is  achieved,  the annual bonus
payment shall equal 160% of the Incentive Amount plus 1% of the Incentive Amount
for each percentage point by which Finlay's measured performance exceeds 140% of
the Target Level.  Notwithstanding  the foregoing,  with respect to fiscal 1995,
pursuant to the terms of his employment  agreement,  Mr. Reiner received a bonus
in the amount of $215,900.

     Under the agreement,  Mr. Reiner received options to purchase 69,263 shares
of Common  Stock at an  exercise  price of $14.00 per share.  Of those  options,
one-half are time-based and one-half  performance-  accelerated,  vesting in ten
years subject to accelerated  vesting upon achievement of specified  performance
goals.  Of the  time-based  options,  one-third  became  exercisable  on each of
February 3, 1996, and February 1, 1997, and one-third will become exercisable on
January 31, 1998. One-third of the performance-accelerated options will vest for
each fiscal year for which  EBITA-FIFO in the applicable  year equals or exceeds
certain specified target levels in that year and any subsequent year.

     In the event of Mr.  Reiner's  termination  of  employment  by the  Holding
Company for "Cause" (as defined in the agreement),  by Mr. Reiner for any reason
(other than "Good  Reason," as defined in the  agreement)  or as a result of Mr.
Reiner's death or Disability (as defined in the agreement),  all the options, to
the extent not then

                                       35
<PAGE>

exercisable,  shall  terminate.  In the  event of Mr.  Reiner's  termination  of
employment  by the Holding  Company  without  "Cause" or by Mr. Reiner for "Good
Reason," all the options,  to the extent not then  exercisable,  shall thereupon
become fully exercisable. In the event of Mr. Reiner's termination of employment
for any reason after January 31, 1998, all  performance-accelerated  options, to
the extent not then exercisable, shall terminate. In addition, in the event of a
"Change of Control" (as defined in the agreement) (i) any outstanding time-based
options shall become  exercisable and (ii) the  performance-accelerated  options
will vest to the extent (A) the  "Enterprise  Value" of the Holding  Company (as
defined in the agreement) exceeds certain established "Enterprise Value" targets
set forth in the agreement  with respect to the fiscal year in which the "Change
of  Control"  occurs or (B) the "Change of  Control"  represents  a per share of
Common  Stock  transaction  price in excess of 130% of the fair market value per
share of Common Stock determined immediately prior to the public announcement of
such "Change of Control."

     Upon the  commencement  of his  employment,  Mr. Reiner  purchased  138,525
shares of Common Stock (the  "Purchased  Shares"),  at a purchase price of $7.23
per share. The aggregate  purchase price of the Purchased Shares was paid in the
form of a note issued by Mr.  Reiner to the Holding  Company,  the  repayment of
which is secured by the Purchased  Shares and certain  proceeds  received by Mr.
Reiner upon disposition of the Purchased Shares or upon any distribution paid on
or with respect to the Purchased Shares. In the event Mr. Reiner's employment is
terminated, the Purchased Shares (together with vested options and shares issued
upon exercise of vested options  ("Option  Shares")) are subject to certain call
rights and the Option Shares are additionally  subject to certain put rights. In
the event the Holding Company does not exercise its call rights,  the rights may
be exercised by the Lee  Investors  and the Desai  Investors,  pro rata based on
their  respective  ownership of Common Stock.  The  Purchased  Shares and Option
Shares are subject to certain  restrictions on transfer and registration  rights
set forth in the agreement and will also be subject to the Amended Stockholders'
Agreement  and the  Registration  Rights  Agreement  other  than the  provisions
relating to restrictions on transfer.  See "Certain Transactions - Stockholders'
Agreement" and "Certain Transactions - Registration Rights Agreement."

     Under Mr. Reiner's  agreement,  subject to certain  specified  limitations,
Finlay is required to maintain  life  insurance on the life of Mr. Reiner in the
amount of $5.0 million, payable to his beneficiaries,  and to provide Mr. Reiner
with catastrophic health insurance.

     Mr.  Reiner's  agreement also provides that if his employment is terminated
by the Holding  Company  without  "Cause" or by Mr.  Reiner for "Good Reason" in
either case prior to a "Change of Control,"  Mr. Reiner will continue to receive
his base salary for the balance of the term and bonus  compensation  (calculated
as though 110% of the Target Level was achieved) as if such  termination had not
occurred.  In the event he is terminated  without "Cause" and coincident with or
following  a "Change of  Control,"  Mr.  Reiner  shall be entitled to a lump sum
payment equal to 299% of his "base amount" (as defined in Section 280 G(b)(3) of
the Code).  In the event that Mr. Reiner  voluntarily  terminates his employment
within one year  following a "Change of Control"  in  connection  with which the
acquiror did not expressly assume Mr. Reiner's agreement and extend its term for
an additional 3 years or otherwise  offer Mr. Reiner a contract on terms no less
favorable than those provided under the existing agreement  providing for a term
of at least 3 years,  or if he terminates his employment  following a "Change of
Control" for "Good Reason" he will be entitled to a payment equal to 299% of the
"base  amount." In the event that Mr. Reiner is terminated  for "Cause" or if he
voluntarily  terminates  his  employment  without  "Good  Reason"  prior  to the
occurrence  of a "Change of  Control,"  he shall be entitled to receive his base
salary  through the date of  termination  and any bonus earned with respect to a
previously  completed  fiscal year which  remains  unpaid.  Payments made to Mr.
Reiner upon termination of employment are subject to certain restrictions in the
event  that  such  payments  constitute   "parachute   payments"  under  Section
280G(b)(2) of the Code. In addition,  Mr. Reiner is required to mitigate certain
payments made to him under the agreement under certain limited circumstances.


                                       36

<PAGE>


Directors' Compensation

     For serving as a director of the Holding  Company,  Mr.  Matthews  receives
aggregate  compensation  at the rate of  $20,000  per  year.  Directors  who are
employees  receive  no  additional  compensation  for  serving as members of the
Board.  Messrs. Lee, Desai, Smith and Kaplan receive no compensation for serving
as directors of the Holding  Company.  For a discussion  of certain fees paid to
affiliates of Messrs.  Lee and Desai and to Mr.  Matthews,  see "-  Compensation
Committee Interlocks and Insider Participation."

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The  following  table  sets  forth  certain  information  with  respect  to
beneficial  ownership of certain voting  securities of the Holding Company as of
April 1, 1997 by each of the Holding Company's directors,  the Holding Company's
Chief  Executive  Officer  and each of the four  other most  highly  compensated
executive  officers  of  the  Holding  Company  or  Finlay  Jewelry,  and by all
directors  and  executive  officers as a group.  No other person is known by the
Holding  Company  to own  beneficially  more than 5% of the  Common  Stock.  The
Holding Company owns all of the issued and  outstanding  capital stock of Finlay
Jewelry.


                                               Shares of Common Stock
                                               Beneficially Owned (1)
                                          ---------------------------------
                                              Number           Percentage
                 Name                       of Shares           of Class
---------------------------------------   --------------     --------------

Thomas H. Lee (2)......................        2,347,529              31.1%
Rohit M. Desai (3)(4)..................        1,657,441              21.9%
David B. Cornstein (5)(6)..............          515,862               6.8%
Arthur E. Reiner (6)(7)................          167,735               2.2%
Warren C. Smith, Jr. (8)...............           29,168                  *
Norman S. Matthews (9).................           40,000                  *
James Martin Kaplan (6)................            4,000                  *
Leslie A. Philip (6)(10)...............           13,333                  *
Barry D. Scheckner (6)(11).............           15,600                  *
Edward Stein (6)(11)...................           11,533                  *

All Directors and Executive                    4,787,618              62.2%
    Officers as a group
    (10 persons) (12)..................

---------------------------
*    Less than one percent.

(1)  The persons named in the table have sole voting and  investment  power with
     respect to all shares of Common  Stock  subject to the terms of the Amended
     Stockholders' Agreement.

(2)  Includes  2,048,808  shares of Common Stock held of record by Thomas H. Lee
     Equity Partners, L.P. ("THLEP"), the general partner of which is THL Equity
     Advisors Limited Partnership,  a Massachusetts limited partnership of which
     Mr. Lee is a general  partner,  and 298,721  shares of Common Stock held of
     record by 1989 Thomas H. Lee Nominee Trust (the "Nominee Trust"). Mr. Lee's
     address  is  c/o  Thomas  H.  Lee  Company,   75  State   Street,   Boston,
     Massachusetts 02109.

(3)  The address of Mr. Desai is c/o Desai Capital Management Incorporated,  540
     Madison Avenue, New York, New York 10022.

(4)  Includes  953,029  shares of Common  Stock held of record by  Equity-Linked
     Investors, L.P. ("ELI-I") and 704,412 shares of Common Stock held of record
     by  Equity-Linked  Investors-II  ("ELI-II").  ELI-I and ELI-II are  limited
     partnerships,  the general  partners of which are Rohit M. Desai Associates
     and  Rohit M.  Desai  Associates-II  (together,  the  "General  Partners"),
     respectively. Rohit M. Desai is the managing general partner of each of the
     General Partners.  Mr. Desai is also the sole stockholder,  chairman of the
     board and  president of Desai  Capital  Management  Incorporated  ("DCMI"),
     which  acts as an  investment  advisor  to  ELI-I  and  ELI-II.  Under  the
     investment  advisory  agreements between DCMI and each of ELI-I and ELI-II,
     DCMI has the power to vote and  dispose of these  securities.  DCMI and Mr.
     Desai disclaim beneficial ownership of the securities. The address of ELI-I
     and  ELI-II is c/o  Desai  Capital  Management  Incorporated,  540  Madison
     Avenue, New York, New York 10022.


                                       37
<PAGE>

(5)  Includes  options to acquire  40,000 shares of Common Stock granted in 1995
     having an exercise price of $14.00 per share.

(6)  The address of Messrs.  Cornstein,  Reiner, Kaplan, Scheckner and Stein and
     Ms. Philip is in care of the Holding Company,  521 Fifth Avenue,  New York,
     New York 10175.

(7)  Includes  options to acquire  23,088 shares of Common Stock granted in 1994
     having an exercise price of $14.00 per share.

(8)  Includes  options to acquire  14,584  shares  from the Nominee  Trust.  Mr.
     Smith's  address is c/o Thomas H. Lee  Company,  75 State  Street,  Boston,
     Massachusetts 02109.

(9)  Includes  options to acquire  10,000 shares of Common Stock granted in 1993
     having an  exercise  price of $12.00 per share,  options to acquire  10,000
     shares of Common Stock  granted in 1993 having an exercise  price of $16.50
     per share, options to acquire 10,000 shares of Common Stock granted in 1995
     having an exercise  price of $14.00 per share and options to acquire 10,000
     shares of Common Stock  granted in 1996 having an exercise  price of $11.16
     per share. Mr. Matthew's address is 650 Madison Avenue,  New York, New York
     10022.

(10) Includes  options to acquire  13,333 shares of Common Stock granted in 1995
     having an exercise price of $11.19 per share.

(11) Includes for Messrs. Scheckner and Stein options to acquire 9,600 and 7,200
     shares,  respectively,  of Common  Stock  granted on May 26, 1993 having an
     exercise  price of $7.23 per share and  options to acquire  4,000 and 3,333
     shares,  respectively,  of Common Stock  granted on April 5, 1995 having an
     exercise price of $14.00 per share.

(12) Includes  options to acquire  140,554 shares having exercise prices ranging
     from $7.23 to $16.50 per share.


Item 13.  Certain Relationships and Related Transactions

1985 Acquisition and 1988 Leveraged Recapitalization

     From 1968 until 1985,  the business of Finlay was operated as a division of
Seligman & Latz,  Inc.  ("S&L").  S&L was  acquired in December  1985 (the "1985
Acquisition") by SL Holdings  Corporation  ("SL Holdings"),  which was formed by
certain officers and directors of SL Holdings.  David B. Cornstein's affiliation
with Finlay  commenced in 1985 when,  concurrent  with the 1985  Acquisition,  a
wholly  owned  subsidiary  of SL  Holdings  acquired  the  outstanding  stock of
Tru-Run,  Inc.,  a  corporation  principally  owned by Mr.  Cornstein  which was
engaged in the  operation  of  licensed  jewelry and watch  repair  departments.
Immediately  following  the 1985  Acquisition,  SL Holdings  contributed  to S&L
Acquisition  Company,  L.P., a Delaware limited partnership ("S&L Acquisition"),
all of the  businesses  and assets of S&L, as well as the business and assets of
Tru-Run,  Inc.  In  connection  with  a  1988  reorganization,  a  wholly  owned
subsidiary  of the Holding  Company was merged into SL Holdings,  and thereby SL
Holdings, which then changed its name to Finlay Fine Jewelry Corporation, became
a wholly owned subsidiary of the Holding Company.

