**UNITED
      STATES**


**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
      2, 2008 or





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
              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
            
            13-3287757State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization
            
            Identification
                No.)





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





212-808-2800





(Registrant’s
      telephone number, including area code)





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 if the registrant is well-known seasoned issuer, as defined in
      Rule 405 of the Securities Act.




Yes
                o
            No
                x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.





Yes
                x
            No
                o




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
                o
            No
                x





*(Note:
      As a voluntary filer, not subject to the filing requirements, the registrant
      filed all reports under Section 13 or 15(d) of
      the
      Exchange Act during the preceding 12 months.)





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’s 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. Not Applicable





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check
      one):





Large
                accelerated filer o
            Accelerated
                filer o
            Non-accelerated
                filer x





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





Yes
                o
            No
                x





As
      of
      April 14, 2008, 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's parent, Finlay Enterprises, Inc., a
      Delaware corporation. The market value of the registrant’s voting and non-voting
      common equity held by non-affiliates was $0 as of August 3, 2007.











**FINLAY
      FINE JEWELRY CORPORATION**





**FORM
      10-K**





**FOR
      THE FISCAL YEAR ENDED FEBRUARY 2, 2008**





**INDEX**





**Page(s)****PART
                I**Item
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            13Item
                1B.
            Unresolved
                Staff Comments
            17Item
                2.
            Properties
            17Item
                3.
            Legal
                Proceedings
            17Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            18**PART
                II**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            19Item
                6.
            Selected
                Consolidated Financial Data
            20Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            24Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            40Item
                8.
            Financial
                Statements and Supplementary Data
            42Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            42Item
                9A.
            Controls
                and Procedures
            42Item
                9B.
            Other
                Information
            43**PART
                III**Item
                10.
            Directors,
                Executive Officers and Corporate Governance
            44Item
                11.
            Executive
                Compensation
            47Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            64Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            68Item
                14.
            Principal
                Accountant Fees and Services
            69**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            70**SIGNATURES**
            77




2




**PART
      I**





**Item
      1.** **Business**





**General
      Overview**





Finlay
      Fine Jewelry Corporation, a Delaware corporation, and its wholly-owned
      subsidiaries (“Finlay Jewelry”, the “Registrant”, “we”, “us” and “our”) is a
      wholly-owned subsidiary of Finlay Enterprises, Inc., a Delaware corporation
      (the
“Holding Company”). References to “Finlay” mean, collectively, the Holding
      Company and Finlay Jewelry. All references herein to “departments” refer to fine
      jewelry departments operated pursuant to license agreements with host stores
      and
      all references herein to “stand-alone jewelry stores” refer to our specialty
      jewelry stores.





**Description
      of the Business**





We
      manage
      our operations under two business segments: Licensed Department Store Based
      Fine
      Jewelry Departments and Stand-Alone Specialty Jewelry Stores, which consists
      of
      Bailey Banks & Biddle, Carlyle and Congress stores, as defined below. As of
      February 2, 2008, we operated a total of 793 locations, including 687 Finlay
      departments in ten host store groups in 40 states and the District of Columbia,
      as well as 106 stand-alone jewelry stores operating as 69 Bailey Banks &
Biddle stores in 24 states, 32 Carlyle stores in nine states and five Congress
      stores located in southwest Florida.





We
      are
      one of the leading retailers of fine jewelry in the United States. We operate
      licensed fine jewelry departments in major department stores for retailers
      such
      as Macy’s Inc. (“Macy’s”) formerly known as Federated Department Stores, Inc.,
      The Bon-Ton Stores, Inc., (the “Bon-Ton”) and Dillard’s, Inc. (“Dillard’s”). We
      sell a broad selection of moderately priced fine jewelry, including necklaces,
      earrings, bracelets, rings and watches, and market these items principally
      as
      fashion accessories with an average sales price of approximately $272 per item.





In
      November 2007, we completed the acquisition of substantially all of the assets
      and specified liabilities of the Bailey Banks & Biddle division of Zale
      Corporation, a chain of 70 stand-alone retail stores with a focus on the luxury
      market, offering jewelry and watches under high-end name brands, with an average
      selling price of approximately $1,200 per item and an average store size of
      approximately 3,950 square feet. With
      the
      November 2007 acquisition of Bailey Banks & Biddle, we will have a
      significantly larger portion of our business dedicated to the high-end sector.
      The Bailey Banks & Biddle stand-alone jewelry stores provide us with a
      national presence in addition to further diversifying our revenue stream between
      the department store based fine jewelry business and the stand-alone jewelry
      store business.





For
      over
      175 years, Bailey Banks & Biddle has combined classic jewelry with
      contemporary designs, offering a compelling shopping environment for the
      high-end luxury consumer. Bailey Banks & Biddle stores are among the
      preeminent jewelers in their markets. They carry both exclusive and recognized
      branded and designer merchandise selections to appeal to the more affluent
      customer. The Bailey Banks & Biddle merchandise assortments focus on
      diamonds, precious gemstones, gold and branded designer jewelry, which is
      complemented by an extensive assortment of prestige watch brands and
      giftware.





In
      conjunction with the Bailey Banks & Biddle acquisition, our revolving credit
      agreement with General Electric Capital Corporation (“G.E. Capital”) and certain
      other lenders was amended and restated (the “Revolving Credit Agreement”) in
      November 2007. The Revolving Credit Agreement, which matures in November 2012,
      provides Finlay Jewelry with a senior secured revolving line of credit up to
      $550.0 million (the “Revolving Credit Facility”).




3




In
      November 2006, we completed the acquisition of L. Congress, Inc. (“Congress”), a
      privately-owned regional chain of five jewelry stores located in southwest
      Florida, with annual sales of approximately $23.0 million in 2007 and a focus
      on
      the luxury market. The average sales price per item was $1,800 in 2007 with
      an
      average store size of approximately 4,000 square feet.





In
      May
      2005, we completed the acquisition of Carlyle & Co. Jewelers (“Carlyle”).
      Carlyle currently operates 32 specialty jewelry stores located primarily in
      the
      southeastern United States under the Carlyle & Co., J.E. Caldwell & Co.
      and Park Promenade trade names, which sell luxury priced jewelry with an average
      sales price of approximately $1,200 per item. The Carlyle stores are principally
      located in shopping malls and lifestyle centers and focus on the designer and
      high-end jewelry markets. Average sales per store were $3.2 million in 2007
      and
      the average size of a store is approximately 2,100 square feet. Carlyle
      generated sales of approximately $103.4 million in 2007.




In
      2007,
      our department store based fine jewelry sales comprised 73% of our total sales.
      Our largest host store relationship is with Macy’s, for which we have operated
      departments since 1983. As a result of Macy’s corporate restructuring
      initiatives, 194 departments were either divested or phased into existing Macy’s
      divisions in 2006. Total sales generated from these departments in 2006 were
      approximately $105.9 million. Macy’s announced further corporate restructuring
      initiatives in February 2008, which will result in the loss of 94 departments
      at
      the end of 2008. Total sales generated from these departments in 2007 were
      approximately $120.0 million. In March 2008, Macy's signed a two-year extension
      of our license agreement through January 29, 2011, for Macy’s Central, the
      newly-merged divisions of Macy's Midwest and Macy’s South, which will consist of
      222 departments. The agreement has no impact on the Bloomingdale’s division
      whose license agreement covering 34 departments, currently runs through January
      30, 2010. As of February 2, 2008, we operated a total of 350 departments in
      five
      of Macy’s eight divisions (including Bloomingdale’s) which accounted for $438.6
      million or 52% of our total sales in 2007. We expect that Macy’s will comprise
      approximately 43% and 36% of our total sales over the next two years (after
      factoring in projected full year results for Bailey Banks & Biddle and the
      loss of the two Macy’s groups in 2009).





In
      October 2006, Macy’s sold its Lord & Taylor division to NRDC Equity Partners
      LLC (“NRDC”). In February 2008, we received notification from NRDC that our
      license agreement would not be renewed upon expiration on January 31, 2009,
      and
      we will close a total of 47 Lord & Taylor departments at the end of 2008. In
      2007, the Lord & Taylor departments generated approximately $44.0 million in
      sales.





In
      May
      2006, the Holding Company announced that Belk, Inc. (“Belk”) would not renew our
      license agreement due to Belk’s acquisition of a privately-held company that
      licensed fine jewelry departments in certain of the Belk stores. The termination
      of the license agreement, effective at the end of 2006, resulted in the closure
      of 75 departments. In 2006, we generated sales of approximately $51.9 million
      from the Belk departments. Further, as a result of Belk’s acquisition of
      Parisian from Saks Incorporated (“Saks”) in October 2006, 33 Parisian
      departments closed in July 2007. In 2007 and 2006, we generated sales of
      approximately $9.8 million and $22.8 million, respectively, from our Parisian
      departments.





We
      were
      initially incorporated on August 2, 1985 as SL Holdings Corporation (“SL
      Holdings”), and the Holding Company was incorporated on November 22, 1988. In
      connection with a reorganization transaction in 1988, SL Holdings changed its
      name to Finlay Fine Jewelry Corporation and became a wholly-owned subsidiary
      of
      the Holding Company. Additionally, in connection with the Carlyle and Congress
      acquisitions, each became a wholly-owned subsidiary of ours. Upon acquisition,
      Bailey Banks & Biddle became an unincorporated division of ours. Our
      principal executive offices are located at 529 Fifth Avenue, New York, New
      York
      10017 and our telephone number at this address is (212) 808-2800.





Our
      fiscal year ends on the Saturday closest to January 31. References to 2008,
      2007, 2006, 2005, 2004 and 2003 relate to the fiscal years ending or ended
      on
      January 31, 2009, February 2, 2008, February 3, 2007, January 28, 2006, January
      29, 2005 and January 31, 2004, respectively. Each of the fiscal years includes
      52 weeks except 2006, which includes 53 weeks.




4




**Overview
      of Operations**





***Licensed
      Department Store Based Fine Jewelry Departments.*** In
      connection with our licensed fine jewelry departments operation, we sell a
      broad
      selection of moderately priced fine jewelry, including necklaces, earrings,
      bracelets, rings and watches, and market these items principally as fashion
      accessories with an average sales price of approximately $272 per item.





Host
      stores benefit from outsourcing the operation of their fine jewelry departments.
      By engaging us, host stores gain specialized managerial, merchandising, selling,
      marketing, inventory control and security expertise. Additionally, by avoiding
      the high working capital investment typically required of the jewelry business,
      host stores improve their return on investment and can potentially increase
      their profitability.





As
      a
      licensee, we benefit from the host stores’ reputation, customer traffic,
      advertising, credit services and established customer base. We also avoid the
      substantial capital investment in fixed assets typical of stand-alone retail
      formats. These factors have generally enabled our new departments to achieve
      profitability within their first twelve months of operation. We further benefit
      because net sales proceeds are generally remitted to us by each host store
      on a
      monthly basis with essentially all customer credit risk borne by the host store.





We
      have
      established separate group service organizations responsible for managing
      departments operated for each host store. Staffing for each group service
      organization varies with the number of departments in each group. Typically,
      we
      service each host store group with a group manager, an assistant group manager
      or director of stores, one merchandise manager, one operations manager, one
      human resources manager, three or more regional supervisors who oversee the
      individual department managers and a number of clerical employees. Each group
      manager reports to one of two regional vice presidents.





As
      a
      result of our strong relationships with our vendors, our management believes
      that our working capital requirements are lower than those of many other jewelry
      retailers. At the end of 2007, approximately 25% of our merchandise was held
      on
      consignment. The use of consignment merchandise also reduces our inventory
      exposure to changing fashion trends because unsold consigned merchandise can
      be
      returned to the vendor.





Most
      of
      our departments have between 50 and 150 linear feet of display cases (with
      an
      average of approximately 80 linear feet) generally located in high traffic
      areas
      on the main floor of our 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. Each
      department is open for business during the same hours as its host store.





We
      had
      average sales per linear foot of approximately $11,000 over the past three
      years. We determine average sales per linear foot by dividing our sales by
      the
      aggregate estimated measurements of the outer perimeters of the display cases
      of
      our departments. We had average sales per department of approximately $891,000,
      $928,000 and $924,000 in 2007, 2006 and 2005, respectively.





***Stand-Alone
      Specialty Jewelry Stores.*** Our
      stand-alone jewelry stores, comprised of Bailey Banks & Biddle, Carlyle and
      Congress, are luxury jewelry stores offering compelling shopping environments
      for the high-end consumer. Our stand-alone jewelry stores carry exclusive and
      recognized branded and designer merchandise selections and merchandise
      assortments with a focus on watches, gold, designer jewelry, diamonds and
      precious gemstones, complemented by an assortment of giftware.





Our
      stores strive to provide their customers with a premier shopping experience
      by
      utilizing knowledgeable, professional and well-trained sales associates,
      marketing programs designed to promote customer awareness of their merchandise
      assortments and extending credit to their customers through their credit card
      programs.




5




***Advertising.*** With
      respect to our licensed department store based fine jewelry business, we promote
      our products primarily through four-color direct mail catalogs using targeted
      mailing lists developed by our host stores, and newspaper advertising. We
      maintain an in-house advertising staff responsible for preparing the majority
      of
      our advertisements and for coordinating the finished advertisements with our
      host stores. We also participate in the majority of our host stores’ promotional
      activities including direct mail postcards and coupons. The majority of our
      license agreements require us to expend certain specified minimum percentages
      of
      the respective department’s annual sales on advertising and promotional
      activities. With respect to our stand-alone jewelry stores, products are
      promoted through direct mail, outdoor and regional print advertising and
      sponsorships.





***Inventory
      Loss Prevention and Insurance.*** We
      undertake substantial efforts to safeguard our merchandise from loss or theft,
      including the installation of safes and lockboxes at each location and the
      taking of a daily diamond inventory count. Additionally, with respect to our
      stand-alone jewelry stores, each store has a sophisticated security system
      in
      place. During 2007, inventory shrinkage amounted to approximately 0.4% of sales.
      We maintain insurance covering the risk of loss of merchandise in transit or
      on
      our premises (whether owned or on consignment) in amounts that management
      believes are reasonable and adequate for the types and amounts of merchandise
      we
      offer for sale.





**Industry**





Consumers
      spent approximately $65.0 billion on jewelry (including both fine and costume
      jewelry) in the United States in 2007, an increase of approximately $24.0
      billion over 1997, according to the United States Department of Commerce. Our
      management believes that greater disposable income in the United States
      population in general has contributed to the growth of the fine jewelry
      retailing industry. Our management also believes that jewelry consumers today
      increasingly perceive fine jewelry as a fashion accessory, resulting in
      purchases which augment our gift and special occasion sales.





**Competition**





We
      face
      competition for retail jewelry sales from national and regional jewelry chains,
      other department stores in which we do not operate fine jewelry departments,
      local independently owned jewelry stores, specialty stores, mass merchandisers,
      catalog showrooms, discounters, direct mail suppliers, televised home shopping
      and internet merchants. Our management believes that competition in the retail
      jewelry industry is based primarily on quality, fashion appeal and perceived
      value of the product offered and on the reputation, integrity and service of
      the
      retailer.





**Strategies**





***Growth
      Strategy.*** We
      intend to continue to pursue the following key initiatives to increase sales
      and
      earnings:





·
            **Increase
                Comparable Store Sales in our Licensed Departments and Stand-Alone
                Specialty Jewelry Stores.**Increasing comparable store sales (sales from locations open for
                the same
                months during the comparable period) is part of our long-term growth
                plan.
                In our department store based fine jewelry departments, our merchandising
                and marketing strategy includes emphasizing key merchandise items,
                increasing focus on holiday and event-driven promotions, participating
                in
                host store marketing programs and positioning our departments as
                “destination locations” for fine jewelry. Over the past decade, we have
                generally experienced comparable store sales increases and have
                consistently outperformed our host store groups with respect to these
                increases.





·
            **Open
                New Channels of Distribution.**An
                important initiative and focus of management is developing opportunities
                for our growth. We consider it a high priority to identify new businesses,
                such as additional regional jewelry chains that offer growth, financial
                viability and manageability that will have a positive impact on
                shareholder value.






6




·
            **Add
                New Stand-Alone Specialty Jewelry
                Stores.**Opening
                new stand-alone specialty stores is part of our long-term growth
                plan.In
                November 2007, we completed the acquisition of substantially all
                of the
                assets and specified liabilities of the Bailey Banks & Biddle division
                of Zale Corporation, a chain of 70 stand-alone retail stores in 24
                states
                with a focus on the luxury market, offering jewelry and watches under
                high-end name brands.In
                2008, we plan on opening four Carlyle stores and two Bailey Banks
&
                Biddle stores.





·
            **Improve
                Operating Leverage.**We
                seek to continue to leverage expenses both by increasing sales at
                a faster
                rate than expenses and by reducing our current level of certain operating
                expenses. For example, we have demonstrated that by increasing the
                selling
                space (with host store approval) of certain high volume departments,
                incremental sales can be achieved without having to incur proportionate
                increases in selling and administrative expenses. In addition, our
                management believes we will benefit from further investments in technology
                and refinements of operating procedures designed to allow our sales
                associates more time for customer sales and service. Our merchandising
                and
                inventory control systems and our point-of-sale systems for our locations
                provide the foundation for improved productivity and expense control
                initiatives. Further, our central distribution facilities enhance
                our
                ability to optimize the flow of merchandise to selling locations
                and to
                reduce payroll and freight costs.





·
            **Enhance
                Customer Service Standards and Strengthen Selling Teams.**We
                are continuously developing and evaluating our selling teams. One
                of our
                priorities is to effectively manage personnel at our store locations,
                as
                they are the talent driving our business at the critical point of
                sale. We
                place strong emphasis on training and customer service. We have expanded
                our interactive, web-based training programs in recent years to provide
                our associates with a uniform training experience. In order to further
                our
                goals of optimizing service levels and driving sales growth, we provide
                incentives to our sales associates in the form of performance-based
                compensation and recognition.





7


***Merchandising
      Strategy.*** In our
      licensed department store based fine jewelry departments, we seek to maximize
      sales and profitability through a unique merchandising strategy known as the
      “Finlay Triangle”, which integrates store management (including host store
      management and our store group management), vendors and our central office.
      By
      coordinating efforts and sharing access to information, each Finlay Triangle
      participant plays a role which emphasizes its area of expertise in the
      merchandising process, thereby increasing productivity. Our advertising
      initiatives and promotional planning are closely coordinated with both host
      store management and our store group management to ensure the effective use
      of
      our marketing programs. Vendors participate in the decision-making process
      with
      respect to merchandise assortment, including the testing of new products,
      marketing, advertising and stock levels. In this way, opportunities are created
      for the vendor to assist in identifying fashion trends thereby improving
      inventory turnover and profitability, both for the vendor and us. As a result,
      our management believes it capitalizes on economies of scale by centralizing
      certain activities, such as vendor selection, advertising and planning, while
      allowing store management the flexibility to implement merchandising programs
      tailored to the host store environments and clientele.





Figure





We
      have
      structured our relationships with vendors to encourage sharing of responsibility
      for marketing and merchandise management. We furnish to vendors, through on-line
      access to our information systems, the same sales, stock and gross margin
      information that is available to our store group management and central office
      for each of the vendor’s styles in our 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. Our
      management believes that the access and input which vendors have in the
      merchandising process results in a better assortment, more timely replenishment,
      higher turnover and higher sales of inventory.





Since
      many of the host store groups in which we operate differ in fashion image and
      customer demographics, our flexible approach to merchandising is designed to
      complement each host store’s own merchandising philosophy. We emphasize a
“fashion accessory” approach to fine jewelry and watches, and seek to provide
      items that coordinate with the host store’s fashion focus as well as to maintain
      stocks of traditional and gift merchandise.





The
      merchandising strategy for our stand-alone jewelry stores is built around their
      customer profiles and partnerships with suppliers. Through analysis of
      customer demographics, fashion trends, industry trends and vendor and store
      management recommendations, we seek to maximize sales and profitability by
      merchandising to the customer tastes within the geographic areas in which the
      stores operate.





8





**Store
      Relationships**




***Department
      Store Based Fine Jewelry Relationships.*** The
      following table identifies the host store groups in which we operated department
      store based fine jewelry departments at February 2, 2008, the year in which
      our
      relationship with each host store group commenced and the number of departments
      operated by us in each host store group.





**Inception of**
            
            **Number of****Host Store Group**
            
            **Relationship**
            
            **Departments****Macy’s**Macy’s
                South
            
            
            1983
            
            
            123Macy’s
                Midwest
            
            
            1992
            *
            
            99Macy’s
                Northwest (1)
            
            
            1993
            
            
            37Macy’s
                North (1)
            
            
            1997
            *
            
            57Subtotal
                Macy’s
            
            
            
            
            
            316Bloomingdale’s
            
            
            2000
            
            
            34Total
                Macy’s Departments
            
            
            
            
            
            
            
            
            350**Bon-Ton**The
                Bon-Ton/Elder-Beerman
            
            
            1986
            
            
            78Carson
                Pirie Scott/Bergner’s/Boston Store/Younkers/Herberger’s
            
            
            1977
            
            
            85Total
                Bon-Ton Departments
            
            
            
            
            
            
            
            
            163**Other****Departments**Gottschalks
            
            
            1969
            
            
            38Lord
                & Taylor (1)
            
            
            1978*
            
            
            47Dillard’s
            
            
            1997
            
            
            89Total
                Other Departments
            
            
            
            
            
            
            
            
            174Total
                Departments
            
            
            
            
            
            
            
            
            687




*
        Represents the year in which our relationship began with the host store group
        previously owned by May.