The 1993 Recapitalization

     On May 26, 1993, Finlay completed the Recapitalization Transactions,  which
were designed (i) to improve the financial and operating  flexibility  of Finlay
and  (ii)   generally  to  reduce  the  equity   interests  of  then-   existing
non-management stockholders and enable the Lee Investors and the Desai Investors
to  acquire  36.8% and 24.5%,  respectively,  of the  voting  securities  of the
Holding Company.

     The Recapitalization Transactions included the Lee Investment and the Desai
Investment in units consisting of the Series C Preferred Stock and Common Stock.
Concurrently,  certain  other  existing  classes  of  preferred  stock  and  all
outstanding  warrants to  purchase  Common  Stock were  redeemed.  These  equity
related  transactions  resulted  in the Lee  Investors  and the Desai  Investors
obtaining 52.6% beneficial ownership of the outstanding Common Stock.

     The Recapitalization  Transactions also included the public issuance by the
Holding Company of units  consisting of 12% Senior Discount  Debentures due 2005
and Common Stock,  the public issuance by Finlay Jewelry of 10 5/8% Senior Notes
due 2003 and the refinancing of the Holding Company's outstanding term loans

                                       38
<PAGE>

and  revolving   indebtedness   (the  "WCC  Revolving  Credit   Facility")  with
Westinghouse Credit Corporation  ("WCC").  The WCC Revolving Credit Facility was
replaced by the $110 million  Revolving  Credit Facility with G.E.  Capital (the
"G.E.  Capital  Revolving Credit  Facility").  The G.E. Capital Revolving Credit
Facility was amended in October 1994 to, among other things, increase the amount
available thereunder to $135 million.

     In connection with the  Recapitalization  Transactions,  certain  executive
officers and directors of the Holding  Company and Finlay  Jewelry  entered into
new   employment   agreements   with  Finlay.   Also  in  connection   with  the
Recapitalization Transactions,  Finlay entered into the Lee Management Agreement
with an affiliate of the Lee Investors and the Desai  Management  Agreement with
an  affiliate  of the  Desai  Investors.  In July  1993  Finlay  entered  into a
consulting  agreement with Norman Matthews,  which agreement was terminated,  in
part, upon completion of the Offering. See "Executive  Compensation - Employment
Agreements  and  Change of  Control  Arrangements,"  "Executive  Compensation  -
Compensation  Committee  Interlocks  and Insider  Participation"  and "Executive
Compensation - Directors' Compensation."

The Offering and Series C Exchange; Stockholder Purchase

     As part of the Offering, the Lee Investors, the Desai Investors and Messrs.
Cornstein  and Reiner  purchased an aggregate of 208,163  shares of Common Stock
from the  underwriters  of the Offering at the initial public  offering price of
$14.00 per share.  Immediately prior to completion of the Offering,  the holders
of the Holding  Company's  Series C Preferred  Stock  exchanged all  outstanding
shares of Series C Preferred Stock with the Holding Company for 2,581,784 shares
of Common  Stock.  For the  purposes of the Series C Exchange,  the  outstanding
Series C Preferred Stock was (i) valued at its liquidation  value of $30,000,000
plus $6,145,000 of accrued  dividends  through April 13, 1995, paid in kind at a
quarterly rate of 2.5% and (ii) exchanged for Common Stock at the initial public
offering price of $14.00 per share. In connection with the Series C Exchange,  a
$10,000,000  non-recurring,  non-cash charge representing the difference between
the liquidation value and the carrying value of the Series C Preferred Stock was
recorded.

Stockholders' Agreement

     Prior  to  completion  of  the  Offering,  the  Lee  Investors,  the  Desai
Investors,  the  Management  Stockholders,  all  employees  holding  options  to
purchase Common Stock, certain private investors and the Holding Company entered
into the Amended  Stockholders'  Agreement  which sets forth certain  rights and
obligations  of the  parties  with  respect  to the Common  Stock and  corporate
governance  of the Holding  Company.  Any employees of Finlay not parties to the
Amended Stockholders'  Agreement who receive options to purchase Common Stock in
connection  with their  employment in the future will also be required to become
parties to the Amended Stockholders' Agreement.

     The Amended Stockholders'  Agreement provides that the parties thereto must
vote their  shares to fix the number of members of the Board of Directors of the
Holding Company at ten and to vote in favor of seven directors who are nominated
as follows: two are nominated by the Lee Investors,  two may be nominated by the
Desai Investors,  two are nominated by Mr. Cornstein and one is nominated by Mr.
Reiner. Notwithstanding the foregoing, the right of various persons to designate
directors  will be  reduced  or  eliminated  at such  time as they own less than
certain specified  percentages of the shares of Common Stock then outstanding or
in certain cases are no longer an employee of the Holding Company.  The nominees
for election to the Board of Directors of the Lee Investors presently serving on
the Board of  Directors  are  Messrs.  Lee and Smith;  the  nominee of the Desai
Investors is Mr.  Desai;  Mr.  Cornstein's  nominees are Messrs.  Cornstein  and
Kaplan; and Mr. Reiner is his own designee. The Amended Stockholders'  Agreement
also provides that the Executive Committee consists of five directors, including
one  independent  director  selected  by the  Board  of  Directors,  one  member
designated by Mr. Lee (so long as the Lee Investors  have the right to designate
a nominee for director), one member designated by

                                       39
<PAGE>

the Desai  Investors (so long as the Desai Investors have the right to designate
a nominee for  director)  and two members  designated  by Mr.  Cornstein  (which
number will be reduced to one if Mr. Cornstein is only entitled to designate one
nominee  for  director  and none if Mr.  Cornstein  ceases  to have the right to
designate a nominee for director).  When a stockholder or group of  stockholders
loses the right to  designate a  director,  such  director  is to be  designated
instead by a majority of the  directors of the Holding  Company.  The  Executive
Committee of the Holding  Company's  Board  consists at present of Messrs.  Lee,
Desai, Matthews,  Cornstein and Kaplan. See "Directors and Executive Officers of
the Registrant."

     In addition, the Amended Stockholders'  Agreement provides that the parties
thereto have (i) certain "come along" rights  allowing  them to  participate  in
private  sales of Common  Stock by parties  selling  at least a majority  of the
outstanding shares of Common Stock and (ii) certain "take along" rights allowing
parties who are selling at least a majority of the outstanding  shares of Common
Stock to require the other  parties to the Amended  Stockholders'  Agreement  to
sell all or a portion of their shares of Common  Stock to the same  purchaser in
the same transaction on the same terms.

Registration Rights Agreement

     The Registration Rights Agreement grants certain registration rights to the
Lee  Investors,  the  Desai  Investors,  certain  other  investors  and  certain
Management Stockholders.  Lee Investors and Desai Investors who together hold at
least  31%  of the  outstanding  "Registrable  Securities"  (as  defined  in the
Registration Rights Agreement) are entitled to request jointly,  and the Holding
Company shall be obligated to effect, up to three  registrations of "Registrable
Securities."  After May 26, 1998,  Lee Investors and Desai  Investors may demand
registration  without the other under certain  circumstances.  The  Registration
Rights Agreement also provides that  stockholders who are parties thereto (other
than the Lee  Investors  and the Desai  Investors)  holding in the  aggregate at
least 20.0% of the "Registrable Securities" then outstanding will have the right
on one occasion to require the Holding Company to file a registration  statement
with the Commission covering all or a portion of their "Registrable  Securities"
in certain circumstances.  In addition, under the Registration Rights Agreement,
if the Holding  Company  proposes to register  shares of Common  Stock under the
Securities  Act,  either for its own account or for the account of others (other
than a registration  statement relating solely to employee benefit plans),  then
each party to the Registration Rights Agreement will have the right,  subject to
certain  restrictions  and  priorities,  to  request  that the  Holding  Company
register its shares of Common Stock in connection with such registration.  Under
the Registration  Rights Agreement,  the holders of "Registrable  Securities" on
the one hand and the Holding  Company on the other agree to indemnify each other
for certain  liabilities,  including  liabilities  under the Securities  Act, in
connection with any  registration of shares subject to the  Registration  Rights
Agreement.

Certain Other Transactions

     Prior to completion of the Offering,  Finlay  entered into  indemnification
agreements with each of Finlay's directors and certain executive  officers.  The
indemnification  agreements  require,  among other things, that Finlay indemnify
its directors and executive officers against certain  liabilities and associated
expenses  arising from their  service as  directors  and  executive  officers of
Finlay and reimburse certain related legal and other expenses. In the event of a
Change  of  Control  (as  defined  therein)  Finlay  will,  upon  request  by an
indemnitee under the agreements, create and fund a trust for the benefit of such
indemnitee   sufficient   to   satisfy   reasonably   anticipated   claims   for
indemnification.  Finlay will also cover each  director  and  certain  executive
officers under a directors and officers liability policy maintained by Finlay in
such amounts as the Board of Directors of the Holding Company finds  reasonable.
Although the indemnification agreements offer coverage similar to the provisions
in the Restated Certificate of Incorporation,  they provide greater assurance to
directors and officers that


                                       40

<PAGE>


indemnification  will be  available,  because,  as  contracts,  they  cannot  be
modified  unilaterally  in  the  future  by the  Board  of  Directors  or by the
stockholders to eliminate the rights they provide.

     For  information  relating  to certain  transactions  involving  members of
management or others,  see  "Executive  Compensation  -  Compensation  Committee
Interlocks and Insider  Participation" and "Executive  Compensation - Employment
Agreements and Change of Control Arrangements."




                                       41

<PAGE>


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K


(a)  Documents filed as part of this report:

 (1)  Financial Statements.  See Financial Statements Index included in  Item 8 
       of Part II of this Form 10-K.

 (2)  Financial Statement Schedules. None.

 (3)  Exhibits.

        Item Number (Exhibit Number referenced to Item 601 of Regulation S-K).
        -----------  

3.1  Certificate of Incorporation,  as amended, of Finlay Jewelry  (incorporated
     by   reference  to  Exhibit  3.1  of  Form  S-1   Registration   Statement,
     Registration No. 33-59380).

3.2  By-laws of Finlay Jewelry  (incorporated  by reference to Exhibit 4.1 filed
     as part of the Current  Report on Form 8-K filed by the  Registrant on June
     10, 1993).

4.1  Article Fourth of the Restated Certificate of Incorporation and Articles II
     and VI of the By-laws (incorporated by reference to Exhibit 4.1 of Form S-1
     Registration Statement, Registration No. 33-59380).

4.2  Specimen 105/8% Senior Note Due 2003 issued by Finlay Jewelry (incorporated
     by reference  to Exhibit 4.2 filed as part of the  Currrent  Report on Form
     8-K filed by the Registrant on June 10, 1993).

4.3(a) Indenture  dated as of May 26,  1993  between  Finlay  Jewelry and Marine
     Midland  Bank,  as Trustee,  relating to the 105/8%  Senior  Notes Due 2003
     issued by Finlay Jewelry (incorporated by reference to Exhibit 4.3 filed as
     part of the Current  Report on Form 8-K filed by Finlay Jewelry on June 10,
     1993).

4.3(b) First  Supplemental  Indenture  dated as of October 28, 1994 among Finlay
     Jewelry,  Sonab  Holdings,  Sonab  International,  Sonab and Marine Midland
     Bank, as Trustee,  to the indenture relating to the 105/8% Senior Notes Due
     2003 issued by Finlay  Jewelry  (incorporated  by  reference to Exhibit 4.1
     filed as part of the  Quarterly  Report on Form 10-Q for the  period  ended
     October 29, 1994 filed by Finlay Jewelry on December 13, 1994).

4.3(c) Second  Supplemental  Indenture,  dated as of July 14, 1995, among Finlay
     Jewelry,  Sonab  Holdings,  Sonab  International,  Sonab and Marine Midland
     Bank, as trustee,  to the indenture relating to the 105/8% Senior Notes due
     2003 issued by Finlay  Jewelry  (incorporated  by  reference to Exhibit 4.1
     filed as part of the  Quarterly  Report on Form 10-Q for the  period  ended
     July 29, 1995 filed by Finlay Jewelry on September 9, 1995).



                                       42

<PAGE>


4.4  Stock  Purchase  Agreement  dated  as of May 26,  1993  among  the  Holding
     Company, Finlay Jewelry, THL Equity Holding Corp., Equity-Linked Investors,
     L.P. and Equity-Linked  Investors-II  (incorporated by reference to Exhibit
     4.4 filed as part of the Current Report on Form 8-K filed by Finlay Jewelry
     on June 10, 1993).