(1)
      We
      will close 94 Macy’s departments and 47 Lord & Taylor departments at the end
      of 2008.





***Terms
      of Department Store Based Fine Jewelry License
      Agreements.*** Our
      license agreements typically have an initial term of one to five years. All
      of
      our license agreements contain provisions for automatic renewal absent prior
      notice of termination by either party. License agreement renewals range from
      one
      to five year periods. In exchange for the right to operate a department within
      the host store, we pay each host store group a license fee, calculated as a
      percentage of sales.





Our
      license agreements typically require host stores to remit sales proceeds for
      each month (without regard to whether such sales were cash, store credit or
      national credit card) to us approximately three weeks after the end of such
      month. Additionally, substantially all of our license agreements provide for
      accelerated payments during the months of November and December, which require
      the host store groups to remit to us 75% of the estimated months’ sales prior to
      or shortly following the end of each such month. Each host store group withholds
      from the remittance of sales proceeds a license fee and other expenditures,
      such
      as advertising costs, which the host store group may have incurred on our
      behalf.





We
      are
      usually responsible for providing and maintaining any fixtures and other
      equipment necessary to operate our departments, while the host store is
      typically required to provide clean space for installation of any necessary
      fixtures. The host store is generally responsible for paying utility costs
      (except certain telephone charges), maintenance and certain other expenses
      associated with the operation of the departments. Our license agreements
      typically provide that we are responsible for the hiring (subject to the
      suitability of such employees to the host store) and discharge of our sales
      and
      department supervisory personnel, and substantially all license agreements
      require us to provide our employees with salaries and certain benefits
      comparable to those received by the host store’s employees. Many of our license
      agreements provide that we may operate the departments in any new stores opened
      by the host store group. In certain instances, we are operating departments
      without written agreements, although the arrangements in respect of such
      departments are generally in accordance with the terms described herein.




9




***Credit.*** In the
      department store based fine jewelry departments, substantially all consumer
      credit risk is borne by the host store rather than by us. Purchasers of our
      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 us by the host
      store, provided that the proper credit approvals have been obtained in
      accordance with the host store’s policy. Accordingly, payment to us in respect
      of our sales proceeds is generally not dependent on when, or if, payment is
      received by the host store.





Our
      stand-alone jewelry stores maintain private label credit card programs that
      are
      managed by third-parties. We have no liability to the card issuer for bad debt
      expense, provided that purchases are made in accordance with the issuing banks’
procedures. Our stand-alone jewelry stores’ credit programs are intended to
      complement their overall merchandising and marketing strategy by encouraging
      larger and more frequent sales and by offering credit card holders special
      offers and advance notice of in-store sales events. During 2007, such private
      label credit card purchases accounted for approximately 27% of our stand-alone
      store sales.




***Locations
      Opened/Closed.*** During
      2007, location openings offset by closings resulted in a net increase of 35
      locations. The openings, which totaled 86 locations, included 15 Finlay
      departments within existing host store groups, and 71 specialty jewelry stores
      primarily as a result of the acquisition of Bailey Banks & Biddle in
      November 2007. The closings totaled 51 locations, including 48 Finlay
      departments and three specialty jewelry stores. See “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations-2007 Compared with
      2006”.





The
      following table sets forth data regarding the number of locations which we
      have
      operated from the beginning of 2003.





**Fiscal Year Ended****Feb. 2,**
              **2008**
            
            **Feb. 3,**
              **2007**
            
            **Jan. 28,**
              **2006**
            
            **Jan. 29,**
              **2005**
            
            **Jan. 31,**
              **2004****Locations:**Open
                at beginning of year
            
            
            758
            
            
            1,009
            
            
            962
            
            
            972
            
            
            1,011Opened
                during year
            
            
            86
            
            
            33
            
            
            62
            
            
            28
            
            
            32Closed
                during year
            
            
            (51
            )
            
            (284
            )
            
            (15
            )
            
            (38
            )
            
            (71
            )Open
                at end of year
            
            
            793
            
            
            758
            
            
            1,009
            
            
            962
            
            
            972Net
                increase (decrease)
            
            
            35
            
            
            (251
            )
            
            47
            
            
            (10
            )
            
            (39
            )





This
      data
      has not been restated to exclude discontinued operations. Refer to “Selected
      Consolidated Financial Data” which provides the number of locations at each year
      end, as restated for discontinued operations. For the years presented in the
      table above, closings were primarily attributable to: ownership changes in
      host
      store groups; internal consolidation within host store groups; the closing
      or
      sale by host store groups of individual stores; host store group decisions
      to
      consolidate with one licensee or to operate departments themselves; and our
      decision to close unprofitable locations. To our 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 our performance.





**Products
      and Pricing**





Each
      of
      our locations offers a broad selection of necklaces, earrings, bracelets, rings
      and watches. Other than watches, substantially all of the fine jewelry items
      sold by us are made from precious metals and many also contain diamonds or
      colored gemstones. We also provide jewelry and watch repair services. We do
      not
      carry costume or gold-filled jewelry. Specific brand identification is generally
      not important within the fine jewelry business, except for watches and designer
      jewelry. The department store based fine jewelry departments emphasize brand
      name vendors, including Citizen, Bulova, Movado and Seiko with respect to
      watches. The Bloomingdale’s store group emphasizes designer jewelry including
      David Yurman, John Hardy, Phillipe Charriol, Roberto Coin and Judith Ripka.
      The
      stand-alone jewelry stores emphasize designer jewelry and, for the Carlyle
      and
      Congress stores, the Rolex brand.




10




The
      department store based fine jewelry departments sell merchandise at prices
      generally ranging from $100 to $1,000. In 2007, the average price of items
      sold
      by these departments was approximately $272 per item. An average department
      has
      over 5,000 items in stock. Many of our license agreements with host store groups
      restrict us from selling certain types of merchandise or, in some cases, selling
      particular merchandise below certain price points. In 2007, the average price
      of
      items sold by our stand-alone jewelry stores was approximately $1,300, with
      these stores carrying, on average, approximately 3,000 to 4,000 items in
      stock.





Consistent
      with fine jewelry retailing in general, a substantial portion of our department
      store based fine jewelry sales are made at prices discounted from listed retail
      prices. Our advertising and promotional planning are closely coordinated with
      our host store’s marketing efforts. A substantial portion of our sales occur
      during publicized sales 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**





A
      key
      element of our strategy has been to lower the working capital investment
      required for operating our existing locations and opening new locations. At
      the
      end of 2007, our net investment in inventory (i.e., the total cost of inventory
      owned and paid for) was approximately 64% of the total cost of our on-hand
      merchandise. At the end of 2007, approximately 25% of our merchandise was held
      on consignment and certain additional inventory had been purchased with extended
      payment terms. We are generally granted exchange privileges which permit us
      to
      return or exchange unsold merchandise for new products at any time. In addition,
      we structure our relationships with vendors to encourage their participation
      in
      and responsibility for merchandise management. By making the vendor a
      participant in our merchandising strategy, we create opportunities for the
      vendor to assist in identifying fashion trends, thereby improving inventory
      turnover and profitability. As a result, our direct capital investment in
      inventory is at a level which we believe is low for the retail jewelry industry.
      In addition, this strategy reduces our inventory exposure to changing fashion
      trends because unsold consignment merchandise can be returned to the vendor.





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





**Personnel
      and Training**





We
      consider our employees an important component of our operations and devote
      substantial resources to training and improving the quality of sales and
      management personnel.





As
      of the
      end of 2007, we regularly employed approximately 7,300 people of which
      approximately 95% were regional and local sales and supervisory personnel with
      the balance employed in administrative or executive capacities. Of our 7,300
      employees, a substantial number are part-time employees, working less than
      32
      hours per week. Our labor requirements fluctuate because of the seasonal nature
      of our business. Our management believes that relations with our employees
      are
      good. Less than 1% of our employees are unionized.





**Seasonality**





Our
      business is subject to substantial seasonal variations. Historically, we have
      realized a significant portion of our sales, cash flow and net income in the
      fourth quarter of the year principally due to sales from the holiday season.
      We
      expect that this general pattern will continue. Our results of operations may
      also fluctuate significantly as a result of a variety of other factors,
      including the timing of new location openings and location
      closings.





11


**Management
      Information and Inventory Control Systems**





We
      use
      our management information systems to monitor sales, gross margin and inventory
      performance by location, merchandise category, style number and vendor. Using
      this information, we are able to monitor merchandise trends and variances in
      performance and improve the efficiency of our inventory management. Our
      merchandising and inventory control systems and point-of-sale systems have
      provided improved analysis and reporting capabilities. Additionally, we measure
      the productivity of our sales force by maintaining current statistics for each
      employee such as sales per hour, transactions per hour and transaction size.





12


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





**Forward-Looking
      Information and Risk Factors that May Affect Future
      Results**





Set
      forth
      below are certain important risks and uncertainties that could adversely affect
      our results of operations or financial condition and cause our actual results
      to
      differ materially from those expressed in the forward-looking statements made
      by
      us. See “Special Note Regarding Forward-Looking Statements” in Item 7 for
      additional risk factors.





***The
      loss of our relationship with Macy’s, or significant store closures by our host
      store groups, would materially adversely affect our business.***




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





In
      2007,
      our department store based fine jewelry sales constituted 73% of our total
      sales, and approximately 52% of our total sales were generated by departments
      operated in store groups owned by Macy’s. As of February 2, 2008, we operated a
      total of 350 departments in five of Macy’s eight divisions. In February 2008,
      Macy’s announced corporate restructuring initiatives impacting three divisional
      changes including the consolidation of Macy's North into Macy's East, Macy's
      Northwest into Macy's West, and Macy's Midwest into Macy's South. The
      consolidation of Macy's North as well as that of Macy's Northwest, will result
      in the non-renewal of our license agreements and the loss of 57 departments
      and
      37 departments, respectively. In March 2008, Macy's signed a two-year extension
      of our license agreement for Macy’s Central (the newly-merged division of Macy's
      Midwest and Macy's South), which consists of 222 departments, through January
      29, 2011. In 2007, the Macy's North and Macy's Northwest locations generated
      approximately $120.0 million in combined revenue for Finlay. The total revenue
      generated from all of the Macy's locations (including Bloomingdale’s) in 2007
      was approximately $438.6 million.




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





In
      May
      2006, the Holding Company announced that Belk would not renew our license
      agreement due to Belk’s acquisition of a privately-held company that licensed
      fine jewelry departments in certain of the Belk stores. The termination of
      the
      license agreement, effective at the end of 2006, resulted in the closure of
      75
      departments. In 2006, we generated sales of approximately $51.9 million from
      the
      Belk departments. Further, in October 2006, Belk acquired Parisian from Saks.
      We
      operated 33 Parisian departments through August 4, 2007. In 2007 and 2006,
      we
      generated sales of approximately $9.8 million and $22.8 million, respectively,
      from our Parisian departments.





***We
      may not be able to successfully expand our business or increase the number
      of
      departments we operate.***




A
      significant portion of our historical growth in sales and income from operations
      has resulted from our ability to obtain licenses to operate departments in
      new
      host store groups and the addition of new departments in existing host store
      groups. We cannot predict the number of departments we will operate in the
      future.




13




***The
      seasonality of the retail jewelry business makes our profitability substantially
      dependent on our fourth quarter results.***




Our
      business is highly seasonal, with a significant portion of our sales and income
      from operations generated during the fourth quarter of each year, which includes
      the year-end holiday season. We have typically experienced net losses in the
      first three quarters of our fiscal year. During these periods, working capital
      requirements have been funded by borrowings under our Revolving Credit
      Agreement. This pattern is expected to continue. A substantial decrease in
      sales
      during the fourth quarter, whether resulting from adverse weather conditions,
      natural disasters, supply chain problems or any other cause, would have a
      material adverse effect on our profitability and our financial
      condition.





***Our
      locations are heavily dependent on customer traffic and the continued popularity
      of our host stores and malls.***




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





***We
      may not be able to successfully identify, finance, integrate or make
      acquisitions outside of the licensed jewelry department business.***




We
      may
      from time to time examine opportunities to acquire or invest in companies or
      businesses that complement our existing core business, such as our acquisition
      of Bailey Banks & Biddle in November 2007, Congress in November 2006 and
      Carlyle in May 2005. There can be no assurance that these acquisitions or any
      other future acquisitions by us will be successful or improve our operating
      results. In addition, our ability to complete acquisitions will depend on the
      availability of both suitable target businesses and acceptable financing. Any
      acquisitions may result in a potentially dilutive issuance of additional equity
      securities, the incurrence of additional debt or increased working capital
      requirements. Such acquisitions could involve numerous additional risks,
      including difficulties in the assimilation of the operations, products, services
      and personnel of any acquired company, diversion of our management's attention
      from other business concerns, and expansion into new businesses with which
      we
      may have no prior experience.





***Our
      substantial debt and the terms of our debt instruments could adversely affect
      our business.***




We
      currently have a significant amount of debt. As of February 2, 2008, we had
      $200.0 million of debt outstanding under our 8 3/8% Senior Notes due June 1,
      2012 (the “Senior Notes”). Additionally, at February 2, 2008, borrowings under
      the Revolving Credit Agreement were $224.2 million and we had letters of credit
      outstanding totaling $6.2 million under our Revolving Credit Facility. During
      2007, our average revolver balance was $146.7 million and we peaked in usage
      at
      $368.2 million, at which point the available borrowings were an additional
      $81.4
      million. The excess availability was in addition to the $30.0 million minimum
      availability that we are required to maintain. Our high leverage could make
      us
      more vulnerable to general changes in the economy.





***Our
      profitability depends, in part, upon our ability to continue to obtain
      substantial amounts of merchandise on consignment.***




The
      willingness of vendors to enter into consignment arrangements may vary
      substantially from time to time based on a number of factors, including the
      type
      of merchandise involved, the vendors’ financial resources, interest rates,
      availability of financing, fluctuations in gem and gold prices, inflation,
      our
      financial condition and a number of other economic or competitive conditions
      in
      the jewelry business or generally.




14




***A
      decline in discretionary consumer spending may adversely affect our industry,
      our operations and our profitability.***




Luxury
      products, such as fine jewelry, are discretionary purchases for consumers.
      Any
      reduction in consumer discretionary spending or disposable income may affect
      our
      industry more significantly than other industries. Many economic factors outside
      of our control could affect consumer discretionary spending, including the
      financial markets, consumer credit availability, prevailing interest rates,
      energy costs, employment levels, salary levels and tax rates. Any reduction
      in
      discretionary consumer spending could materially adversely affect our business
      and financial condition, especially if such changes were to occur in the fourth
      quarter of our fiscal year.





***Volatility
      in the availability and cost of precious metals and precious and semi-precious
      stones could adversely affect our business.***




The
      jewelry industry in general is affected by fluctuations in the prices of
      precious metals and precious and semi-precious stones. The availability and
      prices of gold, diamonds and other precious metals and precious and
      semi-precious stones may be influenced by cartels, political instability in
      exporting countries and inflation. Shortages of these materials or sharp changes
      in their prices could have a material adverse effect on our results of
      operations or financial condition. A significant change in prices of key
      commodities, including gold and diamonds, could adversely affect our business
      by
      reducing operating margins and impacting consumer demand if retail prices are
      increased significantly. Moreover, human rights issues in countries exporting
      diamonds and other precious gemstones may affect consumer demand for these
      products.





***The
      retail jewelry business is highly competitive.***




We
      face
      competition for retail jewelry sales from national and regional jewelry chains,
      other department stores in which we do not operate the fine jewelry departments,
      local independently owned jewelry stores, specialty stores, mass merchandisers,
      catalog showrooms, discounters, direct mail suppliers, internet merchants and
      televised home shopping. Some of our competitors are substantially larger and
      have greater financial resources than us. Competition may result in price
      pressure, reduced gross margins and loss of market share, any of which could
      substantially harm our business and results of operations.





***We
      may not be able to collect proceeds from our host stores.***




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





***We
      are dependent on several key vendors and other suppliers.***




In
      2007,
      approximately 43.3% of sales were generated by merchandise obtained from our
      ten
      largest vendors, and approximately 6.7% of sales were generated by merchandise
      obtained from our largest vendor. There can be no assurance that we can
      identify, on a timely basis, alternate sources of merchandise supply in the
      case
      of an abrupt loss of any of our significant suppliers. Additionally, we receive
      allowances from our vendors through a variety of programs and arrangements,
      including cooperative advertising. A significant reduction in the collection
      of
      such allowances may negatively impact our future gross margins and/or increase
      future selling, general and administrative expenses (“SG&A”), and may reduce
      future net income.




15




***Our
      success depends on our ability to identify and rapidly respond to fashion
      trends.***




The
      jewelry industry is subject to rapidly changing fashion trends and shifting
      consumer demands. Accordingly, our success depends on the priority that our
      target customers place on fashion and our ability to anticipate, identify and
      capitalize upon emerging fashion trends. If we misjudge fashion trends and
      are
      unable to adjust our product offerings in a timely manner, our net sales may
      decline or fail to meet expectations and any excessive inventory may need to
      be
      sold at lower prices.





***We
      could be materially adversely affected if our distribution operations are
      disrupted.***




In
      the
      event that our distribution facilities were to shut down or otherwise become
      inoperable or inaccessible for any reason, we could incur higher costs and
      longer lead times to distribute merchandise to our stores during the time it
      takes to reopen or replace the affected facility.





***We
      are heavily dependent on our management information systems and our ability
      to
      maintain and upgrade these systems from time to time.***





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





From
      time
      to time, we improve and upgrade our management information systems. If we are
      unable to maintain and upgrade our systems or to integrate new and updated
      systems in an efficient and timely manner, our business and results of
      operations could be materially and adversely affected.





***We
      depend on key personnel.***




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





***The
      terms of our debt instruments and other obligations impose financial and
      operating restrictions.***




The
      Revolving Credit Agreement and the indenture relating to the Senior Notes
      contain restrictive covenants that will limit our ability to engage in
      activities that may be in our long-term best interests. These covenants include
      limitations on, or relating to, liens, indebtedness, investments, mergers,
      acquisitions, affiliated transactions, management compensation and the payment
      of dividends and other restricted payments. As of February 2, 2008, we are
      in
      compliance with all of our covenants.





***The
      future impact of legal and regulatory issues is
      unknown.***





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




16




***Our
      stand-alone jewelry store business could be adversely affected if it is unable
      to successfully negotiate favorable lease terms.***





All
      of
      our stand-alone stores are leased with most having a term of ten years. Rent
      for
      those stores is a fixed minimum base plus, for certain of the stores, a
      percentage of store sales in excess of a specified threshold. We have generally
      been successful in negotiating leases for new stores and lease renewals.
      However, our stand-alone jewelry store business, financial condition and
      operating results could be adversely affected if we are unable to continue
      to
      negotiate favorable new and renewal lease terms.





***We
      could have failures in our system of internal control over financial
      reporting.***





We
      maintain a documented system of internal control over financial reporting which
      is reviewed and monitored by management, who meet regularly with the Audit
      Committee of our Board of Directors. We believe we have a well-designed system
      to maintain adequate internal control; however, there can be no assurances
      that
      control deficiencies will not arise in the future. Although we have devoted
      significant resources to document, test, monitor and improve our internal
      control, we cannot be certain that these measures will ensure that our controls
      will be adequate in the future or that adequate controls will be effective
      in
      preventing fraud. Any failures in the effectiveness of our internal control
      over
      financial reporting could have a material adverse effect on the accuracy of
      our
      financial statements and our ability to detect fraud and could cause us to
      fail
      to meet reporting obligations.




**Item
      1B.** **Unresolved
      Staff Comments**





Not
      Applicable.





**Item
      2.** **Properties**





The
      only
      real estate owned by us are Finlay’s central distribution facility, totaling
      106,200 square feet located in Orange, Connecticut and Carlyle’s administrative
      office, totaling approximately 19,700 square feet located in Greensboro, North
      Carolina. In addition, we lease approximately 18,400 square feet at 521 Fifth
      Avenue, New York, New York, and 49,100 square feet at 529 Fifth Avenue, New
      York, New York for our executive, accounting, advertising, merchandising,
      information systems and other administrative functions. The leases for such
      space expire on September 30, 2008 but, in the case of the 529 Fifth Avenue
      leases, have been renewed through September 30, 2023. Generally, as part of
      our
      department store based fine jewelry license agreements, our host stores provide
      office space for our host store group management personnel free of charge.
      Congress’ 4,360 square foot administrative office is located in Bonita Springs,
      Florida, the lease for which expires on March 31, 2011.





At
      February 2, 2008, Bailey Banks & Biddle had a total of 69 leased stores,
      Carlyle had a total of 32 leased stores and Congress had five leased stores,
      which leases expire on various dates through 2017. Store leases are generally
      for a term of ten years. Rent for these stores is a fixed minimum base plus,
      for
      certain of the stores, a percentage of store sales in excess of a specified
      threshold.