4.5  Amended  and  Restated  Stockholders'  Agreement  dated as of March 6, 1995
     among the Holding Company, David B. Cornstein,  Arthur E. Reiner, Robert S.
     Lowenstein, Norman S. Matthews, Ronald B. Grudberg, Harold S. Geneen, James
     Martin Kaplan,  Electra Investment Trust, PLC, RHI Holdings,  Inc., Jeffrey
     Branman,   The  Lee  Holders   listed  on  the   signature   page  thereto,
     Equity-Linked Investors, L.P., Equity-Linked Investors-II and certain other
     security holders (incorporated by reference to Exhibit 4.5 filed as part of
     the Annual  Report on Form 10-K for the period ended January 28, 1995 filed
     by Finlay Jewelry on April 12, 1995).

4.6  Registration  Rights  Agreement  dated as of May 26, 1993 among the Holding
     Company, David B. Cornstein,  Harold S. Geneen, Ronald B. Grudberg,  Robert
     S. Lowenstein,  John C. Belknap,  James Martin Kaplan,  Electra  Investment
     Trust, PLC, RHI Holdings, Inc., Jeffrey Branman, Andrew U. Belknap, Timothy
     H. Belknap,  THL Equity Holding Corp.,  Equity-Linked  Investors,  L.P. and
     Equity-Linked  Investors-II (incorporated by reference to Exhibit 4.6 filed
     as part of the Current  Report on Form 8-K filed by Finlay  Jewelry on June
     10, 1993).

10.1 Underwriting  Agreement relating to the Offering dated April 6, 1995 by and
     among the Holding  Company,  Finlay Jewelry,  the Selling  Stockholders and
     Goldman, Sachs & Co. on behalf of each of the Underwriters (incorporated by
     reference to Exhibit  10.1 filed as part of the Annual  Report on Form 10-K
     for the period ended January 28, 1995 filed by Finlay  Jewelry on April 12,
     1995).

10.2 Form of  Agreement  and  Certificate  of Option  Pursuant  to the Long Term
     Incentive Plan of the Holding Company (incorporated by reference to Exhibit
     10.1  filed as part of the  Quarterly  Report on Form  10-Q for the  period
     ended July 31, 1993 filed by Finlay Jewelry on September 14, 1993).

10.3 The  Holding   Company's   Restated   Retirement   Income   Plan   (401(k))
     (incorporated  by reference to Exhibit 10.6 filed as part of the  Quarterly
     Report on Form 10-Q for the  period  ended  July 29,  1995  filed by Finlay
     Jewelry on September 9, 1995).

10.3(a) Amendment No. 1 to the Holding Company's Restated Retirement Income Plan
     (401 (k))  (incorporated  by reference to Exhibit 10.7 filed as part of the
     Quarterly  Report on Form 10-Q for the period  ended July 29, 1995 filed by
     Finlay Jewelry on September 9, 1995).
 
10.3(b)  Amendment  No.  2 to  the  Holding  Company's  Retirement  Income  Plan
     (incorporated  by reference to Exhibit 10.1 filed as part of the  Quarterly
     Report  on Form  10-Q for the  period  ended  May 4,  1996  filed by Finlay
     Jewelry on June 14, 1996.

10.4 Executive  Medical  Benefits Plan of Finlay Jewelry and the Holding Company
     (incorporated  by  reference  to  Exhibit  10.3  of Form  S-1  Registration
     Statement, Registration No. 33-59380).

10.5(a) Employment Agreement dated as of May 26, 1993 between David B. Cornstein
     and Finlay Jewelry (incorporated by reference to Exhibit 19.2 filed as part
     of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed
     by Finlay Jewelry on June 30, 1993).

                                       43

<PAGE>


10.5(b) Amendment to Employment  Agreement dated as of December 20, 1995 between
     David B. Cornstein and Finlay Jewelry (incorporated by reference to Exhibit
     10.1  filed as part of the  Quarterly  Report on Form  10-Q for the  period
     ended April 29, 1995 filed by Finlay Jewelry on June 3, 1995).

10.6 Employment  Agreement  dated May 26, 1993  between  Ronald B.  Grudberg and
     Finlay Jewelry  (incorporated by reference to Exhibit 19.3 filed as part of
     the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by
     Finlay Jewelry on June 30, 1993).

10.7 Employment  Agreement  dated May 26, 1993 between Robert S.  Lowenstein and
     Finlay Jewelry  (incorporated by reference to Exhibit 19.4 filed as part of
     the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed by
     Finlay Jewelry on June 30, 1993).

10.8(a)  Employment  Agreement  dated as of January  3, 1995  among the  Holding
     Company,  Finlay Jewelry and Arthur E. Reiner (incorporated by reference to
     Exhibit  10.7(a)  of Form  S-1  Registration  Statement,  Registration  No.
     33-88938).

10.8(b)  Executive  Securities  Purchase  Agreement  dated as of January 3, 1995
     between the Holding Company and Arthur E. Reiner (incorporated by reference
     to Exhibit 10.7(b) of Form S-1  Registration  Statement,  Registration  No.
     33-88938).

10.8(c) Limited Recourse Secured  Promissory Note dated as of January 3, 1995 by
     Arthur E. Reiner in favor of the Holding Company (incorporated by reference
     to Exhibit 10.7(c) of Form S-1  Registration  Statement,  Registration  No.
     33-88938).

10.8(d) Stock Pledge  Agreement  dated as of January 3, 1995 between the Holding
     Company and Arthur E. Reiner  (incorporated by reference to Exhibit 10.7(d)
     of Form S-1 Registration Statement, Registration No. 33-88938).

10.8(e) Amendment  to  Employment  Agreement  dated as of May 17, 1995 among the
     Holding Company, Finlay Jewelry and Arthur E. Reiner.

10.9(a) Consulting and Option  Agreement dated as of July 7, 1993 by and between
     Finlay Jewelry and Norman S. Matthews (incorporated by reference to Exhibit
     10.OO filed as part of the Annual  Report on Form 10-K for the period ended
     January 29, 1994 filed by Finlay Jewelry on April 27, 1994).

10.9(b) Amendment to Consulting and Option  Agreement  dated as of March 6, 1995
     between Norman S. Matthews and Finlay Jewelry (incorporated by reference to
     Exhibit  10.2  filed as part of the  Quarterly  Report on Form 10-Q for the
     period ended April 29, 1995 filed by Finlay Jewelry on June 3, 1995).

10.10 Tax Allocation  Agreement dated as of November 1, 1992 between the Holding
     Company and Finlay Jewelry (incorporated by reference to Exhibit 19.5 filed
     as part of the  Quarterly  Report on Form 10-Q for the period  ended May 1,
     1993 filed by Finlay Jewelry on June 30, 1993).

10.11 Management Agreement  dated as of May 26, 1993 among the Holding  Company,
     Finlay  Jewelry and Thomas H. Lee Company  (incorporated  by  reference  to
     Exhibit  28.2  filed as part of the  Current  Report  on Form 8-K  filed by
     Finlay Jewelry on June 10, 1993).

                                       44

<PAGE>


10.12 Management Agreement  dated as of May 26, 1993 among the Holding  Company,
     Finlay Jewelry and Desai Capital Management  Incorporated  (incorporated by
     reference to Exhibit  28.1 filed as part of the Current  Report on Form 8-K
     filed by Finlay Jewelry on June 10, 1993).

10.13(a) Long  Term  Incentive  Plan of the  Holding  Company  (incorporated  by
     reference  to Exhibit  19.5 filed as part of the  Quarterly  Report on Form
     10-Q for the period  ended May 1, 1993 filed by Finlay  Jewelry on June 30,
     1993).

10.13(b)  Amendment  No. 1 to the Holding  Company's  Long Term  Incentive  Plan
     (incorporated by reference to Exhibit 10.14(b) of the Form S-1 Registration
     Statement, Registration No. 33- 88938).

10.14(a) Amended and Restated Credit  Agreement dated as of March 28, 1995 among
     GE Capital,  individually and its capacity as agent,  certain other lenders
     and financial  institutions,  the Holding  Company and Finlay  Jewelry (the
     "Amended  and Restated  Credit  Agreement")  (incorporated  by reference to
     Exhibit  10.15  filed as part of the  Annual  Report  on Form  10-K for the
     period ended January 28, 1995 filed by Finlay Jewelry on April 12, 1995).

10.14(b) Amendment No. 1, dated as of June 15, 1995, to the Amended and Restated
     Credit  Agreement  (incorporated by reference to Exhibit 10.4 filed as part
     of the  Quarterly  Report on Form 10-Q for the period  ended July 29,  1995
     filed by Finlay Jewelry on September 9, 1995).

10.14(c) Amendment No. 2 to the Amended  Restated  Credit  Agreement dated as of
     February 1, 1996  (incorporated  by reference to Exhibit  10.15(c) filed as
     part of the Annual  Report on Form 10-K for the period  ended  February  3,
     1996 filed by Finlay Jewelry on May 3, 1996).
 
10.14(d) Form of Amendment No. 3 to the Amended and Restated Credit Agreement.

10.15(a) Amended and Restated  Revolving  Note dated as of March 28, 1995 by the
     Holding  Company  and  Finlay  Jewelry  to the order of GE  Capital  in the
     principal  amount of  $98,000,000  (incorporated  by  reference  to Exhibit
     10.16(a)  filed as part of the  Annual  Report on Form 10-K for the  period
     ended January 28, 1995 filed by Finlay Jewelry on April 12, 1995).

10.15(b) Amended and Restated  Revolving  Note dated as of March 28, 1995 by the
     Holding  Company  and Finlay  Jewelry  to the order of Shawmut  Bank in the
     principal  amount of  $37,000,000  (incorporated  by  reference  to Exhibit
     10.16(b)  filed as part of the  Annual  Report on Form 10-K for the  period
     ended January 28, 1995 filed by Finlay Jewelry on April 12, 1995).

10.16 Security  Agreement dated as of May 26, 1993 by Finlay Jewelry in favor of
     GE Capital,  as agent  (incorporated  by reference to Exhibit 19.9 filed as
     part of the Quarterly  Report on Form 10-Q for the period ended May 1, 1993
     filed by Finlay Jewelry on June 30, 1993).

10.17 Security  Agreement and  Mortgage -  Trademarks,  Patents and  Copyrights,
     dated as of May 26, 1993 by Finlay Jewelry in favor of GE Capital, as agent
     (incorporated  by reference to Exhibit 19.10 filed as part of the Quarterly
     Report  on Form  10-Q for the  period  ended  May 1,  1993  filed by Finlay
     Jewelry on June 30, 1993).




                                       45

<PAGE>


10.18 Assignment of Life Insurance  Policy as  Collateral  dated May 26, 1993 by
     the Holding Company to GE Capital, as agent (upon the life of each David B.
     Cornstein,  Ronald B. Grudberg and Robert S.  Lowenstein)  (incorporated by
     reference to Exhibit  19.11 filed as part of the  Quarterly  Report on Form
     10-Q for the period  ended May 1, 1993 filed by Finlay  Jewelry on June 30,
     1993).

10.19 Assignment of Business Interruption  Insurance  Policy as Collateral dated
     February 28, 1994 by Finlay Jewelry to GE Capital,  as agent  (incorporated
     by  reference  to Exhibit  10.M filed as part of the Annual  Report on Form
     10-K for the period ended January 29, 1994 filed by Finlay Jewelry on April
     27, 1994).

10.20(a)  Guarantee  dated as of May 26,  1993 by  Finlay  Jewelry,  Inc.  to GE
     Capital, as agent (incorporated by reference to Exhibit 19.13 filed as part
     of the Quarterly Report on Form 10-Q for the period ended May 1, 1993 filed
     by Finlay Jewelry on June 30, 1993).

10.20(b) Guarantee dated as of October 28, 1994 by Sonab Holdings in favor of GE
     Capital  (incorporated  by  reference  to Exhibit 10.5 filed as part of the
     Quarterly  Report on Form 10-Q for the period ended  October 29, 1994 filed
     by Finlay Jewelry on December 13, 1994).

10.20(c) Guarantee dated as of October 28, 1994 by Sonab  International in favor
     of GE Capital  (incorporated  by reference to Exhibit 10.6 filed as part of
     the  Quarterly  Report on Form 10-Q for the period  ended  October 29, 1994
     filed by Finlay Jewelry on December 13, 1994).

10.20(d) Guarantee  dated as of October 28, 1994 by Sonab in favor of GE Capital
     (incorporated  by reference to Exhibit 10.7 filed as part of the  Quarterly
     Report on Form 10-Q for the period  ended  October 29, 1994 filed by Finlay
     Jewelry on December 13, 1994).

10.21(a)  Pledge  Agreement  dated as of May 26,  1993 by Finlay  Jewelry  to GE
     Capital, as agent (incorporated by reference to Exhibit 19.14 filed as part
     of the Quarterly  Report on Form 10-Q for the period ended October 29, 1994
     filed by Finlay Jewelry on December 13, 1994).