**Item
      3.** **Legal
      Proceedings** ****





From
      time
      to time, we are involved in litigation relating to claims arising out of our
      operations in the normal course of business. As of April 14, 2008, we are not
      a
      party to any legal proceedings that, individually or in the aggregate, are
      reasonably expected to have a material adverse effect on our consolidated
      financial statements. However, the results of these matters cannot be predicted
      with certainty, and an unfavorable resolution of one or more of these matters
      could have a material adverse effect on our consolidated financial
      statements.




17




Commonly
      in the retail jewelry industry, a substantial amount of merchandise is sold
      at a
      discount to the “regular” or “original” price. Our experience is consistent with
      this practice. A number of states in which we operate 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.
      Our management believes we are in substantial compliance with all applicable
      legal requirements 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 2007.




18


**PART
      II**





**Item
              5.**
            **Market
                for Registrant’s Common Equity, Related Stockholder Matters and
                Issuer********Purchases
                of Equity Securities**





During
      2007 and 2006, there were no cash dividends distributed to the Holding Company
      by us. Certain restrictive covenants in the indenture relating to our 8-3/8%
      Senior Notes, due June 1, 2012, having an aggregate principal amount of $200.0
      million (the “Senior Notes”) and the Revolving Credit Agreement impose
      limitations on the payment of dividends to the Holding Company. Additionally,
      the Senior Notes and the Revolving Credit Agreement currently restrict the
      amount of annual distributions to the Holding Company.





There
      was
      one record holder of our common stock at April 14, 2008.





We
      are a
      wholly-owned subsidiary of the Holding Company. Accordingly, there is no
      established public trading market for our common stock.





**Issuer
      Purchases of Equity Securities**





There
      were no repurchases of equity securities by us during the fourth quarter of
      2007.




19




**Item
              6.**
            **Selected
                Consolidated 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. As a
      result of the consolidation of certain of our host store groups and the loss
      of
      certain host store license agreements, the results of operations of the stores
      closed have been segregated from those of continuing operations, net of tax,
      and
      classified as discontinued operations for all periods presented. The statement
      of cash flows data and balance sheet data as of and for each of the years ended
      February 2, 2008, February 3, 2007, January 28, 2006, January 29, 2005 and
      January 31, 2004 have been derived from our audited Consolidated Financial
      Statements. The results of operations for 2007 include Bailey Banks &
Biddle’s results of operations since the date of acquisition. The results of
      operations for 2006 include Congress’ results of operations since the date of
      acquisition. The results of operations for 2005 include Carlyle’s results of
      operations since the date of acquisition.


**Fiscal Year Ended (1)****Feb. 2,**
                **2008**
              
              **Feb. 3,**
                **2007**
              
              **Jan. 28,**
                **2006**
              
              **Jan. 29,**
                **2005**
              
              **Jan. 31,**
                **2004****(Dollars
                  in thousands)****Statement
                  of Operations Data:**Sales
              
              $
              835,892
              
              $
              739,021
              
              $
              689,495
              
              $
              626,580
              
              $
              613,901Cost
                  of sales
              
              
              455,664
              
              
              392,012
              
              
              352,407
              
              
              313,073
              
              
              305,516Gross
                  margin (3)
              
              
              380,228
              
              
              347,009
              
              
              337,088
              
              
              313,507
              
              
              308,385Selling,
                  general and administrative expenses
              
              
              347,255
              
              
              322,676
              
              
              304,525
              
              
              282,817
              
              
              277,573Credit
                  associated with the closure of Sonab (4)
              
              
              -
              
              
              -
              
              
              -
              
              
              (364
              )
              
              -Depreciation
                  and amortization
              
              
              15,545
              
              
              14,756
              
              
              14,524
              
              
              14,314
              
              
              14,069Impairment
                  of goodwill (5)
              
              
              3,009
              
              
              -
              
              
              77,288
              
              
              -
              
              
              -Income
                  (loss) from operations
              
              
              14,419
              
              
              9,577
              
              
              (59,249
              )
              
              16,740
              
              
              16,743Interest
                  expense, net
              
              
              30,596
              
              
              23,388
              
              
              21,848
              
              
              18,058
              
              
              14,820Other
                  expense (6)
              
              
              -
              
              
              -
              
              
              79
              
              
              5,963
              
              
              -Income
                  (loss) from continuing operations before income taxes
              
              
              (16,177
              )
              
              (13,811
              )
              
              (81,176
              )
              
              (7,281
              )
              
              1,923Provision
                  (benefit) for income taxes
              
              
              (5,887
              )
              
              (5,754
              )
              
              (6,955
              )
              
              (4,470
              )
              
              467Income
                  (loss) from continuing operations
              
              
              (10,290
              )
              
              (8,057
              )
              
              (74,221
              )
              
              (2,811
              )
              
              1,456Discontinued
                  operations, net of tax (2)
              
              
              236
              
              
              12,457
              
              
              18,456
              
              
              22,298
              
              
              11,788Net
                  income (loss)
              
              $
              (10,054
              )
              $
              4,400
              
              $
              (55,765
              )
              $
              19,487
              
              $
              13,244




20


**Fiscal Year Ended (1)****Feb. 2,**
                
                **Feb. 3,**
                
                **Jan. 28,**
                
                **Jan. 29,**
                
                **Jan. 31,****2008**
                
                **2007**
                
                **2006**
                
                **2005**
                
                **2004****(Dollars in thousands)****Operating
                    and Financial Data:**Number
                    of locations (end of year on a continuing basis)
                
                
                793
                
                
                725
                
                
                705
                
                
                669
                
                
                638Percentage
                    increase in sales
                
                
                13.1
                %
                
                7.2
                %
                
                10.0
                %
                
                2.1
                %
                
                2.2
                %Percentage
                    increase (decrease) in comparable store sales (7)
                
                
                (1.4
                )%
                
                1.9
                %
                
                0.7
                %
                
                2.7
                %
                
                2.3
                %Average
                    sales per location (8)
                
                $
                1,101
                
                $
                1,033
                
                $
                1,004
                
                $
                958
                
                $
                933EBITDA
                    (9)
                
                
                29,964
                
                
                24,333
                
                
                (44,725
                )
                
                31,054
                
                
                30,812**Most
                    directly comparable GAAP measures:**Net
                    income (loss)
                
                $
                (10,054
                )
                $
                4,400
                
                $
                (55,765
                )
                $
                19,487
                
                $
                13,244Cash
                    flows provided by (used in) operating activities (10)
                
                $
                73,298
                
                $
                (43,439
                )
                $
                26,248
                
                $
                (14,172
                )
                $
                48,279**Capital
                    expenditures**
                
                $
                13,406
                
                $
                11,834
                
                $
                11,869
                
                $
                12,667
                
                $
                12,934**Cash
                    flows provided by (used in):**Operating
                    activities (10)
                
                $
                73,298
                
                $
                (43,439
                )
                $
                26,248
                
                $
                (14,172
                )
                $
                48,279Investing
                    activities
                
                
                (243,619
                )
                
                (18,094
                )
                
                (40,659
                )
                
                (12,667
                )
                
                (12,934
                )Financing
                    activities
                
                
                173,318
                
                
                35,739
                
                
                (20,048
                )
                
                (685
                )
                
                (14,349
                )**Balance
                    Sheet Data-End of Period:**Working
                    capital
                
                $
                214,773
                
                $
                253,848
                
                $
                248,639
                
                $
                229,886
                
                $
                197,297Total
                    assets
                
                
                736,432
                
                
                536,643
                
                
                520,789
                
                
                558,477
                
                
                592,324Short-term
                    debt
                
                
                224,231
                
                
                45,876
                
                
                -
                
                
                -
                
                
                -Long-term
                    debt
                
                
                200,000
                
                
                200,000
                
                
                200,000
                
                
                200,000
                
                
                150,000Total
                    stockholder’s equity
                
                
                105,525
                
                
                116,604
                
                
                112,568
                
                
                164,857
                
                
                185,100





(1)
            Each
                of the fiscal years for which information is presented includes 52
                weeks
                except 2006, which includes 53
                weeks.


(2)
            As
                a result of the consolidation of certain of our host store groups
                and the
                loss of certain host store license agreements, the results of operations
                of the stores closed have been segregated from continuing operations
                and
                reflected as discontinued operations for financial statement purposes
                for
                all periods presented. Refer to Note 14 of Notes to Consolidated
                Financial
                Statements for additional information regarding discontinued
                operations.


(3)
            We
                utilize the last-in, first-out (“LIFO”) method of accounting for
                inventories. If we had valued inventories using the first-in, first-out
                inventory valuation method, the gross margin would have increased
                as
                follows: $10.0 million, $7.2 million, $2.6 million, $2.1 million
                and $4.5
                million for 2007, 2006, 2005, 2004 and 2003, respectively. During
                2004, we
                changed our method of determining price indices used in the valuation
                of
                LIFO inventories.


(4)
            Included
                in Credit associated with the closure of Sonab, our former European
                licensed jewelry department subsidiary, for 2004 is a $0.4 million
                credit,
                which represents a revision of our estimate of closure expenses to
                reflect
                our remaining liability associated with the closure of Sonab.


(5)
            During
                2007, based on our annual assessment of the Congress goodwill, we
                determined that goodwill was impaired and the $3.0 million balance
                was
                eliminated. During 2005, Macy’s announced its intention to divest,
                beginning in 2006, certain stores in which we operated fine jewelry
                departments. Based on this business indicator, we determined that
                goodwill
                was impaired and an impairment of $77.3 million, on a pre-tax basis,
                was
                recorded during 2005. Refer to Note 7 of the Notes to the Consolidated
                Financial Statements.


(6)
            Other
                expense for 2005 includes approximately $0.1 million associated with
                a
                loss on foreign exchange related to a refund of foreign taxes. Other
                expense for 2004 includes pre-tax charges of approximately $6.0 million,
                including $4.4 million for redemption premiums paid on our previously
                outstanding $150.0 million senior notes, $1.3 million to write-off
                deferred financing costs related to the refinancing of this debt
                and $0.3
                million for other expenses.


(7)
            Comparable
                store sales are calculated by comparing sales from locations open
                for the
                same months in the comparable periods. Except for 2007 and 2006 which
                are
                presented on a continuing basis, these figures have not been restated
                to
                exclude the discontinued operations.


(8)
            Average
                sales per location is determined by dividing sales by the average
                of the
                number of locations open at the beginning and at the end of each
                period.


(9)
            Our
                definition of EBITDA is earnings before interest, taxes, depreciation
                and
                amortization. Management uses EBITDA as one of several factors in
                evaluating our operating performance as compared to prior years and
                our
                financial plan. We also use a variation of EBITDA to determine incentive
                compensation payments. We believe EBITDA provides useful information
                for
                determining our ability to meet future debt service requirements.
                EBITDA
                is also widely used by us and others in our industry to evaluate
                and price
                potential acquisitions and it is commonly used by certain investors
                and
                analysts to analyze and compare companies on the basis of operating
                performance and to determine a company's ability to service and/or
                incur
                debt.




21




EBITDA
      should not be construed as a substitute for income from operations, net income
      or cash flows from operating activities (all as determined in accordance with
      generally accepted accounting principles (“GAAP”)) for the purpose of analyzing
      our operating performance, financial position and cash flows, as EBITDA is
      not
      defined by generally accepted accounting principles. EBITDA has limitations
      as
      an analytical tool, and you should not consider it in isolation, or as a
      substitute for the analysis of our results as reported under GAAP. Some of
      these
      limitations include:





·
            EBITDA
                does not reflect our cash expenditures, or future requirements for
                capital
                expenditures, or contractual
                commitments;





·
            Although
                depreciation and amortization are non-cash charges, the assets being
                depreciated and amortized will likely require replacement in the
                future,
                and EBITDA does not reflect any cash requirements for such
                replacements;





·
            EBITDA
                does not reflect changes in, or cash requirements for, our working
                capital
                needs;





·
            EBITDA
                does not reflect the significant interest expense, or the cash
                requirements necessary, to service interest or principal payments
                on our
                debt; and





·
            Other
                companies in our industry may calculate EBITDA differently than we
                do,
                limiting its usefulness as a comparative
                measure.





Because
      of these limitations, EBITDA should not be considered as a measure of
      discretionary cash available to us to invest in the growth of our business.
      We
      compensate for these limitations by relying primarily on our GAAP results and
      using EBITDA only supplementally. See the Statements of Cash Flows included
      in
      our consolidated financial statements.





Because
      we consider EBITDA useful as an operating measure, a reconciliation of EBITDA
      to
      Net income (loss) follows for the periods indicated:


**Fiscal Year Ended****Feb. 2,**
                **2008**
              
              **Feb. 3,**
                **2007**
              
              **Jan. 28,**
                **2006**
              
              **Jan. 29,**
                **2005**
              
              **Jan. 31,**
                **2004****(Dollars in thousands)**EBITDA
              
              $
              29,964
              
              $
              24,333
              
              $
              (44,725
              )
              $
              31,054
              
              $
              30,812Depreciation
                  and amortization
              
              
              (15,545
              )
              
              (14,756
              )
              
              (14,524
              )
              
              (14,314
              )
              
              (14,069
              )Interest
                  expense, net
              
              
              (30,596
              )
              
              (23,388
              )
              
              (21,848
              )
              
              (18,058
              )
              
              (14,820
              )Other
                  expense
              
              
              -
              
              
              -
              
              
              (79
              )
              
              (5,963
              )
              
              -(Provision)
                  benefit for income taxes
              
              
              5,887
              
              
              5,754
              
              
              6,955
              
              
              4,470
              
              
              (467
              )Discontinued
                  operations
              
              
              236
              
              
              12,457
              
              
              18,456
              
              
              22,298
              
              
              11,788Net
                  income (loss)
              
              $
              (10,054
              )
              $
              4,400
              
              $
              (55,765
              )
              $
              19,487
              
              $
              13,244




22




Because
      we also consider EBITDA useful as a liquidity measure, a reconciliation of
      EBITDA to our net cash provided by (used in) operating activities follows for
      the periods indicated:


**Fiscal Year Ended****Feb. 2,**
                **2008**
              
              **Feb. 3,**
                **2007**
              
              **Jan. 28,**
                **2006**
              
              **Jan. 29,**
                **2005**
              
              **Jan. 31,**
                **2004****(Dollars
                  in thousands)**EBITDA
              
              $
              29,964
              
              $
              24,333
              
              $
              (44,725
              )
              $
              31,054
              
              $
              30,812Impairment
                  of goodwill
              
              
              3,009
              
              
              -
              
              
              77,288
              
              
              -
              
              
              -Discontinued
                  operations, excluding write-down of goodwill and depreciation
                  expense
              
              
              409
              
              
              16,098
              
              
              23,057
              
              
              25,303
              
              
              30,193Interest
                  expense, net
              
              
              (30,596
              )
              
              (23,388
              )
              
              (21,848
              )
              
              (18,058
              )
              
              (14,820
              )Other
                  expense
              
              
              -
              
              
              -
              
              
              (79
              )
              
              -
              
              
              -(Provision)
                  benefit for income taxes
              
              
              5,887
              
              
              5,754
              
              
              6,955
              
              
              4,470
              
              
              (467
              )Loss
                  on disposal of fixed assets
              
              
              330
              
              
              6,072
              
              
              182
              
              
              902
              
              
              -Write-off
                  of deferred financing costs
              
              
              1,213
              
              
              -
              
              
              -
              
              
              -
              
              
              -Amortization
                  of deferred financing costs
              
              
              1,206
              
              
              1,319
              
              
              1,185
              
              
              1,058
              
              
              828Credit
                  associated with the closure of Sonab
              
              
              -
              
              
              -
              
              
              -
              
              
              (364
              )
              
              -Deferred
                  income tax provision
              
              
              (1,547
              )
              
              (1,409
              )
              
              (5,457
              )
              
              12,235
              
              
              6,759Other
              
              
              199
              
              
              (411
              )
              
              (288
              )
              
              974
              
              
              (7
              )Changes
                  in assets and liabilities, net of effects from acquisitions
                  (11):(Increase)
                  decrease in accounts and other receivables
              
              
              13,202
              
              
              4,810
              
              
              (23,002
              )
              
              1,714
              
              
              (7,501
              )(Increase)
                  decrease in merchandise inventories
              
              
              29,953
              
              
              (33,069
              )
              
              1,989
              
              
              (5,641
              )
              
              (9,404
              )(Increase)
                  decrease in prepaid expenses and other
              
              
              96
              
              
              87
              
              
              (262
              )
              
              (362
              )
              
              664Increase
                      (decrease) in accounts payable and accrued
                      liabilities
              
              
              17,556
              
              
              (45,528
              )
              
              10,050
              
              
              (60,382
              )
              
              10,656Increase
                  (decrease) in due to parent
              
              
              2,417
              
              
              1,893
              
              
              1,203
              
              
              (7,075
              )
              
              566Net
                  cash provided by (used in) operating activities
              
              $
              73,298
              
              $
              (43,439
              )
              $
              26,248
              
              $
              (14,172
              )
              $
              48,279




(10)
            Included
                in 2006 as a use of cash is the increase in inventory as a result
                of the
                termination and retirement of $49.9 million under our former gold
                consignment agreement.


(11)
            Represents
                the changes in assets and liabilities excluding the acquisitions
                of Bailey
                Banks & Biddle in 2007, Congress in 2006 and Carlyle in
                2005.




23




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




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




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





·
            ***Results
                of Operations –***This
                section provides an analysis of the significant line items on the
                consolidated statements of
                operations.





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





·
            ***Seasonality –***This
                section describes the effects of seasonality on our
                business.





·
            ***Critical
                Accounting Policies and Estimates –***This
                section discusses those accounting policies that are considered important
                to our financial condition and results of operations, and require
                us to
                exercise subjective or complex judgments in their application. In
                addition, all of our significant accounting policies, including critical
                accounting policies, are summarized in Note 2 to the Consolidated
                Financial Statements.





·
            ***Special
                Note Regarding Forward-Looking Statements –***This
                section provides cautionary information about forward-looking statements
                and description of certain risks and uncertainties that could cause
                actual
                results to differ materially from our historical results or current
                expectations or projections.





This
      MD&A has been updated for the purpose of restating our financial statements
      for stores which have been treated as discontinued operations.





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





In
      November 2006, we completed the acquisition of Congress, a privately-owned
      regional chain of five jewelry stores located in southwest Florida, with annual
      sales of approximately $23.6 million in 2006. The purchase price was $6.0
      million plus transaction fees and the assumption of $10.0 million of debt.
      The
      transaction was financed with additional borrowings under the Revolving Credit
      Agreement.





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




24




**Executive
      Overview**





**Our
      Business**





We
      have
      two operating segments – licensed department store based fine jewelry
      departments and stand-alone specialty jewelry stores. We operate licensed fine
      jewelry departments in major department stores where we sell a broad selection
      of moderately priced jewelry, with an average sales price of approximately
      $272
      per item. Our stand-alone specialty jewelry stores sell luxury priced jewelry
      at
      an average sales price of approximately $1,300 per item. As of February 2,
      2008,
      we operated a total of 793 locations, including 687 department store based
      fine
      jewelry departments in ten host store groups, in 40 states and the District
      of
      Columbia, as well as 106 stand-alone jewelry stores operating as 69 Bailey
      Banks
& Biddle stores in 24 states, 32 Carlyle stores in nine states, located
      principally in the southeastern United States and five Congress stores in
      southwest Florida.





Our
      primary focus is to offer desirable and competitively priced products, a breadth
      of merchandise assortments and to provide superior customer service. Our ability
      to quickly identify emerging trends and maintain strong relationships with
      vendors has enabled us to present superior assortments in our showcases. With
      respect to our department store based fine jewelry departments, we believe
      that
      we are an important contributor to each of our host store groups. By outsourcing
      their fine jewelry departments to us, host store groups gain our expertise
      in
      merchandising, selling and marketing jewelry and customer service. Additionally,
      by avoiding high working capital investments typically required of the
      traditional retail jewelry business, host stores improve their return on
      investment and increase their profitability. As a licensee, we benefit from
      the
      host stores’ reputation, customer traffic, credit services and established
      customer base. We also avoid the substantial capital investment in fixed assets
      typical of a stand-alone retail format. At the end of 2007, approximately 25%
      of
      our merchandise was held on consignment, which reduces our inventory exposure
      to
      changing fashion trends. These factors have generally led our new departments
      to
      achieve profitability within the first twelve months of operation.





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





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





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





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





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




25




**2007
      Highlights**




Total
      sales were $835.9 million in 2007 compared to $739.0 million in 2006, an
      increase of 13.1%. Sales generated by our stand-alone specialty jewelry stores
      were $223.8 million in 2007 compared to $108.2 million in 2006 (which includes
      sales from the date of acquisition of Bailey Banks & Biddle and Congress in
      November 2007 and November 2006, respectively). Gross margin increased by $33.2
      million in 2007 compared to 2006, and, as a percentage of sales, gross margin
      decreased by 1.5% from 47.0% to 45.5% primarily due to the increased cost of
      sales due to the change in mix of sales with higher sales in designer and watch
      categories which have lower margins than other categories, increased volume
      from
      the stand-alone jewelry stores at lower gross margins as well as a higher LIFO
      provision. Although SG&A increased by $24.6 million, as a percentage of
      sales, SG&A decreased 2.2% from 43.7% to 41.5%, due to corporate office cost
      savings.