10.21(b) Amendment  Agreement dated October 28, 1994 to the Pledge  Agreement by
     Finlay Jewelry in favor of GE Capital (incorporated by reference to Exhibit
     10.8  filed as part of the  Quarterly  Report on Form  10-Q for the  period
     ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).

10.22(a) Share Pledge  Agreement  (Translation)  dated October 28, 1994 by Sonab
     Holdings in favor of GE Capital  (incorporated by reference to Exhibit 10.9
     filed as part of the  Quarterly  Report on Form 10-Q for the  period  ended
     October 29, 1994 filed by Finlay Jewelry on December 13, 1994).

10.22(b) Share Pledge  Agreement  (Translation)  dated October 28, 1994 by Sonab
     International in favor of GE Capital  (incorporated by reference to Exhibit
     10.10  filed as part of the  Quarterly  Report on Form 10-Q for the  period
     ended October 29, 1994 filed by Finlay Jewelry on December 13, 1994).
 



                                       46
<PAGE>

10.23 Master  Agreement for the  Assignment  of Accounts  Receivable as Security
     (Translation)  dated  October  28,  1994 by Sonab  in  favor of GE  Capital
     (incorporated  by reference to Exhibit 10.11 filed as part of the Quarterly
     Report on Form 10-Q for the period  ended  October 29, 1994 filed by Finlay
     Jewelry on December 13, 1994).

10.24 Note Pledge  Agreement dated as of October  28, 1994 by Finlay  Jewelry in
     favor of GE Capital  (incorporated  by reference to Exhibit  10.12 filed as
     part of the Quarterly  Report on Form 10-Q for the period ended October 29,
     1994 filed by Finlay Jewelry on December 13, 1994).

10.25 Termination  Agreement dated  as of  May  26,  1993  by and  among  Finlay
     Jewelry,  the Holding Company and WCC (incorporated by reference to Exhibit
     19.15  filed as part of the  Quarterly  Report on Form 10-Q for the  period
     ended May 1, 1993 filed by Finlay Jewelry on June 30, 1993).

10.26 Exchange  Agreement among the Holding  Company,  the Lee Investors and the
     Desai  Investors  relating  to  the  Series  C  Exchange  (incorporated  by
     reference to Exhibit 10.27 of Form S-1 Registration Statement, Registration
     No. 33-88938).

10.27 Share Purchase  Agreement  dated as of October 28, 1994 among  Societe Des
     Grands  Magasins  Galeries   Lafayette,   Union  Pour  Les  Investissements
     Commerciaux,  Societe  Anonyme Des Galeries  Lafayette,  Sonab Holdings and
     Sonab  International  (incorporated  by  reference to Exhibit 10.1 filed as
     part of the Quarterly  Report on Form 10-Q for the period ended October 29,
     1994 filed by Finlay Jewelry on December 13, 1994).

10.28 Form of Officer's and Director's Indemnification  Agreement  (incorporated
     by reference to Exhibit 10.4 filed as part of the Quarterly  Report on Form
     10-Q for the period ended April 29, 1995 filed by Finlay Jewelry on June 3,
     1995).

10.29(a)  Gold  Consignment  Agreement  dated  as of June 15,  1995  (the  "Gold
     Consignment  Agreement")  between Finlay Jewelry and Rhode Island  Hospital
     Trust  National  Bank ("RIHT")  (incorporated  by reference to Exhibit 10.1
     filed as part of the  Quarterly  Report on Form 10-Q for the  period  ended
     July 29, 1995 filed by Finlay Jewelry on September 9, 1995).

10.29(b) Amendment No. 1 and Limited Consent to the Gold  Consignment  Agreement
     (incorporated  by reference to Exhibit 10.31(b) filed as part of the Annual
     Report on Form 10-K for the period  ended  February 3, 1996 filed by Finlay
     Jewelry on May 3, 1996).

10.30 Security Agreement  dated as of June 15, 1995 between  Finlay  Jewelry and
     RIHT  (incorporated  by  reference  to  Exhibit  10.2  filed as part of the
     Quarterly  Report on Form 10-Q for the period  ended July 29, 1995 filed by
     Finlay Jewelry on September 9, 1995).

10.31 Cash Collateral Agreement dated as of June 15, 1995 between Finlay Jewelry
     and RIHT  (incorporated  by  reference to Exhibit 10.3 filed as part of the
     Quarterly  Report on Form 10-Q for the period  ended July 29, 1995 filed by
     Finlay Jewelry on September 9, 1995).




                                       47

<PAGE>


10.32 Intercreditor Agreement  dated as of June 15, 1995  between GE Capital and
     RIHT and  acknowledged  by Finlay  Jewelry  (incorporated  by  reference to
     Exhibit  10.5  filed as part of the  Quarterly  Report on Form 10-Q for the
     period ended July 29, 1995 filed by Finlay Jewelry on September 9, 1995).

21.1 Subsidiaries of Finlay Jewelry  (incorporated  by reference to Exhibit 21.1
     filed  as part of the  Annual  Report  on Form  10-K for the  period  ended
     January 28, 1995 filed by Finlay Jewelry on April 12, 1995.

27   Financial Data Schedule.

 
 
(b)   Reports on Form 8-K

      No reports on Form 8-K were filed during the fourth quarter of 1996.



                                       48

<PAGE>


  SIGNATURES



     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                        FINLAY FINE JEWELRY CORPORATION


Date: April 28, 1997                    By: /s/ Arthur E. Reiner
                                            --------------------------
                                            Arthur E. Reiner  
                                            Chairman and Chief Executive Officer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated:


      Name                           Title                             Date
      ----                           -----                             ----

 /s/David B. Cornstein   Director                                April 28, 1997
----------------------
  David B. Cornstein                           
                   
        
 /s/ Arthur E. Reiner    Chariman, Chief Executive               April 28, 1997
----------------------   Officer and Director
   Arthur E Reiner       (Principal Executive Officer)


/s/ Barry D. Scheckner   Senior Vice President and Chief         April 28, 1997
----------------------   Financial Officer (Principal  
  Barry D. Scheckner     Financial Officer)


/s/ Bruce E. Zurlnick    Treasurer (Principal Accounting         April 28, 1997
----------------------   Officer)
  Bruce E. Zurlnick


/s/ Norman S. Matthews   Director                                April 28, 1997
----------------------
 Norman S. Matthews

 
                                                   

                                       49

<PAGE>


      Name                           Title                             Date
      ----                           -----                             ----

/s/ James Martin Kaplan     Director                             April 28, 1997
-----------------------
 James Martin Kaplan
 


  /s/ Rohit M. Desai        Director                             April 28, 1997
-----------------------                    
   Rohit M. Desai              


   /s/ Thomas H. Lee        Director                             April 28, 1997
-----------------------
      Thomas H. Lee


/s/ Warren C. Smith, Jr.    Director                             April 28, 1997
-----------------------
 Warren C. Smith, Jr.



























                                       50

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




Report of Independent Public Accountants....................................F-2

Consolidated Statements of Operations for the years ended 
 January 28, 1995, February 3, 1996 and February 1, 1997....................F-3

Consolidated Balance Sheets as of February 3, 1996 and 
 February 1, 1997...........................................................F-4

Consolidated Statements of Changes in Stockholder's Equity for the 
 years ended January 28, 1995, February 3, 1996 and February 1, 1997........F-5

Consolidated Statements of Cash Flows for the years ended 
 January 28, 1995, February 3, 1996 and February 1, 1997....................F-6

Notes to Consolidated Financial Statements..................................F-7





                                       F-1
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors of Finlay Fine Jewelry Corporation:

     We have audited the accompanying consolidated balance sheets of Finlay Fine
Jewelry Corporation (a Delaware  corporation) and subsidiaries as of February 3,
1996  and  February  1,  1997,  and  the  related  consolidated   statements  of
operations,  changes in  stockholder's  equity and cash flows for the  fifty-two
weeks ended January 28, 1995, the  fifty-three  weeks ended February 3, 1996 and
the fifty-two weeks ended February 1, 1997.  These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  financial  position  of  Finlay  Fine  Jewelry
Corporation  and  subsidiaries  as of February 3, 1996 and February 1, 1997, and
the results of their  operations  and their cash flows for the  fifty-two  weeks
ended January 28, 1995,  the  fifty-three  weeks ended  February 3, 1996 and the
fifty-two  weeks ended February 1, 1997 in conformity  with  generally  accepted
accounting principles.

 


                                                       ARTHUR ANDERSEN LLP
New York, New York
March 18, 1997





                                       F-2

<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)


<TABLE>
<CAPTION>

                                                                     Year Ended
                                                     -----------------------------------------
                                                      January 28,   February 3,   February 1, 
                                                         1995          1996          1997
                                                     ------------  ------------  -------------
<S>                                                  <C>           <C>           <C>         
Sales.............................................   $   552,090   $   654,491   $    685,274
Cost of sales.....................................       261,263      314,029         330,300
                                                     ------------  ------------  -------------
Gross margin.....................................        290,827       340,462        354,974
Selling, general and administrative expenses......       239,281       281,693        289,145
Depreciation and amortization.....................         8,910         9,659         10,840
Management transition and consulting expense......         5,144       -              -
                                                     ------------  ------------  -------------
   Income (loss) from operations..................        37,492        49,110         54,989
Proceeds from life insurance......................       -              (5,000)       -
Interest expense, net.............................        20,927        21,844         22,526
                                                     ------------  ------------  -------------
   Income (loss) before income taxes..............        16,565        32,266         32,463
Provision (credit) for income taxes...............         8,349        12,527         14,501
                                                     ------------  ------------  -------------
Net income (loss)................................    $     8,216   $    19,739   $     17,962 
                                                     ============  ============  =============
</TABLE>
                                                                        
 
















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



                                       F-3

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)
<TABLE>
<CAPTION>

                                                                    February 3,    February 1,
                                                                       1996           1997
                                                                   -------------  -------------
                                     ASSETS
Current assets
<S>                                                                <C>            <C>        
   Cash and cash equivalents...................................    $    25,737    $    20,392
   Accounts receivable - department stores.....................         18,889         15,362
   Other receivables...........................................          2,860          4,338
   Merchandise inventories.....................................        195,926        222,445
   Prepaid expenses and other..................................          1,521          1,438
                                                                   -------------  -------------
   Total current assets........................................        244,933        263,975
                                                                   -------------  -------------
Fixed assets
   Equipment, fixtures and leasehold improvements..............         65,206         73,223
   Less - accumulated depreciation and amortization............         22,735         21,423
                                                                   -------------  -------------
      Fixed assets, net........................................         42,471         51,800
                                                                   -------------  -------------
Deferred charges and other assets..............................          7,206          5,770
Goodwill.......................................................         98,447         95,263
                                                                   -------------  -------------
      Total assets.............................................    $   393,057    $   416,808
                                                                   =============  =============
                                                        
               LIABILITIES AND STOCKHOLDER'S EQUITY
                                                                                           
Current liabilities                                                                        
   Current portion of long-term debt...........................    $       206    $         2
   Accounts payable - trade....................................        125,817        133,252
   Accrued liabilities:
      Accrued salaries and benefits............................         14,100         15,061
      Accrued miscellaneous taxes..............................          4,160          4,147
      Accrued insurance........................................          1,115            762
      Accrued interest.........................................          3,703          3,833
      Accrued management transition and consulting.............          2,418          1,787
      Other....................................................         15,495         14,665
   Income taxes payable........................................         11,779         13,970
   Deferred income taxes.......................................            831            804
                                                                   -------------  -------------
        Total current liabilities..............................        179,624        188,283
Long-term debt.................................................        135,002        135,000
Other non-current liabilities..................................          6,044          7,115
                                                                   -------------  -------------
        Total liabilities......................................        320,670        330,398
                                                                   -------------  -------------

Stockholder's equity
   Common Stock, par value $.01 per share; authorized 
      5,000 shares; issued and outstanding 1,000 shares........        -              -
   Additional paid-in capital..................................         69,241         69,241
   Distributions to investor group in excess  
      of carryover basis.......................................        (24,390)       (24,390)
   Retained earnings...........................................         28,283         44,609
   Foreign currency translation adjustment.....................           (747)        (3,050)
                                                                   -------------  -------------
                                                                        72,387         86,410
                                                                   -------------  -------------
        Total liabilities and stockholder's equity.............    $   393,057    $   416,808
                                                                   =============  =============
</TABLE>