During
      2007, comparable store sales decreased 1.4% as a result of decreased consumer
      spending in a weak economic environment in the fourth quarter of 2007 as
      compared to the prior year period. Although we experienced a decline in 2007,
      over the past decade, through the successful execution of our marketing and
      merchandising strategy, we have generally experienced comparable store sales
      increases and we have consistently outperformed our host store groups with
      respect to these increases. We have an experienced management team, a
      well-trained and highly motivated sales force, an expert jewelry merchandising
      team, unique vendor relationships and an established customer base.





In
      November 2007, we completed the acquisition of substantially all of the assets
      and specified liabilities of the Bailey Banks & Biddle division of Zale
      Corporation, a chain of 70 stand-alone retail stores in 24 states dedicated
      to
      the luxury market, offering jewelry and watches under high-end name brands,
      with
      an average sales price of approximately $1,200 per item and average store size
      of approximately 3,950 square feet.





In
      conjunction with the Bailey Banks & Biddle acquisition, our Revolving Credit
      Agreement was amended and restated and provides us with a senior secured
      revolving line of credit up to $550.0 million. We ended 2007 with borrowings
      under the Revolving Credit Agreement of $224.2 million compared to $45.9 million
      at the end of 2006. Maximum outstanding borrowings during 2007 peaked at $368.2
      million, at which point the available borrowings under the Revolving Credit
      Agreement were an additional $81.4 million. The excess availability was in
      addition to the $30.0 million minimum availability that we are required to
      maintain. Refer to Note 8 of Notes to Consolidated Financial Statements.





**Opportunities**





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





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





Consumers
      spent approximately $65.0 billion on jewelry (including both fine jewelry and
      costume jewelry) in the United States in calendar year 2007, an increase of
      approximately $24.0 billion over 1997, according to the United States Department
      of Commerce. Our management believes that greater disposable income in the
      United States population in general has contributed to the growth of the fine
      jewelry retailing industry. Our management also believes that jewelry consumers
      today increasingly perceive fine jewelry as a fashion accessory, resulting
      in
      purchases which augment gift and special occasion sales.




26




In
      March
      2008, we signed a two-year extension with Macy’s for the newly formed
      consolidated Macy’s Central division formerly known as the Macy’s South and
      Macy’s Midwest divisions. The amended license agreement extends our current
      contract until January 29, 2011, and covers 222 departments. The agreement
      has
      no impact on the Bloomingdale’s division whose license agreement, covering 34
      departments, currently runs through January 30, 2010.





During
      2007, we opened four departments within Dillard’s and two departments within the
      Bloomingdale’s stores. Further, we opened one new Carlyle store in 2007. Through
      the Bailey Banks & Biddle acquisition as well as opening new Carlyle stores
      and Bloomingdale’s departments, we will have a larger portion of our business
      dedicated to the luxury sector. In 2008, we plan to open four Carlyle stores
      and
      two Bailey Banks & Biddle stores.





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





·
            Increase
                comparable store sales;





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





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





·
            Capitalize
                on developing fashion trends and emerging merchandise
                categories;





·
            Expand
                our most productive departments;





·
            Continue
                to improve operating leverage;





·
            Continue
                to raise customer service standards;
                and





·
            De-leverage
                the balance sheet.





See
      “Business-General-Growth Strategy” and “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations”.





**Risks
      and Uncertainties**





The
      risks
      and challenges facing our business include:





·
            Dependence
                on or loss of certain host store relationships;





·
            Host
                store consolidation; and





·
            Substantial
                debt leverage.





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




27




As
      of
      February 2, 2008, we operated a total of 350 departments in five of Macy’s eight
      divisions. In February 2008, Macy’s announced corporate restructuring
      initiatives impacting three divisional changes including the consolidation
      of
      Macy's North into Macy's East, Macy's Northwest into Macy's West, and Macy's
      Midwest into Macy's South. The consolidation of Macy's North as well as that
      of
      Macy's Northwest, will result in the non-renewal of these license agreements
      and
      the loss of 57 departments and 37 departments, respectively. In March 2008,
      Macy's signed a two-year extension of our license agreement for Macy’s Central
      (the newly-merged division of Macy's Midwest and Macy's South), which will
      consist of 222 doors. The amended license agreement extends our current contract
      until January 29, 2011. In 2007, our department store based fine jewelry sales
      were 73% of our total sales, and approximately 52% of our total sales were
      generated by departments operated in store groups owned by Macy’s. In 2007, the
      Macy's North and Macy's Northwest locations generated approximately $120.0
      million in combined revenue. We expect that Macy’s will comprise approximately
      43% and 36% of our total sales over the next two years (after factoring in
      projected full year results for Bailey Banks & Biddle and the loss of the
      two Macy’s groups in 2009).





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





In
      May
      2006, the Holding Company announced that Belk would not renew our license
      agreement due to Belk’s acquisition of a privately-held company that currently
      licenses fine jewelry departments in certain of the Belk stores. The termination
      of the license agreement, effective at the end of 2006, resulted in the closure
      of 75 departments. In 2006, we generated sales of $51.9 million in our Belk
      departments. Further, in October 2006, Belk acquired Parisian from Saks. We
      operated the Parisian departments through August 4, 2007. In 2007 and 2006,
      we
      generated sales of approximately $9.8 million and $22.8 million, respectively,
      from our Parisian departments.




We
      currently have a significant amount of debt. As of February 2, 2008, we had
      $200.0 million of debt outstanding under our Senior Notes. Additionally, at
      February 2, 2008, borrowings under the Revolving Credit Agreement were $224.2
      million.





**Results
      of Operations**





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





**Fiscal Year Ended****Feb. 2,**
              **2008**
            
            **Feb. 3,**
              **2007**
            
            **Jan. 28,**
              **2006****Statement
                of Operations Data:**Sales
            
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            54.5
            
            
            53.0
            
            
            51.1Gross
                margin
            
            
            45.5
            
            
            47.0
            
            
            48.9Selling,
                general and administrative expenses
            
            
            41.5
            
            
            43.7
            
            
            44.2Depreciation
                and amortization
            
            
            1.9
            
            
            2.0
            
            
            2.1Impairment
                of goodwill (1)
            
            
            0.4
            
            
            -
            
            
            11.2Income
                (loss) from operations
            
            
            1.7
            
            
            1.3
            
            
            (8.6
            )Interest
                expense, net
            
            
            3.6
            
            
            3.2
            
            
            3.2Loss
                    from continuing operations before income taxes
            
            
            (1.9
            )
            
            (1.9
            )
            
            (11.8
            )Benefit
                for income taxes
            
            
            (0.7
            )
            
            (0.8
            )
            
            (1.0
            )Loss
                from continuing operations
            
            
            (1.2
            )
            
            (1.1
            )
            
            (10.8
            )Discontinued
                operations, net of tax (2)
            
            
            -
            
            
            1.7
            
            
            2.7Net
                income (loss)
            
            
            (1.2)
            %
            
            0.6
            %
            
            (8.1
            )%







(1)
            See
                Note 5 to “Selected Consolidated Financial
                Data”.


(2)
            See
                Note 2 to “Selected Consolidated Financial
                Data”.




28




**2007
      Compared with 2006**





***Sales.*** Sales
      increased $96.9 million, or 13.1%, in 2007 compared to 2006. Sales include
      $612.1 million from the department store based fine jewelry departments which
      represented a 3.0% decrease compared to the $630.9 million in sales for 2006.
      Sales also include $223.8 million generated by our stand-alone specialty jewelry
      stores in 2007 compared to $108.2 million in 2006 (which includes sales from
      the
      date of acquisition of Bailey Banks & Biddle and Congress in November 2007
      and November 2006, respectively). Comparable store sales decreased
      1.4%.





During
      2007, we opened 15 departments within existing host store groups, 70 specialty
      jewelry stores as a result of the Bailey Banks & Biddle acquisition and one
      new Carlyle store. Additionally, in 2007, we closed 48 departments and three
      stand-alone jewelry stores. The openings were comprised of the
      following:





**Store
                Group**
            
            **Number of****Locations**Bailey
                Banks & Biddle
            
            
            70Macy’s
            
            
            6Dillard’s
            
            
            4Carlyle
                store
            
            
            1Other
            
            
            5Total
            
            
            86




The
      closings were comprised of the following:





**Store
                Group**
            
            **Number of**
              **Locations**
            
            **Reason**Parisian
            
            
            33
            
            
            Department
                closings as a result of Parisian’s decision not to renew our license
                agreement.Macy’s
            
            
            5
            
            
            Host
                decision to close these stores.Carlyle
                stores
            
            
            2
            
            
            Management’s
                decision to close unprofitable stores.Bailey
                Banks & Biddle store
            
            
            1
            
            
            Management’s
                decision to close an unprofitable store.Other
            
            
            10
            
            
            Includes
                department closings within existing host store groups.Total
            
            
            51




Our
      major
      merchandise categories include diamonds, gold, gemstones, watches and designer
      jewelry. With respect to Finlay’s licensed department business, watch and
      designer sales increased $4.9 million and $6.2 million, respectively, or 5.4%
      and 10.2%, respectively, in 2007 compared to 2006, due primarily to increased
      consumer demand.





***Gross
      margin.*** Gross
      margin increased by $33.2 million in 2007 compared to 2006. As a percentage
      of
      sales, gross margin decreased by 1.5% from 47.0% to 45.5%. The components of
      this net decrease in gross margin are as follows:





**Component**
            
            **%**
            
            **Reason**Merchandise
                cost of sales
            
            
            (1.5
            )%
            
            Increase
                in cost of sales is due to the change in mix of sales with higher
                sales in
                the designer and watch categories which have lower margins than other
                categories, increased volume from the stand-alone jewelry division
                at
                lower gross margins as well as higher gold prices.LIFO
            
            
            (0.2
            )
            
            Increase
                in the LIFO provision is due to increases in our internal price indices
                as
                well as increased owned inventory.Other
            
            
            0.2
            
            
            Decreases
                in various other components of cost of sales.Net
                decrease
            
            
            (1.5
            )%





***Selling,
      general and administrative expenses.*** The
      components of SG&A include payroll expense, license fees, rent expense, net
      advertising expenditures and other field and administrative expenses. SG&A
      increased $24.6 million, or 7.6%. SG&A dollars have increased as 2007
      includes a full year of Congress’s SG&A as well as an increase in expenses
      as a result of the Bailey Banks & Biddle acquisition. As a percentage of
      sales, SG&A decreased by 2.2% from 43.7% to 41.5%. The components of this
      decrease in SG&A are as follows:


29





**Component**
            
            **%**
            
            **Reason**Net
                advertising expenditures
            
            
            (0.1
            )%
            
            Decrease
                is primarily due to lower gross advertising expenditures.License
                and lease fees
            
            
            (1.1
            )
            
            Decrease
                is primarily due to the significantly lower rent structure of our
                stand-alone stores as a percentage of sales compared to the department
                store based fine jewelry business.Payroll
                expense and other
            
            
            (1.0
            )
            
            Decrease
                is primarily due to corporate office cost savings, including staff
                reductions, as a result of expense reduction initiatives.Net
                decrease
            
            
            (2.2
            )%




***Depreciation
      and amortization.*** Depreciation and amortization increased by $0.8 million primarily due to
      additional depreciation and amortization for capital expenditures for the most
      recent twelve months as well as the assets related to the Congress and Bailey
      Bank & Biddle acquisitions and accelerated depreciation associated with the
      Parisian stores, offset by the effect of certain assets becoming fully
      depreciated.





***Impairment
      of goodwill.*** During
      2007, based on our annual assessment of the Congress goodwill, we determined
      that goodwill was impaired and an impairment of $3.0 million, on a pre-tax
      basis, was recorded.





***Interest
      expense, net.*** Interest
      expense increased by $7.2 million primarily as a result of higher average
      borrowings under the Revolving Credit Agreement. Average borrowings increased
      to
      $346.7 million for the 2007 period compared to $269.2 million for the 2006
      period. The additional borrowings were used to finance the acquisition of Bailey
      Banks & Biddle. The weighted average interest rate on all outstanding
      borrowings were approximately 8.0% for 2007 compared to 8.2% for 2006.





***Benefit
      for income taxes.*** The
      income tax benefit for the 2007 and 2006 periods reflects effective tax rates
      of
      36.4% and 41.7%, respectively. The 2007 period reflects a benefit of
      approximately $1.2 million associated with the impairment of goodwill.
      Additionally, the 2007 and 2006 periods reflect benefits of approximately
      $209,000 and $50,000, respectively, associated with the reversal of tax accruals
      no longer required.





***Discontinued
      operations.*** Discontinued
      operations for 2007 includes the results of operations of the 33 Parisian
      departments, which closed in July 2007. Discontinued operations for 2006
      includes the Parisian departments, the Belk departments that closed in January
      2007 as well as the Macy’s departments that closed during 2006. Sales related to
      these closed departments totaled $9.8 million in 2007 and $180.6 million in
      2006. Gross margin, as a percentage of sales, related to discontinued
      departments decreased 4.8% from 48.1% in 2006 to 43.3% in 2007. The net income
      from discontinued operations for 2007 was $0.2 million compared to net income
      from discontinued operations of $12.5 million during the comparable period
      in
      2006.





***Net
      income (loss).*** Net
      loss
      of $10.1 million for the 2007 period compares to net income of $4.4 million
      in
      the prior period as a result of the factors discussed above.





**2006
      Compared with 2005**





***Sales.*** Sales
      increased $49.5 million, or 7.2%, in 2006 compared to 2005. Sales include $630.9
      million from the department store based fine jewelry departments which
      represented a 1.8% increase compared to the $620.0 million in sales for 2005.
      Sales also include $108.2 million generated by our stand-alone jewelry stores
      in
      2006 compared to $69.5 million in 2005 (which includes sales from the date
      of
      acquisition of Carlyle in May 2005 and of Congress in November 2006,
      respectively). Comparable store sales increased 1.9%.





During
      2006, we opened 26 Finlay departments within existing host store groups and
      two
      Carlyle stores as well as five stores as a result of the Congress acquisition.
      Additionally, in 2006, we closed 283 Finlay departments and one Carlyle store.
      The openings were comprised of the following:





30





**Store
                Group**
            
            **Number
                of**
              **Locations**Dillard’s
            
            
            15Macy’s
            
            
            7Congress
                stores
            
            
            5Carlyle
                stores
            
            
            2Other
            
            
            4Total
            
            
            33




The
      closings were comprised of the following:





**Store
                Group**
            
            **Number
                of**
              **Locations**
            
            **Reason**Macy’s
            
            
            194
            
            
            Stores
                were divested or phased into the Macy’s East or Macy’s West divisions as a
                result of the merger with May.Belk
            
            
            75
            
            
            Department
                closings as a result of Belk’s decision not to renew our license
                agreement.Carlyle
                store
            
            
            1
            
            
            Management’s
                decision to close an unprofitable location.Other
            
            
            14
            
            
            Department
                closings within existing host store groups.Total
            
            
            284




Our
      major
      merchandise categories include diamonds, gold, gemstones, watches and designer
      jewelry. With respect to Finlay’s licensed department business, watch and
      designer sales increased $8.1 million and $4.1 million, respectively, or 9.6%
      and 7.2%, respectively, in 2006 compared to 2005, due primarily to increased
      consumer demand.





***Gross
      margin.*** Gross
      margin increased by $9.9 million in 2006 compared to 2005. As a percentage
      of
      sales, gross margin decreased by 1.9% from 48.9% to 47.0%. The components of
      this net decrease in gross margin are as follows:





**Component**
            
            **%**
            
            **Reason**Merchandise
                cost of sales
            
            
            (1.4
            )%
            
            Increase
                in merchandise cost of sales is due to the increased price of gold,
                lower
                vendor concessions and the mix of sales with higher sales in the
                diamond,
                designer and clearance categories, which have lower margins than
                other
                categories.LIFO
            
            
            (0.6
            )
            
            Increase
                in the LIFO provision is due to increases in our internal price
                indices.Other
            
            
            0.1
            
            
            Decrease
                in various other components of cost of sales.Net
                decrease
            
            
            (1.9
            )%





***Selling,

      general and administrative expenses.*** The
      components of SG&A include payroll expense, license fees, rent expense, net
      advertising expenditures and other field and administrative expenses. SG&A
      increased $18.2 million, or 6.0%. SG&A dollars have increased as 2006
      includes a full year of Carlyle’s SG&A. Additionally certain expenses for
      the department store based fine jewelry departments increase with higher sales,
      such as rent and sales commissions. As a percentage of sales, SG&A decreased
      by 0.5% from 44.2% to 43.7%. The components of this decrease in SG&A are as
      follows:





**Component**
              
              **%**
              
              **Reason**Net
                  advertising expenditures
              
              
              (0.3
              )%
              
              Decrease
                  is primarily due to lower gross advertising expenditures.License
                  and lease fees
              
              
              (0.4
              )
              
              Decrease
                  is primarily due to the significantly lower rent structure of our
                  stand-alone stores as a percentage of sales compared to the department
                  store based fine jewelry business.Payroll
                  expense
              
              
              0.3
              
              
              Increase
                  in payroll expense is due to lower than expected sales in the fourth
                  quarter of 2006 and therefore an unfavorable leveraging of field
                  payroll.Other
              
              
              (0.1
              )
              
              Decrease
                  is primarily due to corporate office cost savings, including staff
                  reductions, as a result of expense reduction initiatives.Net
                  decrease
              
              
              (0.5
              )%




***Depreciation
      and amortization.*** Depreciation and amortization increased by $0.2 million primarily due to
      additional depreciation and amortization for capital expenditures for the most
      recent twelve months, as well as accelerated depreciation associated with the
      closing of the Parisian stores, offset by the effect of certain assets becoming
      fully depreciated.





***Impairment
      of goodwill.*** During
      the quarter ended July 30, 2005, Macy’s announced its intention to divest
      certain stores for which we operated the fine jewelry departments. Based upon
      this business indicator, we determined that goodwill was impaired and an
      impairment of $77.3 million, on a pre-tax basis, was recorded during
      2005.





31


***Interest
      expense, net.*** Interest
      expense increased by $1.5 million primarily due to an increase in the weighted
      average interest rate (8.2% for the period in 2006 compared to 7.7% for the
      comparable period in 2005). Average borrowings decreased to $269.2 million
      for
      the 2006 period compared to $279.4 million for the 2005 period.





***Other
      expense.*** Other
      expense for the 2005 period includes approximately $79,000 associated with
      a
      loss on foreign exchange related to a refund of foreign taxes.





***Benefit
      for income taxes.*** The
      income tax benefit for both the 2006 and 2005 periods reflects effective tax
      rates of 41.7% and 66.0% (before reflecting the impairment of goodwill),
      respectively. The 2005 period reflects a benefit of approximately $0.2 million
      related to a refund of foreign taxes and includes a benefit of approximately
      $4.4 million associated with the impairment of goodwill. Additionally, the
      2006
      and 2005 periods reflect benefits of approximately $50,000 and $425,000,
      respectively, associated with the reversal of tax accruals no longer
      required.





***Discontinued
      operations.*** Discontinued
      operations for 2006 and 2005 includes the results of operations for the 194
      Macy’s stores closed during 2006, the results of operations of the Belk
      departments, which closed in January 2007, as well as the results of operations
      of the Parisian departments closed in July 2007. Sales related to these
      departments totaled $180.6 million for the year ended February 3, 2007 compared
      to $300.6 million in 2005. Gross margin, as a percentage of sales, related
      to
      the discontinued departments decreased 2.7% from 50.8% in 2005 to 48.1% in
      2006.
      The gross margin percentage was negatively impacted as a result of markdowns
      in
      these departments in an effort to reduce inventory levels. The net income from
      discontinued operations for 2006 was $12.5 million compared to net income from
      discontinued operations of $18.5 million during the comparable period in
      2005.





***Net
      income (loss).*** Net
      income of $4.4 million for the 2006 period compares to a net loss of $55.8
      million in the prior period as a result of the factors discussed
      above.





**Liquidity
      and Capital Resources**





Information
      about our financial position is presented in the following table:





**February
                2,**
              **2008**
            
            **February
                3,**
              **2007****(dollars
                in thousands)**Cash
                and cash equivalents
            
            $
            4,701
            
            $
            1,704Working
                capital
            
            
            214,773
            
            
            253,848Short-term
                debt
            
            
            224,231
            
            
            45,876Long-term
                debt
            
            
            200,000
            
            
            200,000Stockholder’s
                equity
            
            
            105,525
            
            
            116,604





Our
      primary capital requirements are funding working capital for new locations
      and
      growth of existing locations, as well as debt service obligations and license
      fees to host store groups, rent payments for the stand-alone jewelry stores,
      capital expenditures for opening new locations, renovating existing locations,
      information technology investments and funding potential acquisitions. For
      2007
      and 2006, capital expenditures totaled $13.4 million and $11.8 million,
      respectively, exclusive of fixed assets acquired. Total capital expenditures
      for
      2008 are estimated to be in the range of $18.0 million to $20.0 million.





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





32


Cash
      flows provided by (used in) operating, investing and financing activities for
      the fiscal years ended February 2, 2008, February 3, 2007 and January 28, 2006
      were as follows:





**Fiscal Years Ended****February 2,**
              **2008**
            
            **February 3,**
              **2007**
            
            **January 28,**
              **2006****(dollars in thousands)**Operating
                Activities
            
            $
            73,298
            
            $
            (43,439
            )
            $
            26,248Investing
                Activities
            
            
            (243,619
            )
            
            (18,094
            )
            
            (40,659
            )Financing
                Activities
            
            
            173,318
            
            
            35,739
            
            
            (20,048
            )Net
                increase (decrease) in cash and cash equivalents
            
            $
            2,997
            
            $
            (25,794
            )
            $
            (34,459
            )




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





·
            Investment
                in inventory and for working
                capital;





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





·
            Investments
                in technology; and





·
            Strategic
                acquisitions.





***Operating
      Activities***





**** The
      primary source of our liquidity is cash flows from operating activities. The
      key
      component of operating cash flow is merchandise sales. Operating cash outflows
      include payments to vendors for inventory, services and supplies, payments
      for
      employee payroll, license fees, rent and payments of interest and taxes. Net
      cash flows provided by operations were $73.3 million in 2007. Merchandise
      inventories decreased by $30.0 million, reflecting a reduction of Bailey Banks
      & Biddle inventory by approximately $20.0 million from the acquisition date
      through year end, as well as a $10.0 million inventory decrease at the other
      divisions for the fiscal year. Accounts receivable decreased to $13.8 million
      from $26.3 million primarily due to the impact of lower sales in our department
      store based fine jewelry business in January 2008 as compared to January 2007
      as
      well as the 53 rd week in
      2006. Additionally, accounts payable increased to $110.5 million from $85.1
      million primarily as a result of higher inventory purchases in the fourth
      quarter of the current year, in part due to the conversion of the gold
      consignment program to owned merchandise. In addition, Bailey Banks & Biddle
      had the impact of increasing accounts payable by $10.0 million.





Our
      operations involving licensed fine jewelry departments substantially preclude
      customer receivables as our license agreements typically require host stores
      to
      remit sales proceeds for each month (without regard to whether such sales were
      cash, store credit or national credit card) to us approximately three weeks
      after the end of such month. Additionally, at the end of 2007, approximately
      25%
      of our merchandise was held on consignment. Our working capital balance was
      $214.8 million at February 2, 2008, a decrease of $39.1 million from February
      3,
      2007.





The
      seasonality of our business causes working capital requirements, and therefore,
      borrowings under the Revolving Credit Agreement, to reach their highest level
      in
      the months of October, November and December in anticipation of the year-end
      holiday season. Accordingly, we experience seasonal cash needs as inventory
      levels peak. Additionally, substantially all of our license agreements provide
      for accelerated payments during the months of November and December, which
      require the host store groups to remit to us 75% of the estimated months' sales
      prior to or shortly following the end of that month. These proceeds result
      in a
      significant increase in our cash, which is used to reduce our borrowings under
      the Revolving Credit Agreement. Inventory levels increased by $181.0 million
      as
      compared to February 3, 2007, as a result of the acquisition of Bailey Banks
      & Biddle, whose inventory levels were $191.5 million as of February 2,
      2008.





33




***Investing
      Activities***





For
      2007,
      net cash used in investing activities of $243.6 million primarily relates to
      the
      acquisition of Bailey Banks & Biddle, which accounted for $230.1 million of
      cash invested with a remaining amount of $5.6 million payable to Zale
      Corporation in February 2008. Cash used for capital expenditures totaled $13.4
      million in 2007. Capital expenditures in 2007, 2006 and 2005 related primarily
      to expenditures for opening new locations and renovating existing locations.
      For
      2006 and 2005, net cash used in investing activities totaled $18.1 million
      and
      $40.7 million, respectively. In 2006 and 2005, cash of $6.3 million and $28.8
      million was utilized for the acquisitions of Congress and Carlyle,
      respectively.





***Financing
      Activities***





Proceeds
      from, and principal repayments on, the Revolving Credit Facility have been
      our
      primary financing activities. Net cash from financing activities was $173.3
      million in 2007 and was used primarily for the acquisition of Bailey Banks
&
Biddle.





At
      our
      option, Tranche A bears interest at a floating rate equal to a margin of 0.25%
      over the Index Rate or 2.00% over the LIBOR (London Interbank Offer Rate) from
      November 9, 2007 through January 1, 2009. After January 1, 2009, the loans
      under
      Tranche A will bear interest in accordance with a graduated pricing matrix
      based
      on the average excess availability under the facility for the previous quarter.
      Tranche B bears interest at a floating rate equal to a margin of 2.75% over
      the
      Index Rate or 4.50% over LIBOR. The Index Rate is equal to the higher of (i)
      the
      federal funds rate plus 50 basis points and (ii) the publicly quoted rate as
      published by the Wall Street Journal as the “prime rate”. The weighted average
      interest rate was 7.5% and 7.7% for 2007 and 2006, respectively.





Borrowings
      under the Revolving Credit Agreement at February 2, 2008 were $224.2 million.
      The average amounts outstanding under the Revolving Credit Agreement during
      2007
      and 2006 were $146.7 million and $69.2 million, respectively. The maximum amount
      outstanding during 2007 was $368.2 million, **** at
      which
      point the available borrowings were an additional $81.4 million. The excess
      availability was in addition to the $30.0 million minimum availability that
      we
      are required to maintain. At February 2, 2008 and February 3, 2007, we had
      letters of credit outstanding totaling $6.2 million and $6.1 million,
      respectively, which guarantee various trade activities.





In
      November 2007, we completed the acquisition of specified assets and liabilities
      that comprise the Bailey Banks & Biddle division of Zale Corporation, a
      chain of 70 stand-alone retail stores in 24 states with a focus on the luxury
      market, offering jewelry and watches under high-end name brands. The purchase
      price of approximately $200.0 million, plus transaction fees of
      approximately $4.1 million, was financed with borrowings under the
      Revolving Credit Agreement. A post-closing inventory adjustment of $31.6 million
      was also financed through borrowings under the Revolving Credit Agreement.
      Since
      the date of acquisition, Bailey Banks & Biddle’s cash requirements have
      been, and will continue to be, funded under the Revolving Credit
      Agreement.





In
      November 2006, we completed the stock purchase of Congress; a chain of five
      jewelry stores located in southwest Florida with a focus on the luxury market.
      The purchase price was $6.0 million plus transaction fees, and was financed
      with
      additional borrowings under the Revolving Credit Agreement. Congress’ revolving
      credit facility totaling $10.0 million was terminated and paid in full at the
      closing. Since the date of acquisition, Congress’ cash requirements have been,
      and will continue to be, funded under the Revolving Credit Agreement. Refer
      to
      Note 7 of Notes to the Consolidated Financial Statements for a discussion of
      goodwill impairment in 2007.




34




In
      May
      2005, we completed the acquisition of Carlyle. The purchase price was
      approximately $29.0 million plus transaction fees, and was financed with
      additional borrowings under the Revolving Credit Agreement. In connection with
      the acquisition, Carlyle’s revolving credit facility totaling $17.1 million was
      terminated and paid in full at the closing. Since the date of the acquisition,
      Carlyle’s cash requirements have been, and will continue to be, funded under the
      Revolving Credit Agreement.





A
      significant amount of our operating cash flow will be used to pay interest
      with
      respect to the Senior Notes and amounts due under the Revolving Credit
      Agreement. As of February 2, 2008, our outstanding borrowings were $424.2
      million, which included a $200.0 million balance under the Senior Notes and
      $224.2 million balance under the Revolving Credit Agreement.




The
      Revolving Credit Agreement contains customary covenants, including limitations
      on, or relating to, liens, indebtedness, investments, mergers, acquisitions,
      affiliate transactions, management compensation and the payment of dividends
      and
      other restricted payments. The only financial covenant is the maintenance of
      a
      minimum of $30.0 million of availability under the facility. The indenture
      related to the Senior Notes contains restrictions relating to, among other
      things, the payment of dividends, redemptions or repurchases of capital stock,
      the incurrence of additional indebtedness, the making of certain investments,
      the creation of certain liens, the sale of certain assets, entering into
      transactions with affiliates, engaging in mergers and consolidations and the
      transfer of all or substantially all assets. Refer to Note 8 of Notes to the
      Consolidated Financial Statements. We were in compliance with all such covenants
      as of February 2, 2008.





We
      believe that, based upon current operations, anticipated growth and continued
      availability under the Revolving Credit Agreement, we will, for the foreseeable
      future, be able to meet our debt service and anticipated working capital
      obligations and to make distributions to the Holding Company sufficient to
      permit the Holding Company to pay certain expenses as they come due. No
      assurances, however, can be given that our current level of operating results
      will continue or improve or that our income from operations will continue to
      be
      sufficient to permit us to meet our debt service and other obligations. The
      amounts required to satisfy the aggregate of Finlay Jewelry’s interest expense
      totaled $28.9 million and $23.0 million in 2007 and 2006,
      respectively.





Our
      long-term needs for external financing will depend on our rate of growth, the
      level of internally generated funds and the ability to continue obtaining
      substantial amounts of merchandise on advantageous terms, including consignment
      arrangements with our vendors. At February 2, 2008 and February 3, 2007, $217.9
      million and $204.0 million, respectively, of consignment merchandise from
      approximately 300 vendors was on hand. For 2007, we had an average balance
      of
      consignment merchandise of $198.3 million as compared to an average balance
      of
      $296.5 million in 2006. The decrease is primarily associated with the
      termination of our former gold consignment agreement and the conversion of
      this
      merchandise to owned inventory.





The
      following table summarizes our contractual and commercial obligations which
      may
      have an impact on future liquidity and the availability of capital resources,
      as
      of February 2, 2008 (dollars in thousands):




**Payments Due By Period****Contractual Obligations**
            
            **Total**
            
            **Less than**
              **1 year**
            
            **1-3 years**
            
            **3-5 years**
            
            **More than****5 years**Long-Term
                Debt Obligations:Senior
                Notes (due 2012) (1)
            
            $
            200,000
            
            $
            -
            
            $
            -
            
            $
            200,000
            
            $
            -Interest
                payments on Senior Notes
            
            
            75,375
            
            
            16,750
            
            
            33,500
            
            
            25,125
            
            
            -Operating
                lease obligations (2)
            
            
            160,879
            
            
            26,524
            
            
            43,431
            
            
            28,580
            
            
            62,344Revolving
                Credit Agreement (due 2012) (3)
            
            
            224,231
            
            
            224,231
            
            
            -
            
            
            -
            
            
            -Employment
                agreements
            
            
            2,184
            
            
            2,158
            
            
            26
            
            
            -
            
            
            -Contractual
                bonuses (4)
            
            
            862
            
            
            690
            
            
            172
            
            
            -
            
            
            -Letters
                of credit
            
            
            6,174
            
            
            6,174
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            669,705
            
            $
            276,527
            
            $
            77,129
            
            $
            253,705
            
            $
            62,344





(1)
            In
                June 2004, we issued $200.0 million of Senior Notes due 2012. Refer
                to
                Note 8 of Notes to the Consolidated Financial
                Statements.


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






35




(3)
            The
                above table excludes interest due under the Revolving Credit Agreement.
                The average interest rate during 2007 was 7.5%. The average amount
                outstanding during 2007 was $146.7 million. Refer to Note 8 of Notes
                to
                the Consolidated Financial
                Statements.


(4)
            Represents
                a special bonus for four senior executives equal to 50% of the executives’
                salary if employed by us on the dates specified in the respective
                employment agreements.





The
      operating leases included in the above table do not include contingent rent
      based upon sales volume, which amounted to approximately $104.9 million for
      2007, or variable costs such as maintenance, insurance and taxes. Our open
      purchase orders are cancelable without penalty and were excluded from the above
      table. There were no commercial commitments outstanding as of February 2, 2008
      other than as disclosed in the table above, nor have we provided any third-party
      financial guarantees as of and for the year ended February 2, 2008.




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





***Other
      Activities Affecting Liquidity***





We
      have
      entered into various employment agreements with certain senior executives which
      provide for future minimum compensation aggregating $2.2 million at February
      2,
      2008. These agreements, each expiring after a three year period, guarantee
      a
      minimum annual salary level and incentive compensation upon achieving specific
      financial goals. Several agreements provide for a special bonus equal to 50%
      of
      the executive’s salary if the executive remains employed with us for the
      duration of the agreement.





**Seasonality**





Our
      business is highly seasonal, with a significant portion of our sales and income
      from operations generated during the fourth quarter of each year, which includes
      the year-end holiday season. The fourth quarter of 2007 and 2006 each accounted
      for an average of approximately 43.8% of our annual sales. We have typically
      experienced net losses in the first three quarters of our fiscal year. During
      these periods, working capital requirements have been funded by borrowings
      under
      the Revolving Credit Agreement. Accordingly, the results for any of the first
      three quarters of any given fiscal year, taken individually or in the aggregate,
      are not indicative of annual results. See Note 17 of Notes to Consolidated
      Financial Statements.





**Inflation**





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





**Critical
      Accounting Policies and Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires the appropriate application
      of
      certain accounting policies, many of which require us to make estimates and
      assumptions about future events and their impact on amounts reported in our
      financial statements and related notes. We believe the application of our
      accounting policies, and the estimates inherently required therein, are
      reasonable. These accounting policies and estimates are periodically
      re-evaluated, as appropriate, and adjustments are made when facts and
      circumstances dictate a change. However, since future events and their impact
      cannot be determined with certainty, actual results may differ from our
      estimates, and such differences could be material to the consolidated financial
      statements. Historically, we have found our application of accounting policies
      to be appropriate, and actual results have not differed materially from those
      determined using necessary estimates. A summary of our significant accounting
      policies and a description of accounting policies that we believe are most
      critical may be found in Note 2 to the Consolidated Financial
      Statements.





36




***Merchandise
      Inventories***





We
      value
      our inventories at the lower of cost or market. The cost is determined by the
      LIFO method utilizing an internally generated index. We determine the LIFO
      cost
      on an interim basis by estimating annual inflation trends, annual purchases
      and
      ending inventory levels for the fiscal year. Actual annual inflation rates
      and
      inventory balances as of the end of any fiscal year may differ from interim
      estimates, and, as such, estimates are adjusted in the fourth quarter of each
      year. Factors related to inventories, such as future consumer demand and the
      economy’s impact on consumer discretionary spending, inventory aging, ability to
      return merchandise to vendors, merchandise condition and anticipated markdowns,
      are analyzed to determine estimated net realizable values. An adjustment is
      recorded to reduce the LIFO cost of inventories, if required, to their estimated
      net realizable values. Any significant unanticipated changes in the factors
      above could have a significant impact on the value of the inventories and our
      reported operating results. Adjustments
      to earnings resulting from changes in historical loss trends have been
      insignificant for 2007 and 2006.





We
      estimate inventory shrinkage for the period from the last inventory date to
      the
      end of the reporting period on a store-by-store basis. Our inventory shortage
      estimate can be affected by changes in merchandise mix and changes in actual
      shortage trends. The shrinkage rate from the most recent physical inventory,
      in
      combination with historical experience, is the basis for ** estimating
      shrinkage. As of February 2, 2008, our shrink reserve totaled $0.4 million,
      compared to $0.2 million as of February 3, 2007. Additionally, during 2007
      and
      2006, inventory shrinkage amounted to approximately 0.4% and 0.5%, respectively,
      of sales.





***Vendor
      Allowances***





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





Vendor
      allowances have been accounted for in accordance with the provisions of the
      Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force,
      (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for
      Cash Consideration Received from a Vendor” (“EITF No. 02-16”). Vendor allowances
      provided as a reimbursement of specific, incremental and identifiable costs
      incurred to promote a vendor’s products are recorded as an SG&A reduction
      when the cost is incurred. All other vendor allowances are initially deferred
      with the deferred amounts recognized as a reduction in ** cost
      of
      sales when the related product is sold. In 2007, 2006 and 2005, $8.1 million,
      $9.7 million and $11.3 million, respectively, of vendor allowances has been
      reflected as a reduction to cost of sales.





As
      of February 2, 2008 and February 3,
      2007, deferred vendor allowances totaled (i) $7.1 million and $9.4 million,
      respectively, for owned merchandise, which allowances are included as an offset
      to merchandise inventories on the Consolidated Balance Sheets, and (ii) $4.4
      million and $5.2 million, respectively, for merchandise received on consignment,
      which allowances are included as deferred income on the Consolidated Balance
      Sheets.





***Long-Lived
      Assets***




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





37





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


·
            Significant
                negative industry or economic trends;
                or


·
            Store
                closings.





When
      we
      determine that the carrying value of long-lived assets may
      not
      be ** recoverable
      based upon the existence of one or more of the above indicators of impairment,
      we recognize an impairment loss at the time the undiscounted estimated future
      net cash flows expected to be generated by an asset (or group of assets) is
      less
      than its carrying value. We measure impairment losses as the amount
      by ** which
      the
      asset’s carrying value exceeds its fair
      value. To the extent future cash flows are less than anticipated, additional
      impairment charges may result. In 2007, we recorded an impairment charge of
      $3.0
      million to write-off the goodwill related to Congress. We also review the
      estimated useful lives of the assets and reduce such lives if
      necessary.





***Revenue
      Recognition***





**** We
      recognize revenue upon the sale of merchandise, either owned or consigned,
      to
      our customers, net of anticipated returns and net of sales taxes collected.
      The
      provision for sales returns is based on historical evidence of our return rate.
      As of February 2, 2008 and February 3, 2007, our allowance for sales returns
      totaled $2.1 million and $1.9 million, respectively. Adjustments to earnings
      resulting from revisions to estimates on our sales return provision have been
      insignificant for 2007 and 2006. Layaway deposits are not recognized as sales
      until fully paid for by the customer and the customer claims the
      merchandise.





***Self-insurance
      Reserves***





We
      are
      self-insured for medical and workers’ compensation claims up to certain maximum
      liability amounts. Although the amounts accrued are determined based on an
      analysis of historical trends of losses, settlements, litigation costs and
      other
      factors, the amounts that we will ultimately disburse could differ materially
      from the accrued amounts. Self-insurance
      reserves aggregated $7.7 million and $7.9 million at February 2, 2008 and
      February 3, 2007, respectively.





***Income
      Taxes***





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





***Accounting
      for Acquisitions***





In
      November 2007 and November 2006, we completed the acquisitions of Bailey Banks
      & Biddle, and Congress, respectively. In May 2005, we completed the
      acquisition of Carlyle. These acquisitions have been accounted for under the
      purchase method of accounting in accordance with SFAS No. 141, “Business
      Combinations”. As such, we have undertaken an analysis of the fair value of
      identified tangible and intangible assets and liabilities. We utilized estimates
      to determine the fair value of inventory and certain acquisition costs.





38




***New
      Accounting Pronouncements***




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements”, (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a
      framework for measuring fair value in accordance with accounting principles
      generally accepted in the United States, and expands disclosures about fair
      value measurements. On December 14, 2007, the FASB issued proposed FASB
      Staff Position No. FAS 157-b, “Effective Date of FASB Statement
      No. 157” (the “proposed FSP”). The proposed FSP would amend SFAS No. 157,
      to delay the effective date for all nonfinancial assets and nonfinancial
      liabilities, except those that are recognized or disclosed at fair value in
      the
      financial statements on a recurring basis (that is, at least annually). The
      proposed FSP defers the effective date of SFAS No. 157 to fiscal years beginning
      after January 31, 2009. We are subject to the remaining provisions of SFAS
      No.
      157 beginning December 30, 2007. We have not yet determined the impact, if
      any, that the implementation of SFAS No. 157 will have on our results of
      operations or financial condition.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
      permits companies to voluntarily choose to measure many financial instruments
      and certain other items at fair value. SFAS No. 159 is effective beginning
      February 4, 2008. We have decided not to adopt this optional
      standard.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007),
‘‘Business Combinations’’ (‘‘SFAS No. 141(R)’’), which establishes
      principles and requirements for how an acquirer recognizes and measures in
      its
      financial statements the identifiable assets acquired, the liabilities assumed
      and any non controlling interest in an acquiree, including the recognition
      and
      measurement of goodwill acquired in a business combination. Certain forms of
      contingent consideration and certain acquired contingencies will be recorded
      at
      fair value at the acquisition date. SFAS No. 141(R) also states acquisition
      costs will generally be expensed as incurred, and restructuring costs will
      be
      expensed in periods after the acquisition date. SFAS No. 141(R) applies
      prospectively to business combinations for which the acquisition date is on
      or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008. We have not yet determined the impact, if any, that the
      implementation of SFAS No. 141(R) will have on our results of operations or
      financial condition.




**Special
      Note Regarding Forward-Looking Statements**





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





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





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





·
            The
                seasonality of the retail jewelry business;





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




39




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





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





·
            Attacks
                or threats of attacks by terrorists or war which may negatively impact
                the
                economy and/or the financial markets and reduce discretionary spending;





·
            The
                impact of fluctuations in gold and diamond prices;





·
            Competition
                in the retail jewelry business and fluctuations in our quarterly
                results;





·
            Our
                ability to collect net sales proceeds from our host stores and the
                impact
                of any host store bankruptcy;





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





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





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





·
            Our
                dependence on key officers;





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





·
            Our
                compliance with applicable contractual covenants;





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





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





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





Readers
      are cautioned not to unduly rely on these forward-looking statements, which
      reflect management's analysis, judgment, belief or expectation only as of the
      date hereof. We undertake no obligation to publicly revise these forward-looking
      statements to reflect events or circumstances that arise after the date hereof
      or to reflect the occurrence of unanticipated events. In addition to the
      disclosure contained herein, readers should carefully review any disclosure
      of
      risks and uncertainties contained in other documents we file or have filed
      from
      time to time with the Commission.