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



                                       F-4
<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                                      
                                                                                                                      
                                                                                 Distributions                                
                                                Common Stock                      to investor               Foreign   
                                              --------------------  Additional     group in                 Currency      Total
                                                 Number              Paid-in      excess of      Retained  Translation Stockholder's
                                               of shares   Amount    Capital    carryover basis  Earnings   Adjustment    Equity    
                                              -----------  -------  ----------  ---------------  --------- ----------- -------------
<S>              <C> <C>                          <C>      <C>      <C>         <C>              <C>       <C>         <C>        
Balance, January 29, 1994.................        1,000    $  -     $  42,506   $    (24,390)    $  2,692  $    -      $    20,808
   Net income (loss)......................        -           -         -              -            8,216       -            8,216
   Dividends on Common Stock..............        -           -         -              -             (984)      -             (984)
   Foreign currency translation                                                                                                     
      adjustment..........................        -           -         -              -             -         (334)          (334)
                                              -----------  -------  ----------  ---------------  --------- ----------- -------------
Balance, January 28, 1995.................       1,000        -        42,506        (24,390)       9,924      (334)        27,706
   Net income (loss)......................        -           -         -              -           19,739       -           19,739
   Dividends on Common Stock..............        -           -         -              -           (1,380)      -           (1,380)
   Foreign currency translation                                                                                                     
      adjustment..........................        -           -         -              -             -         (413)          (413)
   Capital contribution from parent.......        -           -        26,735          -             -          -           26,735
                                              ----------   -------  ----------  ---------------  --------- ----------- -------------
Balance, February 3, 1996.................       1,000        -        69,241        (24,390)      28,283      (747)        72,387
   Net income (loss)......................        -           -         -              -           17,962       -           17,962
   Dividends on Common Stock..............        -           -         -              -           (1,636)      -           (1,636)
   Foreign currency translation                                                                                                     
      adjustment..........................        -           -         -              -             -       (2,303)        (2,303)
                                              ----------   -------  ----------  ---------------  --------- ----------- -------------
Balance, February 1, 1997.................       1,000     $  -     $  69,241   $    (24,390)    $ 44,609  $ (3,050)   $    86,410
                                              ==========   =======  ==========  ===============  ========= =========== =============
</TABLE>













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



                                       F-5

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                                Year Ended
                                                                                 -----------------------------------------
                                                                                  January 28,   February 3,   February 1,
                                                                                     1995          1996          1997
                                                                                 ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                              <C>           <C>           <C>        
   Net income (loss)............................................................ $     8,216   $    19,739   $    17,962
   Adjustments to reconcile net income (loss) to net cash provided from                                                    
      (used in) operating activities:                                                                                      
   Depreciation and amortization................................................       9,755        10,587        11,871
   Other, net...................................................................       1,409           797         1,845
   Changes in operating assets and liabilities, net of effects from purchase                                             
      of Sonab (Note 11):                                                                                                  
      (Increase) decrease in accounts and other receivables.....................      (3,642)       (9,856)        1,560
      Increase in merchandise inventories.......................................     (29,412)      (35,601)      (28,380)
      (Increase) decrease in prepaid expenses and other.........................          57          (262)           66
      Increase in accounts payable and accrued liabilities......................      41,504        10,515         9,300
      Decrease in deferred income taxes.........................................      (2,376)         (539)          (27)
                                                                                 ------------- ------------- -------------     
   NET CASH PROVIDED FROM (USED IN) OPERATING                                               
           ACTIVITIES...........................................................      25,511        (4,620)       14,197
                                                                                 ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of equipment, fixtures and leasehold improvements..................     (11,228)      (14,933)      (17,533)
   Payment for puchase of Sonab, net of cash acquired...........................        (276)       -             -
   Other, net...................................................................        (874)       (2,224)         (839)
                                                                                 ------------- ------------- -------------
        NET CASH USED IN INVESTING ACTIVITIES...................................      (12,378)     (17,157)      (18,372)
                                                                                 ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from revolving credit facility......................................      392,911      439,720       442,947
   Principal payments on revolving credit facility..............................     (392,911)    (439,720)     (442,947)
   Repayment of Sonab loans.....................................................       (9,418)       -            -
   Capital contribution from parent.............................................       -            26,735        -
   Payment of dividends.........................................................       (1,038)      (1,810)         (818)
   Other, net...................................................................       (1,103)        (372)         (206)
                                                                                 ------------- ------------- -------------
        NET CASH PROVIDED FROM (USED IN)                                                                                   
           FINANCING ACTIVITIES.................................................      (11,559)      24,553        (1,024)
                                                                                 ------------- ------------- -------------
       EFFECT OF EXCHANGE RATE CHANGES ON CASH..................................           (5)        (221)         (146)
                                                                                 ------------- ------------- -------------
        INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................        1,569        2,555        (5,345)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................................       21,613       23,182        25,737
                                                                                 ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $     23,182  $    25,737   $    20,392
                                                                                 ============= ============= =============
</TABLE>








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



                                       F-6
<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -  ORGANIZATION OF FINLAY JEWELRY, INITIAL PUBLIC OFFERING AND THE
              RECAPITALIZATION TRANSACTIONS

     Finlay Fine Jewelry Corporation ("Finlay Jewelry"), a Delaware corporation,
is  a  wholly  owned  subsidiary  of  Finlay  Enterprises,  Inc.  (the  "Holding
Company"). References to "Finlay" mean collectively, the Holding Company, Finlay
Jewelry and all  predecessor  businesses.  Finlay is a retailer of fine  jewelry
products and primarily  operates  leased fine jewelry  departments in department
stores throughout the United States and France. Finlay also operates leased fine
jewelry departments in the United Kingdom and Germany.  All references herein to
leased departments refer to departments  operated pursuant to license agreements
or other arrangements with host department stores.

Initial Public Offering and Related Transactions

     On April 6, 1995, the Holding Company  completed an initial public offering
(the  "Offering")  of 2,500,000  shares of its Common Stock at a price of $14.00
per share.  An additional  115,000  shares were sold by  non-management  selling
stockholders.  Net proceeds from the Offering after  deducting the  underwriting
discount of  $2,300,000  and expenses of  approximately  $2,500,000  incurred in
connection with the Offering,  were  $30,200,000.  The net proceeds were used to
repurchase  $6,103,000  accreted  balance of the  Holding  Company's  12% Senior
Discount  Debentures due 2005 (the "Debentures") at a price equal to $5,789,000,
or  approximately  95% of the accreted  amount.  The balance of the net proceeds
were used to reduce a portion of the  outstanding  indebtedness  under  Finlay's
$135,000,000  Revolving Credit Facility (the "Revolving  Credit  Facility") with
General Electric Capital Corporation ("G.E.  Capital"),  which was accounted for
as a capital contribution to Finlay Jewelry.

     Immediately  prior to the  completion of the  Offering,  the holders of the
Holding  Company's 10% Series C Cumulative  Preferred Stock ("Series C Preferred
Stock")  exchanged all  outstanding  shares of Series C Preferred Stock with the
Holding Company for 2,581,784 shares of the Holding  Company's Common Stock (the
"Series C  Exchange").  For purposes of the Series C Exchange,  the  outstanding
Series C Preferred Stock was (i) valued at its liquidation  value of $30,000,000
plus  $6,145,000  of accrued  dividends  through the date of  completion  of the
Series C Exchange,  paid in kind at a quarterly  rate of 2.5% and (ii) exchanged
for Common Stock at the initial public offering price of $14.00 per share.

     G.E.  Capital  agreed to reduce the interest rate on the  Revolving  Credit
Facility by 0.5% concurrent with the Offering.  Finlay Jewelry and G.E.  Capital
amended  the  Revolving  Credit  Facility  in March 1995  pursuant  to which the
Holding  Company  became a co-obligor  with Finlay  Jewelry  under the Revolving
Credit Facility with respect to a portion of the borrowings thereunder.

The 1993 Recapitalization

     In May 1993,  an  affiliate  of Thomas H. Lee  Company  (together  with its
affiliated  transferees,  the "Lee Investors") and partnerships managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors"),  acquired
36.8% and 24.5%,  respectively,  of the  outstanding  voting  securities  of the
Holding  Company in a series of  transactions  which  recapitalized  the Holding
Company (the  "Recapitalization  Transactions").  Following the Recapitalization
Transactions, management maintained a substantial equity interest in the Holding
Company.



                                       F-7

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -  ORGANIZATION OF FINLAY JEWELRY, INITIAL PUBLIC OFFERING AND THE
                RECAPITALIZATION TRANSACTIONS (continued)

     The  Recapitalization  Transactions  included  an  investment  by  the  Lee
Investors  (the  "Lee   Investment")   and  the  Desai   Investors  (the  "Desai
Investment")  in units  consisting  of the Series C  Preferred  Stock and Common
Stock.  Concurrently,  certain other existing classes of preferred stock and all
outstanding  warrants to  purchase  Common  Stock were  redeemed.  These  equity
related  transactions  resulted  in the Lee  Investors  and the Desai  Investors
obtaining 52.6% beneficial ownership of the Holding Company's outstanding Common
Stock.

     The Recapitalization  Transactions also included the public issuance by the
Holding Company of units  consisting of Debentures and Common Stock,  the public
issuance by Finlay  Jewelry of the 105/8 Senior Notes due 2003 (the "Notes") and
the  refinancing of Finlay's  outstanding  term loans (the "WCC Term Loans") and
revolving  indebtedness  (the "WCC Revolving  Credit  Facility" and collectively
with the WCC Term Loans, the "WCC Loans") with Westinghouse  Credit  Corporation
("WCC").  The WCC  Revolving  Credit  Facility  was replaced by the $110 million
Revolving Credit Facility with G.E.  Capital.  The Revolving Credit Facility was
amended at the time of the Sonab  acquisition  to, among other things,  increase
the amount available thereunder to $135 million. See Notes 4 and 11.

Organization and the 1988 Leveraged Recapitalization

     Finlay Jewelry was initially  incorporated on August 2, 1985 as SL Holdings
Corporation  ("SL  Holdings").  The  Holding  Company,  a  Delaware  corporation
incorporated  on  November 22,  1988,  was  organized  by certain  officers  and
directors (the "Investor Group") of SL Holdings to acquire certain operations of
SL  Holdings.   In  connection   with  the   reorganization   ("1988   Leveraged
Recapitalization"), which resulted in the merger of a wholly owned subsidiary of
the Holding  Company  into SL Holdings,  SL Holdings  changed its name to Finlay
Fine Jewelry  Corporation  and became a wholly owned  subsidiary  of the Holding
Company.

     The 1988 Leveraged  Recapitalization was accounted for as a purchase in the
accompanying financial statements. Accordingly, the excess of the purchase price
over the net assets of Finlay  Jewelry  has been  assigned  to  goodwill.  Since
certain members of the Investor Group  beneficially  owned shares of SL Holdings
before  the 1988  Leveraged  Recapitalization  and owned  shares of the  Holding
Company  after  the 1988  Leveraged  Recapitalization,  the  purchase  method of
accounting  does  not  apply  to  their  ownership   interest  in  SL  Holdings.
Accordingly,  for accounting  purposes,  stockholder's equity reflects the total
shares of SL Holdings owned by the Investor Group at their  respective  adjusted
historical costs,  reduced by the consideration  paid for the SL Holdings shares
owned by the  Investor  Group.  This  resulted in a reduction  in  stockholder's
equity of  $24,390,000  and is reflected as  Distributions  to investor group in
excess of carryover basis in the accompanying Consolidated Balance Sheets.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

     Basis  of  Accounting  and  Presentation:   The  accompanying  Consolidated
Financial  Statements  have been  prepared on the accrual basis of accounting in
accordance with generally  accepted  accounting  principles,  which, for certain
financial statement accounts, requires the use of management's estimates. Actual
results may differ from these estimates.



                                       F-8

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

     Fiscal Year:  Finlay  Jewelry's fiscal year ends on the Saturday closest to
January 31.  References to 1994,  1995 and 1996 relate to the fiscal years ended
on January 28, 1995,  February 3, 1996 and February 1, 1997.  Each of the fiscal
years includes 52 weeks except 1995, which includes 53 weeks.

     Merchandise  Inventories:  Consolidated inventories are stated at the lower
of cost or  market  with  cost for the  domestic  operations  determined  by the
last-in, first-out ("LIFO") method. Market represents estimated realizable value
after  providing  for a  normal  profit  margin.  The  cost  to  Finlay  of gold
merchandise sold on consignment,  which typically varies with the price of gold,
is not fixed until the sale is reported to the vendor  following the sale of the
merchandise.  Finlay at times enters into futures contracts,  such as options or
forwards,  based upon the  anticipated  sales of gold  product in order to hedge
against the risk arising from those payment arrangements.  Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the years ended January 28,  1995,  February 3, 1996 and
February 1, 1997,  the  gain/loss on open futures  contracts  was not  material.
Finlay Jewelry did not have any open positions in futures  contracts for gold at
February 3, 1996 or February 1, 1997.