**Item
      7A.** **Quantitative
      and Qualitative Disclosures about Market Risk**





We
      are
      exposed to market risk through the interest rate on our borrowings under the
      Revolving Credit Agreement, which has a variable interest rate. Based on the
      average amounts outstanding under the Revolving Credit Agreement for 2007,
      a 100
      basis point increase in interest rates would have resulted in an increase in
      interest expense of approximately $1.5 million in 2007. In seeking to minimize
      the risks from interest rate fluctuations, we manage exposures through our
      regular operating and financing activities.




40




**Commodity
      Risk**





We
      principally address commodity risk through retail price points. Our commodity
      risk exposure to diamond, gold and other merchandise categories relates to
      market price fluctuations and we currently do not engage in any hedging
      activities.




41


**Item
      8.** **Financial
      Statements and Supplementary Data**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**Page**Management’s
                Report on Internal Control Over Financial Reporting
            
            F-2Reports
                of Independent Registered Public Accounting Firms
            
            F-3Consolidated
                Statements of Operations for the years ended February 2, 2008, February
                3,
                2007 and January 28, 2006
            
            F-6Consolidated
                Balance Sheets as of February 2, 2008 and February 3, 2007
            
            F-7Consolidated
                Statements of Changes in Stockholder’s Equity and Comprehensive Income
                (Loss) for the years ended February 2, 2008, February 3, 2007 and
                January
                28, 2006
            
            F-8Consolidated
                Statements of Cash Flows for the years ended February 2, 2008, February
                3,
                2007 and January 28, 2006
            
            F-9Notes
                to Consolidated Financial Statements for the years ended February
                2, 2008,
                February 3, 2007 and January 28, 2006
            
            F-10




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





We
      have
      had no disagreements with our independent registered public accounting firm
      regarding accounting or financial disclosure matters.





**Item
      9A.** **Controls
      and Procedures**





**Management’s
      Report on Internal Control Over Financial Reporting**





Our
      management’s report on internal control over financial reporting is set forth on
      page F-2 of this report and is incorporated herein by reference. The
      effectiveness of our internal control over financial reporting as of February
      2,
      2008 has been audited by Eisner LLP, independent registered public accounting
      firm, as stated in its report which is set forth on page F-3 of this
      report.





**Disclosure
      Controls and Procedures**





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





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




42




**Changes
      in Internal Controls over Financial Reporting**




Our
      management, with the participation of our CEO and CFO, also conducted an
      evaluation of our internal control over financial reporting, as defined in
      Exchange Act Rule 13a-15(f), to determine whether any changes occurred during
      the quarter ended February 2, 2008  that
      have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting. Based on that evaluation, there was no such
      change during the quarter ended February 2, 2008.





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





**Item
      9B.** **Other
      Information**





None.





43


**PART
      III**





**Item
      10.** **Directors,
      Executive Officers and Corporate Governance**





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**Arthur
                E. Reiner
            
            67
            
            Chairman
                of the Board, President and Chief Executive Officer of the Holding
                Company, Chairman and Chief Executive Officer of Finlay Jewelry and
                DirectorJoseph
                M. Melvin
            
            57
            
            Executive
                Vice President and Chief Operating Officer of the Holding Company
                and
                President and Chief Operating Officer of Finlay JewelryLeslie
                A. Philip
            
            61
            
            Executive
                Vice President and Chief Merchandising Officer of the Holding Company
                and
                Finlay JewelryEdward
                J. Stein
            
            63
            
            Senior
                Vice President and Director of Stores of Finlay JewelryJoyce
                Manning Magrini
            
            52
            
            Executive
                Vice President – Administration of Finlay JewelryBruce
                E. Zurlnick
            
            56
            
            Senior
                Vice President, Treasurer and Chief Financial Officer of the Holding
                Company and Finlay JewelryDavid
                B. Cornstein
            
            69
            
            DirectorRohit
                M. Desai
            
            69
            
            DirectorEllen
                R. Levine
            
            64
            
            DirectorLouis
                Lipschitz
            
            63
            
            DirectorNorman
                S. Matthews
            
            75
            
            DirectorCharles
                E. McCarthy
            
            39
            
            DirectorThomas
                M. Murnane
            
            61
            
            Director




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
      serve staggered three-year terms. Messrs. Desai, Lipschitz and Murnane are
      Class
      I directors; Messrs. Cornstein and Reiner are Class II directors; and Messrs.
      Matthews and McCarthy and Ms. Levine are Class III directors. The terms of
      the
      Class I, Class II and Class III directors expire at the Holding Company’s annual
      meeting of stockholders to be held in 2008, 2009 and 2010, respectively.
      Officers serve at the discretion of the Board of Directors.




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




**Arthur
      E. Reiner** became
      Chairman of the Holding Company effective February 1, 1999 and, from January
      1995 to such date, served as Vice Chairman of the Holding Company. Mr. Reiner
      has also served as President and Chief Executive Officer of the Holding Company
      since January 30, 1996 and as Chairman of the Board and Chief Executive Officer
      of Finlay Jewelry since January 3, 1995. Prior to joining Finlay, Mr. Reiner
      had
      spent over 30 years with the Macy’s organization. From February 1992 to October
      1994, Mr. Reiner was Chairman and Chief Executive Officer of Macy’s East, a
      subsidiary of Macy’s. 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 is also a director of New York
& Company, Inc.




44




**Joseph
      M. Melvin** was
      appointed as Executive Vice President and Chief Operating Officer of the Holding
      Company and President and Chief Operating Officer of Finlay Jewelry on May
      1,
      1997. From September 1975 to March 1997, Mr. Melvin served in various positions
      with May, including, from 1990 to March 1997, as Chairman and Chief Operating
      Officer of Filene’s (a division of May).




**Leslie
      A. Philip** has been
      Executive Vice President and Chief Merchandising Officer of the Holding Company
      and Finlay Jewelry since May 1997. From May 1995 to May 1997, Ms. Philip was
      Executive Vice President-Merchandising and Sales Promotion of Finlay Jewelry.
      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.




**Edward
      J. Stein** has been
      Senior Vice President and 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 Finlay’s
      predecessors from 1983 to December 1988. Mr. Stein held various other positions
      at Finlay from 1965 to 1983. Mr. Stein will retire on June 23,
      2008.




**Joyce
      Manning**  **Magrini** has been
      Executive Vice President - Administration of Finlay Jewelry since June 2005.
      From March 1999 to June 2005, Ms. Magrini was Senior Vice President of Human
      Resources of Finlay Jewelry and from January 1995 to February 1999, Ms. Magrini
      was Vice President of Human Resources. Ms. Magrini held various human resources
      and customer service positions at Macy’s from June 1978 through December
      1994.




**Bruce
      E. Zurlnick** has been
      Senior Vice President, Treasurer and Chief Financial Officer of the Holding
      Company and Finlay Jewelry since January 2000. From June 1990 to December 1999,
      he was Treasurer of the Holding Company and Vice President and Treasurer of
      Finlay Jewelry. From December 1978 through May 1990, Mr. Zurlnick held various
      finance and accounting positions with Finlay’s predecessors.




**David
      B. Cornstein** has been
      Chairman Emeritus of the Holding Company since his retirement from day-to-day
      involvement with the Holding Company effective January 31, 1999. He served
      as
      Chairman of the Holding Company from May 1993 until his retirement, and has
      been
      a director of the Holding Company and Finlay Jewelry since their inception
      in
      December 1988. Mr. Cornstein is a Principal of Pinnacle Advisors Limited. 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 a predecessor
      of the Holding Company. He is also a director of Circa, Inc.




**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 managed the assets of various
      institutional clients. Since its inception, it has sponsored four institutional
      investment partnerships, each with committed capital of between $325 million
      and
      $410 million. All of these partnerships have now successfully completed their
      investment programs. Mr. Desai also serves as a director of Atlas Acquisition
      Holdings Corp. and Alphatec Holdings, Inc.




45




**Ellen
      R. Levine** was
      appointed as a director of the Holding Company and Finlay Jewelry in January
      2004. Ms. Levine was Editor-in-Chief of Good Housekeeping from 1994 until her
      promotion to Editorial Director of Hearst Magazines in 2006. Ms. Levine also
      served as Editor-in-Chief of two other major women’s magazines from 1982 to
      1994. She is also a director of Gaylord Entertainment Company.




**Louis
      Lipschitz** was
      appointed as a director of the Holding Company and Finlay Jewelry in December
      2006. Mr. Lipschitz retired from his position as Executive Vice President and
      Chief Financial Officer of Toys “R” Us, Inc. in March 2004. He had served in
      such position since 1996. He currently serves on the boards of Forward
      Industries, Inc., Majesco Entertainment Company and New York & Company,
      Inc.




**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 more than the past
      five years. Mr. Matthews served as Vice Chairman and then President of Federated
      Department Stores from 1983 to 1988. He is also a director of The Progressive
      Corporation and Henry Schein, Inc.




**Charles
      E. McCarthy** was
      appointed as a director of the Holding Company and Finlay Jewelry in November
      2006. Mr. McCarthy is a controlling shareholder of Prides Capital, LLC, which
      indirectly beneficially owns approximately 17% of the Holding Company’s Common
      Stock and which he co-founded in 2004. Immediately prior to founding Prides
      Capital, Mr. McCarthy was a Senior Vice President at Putnam Investments from
      1997 to March 2004, where he was head of high yield trading and an analyst
      covering the gaming, lodging, homebuilding and leisure sector. He is also a
      director of Waste Services, Inc.




**Thomas
      M. Murnane** has
      served as a director of the Holding Company and Finlay Jewelry since December
      2002. Mr. Murnane is a retired partner of PricewaterhouseCoopers, LLP, who
      served in various capacities during his tenure with that firm since 1980,
      including Director of the firm’s Retail Strategy Consulting Practice, Director
      of Overall Strategy Consulting for the East Region of the United States, and
      Global Director of Marketing and Brand Management for PwC Consulting. Mr.
      Murnane is currently a co-principal and co-owner of ARC Business Advisors,
      a
      privately-held, boutique consulting firm. He is also a director of The Pantry,
      Inc., Captaris, Inc. and Pacific Sunwear of California, Inc.




**Codes
      of Ethics**




Finlay
      has adopted Codes of Ethics that apply to all of our directors and employees
      including, without limitation, our CEO, our CFO and all of our employees
      performing financial or accounting functions. The Codes of Ethics are posted
      on
      the Holding Company’s Web site, www.finlayenterprises.com under
      the heading “Governance”. The Holding Company intends to satisfy the disclosure
      requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver
      from, a provision of its Codes of Ethics by posting such information on its
      Web
      site at the location specified above. However, the Holding Company may elect
      to
      disclose any such amendment or waiver in a report on Form 8-K filed with the
      Commission either in addition to or in lieu of the Web site disclosure. The
      Holding Company will provide to any person without charge, upon request
      addressed to the Corporate Secretary at Finlay Fine Jewelry Corporation, 529
      Fifth Avenue, New York, N.Y. 10017, a copy of the Codes of Ethics.




46




**Audit
      Committee**




The
      Audit
      Committee of the Board of Directors consists of the following members of the
      Board of Directors of each of the Holding Company and Finlay Jewelry: Rohit
      M.
      Desai, Louis Lipschitz and Thomas M. Murnane, each of whom is an “independent
      director” under the NASDAQ listing standards and Commission regulations
      applicable to audit committee members. The Board of Directors of both the
      Holding Company and Finlay Jewelry have determined that Mr. Lipschitz, Chairman
      of the Audit Committee, qualifies as an “audit committee financial expert” as
      defined in Item 407(d)(5) of Regulation S-K.




**Item
      11.** **Executive
      Compensation**




EXECUTIVE
      COMPENSATION





For
      purposes of this Executive Compensation discussion and the related executive
      compensation tables in this Item 11, references to the “Board of Directors”
refer to the Holding Company’s Board of Directors, and references to “we,” “us”
and “our” refer to the Holding Company and Finlay Jewelry
      collectively.





***General***





Compensation
      policies for our senior officers are overseen by the Holding Company’s
      Compensation Committee (referred to as the “Committee” for purposes of this
      Executive Compensation discussion). The principal functions of the Committee
      are
      to review and approve the compensation of our senior officers, based on formal
      performance evaluations, and review and recommend to the Board of Directors
      the
      compensation for non-employee directors. The Committee also makes
      recommendations to the Board of Directors with respect to targets and awards
      under our incentive compensation plans and equity-based plans. Except with
      respect to our incentive compensation and equity-based plans for which the
      Committee makes recommendations for approval by the Board of Directors, the
      Committee makes all executive compensation determinations which it then reports
      to the full Board of Directors for ratification.





The
      members of the Committee are appointed by the Board of Directors upon the
      recommendation of the Holding Company’s Nominating & Corporate Governance
      Committee. In addition to being independent under Nasdaq listing standards,
      each
      Committee member is also a “non-employee director” within the meaning of Rule
      16b-3 under the Exchange Act and an “outside director” within the meaning of
      Section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended (the
      “Code”). The Committee operates under a written charter adopted by the Board of
      Directors. A copy of the charter is available on our Web site,
      www.finlayenterprises.com, under “Governance”. While the charter permits the
      Committee to engage the services of a compensation consultant with respect
      to
      executive and/or director compensation matters, the Committee decided not to
      retain a consultant for 2007 and does not currently plan to engage one for
      2008.





***Compensation
      Committee Process***





As
      noted
      above, the Committee retains the authority to determine senior officer
      compensation. In the course of administering our executive compensation
      programs, the Committee does, however, routinely seek the recommendations and
      assistance of our management in gathering relevant compensation information
      and
      preparing individual performance assessments. The Committee also requests that
      management provide various coordination and administrative services, such as
      scheduling meetings and distributing meeting materials. The Chief Executive
      Officer, General Counsel and Executive Vice President- Administration
      attend and participate in every Committee meeting, although no senior officer
      is
      present when the Committee is deliberating with respect to his or her own
      compensation. The Chief Executive Officer participates fully with the Committee
      in assessing the performance of the senior officers and in making
      recommendations on the level of compensation for each pay component. However,
      the Chief Executive Officer is not present for any discussions concerning his
      own compensation.




47




The
      compensation of our Chief Executive Officer is fixed by his employment
      agreement. For the compensation of the remaining senior officers, the Chief
      Executive Officer and Executive Vice President-Administration make
      recommendations to the Committee that generally, after discussion, are approved
      with minor adjustments. With respect to equity compensation awards, the
      Committee makes equity grants, generally based upon guidance from the Chief
      Executive Officer. However, in September 2003, the Committee delegated authority
      to the Chief Executive Officer to grant at his discretion, on an annual basis,
      equity awards under the Holding Company’s stock incentive plans for up to 15,000
      shares in the aggregate. The Chief Executive Officer has not exercised this
      delegated authority to date, and all equity awards have been granted solely
      by
      the Committee.




***Executive
      Compensation Philosophy***





Our
      executive compensation program is designed to incentivize our senior officers
      to
      achieve our financial and operational goals and focus on important business
      initiatives by linking a substantial portion of their compensation with our
      overall performance, and provide a competitive level of compensation and
      benefits necessary to attract and retain qualified executives.





Our
      current executive compensation program is a mix of short-term and long term
      incentives and consists of base salary, the potential for annual cash incentive
      compensation in the form of performance bonuses, the potential for long term
      incentive compensation in the form of stock options and restricted stock grants,
      the ability to participate in the Holding Company’s Executive Deferred
      Compe nsation and
      Stock
      Purchase Plan (the “Executive Deferred Compensation Plan”) ,
      and
      limited supplemental executive benefits. The Chief Executive Officer’s
      compensation mix is established by his employment agreement.




We
      believe our total compensation is competitive with the compensation paid by
      our
      competitors, but due to the limited liquidity of our common stock, base salary
      and cash incentive compensation may represent a higher percentage of total
      compensation for our executive officers than is the case with our competitors.





***Compensation
      of Chief Executive Officer***





Mr.
      Reiner’s compensation is governed by the terms of his employment agreement dated
      as of January 30, 2005 and amended March 11, 2008. The term of that agreement
      is
      January 30, 2005 to January 31, 2009, unless earlier terminated in accordance
      with its provisions. As our Chief Executive Officer is in a unique position
      to
      help us achieve our annual and long term goals, his higher compensation is
      reflective of that role as well as his years of experience and historical
      accomplishments. His employment agreement provides for the payment of a minimum
      annual base salary of $1,005,000 and an annual award of time-vesting restricted
      stock in an amount equal to $500,000, which may, at the discretion of the
      Compensation Committee, be paid in cash. In addition, Mr. Reiner is entitled
      to
      receive a cash bonus (“Cash Incentive Compensation”) and nonrestricted stock
      (“Stock Incentive Compensation” and collectively with the Cash Incentive
      Compensation, the “Incentive Compensation”) based on the attainment of financial
      objectives approved by the Committee and ratified by the Board of Directors.




48




**Summary
      Compensation Table**


**Fiscal
      Year Ended February 2, 2008**




The
      table
      below summarizes the total compensation paid to or earned by each of our named
      executive officers for the fiscal year ended February 2, 2008 and February
      3,
      2007, as follows:


**Name and PrincipalPosition**
              
              **Year**
              
              **Salary**
                **($)**
              
              **Bonus**
                **($)(1)**
              
              **Stock
                  Awards**
                **($)(4)**
              
              **Option
                  Awards**
                **($)(5)**
              
              **Non-Equity
                  Incentive Plan Compensation**
                **($)(6)(7)**
              
              **Nonqualified
                  Deferred Compensation Earnings**
                **($)**
              
              **All Other
                  Compensation ($)(8)**
              
              **Total**
                **($)****Arthur
                  E. Reiner**
                *Chairman,
                  President and Chief Executive Officer of the Holding Company and
                  Chairman
                  and Chief Executive Officer of Finlay Jewelry*
              
              
              2007
              
              $
              1,005,000
              
              $
              500,000
              (2)
              $
              451,393
              
              
              —
              
              
              —
              
              
              —
              
              $
              83,396
              
              $
              2,039,7892006
              
              
              1,005,000
              
              
              200,000
              (3)
              
              472,391
              
              $
              28,800
              
              $
              1,039,840
              
              
              —
              
              
              86,289
              
              
              2,832,320**Bruce
                  E. Zurlnick**
                *Senior
                  Vice President, Treasurer and Chief Financial Officer of the Holding
                  Company and Finlay Jewelry*
              
              
              2007
              
              
              310,000
              
              
              —
              
              
              57,540
              
              
              1,986
              
              
              —
              
              
              —
              
              
              12,052
              
              
              381,5782006
              
              
              310,000
              
              
              —
              
              
              63,250
              
              
              7,200
              
              
              192,448
              
              
              —
              
              
              12,267
              
              
              585,165**Joseph
                  M. Melvin**
                *Executive
                  Vice President, and Chief Operating Officer of the Holding Company
                  and
                  President and Chief Operating Officer of Finlay
                  Jewelry*
              
              
              2007
              
              
              452,056
              
              
              —
              
              
              95,762
              
              
              3,575
              
              
              —
              
              
              —
              
              
              12,052
              
              
              563,4452006
              
              
              452,056
              
              
              —
              
              
              108,440
              
              
              12,960
              
              
              280,636
              
              
              —
              
              
              13,347
              
              
              867,439**Leslie
                  A. Philip**
                *Executive
                  Vice President, and Chief Merchandising Officer of the Holding
                  Company and
                  Finlay Jewelry*
              
              
              2007
              
              
              471,690
              
              
              —
              
              
              79,797
              
              
              3,575
              
              
              —
              
              
              —
              
              
              13,294
              
              
              568,3562006
              
              
              471,690
              
              
              —
              
              
              110,639
              
              
              14,400
              
              
              292,825
              
              
              —
              
              
              14,589
              
              
              904,143**Edward
                  J. Stein**
                *Senior
                  Vice President and Director of Stores of Finlay
                  Jewelry*
              
              
              2007
              
              
              390,056
              
              
              —
              
              
              79,890
              
              
              1,192
              
              
              —
              
              
              —
              
              
              13,294
              
              
              484,4322006
              
              
              390,056
              
              
              —
              
              
              82,589
              
              
              7,200
              
              
              242,147
              
              
              —
              
              
              122,639
              
              
              844,631
  49


(1)
            Annual
                cash bonuses earned under the Cash Bonus Plan are reported in the
                “Non-Equity Incentive Plan Compensation”
column.




(2)
            This
                amount represents the cash payment to Mr. Reiner in February 2008
                of his
                Restricted Stock Time-Based Bonus award for 2007 pursuant to the
                terms of
                his employment agreement, as modified by the agreement to pay this
                equity
                award in cash for 2007.




(3)
            This
                amount represents the cash payment to Mr. Reiner in April 2007 of
                his
                Stock Incentive Compensation award for 2006 pursuant to the terms
                of his
                employment agreement, as modified by the agreement to pay this equity
                award in cash for 2006.