     Depreciation and Amortization:  Depreciation and amortization, except where
otherwise indicated, are computed by the straight-line method over the estimated
useful lives of the fixed assets ranging from three to ten years.

     Principles of Consolidation:  The consolidated financial statements include
the  accounts  of  Finlay  Jewelry  and its  wholly  owned  subsidiaries,  Sonab
Holdings,  Inc.  and Sonab  International,  Inc.  All  significant  intercompany
transactions have been eliminated in consolidation.

     Software  Development  Costs:  Costs incurred for the routine operation and
maintenance of management  information  systems are expensed as incurred.  It is
Finlay Jewelry's policy to capitalize  significant  amounts relating to software
purchased from third party software vendors as well as external consulting costs
incurred  in the  development  and  improvement  of new  management  information
systems.

     Intangible Assets Arising from Acquisition:  The excess purchase price paid
over the fair market value of net assets acquired  ("Goodwill")  was recorded in
accordance with Accounting Principles Board ("APB") Opinion No. 16 - "Accounting
for Business  Combinations" and is being amortized on a straight-line basis over
forty years.  Finlay  Jewelry  continually  evaluates the carrying value and the
economic useful life of Goodwill based on Finlay Jewelry's operating results and
the expected  future net cash flows and will adjust the  carrying  value and the
related amortization  period, if and when appropriate.  Amortization of Goodwill
for  1994,  1995  and  1996  totalled  $2,963,000,  $3,149,000  and  $3,143,000,
respectively.  Accumulated  amortization  of  Goodwill  at  February 3, 1996 and
February 1, 1997 totalled $21,408,000 and $24,551,000, respectively.

     Foreign  Currency  Translation:  Results of operations for Finlay Jewelry's
foreign  subsidiary are translated into U.S.  dollars using the average exchange
rates  during the period,  while assets and  liabilities  are  translated  using
current rates in accordance  with  Statement of Financial  Accounting  Standards
("SFAS") No. 52,  "Foreign  Currency  Translation".  The  resulting  translation
adjustments  are recorded  directly into a separate  component of  Stockholder's
equity.  Transaction  gains and losses are  reported  in net income and were not
significant in any year.



                                       F-9
<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

     Debt Issuance  Costs: Debt issuance costs of $6,379,000 arising principally
from the  Recapitalization  Transactions  are being amortized using the straight
line method over the terms of the related debt  agreements.  These debt issuance
costs  totalled  approximately  $4,100,000 at February 3, 1996 and $3,200,000 at
February 1, 1997.  The debt  issuance  costs are  reflected  as a  component  of
Deferred  charges  and other  assets in the  accompanying  Consolidated  Balance
Sheets.  Amortization  of debt issuance  costs for 1994,  1995 and 1996 totalled
$845,000,  $872,000  and  $889,000,  respectively,  and have been  recorded as a
component of Interest expense, net in the accompanying  Consolidated  Statements
of Operations.

     Cost of Sales:  Cost of sales includes the cost of merchandise sold, repair
expense,  shipping,  shrinkage and inventory losses.  Buying and occupancy costs
such as  lease  and  rental  fees  are not  included  in Cost of  sales  and are
reflected in Selling,  general and  administrative  expenses on the Consolidated
Statements of Operations.

     Statements of Cash Flows:   Finlay Jewelry considers cash on hand, deposits
in banks  and  deposits  in  money  market  funds as cash and cash  equivalents.
Interest  paid  during  1994,  1995 and 1996 was  $20,071,000,  $21,027,000  and
$21,480,000,  respectively.  Income taxes paid in 1994,  1995 and 1996  totalled
$6,554,000,  $9,367,000  and  $9,320,000,  respectively.  Refer to Note 11 for a
discussion of the Sonab acquisition.

     Fair Value of Financial Instruments: Cash, accounts receivable,  short-term
borrowings,  accounts  payable  and accrued  liabilities  are  reflected  in the
financial  statements at fair value because of the short-term  maturity of these
instruments.  Marketable  securities are recorded in the financial statements at
current  market  values,  which  approximates  cost.  The fair  values of Finlay
Jewelry's debt and off-balance sheet financial instruments are disclosed in Note
4.

     Stock-Based Compensation:  Stock-based compensation is recognized using the
intrinsic  value  method.  For  disclosure  purposes,  pro forma net  income and
earnings per share are provided as if the fair value method had been applied.

     Accounting  for  the  Impairment  of  Long-Lived  Assets:   SFAS  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," requires long-lived assets as well as identifiable  intangibles
be reviewed for impairment whenever events or changes in circumstances  indicate
the carrying amount of the assets may not be recoverable.  Upon adoption of this
Statement in 1996, there was no impact on Finlay Jewelry's financial position or
results of operations.

     Seasonality:  A significant  portion of Finlay's  revenues are generated in
the fourth quarter due to the seasonality of the retail industry.  Approximately
75% of  Finlay's  domestic  sales in 1996  were  from  operations  in two  major
department store groups of which 51% represents Finlay's domestic sales from one
department store group.







                                      F-10
<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - MERCHANDISE INVENTORIES

     Merchandise inventories consisted of the following:

<TABLE>
<CAPTION>

                                                     February 3,    February 1,
                                                        1996           1997
                                                    -------------  -------------
                                                          (in thousands)
Jewelry goods - rings, watches and 
  other fine jewelry (specific 
<S>                                                 <C>            <C>        
  identification basis)........................     $    202,860   $   231,298
Excess of specific identification 
  cost over LIFO inventory value...............            6,934         8,853
                                                    -------------  -------------
                                                    $    195,926   $   222,445
                                                    =============  =============
</TABLE>


     The LIFO method had the effect of  decreasing  Income  (loss) before income
taxes in 1994, 1995 and 1996 by $845,000, $943,000 and $1,919,000, respectively.
Finlay determines its LIFO inventory value by utilizing  selected producer price
indices published for jewelry and watches by the Bureau of Labor Statistics. Due
to the  application of APB Opinion No. 16,  inventory  valued at LIFO for income
tax  reporting  purposes  is  approximately  $22,000,000  lower  than  that  for
financial reporting purposes at February 1, 1997.

     Approximately  $199,079,000  and  $194,276,000  at  February  3,  1996  and
February 1, 1997, respectively,  of merchandise received on consignment has been
excluded  from  Merchandise   inventories  and  Accounts  payable-trade  in  the
accompanying Consolidated Balance Sheets.

     In August 1995,  Finlay Jewelry  consummated a gold  consignment  agreement
(the "Gold  Consignment  Agreement")  with Rhode Island  Hospital Trust National
Bank  ("RIHT"),  which  matures  on  February  28,  1998.  The Gold  Consignment
Agreement  enables Finlay Jewelry to pay for  merchandise by providing  gold, or
otherwise  making payment,  to certain vendors who currently  supply Finlay with
merchandise on consignment.  While the merchandise  involved remains  consigned,
the consignor and title to the gold content of the merchandise  changes from the
vendors to RIHT. As a result,  such vendors have reduced  their working  capital
requirements and associated financing costs. Consequently, Finlay has negotiated
more favorable terms with the participating vendors.

     Finlay can obtain,  pursuant to the Gold Consignment  Agreement,  up to the
lesser of (i) 85,000 fine troy ounces or (ii) $25 million worth of gold, subject
to a formula as prescribed  by the Gold  Consignment  Agreement.  At February 3,
1996 and  February  1,  1997,  amounts  outstanding  under the Gold  Consignment
Agreement totalled 22,090 and 36,916 fine troy ounces,  respectively,  valued at
approximately $9.0 million and $12.8 million,  respectively.  The purchase price
per  ounce is based on the  daily  Second  London  Gold  Fixing.  For  financial
statement   purposes,   the  consigned  gold  is  not  included  in  Merchandise
inventories on Finlay Jewelry's  Consolidated  Balance Sheet and, therefore,  no
related liability has been recorded. RIHT charges Finlay a daily consignment fee
on the dollar equivalent value of ounces outstanding,  a floating rate which, as
of February 3, 1996 and February 1, 1997, was approximately 4.5% per annum.






                                      F-11
<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - MERCHANDISE INVENTORIES (continued)

     In  addition,  Finlay is  required to pay an unused line fee of 0.5% if the
amount of gold consigned has a value equal to or below $10 million.  Included in
interest  expense for the year ended  February 3, 1996 and  February 1, 1997 are
consignment fees of $189,000 and $638,000, respectively.

     In conjunction with the Gold Consignment Agreement,  Finlay Jewelry granted
RIHT,  subject to the terms of an intercreditor  agreement between RIHT and G.E.
Capital,  a first  priority  perfected  lien on,  and a  security  interest  in,
specified  gold  jewelry  of  participating  vendors  approved  under  the  Gold
Consignment  Agreement  and  certain  cash on  deposit  with  RIHT and a lien on
proceeds and products of such jewelry and cash deposits.

     The Gold  Consignment  Agreement  requires  Finlay  Jewelry to comply  with
certain  covenants,   including   restrictions  on  the  incurrence  of  certain
indebtedness,   the  incurrence  or  creation  of  liens,  engaging  in  certain
transactions  with affiliates and related parties and limitations on the payment
of dividends.  The Gold Consignment  Agreement also contains  various  financial
covenants,  including  fixed  charge  coverage  ratio  requirements  and certain
maximum  debt  limitations.  Finlay  Jewelry was in  compliance  with all of its
financial covenants as of and for the year ended February 1, 1997.

NOTE 4 - SHORT AND LONG-TERM DEBT

     The Holding  Company and Finlay  Jewelry are parties to a credit  agreement
with G.E. Capital which provides Finlay with a senior secured  revolving line of
credit of up to $135  million,  a portion of which is  available  to the Holding
Company under certain  circumstances.  The Revolving  Credit  Facility  provides
Finlay with a facility  maturing on May 26,  1998,  for  borrowings  based on an
advance rate of (i) up to 85% of eligible domestic accounts  receivable and (ii)
up to 60% of eligible  domestic owned  inventory  after taking into account such
reserves or offsets as G.E. Capital may deem appropriate (the "Borrowing Base").
Eligibility criteria are established by G.E. Capital, which retains the right to
adjust the Borrowing Base in its reasonable  judgement by revising  standards of
eligibility,  establishing reserves and/or increasing or decreasing from time to
time the advance rates.  Finlay Jewelry is permitted to use up to $20 million of
the Revolving  Credit  Facility for the guarantee by G.E.  Capital of letters of
credit  issued for the  account of Finlay  Jewelry by banks  acceptable  to G.E.
Capital. The outstanding balance under the Revolving Credit Facility is required
to be reduced  each year to $10 million  for a 20  consecutive  day period,  and
immediately  thereafter  to zero for an  additional  10  consecutive  days  (the
"Balance  Reduction  Requirement").  Funds available under the Revolving  Credit
Facility are utilized for working capital purposes.

     The  Revolving  Credit  Facility  bears  interest  at a rate  equal  to, at
Finlay's  option,  (i) the Index Rate (as defined)  plus 1.0% or (ii) for one or
more  portions of the Revolving  Credit  Facility of $1.0 million or any greater
integral  multiple  thereof,  reserve adjusted LIBOR plus 2.0%.  "Index Rate" is
defined  as the  higher of (i) the  highest  daily  prime or base rate  publicly
announced by any of the four largest member banks of the New York Clearing House
Association and (ii) the latest rate of dealer ninety-day commercial paper as is
customarily  published in the "Money Rates" section of The Wall Street  Journal.
Upon the occurrence  (and during the  continuance)  of an event of default under
the Revolving  Credit  Facility,  interest would accrue at a rate which is 2% in
excess of the rate otherwise applicable, and would be payable upon demand.



                                      F-12
<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

     The  Revolving  Credit  Facility is secured by a first  priority  perfected
security interest in all of Finlay Jewelry's (and any subsidiary's)  present and
future tangible and intangible  assets,  excluding any of Finlay Jewelry's lease
agreements which are not assignable without the lessor's consent.

     The Revolving  Credit  Facility  contains  customary  covenants,  including
limitations  on capital  expenditures,  limitations  on  borrowing  transactions
between  Finlay  and its  officers,  directors,  employees  and  affiliates  and
limitations on payments of dividends. In addition, G.E. Capital has the right to
approve (such approval not to be unreasonably withheld) certain private sales of
Common Stock.  The Revolving  Credit  Facility also contains  various  financial
covenants,   including   minimum   earnings  and  fixed  charge  coverage  ratio
requirements and certain maximum debt limitations. Finlay was in compliance with
all of its financial covenants as of and for the year ended February 1, 1997.

     The credit agreement  provides for an annual agency fee of $275,000 payable
to G.E. Capital.  Furthermore,  a letter of credit fee of 2.25% per annum of the
face amount of letters of credit  guaranteed under the Revolving Credit Facility
and an unused  facility fee equal to 0.5% per annum on the average  unused daily
balance of the Revolving Credit Facility is payable monthly in arrears.