(4)
            The
                amounts in this column reflect the compensation costs of restricted
                stock
                and matching RSUs granted under the Long Term Incentive Plan (adopted
                in
                1993) (the “1993 Plan”), 1997 Long Term Incentive Plan (the “1997 Plan”)
                or 2007 Long Term Incentive Plan (the “2007 Plan”) for financial reporting
                purposes for 2007 and 2006, respectively, under SFAS 123(R), and
                thus may
                include amounts from awards granted in and prior to the respective
                fiscal
                year. These amounts reflect our accounting expense for these awards,
                and
                do not reflect compensation actually received by the named executive
                officer. See Note 11, “Stock-Based Compensation” to our Consolidated
                Financial Statements for the assumptions made in determining
                SFAS 123(R) values.




(5)
            The
                amounts in this column reflect the compensation cost of stock options
                granted under the 1993 Plan, 1997 Plan or 2007 Plan for financial
                reporting purposes for 2007 and 2006, respectively, under SFAS 123(R),
                and
                thus may include amounts from awards granted in and prior to the
                respective fiscal year. These amounts reflect our accounting expense
                for
                these awards, and do not reflect compensation actually received by
                the
                named executive officer. See Note 11, “Stock-Based Compensation” to our
                Consolidated Financial Statements for the assumptions made in determining
                SFAS 123(R) values. During 2007, the following stock options expired
                without being exercised by the named executive officers: Mr. Reiner:
                300,000 options with exercise prices ranging from $13.88 to $14.00
                per
                share; Mr. Zurlnick: 3,000 options with an exercise price of $8.25
                per
                share; Mr. Melvin: 50,000 options with an exercise price of $14.88
                per
                share; Ms. Philip: 46,667 options with exercise prices ranging from
                $13.88
                to $23.19 per share; and Mr. Stein: 12,667 options with an exercise
                price
                of $8.25.




(6)
            This
                column reflects amounts earned by the Chief Executive Officer under
                his
                employment agreement and the Cash Bonus Plan and by all other named
                executive officers under the Cash Bonus Plan during 2006, which amounts
                were paid on April 25, 2007. Amounts shown are not reduced to reflect
                the
                named executive officers’ elections, if any, to defer receipt of a portion
                of these awards into the Executive Deferred Compensation Plan.




(7)
            Each
                of the named executive officers other than Ms. Philip elected to
                defer
                amounts equal to 25% of their target cash bonus amount or cash bonus
                earned for the fiscal year ended February 3, 2007 under the Executive
                Deferred Compensation Plan, pursuant to which RSUs were credited
                to their
                accounts on April 25, 2007. Each of the named executive officers
                other than Ms. Philip elected to defer amounts equal to 25% of their
                target cash bonus amount or cash bonus earned for the fiscal year
                ended
                February 2, 2008 under the Executive Deferred Compensation Plan. 
                Since no cash bonuses were earned for 2007, no RSUs will be credited
                to
                their accounts.  As of February 2, 2008, the named executive officers
                owned RSUs in the amounts set forth
                below:




**Participant**
            
            **Matching****RSUs**
            
            **RSUs**Vested
            
            UnvestedArthur
                E. Reiner
            
            
            67,570
            
            
            —
            
            
            67,570Bruce
                E. Zurlnick
            
            
            16,042
            
            
            2,417
            
            
            13,625Joseph
                M. Melvin
            
            
            19,936
            
            
            —
            
            
            19,936Leslie
                A. Philip
            
            
            8,220
            
            
            —
            
            
            8,820Edward
                J. Stein
            
            
            20,876
            
            
            —
            
            
            20,876




(8)
            The
                amounts in this column for 2007 are reflected in the All Other
                Compensation table below, which includes perquisites, employee benefits
                and company contributions to the 401(k)
                plan.




50




**All
      Other Compensation**


**Name**
              
              **Perquisites and
                  Other Personal Benefits ($)**
              
              **Tax Gross-Ups and**
                **Reimbursements**
                **($)**
              
              **MedicalBenefits($) (3)**
              
              **CompanyContributionsto DefinedContributionPlans ($) (4)**
              
              **Company-paid
                  Insurance Premiums**
                **($) (5)**
              
              **Total($)****ARTHUR
                  E. REINER**
              
              $
              9,451
              (1)
              $
              30,282
              (2)
              
              —
              
              $
              5,625
              
              $
              38,038
              
              $
              83,396**BRUCE
                  E. ZURLNICK**
              
              
              —
              
              
              —
              
              $
              4,105
              
              
              5,625
              
              
              2,322
              
              
              12,052**JOSEPH
                  M. MELVIN**
              
              
              —
              
              
              —
              
              
              4,105
              
              
              5,625
              
              
              2,322
              
              
              12,052**LESLIE
                  A. PHILIP**
              
              
              —
              
              
              —
              
              
              4,105
              
              
              5,625
              
              
              3,564
              
              
              13,294**EDWARD
                  J. STEIN**
              
              
              —
              
              
              —
              
              
              4,105
              
              
              5,625
              
              
              3,564
              
              
              13,294







(1)
            This
                amount reflects the portion of the car allowance provided to Mr.
                Reiner
                that relates to his personal rather than business use.




(2)
            This
                amount reflects tax equalization payments made in connection with
                life
                insurance premiums paid by us on behalf of Mr.
                Reiner.




(3)
            Amounts
                in this column reflect the insurance premiums paid in respect of
                the named
                executive officer under the Executive Medical Reimbursement Plan.




(4)
            Amounts
                in this column reflect the dollar amount of all matching contributions
                and
                profit-sharing contributions under our 401(k) plan allocated to the
                account of each named executive officer.




(5)
            Amounts
                in this column reflect insurance premiums paid by us with respect
                to life
                insurance for the benefit of each named executive
                officer.




***Annual
      Cash Bonuses***





Annual
      cash bonuses for our named executive officers are awarded under our Cash Bonus
      Plan as approved by the Holding Company’s stockholders in 2004 and again in
      2007, and are formula-driven. The Cash Bonus Plan is intended to provide annual
      incentives to executive officers in a manner designed to reinforce our
      performance goals, to link a significant portion of the executives’ compensation
      to the achievement of such goals, and to continue to attract, motivate and
      retain key executives on a competitive basis, while seeking to preserve for
      our
      benefit, to the extent practicable, the associated Federal income tax deduction
      for payments of qualified ‘‘performance-based’’ compensation.





Under
      the
      Cash Bonus Plan, the Committee does not have discretion to increase bonus
      amounts over the level determined by application of the performance goal
      formula(s) and is required to certify, prior to payment, that the performance
      goals underlying the bonus payments have been satisfied. However, in limited
      circumstances, the Committee does have the ability to adjust the performance
      goals to account for extraordinary events. For fiscal 2005, 2006 and 2007,
      the bonus opportunity for each executive officer under the Cash Bonus Plan
      for each performance period was related by a specific formula to the
      executive officer’s base salary at the start of the performance period. The
      maximum bonus paid under the plan to any individual in respect of any fiscal
      year may not exceed $2.0 million. Since the Cash Bonus Plan was established
      in 2004, no bonus payout to an executive officer other than the Chief Executive
      Officer under the plan has exceeded $300,000 in any single fiscal year. The
      Chief Executive Officer’s annual cash bonus is governed by the terms of his
      employment agreement. However, the Cash Bonus Plan was adopted with the intent
      for the Chief Executive Officer’s annual cash bonuses to be awarded under the
      plan whenever possible. The Chief Executive Officer’s Cash Incentive
      Compensation has been awarded under the Cash Bonus Plan since the plan was
      adopted, and has not exceeded $1.1 million in any single fiscal
      year.




51




The
      Committee selected EBITA (defined as earnings before interest, taxes and
      amortization of goodwill on a FIFO basis) as the performance measure for the
      Chief Executive Officer’s incentive compensation when negotiating his employment
      agreement in January 2005. Consistent with the Committee’s belief that annual
      cash bonuses for all executive officers should be governed by the same measures
      of our performance, EBITA is the performance measure applied to all executive
      officer incentive compensation. The Committee selected this performance measure
      because it believes that EBITA is a measure of our performance that the senior
      management team can most directly influence.





Each
      April, following the close of the prior fiscal year, the Committee determines
      the level of performance achieved with respect to the prior year’s cash bonus
      award targets and establishes the cash bonus incentive targets for the new
      fiscal year (the “Target Level”).





Under
      the
      Cash Bonus Plan, for fiscal 2005, 2006 and 2007, if EBITA is 100% of the Target
      Level, cash bonuses will be payable to each of the named executive officers
      (other than the Chief Executive Officer whose incentive compensation formula
      is
      set forth in his employment agreement) in the amount of 60% of each executive
      officer’s then current base salary. Consistent
      with the plan’s purpose of rewarding company performance, there is no maximum
      amount that could be earned under this award formula, other than the stated
      plan
      maximum. The
      incentive targets will not result in a payout if our performance is below 80%
      of
      the Target Level. These targets are scaled so that if EBITA is 80% of the Target
      Level, cash bonuses will be payable in the amount of 20% of each executive
      officer’s then current base salary, and if EBITA exceeds 80%, then the bonus
      payout will be 20% of the executive officer’s base salary plus 2% for each
      percentage point by which EBITA exceeds 80% of the Target Level. Receipt of
      any
      cash incentive compensation under this plan is contingent on the executive
      officer’s continued employment through the payment date.





As
      provided in his employment agreement, the target amount of Mr. Reiner’s annual
      Cash Incentive Compensation is based on his base salary at the beginning of
      the
      year, with the actual amount determined by the extent to which the target EBITA
      level is met for such year. The target EBITA level for each year must be
      determined by the Committee during the first 90 days of the fiscal year and
      may
      be subsequently adjusted by the Committee to reflect material changes (such
      as
      acquisitions or divestitures) that were not anticipated at the time the target
      level was established. According to Mr. Reiner’s employment agreement, if EBITA
      in any fiscal year is 80% of the Target Level, his Cash Incentive Compensation
      is 33.333% of his base salary. If EBITA exceeds 80% of the Target Level, the
      percentage payable will increase 3.333% for each percentage point by which
      EBITA
      exceeds 80% of the Target Level. Under this formula, if EBITA for 2007 was
      100%
      of the Target Level, Mr. Reiner would earn a cash bonus in the amount of 100%
      of
      his 2007 base salary. If EBITA levels exceed 100% of the Target Level,
      Mr. Reiner’s Cash Incentive Compensation can exceed his base salary. Mr.
      Reiner is not entitled to any Cash Incentive Compensation payment for any fiscal
      year in which EBITA is less than 80% of the Target Level for such fiscal year.





The
      Committee has not historically granted discretionary cash bonuses to executive
      officers outside of the Cash Bonus Plan.





***Equity
      Incentives***





Historically,
      the primary form of equity compensation that we awarded consisted of stock
      options. However, beginning in 2003, in recognition of the trend among companies
      toward other forms of equity compensation and the change in accounting treatment
      of stock options, the Committee began moving toward granting limited amounts
      of
      time-vested restricted stock in addition to minimal numbers of stock options.
      Contractually obligated grants to the Chief Executive Officer have been made
      pursuant to his employment agreement.




52




Stock
      option grants in prior years were made upon recommendation of the Committee
      and
      coordinated with regularly-scheduled Board of Directors’ meetings. All option
      grants were made at the fair market value on the date of grant, defined as
      the
      volume-weighted average of the common stock’s trading price on such grant date.
      All options granted to senior management vest over a three or five-year period
      beginning with the first anniversary of the date of the grant and expire after
      ten years.





Under
      his
      employment agreement, Mr. Reiner receives annually Stock Incentive Compensation
      having an aggregate fair market value of up to $400,000, with the actual amount
      determined by the extent to which the target EBITA level is met for such year
      (“Performance-Based Stock Award”). For purposes of this Performance-Based Stock
      Award, fair market value is the mean between the high and low sales price of
      the
      Holding Company’s Common Stock on Nasdaq on the date on which our audited
      financial statements have been completed by our independent public accountants,
      or, if there is no such sale on that date, on the last preceding date on which
      such a sale was made. The payout formula, minimum performance level and each
      year’s target EBITA level for the Performance-Based Stock Award are the same as
      for Mr. Reiner’s Cash Incentive Compensation, except that his Performance-Based
      Stock Award may not exceed the $400,000 target amount in any fiscal year. Any
      stock awarded to Mr. Reiner in connection with his Performance-Based Stock
      Award
      is vested immediately.





As
      noted
      above, Mr. Reiner is also entitled to receive, for each fiscal year during
      the
      employment term, shares of time-vesting restricted stock having an aggregate
      market value nearest to $500,000 (“Restricted Stock Time-Based Bonus”). For
      purposes of this Restricted Stock Time-Based Bonus, fair market value is
      determined in the same manner as for the Performance-Based Stock Award except
      that the relevant measurement date is the last day of the fiscal year on which
      the Holding Company’s Common Stock trades. This award of restricted stock is
      made immediately following the close of each fiscal year. The restricted stock
      awarded to Mr. Reiner in connection with his Restricted Stock Time-Based
      Bonus for 2005 and 2006 vested in full on February 2, 2008. Because there were
      not enough shares available under the 2007 Plan to grant his 2007 award in
      stock, Mr. Reiner and the Holding Company agreed that he would receive his
      2007 Restricted Stock Time-Based Bonus in cash rather than in stock. Any
      restricted stock awarded to Mr. Reiner in connection with his Restricted Stock
      Time-Based Bonus for fiscal year 2008, vests in full on January 31, 2009 if
      he
      has been continuously employed by us on that date.





***401(k)
      Plan***





We
      maintain a 401(k) plan to provide retirement benefits for all personnel.
      Historically, this plan provided for company matching contributions of $0.25
      for
      each $1.00 of employee contribution, up to 5% of the employee’s salary (as
      limited by the Code), which began to vest upon the completion of two years
      of
      employment and accrued at the rate of 20% per year. Additionally, we had the
      option to contribute 2% of the employee’s earnings annually, as limited by the
      Code, which began to vest upon the completion of three years of employment
      and
      accrued at the rate of 20% per year. Effective with the 2006 plan year, we
      changed the matching contribution under the 401(k) plan to $0.50 for each $1.00
      of employee contribution, up to 5% of the employee’s salary (as limited by the
      Code), and eliminated making future discretionary profit-sharing contributions
      under the plan.




53




In
      addition, Carlyle maintains a separate employee tax savings plan under Section
      401(k) of the Code, which provides for matching contributions of 25% of employee
      contributions, up to 5% of each participating employee’s earnings. Carlyle has
      discretion to make additional contributions to the plan; however, no additional
      contributions were made during 2007.





***Benefits
      and Perquisites***





We
      generally do not provide personal benefits to our executives that are not also
      available generally to all salaried employees. With the exception of our
      Executive Medical Reimbursement Plan, our executives receive health and welfare
      benefits under the same programs and on the same basis as our employees in
      general. Our senior officers are eligible to participate in our 401(k) plan
      on
      the same basis as our employees generally (including our contributions to the
      401(k) plan), with the exception of Carlyle which maintains its own 401(k)
      plan.
      We do not maintain a defined benefit pension plan or provide post-retirement
      health coverage.





Our
      Executive Medical Reimbursement Plan reimburses executives in annual amounts
      up
      to $10,000 per year for necessary medical expenses incurred (including the
      cost
      of deductibles) which are not covered by our underlying medical benefits plans.
      Mr. Reiner does not participate in this plan.





We
      provide enhanced relocation benefits to our senior officers to assist them
      with
      the cost of company-mandated relocation and also provide to Mr. Reiner and
      Mr.
      Melvin an annual car allowance; benefits the Committee believes are consistent
      and competitive with benefits provided to executives in similar positions at
      the
      companies with whom we compete for executive talent and the industry in general.





***Long
      Term Incentive Plans***





The
      principal vehicles for awarding stock-based compensation have been the Holding
      Company’s 1993 and 1997 Plans, pursuant to which we have awarded stock options,
      restricted and nonrestricted stock awards, and restricted stock units under
      the
      Executive Deferred Compensation Plan and the Director Deferred Compensation
      Plan
      discussed under “Director Compensation” below. In June 2007, the Holding
      Company’s stockholders approved the merger of the 1993 and 1997 Plans into a new
      long term incentive plan, called the 2007 Long Term Incentive Plan.





The
      2007
      Plan permits the Holding Company to grant non-incentive stock options,
      restricted and nonrestricted stock, restricted stock units and performance
      awards, including awards that qualify as “performance-based compensation” under
      Section 162(m) of the Code. In connection with approval of the 2007 Plan,
      beginning June 19, 2007, no new awards may be made under the 1993 Plan or 1997
      Plan, and all shares that were available
      to be granted as awards under the 1993 Plan and the 1997 Plan became available
      to be granted as awards under the 2007 Plan. Shares from forfeited awards made
      under the 1993 Plan or 1997 Plan or shares from awards made under the 1993
      Plan
      or 1997 Plan that are settled in cash or which otherwise terminate after June
      19, 2007 are available to be granted as awards under the 2007 Plan.




An
      aggregate of 469,974 shares of the Holding Company’s Common Stock has been
      reserved for issuance pursuant to the 2007 Plan. As of February 2, 2008, no
      shares have been issued in connection with exercises of options granted under
      the 2007 Plan, 275,000 shares are reserved for issuance upon the exercise of
      currently outstanding options at an exercise price of $2.71 per share and 39,346
      shares have been issued or are subject to purchases and awards of restricted
      stock and restricted stock units. As of February 2, 2008, 155,628 shares of
      the
      Holding Company’s Common Stock are available for future grants under the 2007
      Plan.




54




The
      1993
      Plan permitted the Holding Company to grant to key employees, directors,
      consultants and certain other persons the following: (i) incentive or
      non-incentive 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; (v) performance units 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 the Holding Company’s
      Common Stock; or (vi) any combination of the foregoing. As of February 2, 2008,
      511,111 shares of the Holding Company’s Common Stock have been issued in
      connection with exercises of options granted under the 1993 Plan, 13,000 shares
      are reserved for issuance upon exercise of outstanding options and 145,699
      shares have been issued or are subject to purchase and awards of restricted
      stock and restricted stock units.





The
      1997
      Plan permitted us to grant the same types of **** awards
      as
      permitted under the 1993 Plan. As of February 2, 2008, 294,494 shares of the
      Holding Company’s Common Stock have been issued in connection with exercises of
      options granted under the 1997 Plan, 575,200 shares are reserved for issuance
      upon exercise of outstanding options and 848,118 shares have been issued or
      are
      subject to purchases and awards of restricted stock and restricted stock units.




***Executive
      Deferred Compensation and Stock Purchase Plan***




In
      addition to giving us the ability to make stock-based awards to current or
      future designated executives, the Executive Deferred Compensation Plan provides
      an opportunity to defer compensation, which is a compensation element we believe
      is available to executives at other companies with whom we compete for executive
      talent. The plan also provides a vehicle for designated executives to acquire
      the Holding Company’s Common Stock and raise the level of stock ownership in the
      Holding Company by these executives, thereby strengthening the mutuality of
      interests between them and the Holding Company’s stockholders.




Under
      the
      Executive Deferred Compensation Plan, designated executives are eligible to
      receive RSUs through the elective deferral of 25% of their annual actual or
      target bonus that would otherwise be paid in cash under our Cash Bonus Plan.
      An
      RSU is a unit of measurement equivalent to one share of the Holding Company’s
      Common Stock, but with none of the attendant rights of a stockholder of a share
      of Common Stock. Two types of RSUs are awarded under the Executive Deferred
      Compensation Plan: (i) participant RSUs received in lieu of cash bonus amounts,
      and (ii) matching RSUs, where the Holding Company credits the executive’s plan
      account with one matching RSU for each participant RSU that the participant
      elects to purchase. While participant RSUs are fully vested at all times,
      matching RSUs are subject to vesting and forfeiture as more fully described
      below.




Participant
      RSUs are credited under the Executive Deferred Compensation Plan to a
      participant’s account on April 25 th of each
      plan year in an amount equal to 25% of the executive’s target or actual bonus
      received divided by the fair market value of a share of common stock on the
      award date (with fair market value defined in the plan as the volume-weighted
      average trading price of a share of common stock on Nasdaq for such date or,
      if
      there is no sale on that date, then on the last preceding date on which a sale
      was reported).




55




At
      the
      time of distribution under the Executive Deferred Compensation Plan, RSUs are
      converted into actual shares of Common Stock of the Holding Company. Subject
      to
      the requirements of Section 409A of the Code, for
      each
      participant RSU, a participant will receive one share of Common Stock (and
      cash
      in lieu of fractional shares) as soon as practicable following the earlier
      of
      the participant’s termination of employment or the expiration of the deferral
      period elected by the participant (i.e., three, five or seven years after an
      award date, or as extended or terminated earlier in accordance with the plan).
      For each vested matching RSU, a participant will receive one share of Common
      Stock (and cash in lieu of fractional shares) as soon as practicable following
      the earlier of the participant’s termination of employment or the expiration of
      the deferral period elected by the participant, provided that if a participant’s
      employment or directorship is terminated for any reason other than due to death,
      “disability”, or a “change of control” or a termination of the Executive
      Deferred Compensation Plan, each vested matching RSU in a participant’s account
      will be distributed 12 months after such termination.