     There were no amounts  outstanding  at February 3, 1996 or February 1, 1997
under the Revolving Credit Facility.  The maximum amounts  outstanding under the
Revolving  Credit  Facility  during  1994,  1995  and  1996  were  $108,800,000,
$99,100,000 and $114,100,000,  respectively. The average amounts outstanding for
the same periods were  $69,300,000,  $68,400,000 and $75,371,000,  respectively.
The  weighted  average  interest  rates during the period  (calculated  based on
actual  interest  expense divided by the average amount  outstanding  during the
period) were 7.6%, 8.9% and 8.0% for 1994, 1995 and 1996, respectively.

     At  February  3, 1996 and  February  1, 1997,  Finlay had letters of credit
outstanding  totalling  $11.0  million and $11.1  million,  respectively,  which
guarantee various trade activities. The contract amount of the letters of credit
approximate their fair value.

     Long-term debt consisted of the following:
<TABLE>
<CAPTION>

                                             February 3,    February 1,
                                                1996           1997
                                            -------------  -------------
                                                   (in thousands)
<S>                                         <C>            <C>        
Senior Notes ............................   $   135,000    $   135,000
Other....................................           208              2
                                            -------------  -------------
                                                135,208        135,002
Less - current portion...................           206              2
                                            -------------  -------------
                                            $   135,002    $   135,000
                                            =============  =============
</TABLE>








                                      F-13

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

     On May 26,  1993,  as part of  Finlay's  recapitalization,  Finlay  Jewelry
issued  105/8%  Senior  Notes due 2003  with an  aggregate  principal  amount of
$135,000,000.  Interest  on the  Notes  is  payable  semi-annually  on May 1 and
November 1 of each year,  and commenced on November 1, 1993.  Except in the case
of certain equity offerings,  the Notes are not redeemable prior to May 1, 1998.
Thereafter,  the Notes will be redeemable, in whole or in part, at the option of
Finlay, at specified redemption prices plus accrued and unpaid interest, if any,
to the date of the  redemption.  In the event of a Change of Control (as defined
in the Notes indenture), each holder of the Notes will have the right to require
Finlay  Jewelry to repurchase its Notes at a purchase price equal to 101% of the
principal  amount  thereof  plus  accrued  and  unpaid  interest  thereon to the
repurchase  date. The Notes rank senior in right of payment to all  subordinated
indebtedness  of  Finlay  and pari  passu in right of  payment  with all  senior
borrowings,  including borrowings under the Revolving Credit Facility.  However,
because the Revolving  Credit  Facility is secured by a pledge of  substantially
all the assets of Finlay Jewelry, the Notes are structurally subordinated to the
borrowings under the Revolving Credit  Facility.  The indenture  relating to the
Notes  contains  restrictions  relating to, among other  things,  the payment of
dividends,  the  repurchase of stock and the making of certain other  restricted
payments,  the  incurrence of additional  indebtedness,  the creation of certain
liens,  certain asset sales  transactions with subsidiaries and other affiliates
and mergers and consolidations.

     The fair value of the Notes at February 1, 1997, determined based on market
quotes, was $142,425,000.

     On May 26, 1993, as part of Finlay's recapitalization,  the Holding Company
sold, for  $55,167,140,  an aggregate of 98,000 units  consisting of $98,000,000
12% Senior Discount  Debentures due 2005 and 130,667 shares of Common Stock. The
Debentures are secured by a first priority lien on and security  interest in all
of the issued and outstanding  stock and intercompany  indebtedness,  if any, of
Finlay  Jewelry.  However,  the operations of the Holding  Company are conducted
through Finlay Jewelry and, therefore, the Holding Company is dependent upon the
cash flow of Finlay Jewelry to meet its  obligations,  including its obligations
under the Debentures.  As a result, the Debentures are effectively  subordinated
to all indebtedness and all other  obligations of Finlay Jewelry.  The indenture
relating  to the  Debentures  contains  restrictions  relating  to,  among other
things,  the payment of  dividends,  the  repurchase  of stock and the making of
certain other restricted  payments,  the incurrence of additional  indebtedness,
the  creation  of  certain  liens,   certain  asset  sales   transactions   with
subsidiaries and other affiliates and mergers and consolidations.

     Finlay  was in  compliance  with all of the  provisions  of the  Notes  and
Debenture indentures as of and for the year ended February 1, 1997.












                                      F-14
<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - SHORT AND LONG-TERM DEBT (continued)
 
     The aggregate  amounts of long-term  debt payable in each of the five years
in the period ending February 2, 2002 and thereafter are as follows:


                                                   (in thousands)
                                                   --------------
    
     
1997...........................................    $           2
1998...........................................           -
1999...........................................           -
2000...........................................           -
2001...........................................           -
Thereafter.....................................          135,000
                                                   --------------
                                                   $     135,002
                                                   ==============

     Interest expense for 1994, 1995 and 1996 was  $20,950,000,  $21,985,000 and
$22,609,000,  respectively.  Interest  income for the same  periods was $23,000,
$141,000 and $83,000, respectively.

NOTE 5 - LONG TERM INCENTIVE PLAN AND MANAGEMENT
               PURCHASE OF COMMON STOCK

     The Holding  Company's  Long Term  Incentive  Plan (the  "Incentive  Plan")
permits the Holding  Company to grant to officers and other key employees of the
Holding Company and its  subsidiaries  and consultants and other persons who are
deemed  to  render   significant   services  to  the  Holding   Company  or  its
subsidiaries, as well as directors of the Holding Company (other than members of
the  Compensation  Committee),  the  following:  (i) stock  options,  (ii) stock
appreciation rights in tandem with stock options, (iii) limited rights in tandem
with   stock   options,   (iv) restricted   or   nonrestricted   share   awards,
(v) performance  units or  (vi) any  combination  of the  foregoing.  Under  the
Incentive  Plan,  the Holding  Company may grant stock  options which are either
incentive  stock  options  within the  meaning of  Section 422  of the  Internal
Revenue Code of 1986, as amended (the "Code"),  or non-incentive  stock options.
An aggregate of 663,486  shares of Common Stock of the Holding  Company has been
reserved for issuance pursuant to the Incentive Plan.

     Finlay  has  adopted  the  disclosure-only  provisions  of  SFAS  No.  123,
"Accounting for Stock-Based  Compensation,"  which became  effective in 1996. As
permitted  by the  Statement,  Finlay has  elected to  continue  to account  for
stock-based  compensation  using the  intrinsic  value method.  Accordingly,  no
compensation expense has been recognized for its stock-based compensation plans.
Had the fair value method of  accounting  been applied to the Holding  Company's
stock option plans, which requires recognition of compensation cost ratably over
the vesting period of the stock options,  Finlay Jewelry's net income would have
been  reduced by $228,000 in 1995 and  $219,000 in 1996.  This pro forma  impact
only  reflects  options  granted  since the  beginning of 1995 and therefore the
resulting  compensation cost may not be representative of that to be expected in
future years.

     The fair value of options  granted in 1995 and 1996 was estimated using the
Black-Scholes option-pricing model based on the weighted average market price at
the grant date of $13.67 in 1995 and $13.56 in 1996 and the  following  weighted
average  assumptions:  risk free  interest  rate of 6.89% and 6.67% for 1995 and
1996,  respectively,  expected  life of  seven  years  for  1995  and  1996  and
volatility  of 35.10%  for 1995 and 1996.  The  weighted  average  fair value of
options granted in 1995 and 1996 was $7.02 and $6.88, respectively.




                                      F-15

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - LONG TERM INCENTIVE PLAN AND MANAGEMENT
                PURCHASE OF COMMON STOCK (continued)

     The following summarizes the transactions pursuant to the Holding Company's
Incentive Plan for 1994, 1995 and 1996:
<TABLE>
<CAPTION>

                                                 1994                       1995                           1996
                                      --------------------------   --------------------------   ---------------------------
                                       Number of      Wtd. Avg.     Number of      Wtd. Avg.      Number of     Wtd. Avg.
                                        Options       Ex. Price      Options       Ex. Price       Options      Ex. Price
                                      -----------    -----------   -----------   ------------   ------------   ------------
Outstanding at beginning
<S>                                     <C>          <C>             <C>         <C>               <C>         <C>       
     of year.......................     365,323      $    7.87       396,821     $     9.11        545,834     $    11.61
Granted............................      72,262          14.29       264,505          13.67         21,333          13.56
Exercised..........................       -              -           (41,284)          7.23        (27,826)          7.23
Forfeited..........................     (40,764)          7.23       (74,208)          8.00        (15,574)         11.45
                                      -----------    -----------   -----------   ------------   ------------   -----------
Outstanding at end of year              396,821           9.11       545,834          11.61        523,767          11.93
                                      ===========    ===========   ===========   ============   ============   =========== 
Exercisable at end of year               57,439      $    8.04       113,970     $     9.73        207,122     $    10.94
</TABLE>

     The options  outstanding  at February 1, 1997 have exercise  prices between
$7.23 and  $18.06,  with a  weighted  average  exercise  price of  $11.93  and a
weighted average  remaining  contractual life of 7.61 years.  Options  generally
vest in five years and expire in ten years from date of grant.

     Upon the  commencement of his  employment,  a senior officer of the Holding
Company purchased 138,525 shares of Common Stock (the "Purchased Shares"),  at a
price of $7.23 per share. The aggregate  purchase price of these shares was paid
in the form of a note issued to the Holding Company in the amount of $1,001,538.
The note is secured by the  Purchased  Shares and certain  proceeds from sale of
the  Purchased  Shares  or any  distribution  paid  on or  with  respect  to the
Purchased  Shares.  Interest accrues on the unpaid balance of the note at a rate
equal to 7.92% per annum,  compounded  annually.  In the event of termination of
employment, the Purchased Shares (together with vested options and shares issued
upon exercise of vested options  ("Option  Shares")) are subject to certain call
rights and the Option Shares are additionally  subject to certain put rights. In
the event the Holding Company does not exercise its call rights,  the rights may
be exercised by the Lee  Investors  and the Desai  Investors,  pro rata based on
their  respective  ownership of Common Stock.  The  Purchased  Shares and Option
Shares are subject to certain restrictions on transfer.

NOTE 6 - LEASE AGREEMENTS

     Finlay conducts  substantially all of its operations as leased  departments
in department  stores.  All of these leases, as well as rentals for office space
and equipment,  are accounted for as operating  leases. A substantial  number of
such operating leases expire on various dates through 2008.

     Substantially  all of the leases  provide  that the title to certain  fixed
assets of Finlay transfers upon termination of the leases,  and that Finlay will
receive  the  undepreciated  value of such fixed  assets  from the lessor in the
event such transfers  occur. The values of such fixed assets are recorded at the
inception  of the  lease  arrangement  and  are  reflected  in the  accompanying
Consolidated Balance Sheets.





                                      F-16

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - LEASE AGREEMENTS (continued)

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

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

                                              Year Ended
                              ------------------------------------------------
                               January 28,       February 3,      February 1,
                                  1995              1996              1997
                              -------------     -------------    ------------- 
<S>                           <C>               <C>              <C>        
Minimum fees..............    $    8,606        $    10,555      $     6,188
Contingent fees...........        80,211             94,679          103,319
                              -------------     -------------    -------------
     Total................    $   88,817        $   105,234      $   109,507
                              =============     =============    =============
</TABLE>

     Future  minimum  payments  under  noncancellable  operating  leases  having
initial or  remaining  noncancellable  lease  terms in excess of one year are as
follows:



                                                       (in thousands)
                                                      ----------------
     1997 .................................           $       9,732
     1998 .................................                   3,876
     1999 .................................                   3,368
     2000 .................................                   2,978
     2001 .................................                   2,417
     Thereafter............................                  13,089
                                                      ----------------
Total minimum payments required...................... $      35,460
                                                      ================


     Minimum  payments  shown  above have not been  reduced by minimum  sublease
payments of $260,000 due in the future under noncancellable subleases.

NOTE 7 - PENSION PLANS

     Finlay  maintains  a defined  contribution  profit-sharing  plan to provide
retirement  benefits for all personnel.  This plan provides for company matching
contributions of $.25 for each $1.00 of employee  contribution,  up to 5% of the
employee's salary, as limited by the Code.  Additionally,  Finlay contributes 2%
of the employees' earnings annually, as limited by the Code. Vesting in Finlay's
contributions begins upon completion of three years of employment and accrues at
the rate of 20% per year.

 



                                      F-17

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - PENSION PLANS (continued)

     Finlay also provides fixed retirement benefits for certain former employees
not covered by existing pension plans. The estimated liability for such benefits
has  been  accrued  for  in  these  financial  statements  and is  reflected  as
components of Other accrued liabilities and Other non-current liabilities.

     The cost of the  defined  contribution  plan  maintained  by Finlay and the
retirement  benefits  for  certain  former  employees   aggregated   $1,603,000,
$1,728,000 and $1,753,000 for 1994, 1995 and 1996, respectively.

NOTE 8 - INCOME TAXES

     For income tax reporting  purposes,  Finlay Jewelry has an October 31  year
end.  Finlay  Jewelry files a  consolidated  Federal  income tax return with its
parent, the Holding Company, and its wholly owned subsidiaries. Finlay Jewelry's
provision  for  income  taxes  and  deferred  tax  assets  and  liabilities  was
calculated as if Finlay Jewelry including its subsidiaries, filed its tax return
on a stand-alone basis.

     Deferred  income  taxes  at  year  end  reflect  the  impact  of  temporary
differences  between  amounts of assets and  liabilities  for  financial and tax
reporting purposes.





























                                      F-18
<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - INCOME TAXES (continued)

     Temporary  differences and  carryforwards  which give rise to a significant
portion of deferred tax assets and liabilities at year end are as follows:
<TABLE>
<CAPTION>

                                                                           Year Ended
                                                               -------------------------------
                                                                 February 3,      February 1,
                                                                    1996             1997
                                                               --------------    -------------  
                                                                       (in thousands)
Deferred Tax Assets
<S>                                                            <C>               <C>       
 Uniform inventory capitalization.........................     $     3,154       $    3,462
 Expenses not currently deductible........................           4,398            4,074
 ITC carryover............................................           1,100            1,100
 AMT credit...............................................             566              566
 Deferred financing costs-current.........................             205              208
                                                               --------------    -------------
                                                                     9,423            9,410
 Valuation allowance......................................           1,200            1,200
                                                               --------------    -------------
  Total current...........................................           8,223            8,210
                                                               --------------    -------------
 Deferred financing costs-non-current.....................             642              429
                                                               --------------    -------------
  Total non-current.......................................             642              429
                                                               --------------    -------------
    Total deferred tax assets.............................           8,865            8,639
                                                               --------------    -------------
Deferred Tax Liabilities
  LIFO inventory valuation................................           9,054            9,014
                                                               --------------    -------------
   Total current..........................................           9,054            9,014
                                                               --------------    -------------
 Depreciation.............................................           6,050            7,029
                                                               --------------    -------------
   Total non-current......................................           6,050            7,029
                                                               --------------    -------------
     Total deferred tax liabilities.......................          15,104           16,043
                                                               --------------    -------------
        Net deferred income tax liabilities...............     $     6,239       $    7,404
                                                               ==============    =============

   Net current deferred income tax liabilities............     $       831       $      804           
   Net non-current deferred income tax liabilities........           5,408            6,600
                                                               --------------    -------------
     Net deferred income tax liabilities..................     $     6,239       $    7,404          
                                                               ==============    =============  
</TABLE>
                                                                   












                                      F-19
<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - INCOME TAXES (continued)

     The components of income tax expense are as follows:
<TABLE>
<CAPTION>


                                                   Year Ended
                                 ----------------------------------------------
                                   January 28,     February 3,     February 1,
                                      1995            1996            1997
                                 --------------   -------------   -------------
<S>                              <C>              <C>             <C>                 
Current domestic taxes.......    $      9,486     $    11,106     $    12,291         
Current foreign taxes........             449           1,238           1,045
Deferred taxes...............          (1,586)            183           1,165
                                 --------------   -------------   -------------
Income tax expense...........    $      8,349     $    12,527     $    14,501                                    
                                 ==============   =============   =============
</TABLE>


     A  reconciliation  of the income tax  provision  computed by  applying  the
federal statutory rate to Income (loss) before income taxes to the Provision for
income taxes on the  accompanying  Consolidated  Statements  of Operations is as
follows:

<TABLE>
<CAPTION>

                                                     Year Ended
                                 ----------------------------------------------
                                  January 28,      February 3,     February 1,
                                     1995             1996            1997
                                 --------------   -------------   -------------
<S>                              <C>              <C>             <C>        
Federal Statutory Provision..    $      5,798     $    11,294     $    11,367
Foreign taxes................             449           1,238           1,045
State tax, net of federal 
   benefit...................           1,308           1,836           1,934
Non-deductible amortization..           1,037           1,037           1,037
Life insurance proceeds......         -                (1,750)         -
Benefit of foreign tax 
   credit....................            (449)         (1,238)         (1,045)
Other........................             206             110             163
                                 --------------   -------------   -------------
Provision for income taxes...    $      8,349     $    12,527     $    14,501
                                 ==============   =============   =============
</TABLE>


     Section  382 of the  Code  restricts  utilization  of  net  operating  loss
carryforwards ("NOLs") after an ownership change exceeding 50%. Such utilization
is  generally  restricted  to an annual  limit  computed by applying the federal
long-term  tax exempt rate to the fair market  value of the stock of the Holding
Company  immediately  prior to the time of the ownership  change. As a result of
the Recapitalization  Transactions, a change in ownership of the Holding Company
exceeding  50% occurred  within the meaning of Section 382 of the Code.  Similar
restrictions  will  apply  to  other  carryforwards.  Consequently,  there  is a
material  limitation  on the  annual  utilization  of the Finlay  Jewelry's  net
operating loss and other  carryforwards which requires a deferral or loss of the
utilization  of such  carryforwards.  The IRS  permits  taxpayers  who  obtain a
private  letter ruling to close their books at the change of ownership  date and
to offset  pre-Change  of  Control  income by the NOL  available  to that  year,
regardless of the annual  limitation.  Finlay Jewelry has received such a ruling
and, as a result,  at October 31, 1996, has a NOL  carryforward for tax purposes
of $14,000,000  which is subject to an annual limit of approximately  $2,000,000
per year, of which $10,000,000  expires in 2004 and $4,000,000  expires in 2005.
At October 31, 1996, Finlay Jewelry had Investment Tax Credit ("ITC")



                                      F-20

<PAGE>

                  FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - INCOME TAXES (continued)

carryovers  of  approximately  $1,100,000,  of which  $150,000  expires in 1997,
$649,000 in 1998,  $264,000 in 1999 and  $37,000 in 2000.  At October 31,  1996,
Finlay Jewelry also had  Alternative  Minimum Tax Credit  ("AMT")  carryovers of
$566,000 which may be used indefinitely to reduce federal income taxes.

     SFAS No. 109 "Accounting  for Income Taxes,"  requires that the tax benefit
of such  NOLs  and tax  credits  be  recorded  as an asset  to the  extent  that
management  assesses  the  utilization  to be "more  likely  than  not".  As the
accompanying  Consolidated Financial Statements include profits earned after the
tax year end at October 31, (the profit of the Christmas  selling  season),  for
financial  reporting  purposes only, the NOL  carryforward  has been absorbed in
full and no NOL carryfoward exists as of February 1, 1997. Management determined
at  February  1, 1997,  that based upon Finlay  Jewelry's  history of  operating
earnings  and its  expectations  for the  future,  no  change  to the  valuation
allowance is warranted.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

     Finlay Jewelry, from time to time, is involved in litigation concerning its
business  affairs.  Management  believes  that  the  resolution  of all  pending
litigation will not have a material adverse effect on the financial statements.

     Finlay  Jewelry  has  employment  agreements  with two  senior  members  of
management  which  provide  for  minimum  salary  levels  as well  as  incentive
compensation  based on meeting specific  financial  goals.  Such agreements have
remaining  terms of one year and have a  remaining  aggregate  minimum  value of
approximately $1,400,000 as of February 1, 1997.

     The credit agreement with G.E. Capital, the Gold Consignment Agreement with
RIHT and the indenture relating to the Notes restrict  distributions from Finlay
Jewelry to the Holding  Company to 0.25% of Finlay  Jewelry's  net sales for the
preceding  fiscal year.  During 1996,  dividends of $1,636,000 were declared and
$818,000 was  distributed  to the Holding  Company.  During  1995,  dividends of
$1,380,000 were declared and $1,810,000 was distributed to the Holding  Company.
During 1994, dividends of $984,000 were declared and $738,000 was distributed to
the Holding Company.

     Finlay  Jewelry s  concentration  of credit risk  consists  principally  of
accounts receivable. Finlay Jewelry believes that the risk associated with these
receivables, other than those from department store groups indicated in the last
paragraph  of  Note 2,  would  not have a  material  adverse  effect  on  Finlay
Jewelry's financial position or results of operations.

     Finlay Jewelry is committed to expend a total of approximately  $10,000,000
for the completion of a 75,000 square foot  distribution and warehouse  facility
in Orange,  Connecticut,  of which  approximately half has been disbursed during
1996.   Expenditures   included  the  purchase  of  machinery   and   equipment,
construction costs and the purchase and installation of computer systems.






                                      F-21

<PAGE>


                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following table summarizes the quarterly  financial data for 1994, 1995
and 1996 (in thousands):
<TABLE>
<CAPTION>


                                          Year Ended January 28, 1995
                             --------------------------------------------------
                                First       Second        Third        Fourth
                               Quarter      Quarter      Quarter     Quarter(a)
                             ----------   -----------  ----------   -----------
<S>                          <C>          <C>          <C>          <C>       
Sales...................     $  93,858    $  109,209   $ 109,657    $  239,366
Gross margin............        49,087        56,973      57,697       127,070
Net income (loss).......        (4,356)       (1,985)     (1,982)       16,539
</TABLE>
 
<TABLE>
<CAPTION>

                                          Year Ended February 3, 1996
                             --------------------------------------------------
                                First       Second        Third       Fourth
                               Quarter    Quarter(a)     Quarter     Quarter
                             ----------   -----------  ----------   -----------
<S>                          <C>            <C>        <C>          <C>       
Sales...................     $ 112,716      $135,428   $ 132,058    $  274,289
Gross margin............        58,875        70,327      68,773       142,487
Net income (loss).......        (4,102)        4,545      (1,373)       20,669
</TABLE>

<TABLE>
<CAPTION>

                                         Year Ended February 1, 1997
                             --------------------------------------------------
                                First       Second        Third        Fourth
                               Quarter      Quarter      Quarter       Quarter
                             -----------  -----------  -----------  -----------
<S>                          <C>          <C>          <C>          <C>       
Sales...................     $ 130,719    $  137,188   $  136,140   $  281,227
Gross margin............        66,681        71,343       70,360      146,590
Net income (loss).......        (2,929)          (15)      (1,091)      21,997
</TABLE>

-------------------------
(a)  The fourth  quarter of 1994 includes  $5,144,000,  on a pre-tax  basis,  of
     expenses related to the management  transition and consulting expense.  The
     second  quarter  of  1995  includes  proceeds  of  $5,000,000  from  a life
     insurance policy maintained on a senior executive.

NOTE 11 - ACQUISITIONS

     On October 28, 1994,  Finlay Jewelry  completed the  acquisition of Societe
Nouvelle  d'Achat  de  Bijouterie  -  S.O.N.A.B.  ("Sonab"),  a  French  company
operating 95 leased jewelry departments and three free standing  locations,  all
in France from Galeries  Lafayette.  The leased fine jewelry departments operate
in department stores such as Galeries Lafayette, Nouvelles Galeries and Bazar De
L'Hotel de Ville.  Simultaneously  with the acquisition of Sonab,  G.E.  Capital
agreed to provide additional  financing by increasing  Finlay's Revolving Credit
Facility by $25,000,000, from $110,000,000 to $135,000,000.  The acquisition was
recorded under the purchase method of accounting. The Sonab acquisition required
approximately  $11,000,000  primarily  for  the  purpose  of  repaying  existing
intercompany loans to Galeries Lafayette,  as well as an outstanding gold credit
line. Finlay Jewelry paid approximately  $356,000 for the common stock of Sonab.
Goodwill associated with this transaction was not significant.






                                      F-22

<PAGE>

                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - ACQUISITIONS (continued)

     The  following   summarized,   unaudited  pro  forma  combined  results  of
operations  for the years ended  January 29, 1994 and January 28, 1995 have been
prepared  assuming the  acquisition  of Sonab  occurred at the  beginning of the
respective  periods.  The pro forma  information  is provided for  informational
purposes only. It is based on historical  information  and does not  necessarily
reflect  the  actual  results  that would have  occurred  nor is it  necessarily
indicative of future results of operations of the combined  company  (dollars in
thousands):

<TABLE>
<CAPTION>

                                                 Year Ended
                                   -----------------------------------------
                                      January 29,              January 28,
                                        1994                     1995
                                   ----------------        -----------------
<S>                                <C>                     <C>           
Sales.....................         $    530,676            $      572,965
Net income (loss).........               (4,724)                    8,841
</TABLE>







                                      F-23