Participant
      RSUs are fully vested at all times. Matching RSUs under the Executive Deferred
      Compensation Plan vest three years after the applicable award date, provided
      the
      executive is continuously employed by us or a subsidiary from the award date
      through the applicable vesting date. In the event an executive’s employment is
      terminated for any reason (other than by us without “cause” or as a result of
      death, “disability,” “retirement” or a “change of control” (as each such term is
      defined in the plan)) prior to the applicable vesting date, all unvested
      matching RSUs are forfeited. Notwithstanding the foregoing, upon a participant’s
      death, “disability” or upon a “change of control,” in each case while employed
      by us or a subsidiary, all unvested matching RSUs will become 100% vested.
      Upon
      a termination of a participant’s employment by us or a subsidiary without
“cause” or upon “retirement” (as each such term is defined in the plan), a
      participant’s unvested matching RSUs will be subject to pro-rata vesting, based
      on the number of whole years employed in a particular vesting period, and any
      remaining unvested matching RSUs will be
      forfeited.





If
      a participant engages in “detrimental activity” (as defined in the plan) while
      employed or during a period commencing on the participant’s termination date and
      ending one year following the date that a participant terminates employment:
      (i)
      the participant will forfeit both vested and unvested matching RSUs to the
      extent not yet distributed to a participant, and (ii) the Holding
      Company may
      recover from such participant, the value of any shares of Common Stock that
      were
      distributed under the plan attributable to such matching RSUs, valued at the
      greater of the “fair market value” on the date the participant received the
      distribution under the plan or the date that the participant engaged in
“detrimental activity.”




56




**Outstanding
      Equity Awards at 2007 Fiscal Year End**




The
      table
      below sets forth information regarding outstanding equity awards held by our
      named executive officers at the end of 2007.


**Option
                Awards (1)**
            
            **Stock
                Awards****Name**
            
            **Number**
              **of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options**
              **(#)**
              **Exercisable**
            
            **Number****of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options**
              **(#)**
              **Unexercisable**
            
            **Equity Incentive Plan**
              **Awards: Number of**
              **Securities Underlying**
              **Unexercised**
              **Unearned Options**
              **(#)**
            
            **Option**
              **Exercise**
              **Price**
              **($)**
            
            **Option**
              **Expiration**
              **Date**
            
            **Number of**
              **Shares or Units**
              **of Stock That**
              **Have Not**
              **Vested**
              **(#)**
            
            **Market Value**
              **of Shares or**
              **Units of Stock**
              **That Have Not**
              **Vested**
              **($) (6)**
            
            **Equity Incentive**
              **Plan Awards:**
              **Number of**
              **Unearned**
              **Shares, Units or**
              **Other Rights**
              **That Have Not**
              **Vested**
              **(#)**
            
            **Equity Incentive**
              **Plan Awards:**
              **Market or Payout**
              **Value of Unearned**
              **Shares, Units or**
              **Other Rights That**
              **Have Not Vested**
              **($)****ARTHUR E. REINER**
            
            
            100,000
            
            
            —
            
            
            —
            
            
            12.75
            
            
            2/16/2010
            
            
            9,427
            (4)
            
            17,440
            
            
            —
            
            
            —60,000
            
            
            —
            
            
            —
            
            
            7.05
            
            
            9/28/2011
            
            
            13,439
            (3)
            
            24,862
            
            
            —
            
            
            ——
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            44,704
            (2)
            
            82,702
            
            
            —
            
            
            —**BRUCE E. ZURLNICK**
            
            
            5,000
            
            
            —
            
            
            —
            
            
            8.25
            
            
            6/22/2008
            
            
            2,865
            (4)
            
            5,300
            
            
            —
            
            
            —10,000
            
            
            —
            
            
            —
            
            
            13.5625
            
            
            12/20/2009
            
            
            2,487
            (3)
            
            4,601
            
            
            —
            
            
            —5,000
            
            
            —
            
            
            —
            
            
            12.75
            
            
            2/16/2010
            
            
            3,600
            (5)
            
            6,660
            
            
            —
            
            
            —15,000
            
            
            —
            
            
            —
            
            
            7.05
            
            
            9/28/2011
            
            
            8,273
            (2)
            
            15,305
            
            
            —
            
            
            ——
            
            
            25,000
            
            
            —
            
            
            2.7122
            
            
            12/4/2017
            
            
            —
            
            
            —
            
            
            —
            
            
            —**JOSEPH M.
                MELVIN**
            
            
            10,000
            
            
            —
            
            
            —
            
            
            24.3125
            
            
            6/22/2008
            
            
            4,244
            (4)
            
            7,851
            
            
            —
            
            
            —20,000
            
            
            —
            
            
            —
            
            
            8.25
            
            
            12/1/2008
            
            
            3,627
            (3)
            
            6,710
            
            
            —
            
            
            —20,000
            
            
            —
            
            
            —
            
            
            12.75
            
            
            2/16/2010
            
            
            7,200
            (5)
            
            13,320
            
            
            —
            
            
            —27,000
            
            
            —
            
            
            —
            
            
            7.05
            
            
            9/28/2011
            
            
            12,065
            (2)
            
            22,320
            
            
            —
            
            
            ——
            
            
            45,000
            
            
            —
            
            
            2.7122
            
            
            12/4/2017
            
            
            —
            
            
            —
            
            
            —
            
            
            —**LESLIE A.****PHILIP**
            
            
            30,000
            
            
            —
            
            
            —
            
            
            8.25
            
            
            12/1/2008
            
            
            4,435
            (4)
            
            8,205
            
            
            —
            
            
            —30,000
            
            
            —
            
            
            —
            
            
            12.75
            
            
            2/16/2010
            
            
            3,785
            (3)
            
            7,002
            
            
            —
            
            
            —30,000
            
            
            —
            
            
            —
            
            
            7.05
            
            
            9/28/2011
            
            
            7,200
            (5)
            
            13,320
            
            
            —
            
            
            ——
            
            
            45,000
            
            
            —
            
            
            2.7122
            
            
            12/4/2017
            
            
            —
            
            
            —
            
            
            —
            
            
            —**EDWARD J. STEIN**
            
            
            10,000
            
            
            —
            
            
            —
            
            
            8.25
            
            
            6/22/2008
            
            
            4,490
            (4)
            
            8,307
            
            
            —
            
            
            —20,000
            
            
            —
            
            
            —
            
            
            13.4219
            
            
            9/9/2009
            
            
            5,976
            (3)
            
            11,056
            
            
            —
            
            
            —10,000
            
            
            —
            
            
            —
            
            
            12.75
            
            
            2/16/2010
            
            
            3,600
            (5)
            
            6,660
            
            
            —
            
            
            —15,000
            
            
            —
            
            
            —
            
            
            7.05
            
            
            9/28/2011
            
            
            10,410
            (2)
            
            19,259
            
            
            —
            
            
            ——
            
            
            15,000
            
            
            —
            
            
            2.7122
            
            
            12/4/2017
            
            
            —
            
            
            —
            
            
            —
            
            
            —




57







(1)
            Options
                with expiration dates before 2017 vest completely and become fully
                exercisable on the fifth anniversary of their grant date and expire
                on the
                day before the tenth anniversary of their grant date; options with
                expiration dates in or after 2017 vest completely and become fully
                exercisable on the third anniversary of their grant date and expire
                on the
                day before the tenth anniversary of their grant
                date.




(2)
            Reflects
                the number of unvested matching RSUs as of February 2, 2008 awarded
                in
                April 2007 held for the account of the named executive officer pursuant
                to
                the Executive Deferred Compensation Plan. These matching RSUs vest
                on the
                third anniversary of their award
                date.




(3)
            Reflects
                the number of unvested matching RSUs as of February 2, 2008 awarded
                in
                April 2006 held for the account of the named executive officer pursuant
                to
                the Executive Deferred Compensation Plan. These matching RSUs vest
                on the
                third anniversary of their award
                date.




(4)
            Reflects
                the number of unvested matching RSUs as of February 2, 2008 awarded
                in
                April 2005 held for the account of the named executive officer pursuant
                to
                the Executive Deferred Compensation Plan. These matching RSUs vest
                on the
                third anniversary of their award
                date.




(5)
            Reflects
                unvested restricted stock awarded to each named executive officer
                in April
                2005, which shares are to be received upon completion of vesting
                in April
                2008 (or an earlier vesting date under certain circumstances), if
                the
                respective officers are then employed by
                us.




(6)
            Reflects
                the number of unvested RSUs and restricted stock held as of February
                2,
                2008 multiplied by $1.85, the closing price of the Holding Company’s
                Common Stock on that date.




***Potential
      Payments upon Termination or Change of Control***




Pursuant
      to the terms of their employment agreements, the Change of Control Executive
      Severance Plan, the Executive Deferred Compensation Plan, the 1993, 1997 and
      2007 Long Term Incentive Plans and individual award agreements under those
      plans, our named executive officers are entitled to certain payments or benefits
      upon a change of control of the Holding Company or in connection with certain
      termination events. In connection with his planned retirement on June 23, 2008,
      Finlay and Mr. Stein entered into a Severance Agreement and General Release
      which replaces his prior employment agreement and governs his termination
      compensation.




**Chief
      Executive Officer**





If,
      at
      the expiration of the employment term (or earlier under specified
      circumstances), Mr. Reiner and Finlay cannot agree upon terms to continue Mr.
      Reiner's employment, or if his employment is terminated without “cause” or by
      Mr. Reiner for “good reason” (as defined in his employment agreement), he would
      be entitled to receive a severance payment of one year's base salary plus an
      amount equal to the greater of: (i) his Cash Incentive Compensation paid for
      the
      most recently completed fiscal year, or (ii) one year's base salary (“Severance
      Amount”). Mr. Reiner would also be entitled to continued payment of premiums on
      his term life insurance for the remainder of the term of his
      agreement.





If
      Mr.
      Reiner's employment is terminated prior to a “change of control” (as defined in
      his employment agreement) either by Finlay without “cause” or by Mr. Reiner for
“good reason,” Mr. Reiner will continue to receive his base salary for the
      balance of the term and Incentive Compensation (calculated as though 110% of
      the
      Target Level were achieved) as if such termination had not occurred. Mr. Reiner
      would also be entitled to receive upon termination, all of the Restricted Stock
      Time-Based Bonuses issuable under the terms of his employment agreement, the
      Severance Amount and insurance and other benefits. If such termination occurs
      within 90 days prior to a “change of control” then Mr. Reiner will also receive
      the amounts described below that are payable upon a change of control but only
      to the extent such amounts exceed the amounts described in this
      paragraph.





In
      the
      event Mr. Reiner's employment is terminated by Finlay without “cause” or by Mr.
      Reiner for “good reason” in connection with or following a “change of control,”
or by Mr. Reiner for any reason within 90 days following a change of control,
      Mr. Reiner would be entitled to a lump sum payment of 299% of his “base amount”
(as defined in Section 280G(b)(3) of the Code), subject to certain restrictions,
      and all of the Restricted Stock Time-Based Bonuses and Performance-Based Stock
      Awards issuable under the terms of his employment agreement.




58




Mr.
      Reiner’s employment agreement defines “good reason” to include: (1) any material
      breach by us of certain provisions in the agreement; (2) a reduction in his
      base
      salary, Incentive Compensation opportunity or Restricted Stock Time-Based Bonus;
      (3) our failure to use reasonable efforts to cause him to remain a director;
      (4)
      the relocation of our principal executive offices to more than 30 miles outside
      of New York City; in each case only if he notifies the Board of Directors in
      writing of the occurrence of such event and the Board of Directors fails to
      remedy the event within ten business days of receipt of the notice; or (5)
      the
      failure of the acquirer or successor corporation following a change of control
      to expressly assume our obligations under the employment agreement and extend
      the employment term so that the unexpired portion is not less than three years
      (or otherwise offer him a contract providing for a term of at least three years
      on terms no less favorable to him than his existing employment
      agreement).





Mr.
      Reiner’s employment agreement defines “cause” to include: (1) the executive’s
      failure substantially to perform his job duties or to follow reasonable
      directions from our Board of Directors within ten business days after receiving
      written notice of such failure; (2) the executive’s willful misconduct in
      connection with his employment or intentional breach of our policies; (3) the
      executive’s conviction of, or plea of nolo contendere to, a felony or any crime
      involving moral turpitude; or (4) the executive’s breach of any provision of the
      agreement which the executive officer fails to cure within ten business days
      after receiving notice of the breach.





Mr.
      Reiner’s employment agreement defines “change of control” to include: (1) any
      transaction or series of transactions that results in any person or group (other
      than Mr. Reiner and his related entities) becoming the beneficial owner of
      more
      than 50% of the Holding Company’s voting stock and/or warrants or options to
      acquire such voting stock, calculated on a fully diluted basis; (2) a change
      in
      majority of the Holding Company’s Board of Directors not approved by two-thirds
      of the directors serving when the agreement was entered into, unless such
      majority of directors has been elected or nominated by Mr. Reiner and his
      related entities; or (3) a sale of assets constituting all or substantially
      all
      of our assets.





**Other
      Executive Officers**





In
      June
      2005, Finlay Jewelry entered into an employment agreement with Joseph M. Melvin,
      Executive Vice President and Chief Operating Officer of the Holding Company
      and
      President and Chief Operating Officer of Finlay Jewelry, and Finlay
      Merchandising & Buying, Inc., a wholly-owned subsidiary of Finlay Jewelry
      (“FM&B”), entered into an employment agreement with Leslie A. Philip,
      Executive Vice President and Chief Merchandising Officer of the Holding Company
      and Finlay Jewelry. We entered into these agreements for the purposes of
      retention and stability during our transition period. In addition, these
      agreements contain non-compete and non-solicitation provisions.





Each
      of
      these employment agreements has a term of three years unless earlier terminated
      in accordance with the provisions of the employment agreements. Mr. Melvin
      will
      receive a minimum annual base salary of $452,056, and Ms. Philip will receive
      a
      minimum annual base salary of $471,690. In addition to annual base salary,
      each
      of the executives is entitled to receive an annual cash bonus, as described
      under “Annual Cash Bonuses” above. As an additional retention tool, each
      employment agreement also provides that the executive shall receive, in the
      event he or she remains employed by Finlay Jewelry or FM&B, as applicable,
      on June 30, 2008, a special bonus equal to 50% of the executive’s then-current
      base salary.





If
      an
      executive is terminated without “good cause” (as defined in the employment
      agreements), the executive is entitled to receive, subject to satisfaction
      of
      specified conditions, a lump sum severance payment of the greater of (i) the
      executive’s base salary at the then-current rate through June 30, 2008, or (ii)
      one year’s base salary at the then-current rate plus one year’s bonus
      (calculated by averaging the annual bonus to the executive over the prior three
      fiscal years).




59




In
      March
      2006, we entered into an employment agreement with Bruce E. Zurlnick, Senior
      Vice President, Treasurer and Chief Financial Officer of the Holding Company
      and
      Finlay Jewelry. The
      agreement with Mr. Zurlnick provides for his continued employment as Senior
      Vice
      President, Treasurer and Chief Financial Officer, for a term ending February
      28,
      2009 unless earlier terminated in accordance with the provisions of the
      employment agreement. Mr. Zurlnick will receive a minimum annual base salary
      of
      $310,000. In addition, Mr. Zurlnick will be entitled to receive an annual cash
      bonus, as described under “Annual Cash Bonuses” above. The agreement with Mr.
      Zurlnick also provides that, in the event he remains employed by us on February
      28, 2009, he will receive a special bonus of 50% of his then-current base
      salary. If Mr. Zurlnick is terminated without “good cause” (as defined in his
      agreement), he is entitled to receive, subject to satisfaction of specified
      conditions, a lump sum severance payment in an amount equal to the greater
      of
      (i) his base salary at the then-current rate through February 28, 2009, or
      (ii)
      one year’s base salary at the then-current rate plus one year’s bonus
      (calculated by averaging his annual bonus over the prior three fiscal years).





Under
      these employment agreements, “good cause” has the same definition as “cause”
under Mr. Reiner’s employment agreement.




**Change
      of Control Executive Severance Plan**




The
      employment agreements for Mr. Melvin, Ms. Philip and Mr. Zurlnick do not contain
      change of control provisions. However, on March 11, 2008, the Holding Company
      adopted a Change of Control Executive Severance Plan (the “Executive Severance
      Plan”), which applies to, among other executives, Mr. Melvin, Ms. Philip and Mr.
      Zurlnick.




The
      Executive Severance Plan provides that in the event of a termination without
      “cause” or for “good reason” within 18 months following a “change of control,”
the executive will receive: (i) a lump sum cash payment in an amount equal
      to
      two times the sum of the his or her base salary plus the average of his or
      her
      annual bonus paid for the three fiscal years preceding the year in which a
      change of control occurs; (ii) if the special bonus has not already been paid,
      a
      lump sum cash payment equal to the amount of the special bonus, if any, that
      would be payable to the executive pursuant to the executive’s employment
      agreement upon his or her continued employment through a specified date; (iii)
      continued group health plan coverage pursuant to COBRA paid in part by Finlay
      or
      its affiliates, for eighteen months following termination, or until the earlier
      of the executive’s ceasing to be eligible for COBRA or becoming eligible under a
      subsequent employer’s health plan; and (iv) accelerated vesting of all unvested
      equity awards held by the executive.




The
      Executive Severance Plan has the same definition of “change of control” and
      substantially the same definition of “cause”, as Mr. Reiner’s employment
      agreement.




The Executive
      Severance Plan
      defines “good reason” to
      include: (1) any material breach by us of certain provisions of the executive’s
      employment agreement; (2) a reduction in the executive’s base salary or annual
      bonus opportunity; (3) the relocation of the executive’s office to a location
      more than 30 miles outside of Manhattan, New York City; or (4) the failure
      of
      the acquirer or successor corporation following a change of control to expressly
      assume our obligations under the executive’s employment agreement and extend the
      employment term so that the unexpired portion is not less than three years
      (or
      otherwise offer the executive a contract providing for a term of at least three
      years on terms no less favorable to the executive than his or her existing
      employment agreement), provided the executive does not consent in writing to
      the
      change and we have not fully corrected in all material respects within ten
      days
      following receipt of notice of the event.




Executives
      who accept severance payments under the Executive Severance Plan will be
      required to sign a release and will be subject to certain restrictive covenants.
      The Executive Severance Plan provides that all severance benefits will be
      provided in a manner intended to comply with, or be exempt from, Section 409A
      of
      the Code, including delaying certain benefits to specified employees for a
      period of six months following termination. Severance benefits provided under
      the Plan will also be subject to reduction to avoid any excise tax on “parachute
      payments” under Section 280G of the Code.




60




**Senior
      Vice President and Director of Stores**




In
      connection with his planned retirement on June 23, 2008, we entered into a
      Severance Agreement and General Release with Edward J. Stein, Senior Vice
      President and Director of Stores of Finlay Jewelry, which agreement replaces
      his
      prior employment agreement and governs his termination compensation.





Under
      the
      agreement, upon Mr. Stein’s retirement, Mr. Stein will receive the accrued
      benefits otherwise due him under our benefit plans, COBRA rights under our
      health insurance plans, the right to exercise vested options within 21 days
      of
      the retirement date and to receive his vested RSUs under the terms of the
      Executive Deferred Compensation Plan.





Under
      the
      terms of the agreement, Mr. Stein has agreed, among other things, to
      release us from all claims, to not disclose confidential or proprietary
      information obtained during his employment, and to not solicit our customers
      and
      certain of its employees for a period of one year after the retirement date.
      Mr.
      Stein will receive, subject to his compliance with these obligations, a
      severance payment in the amount of $595,420, payable as follows: (1) on December
      24, 2008, a lump sum of $297,710 (plus accrued interest from June 24, 2008
      through December 23, 2008), and (2) commencing January 25, 2009, six monthly
      payments of $49,618 each. Mr. Stein will also receive a payment of $50,000,
      payable December 24, 2008, in lieu of any relocation allowance to which
      Mr. Stein may otherwise be entitled under our relocation policy for
      executives. In addition, Mr. Stein is entitled to pay health insurance
      premiums at our employee rate for the first eleven months following the
      retirement date, if he elects to continue health insurance coverage under
      Finlay’s medical plans.




**Equity
      Awards**




In
      addition to the payments or benefits described above, and to the extent not
      already vested pursuant to the agreements described above, in the case of
      termination of employment due to death or disability or in the case of a change
      of control, all unvested equity awards granted under the 1993, 1997 and 2007
      Long Term Incentive Plans (including RSUs awarded under the Executive Deferred
      Compensation Plan) will become fully vested. In the case of retirement or
      termination of employment by us without cause or good cause, a prorated portion
      of the unvested matching RSUs awarded under the Executive Deferred Compensation
      Plan will become fully vested.




The
      1993
      and 1997 Plans, award agreements under the 2007 Plan and the Executive Deferred
      Compensation Plan define “change of control” to include: (1) approval by the
      Holding Company’s stockholders of (a) any consolidation or merger of the Holding
      Company in which the Holding Company is not the surviving corporation or
      pursuant to which shares of the Holding Company’s Common Stock would be
      converted into cash, securities or other property, other than a merger of the
      Holding Company in which the holders of the Holding Company’s Common Stock
      immediately prior to the merger have the same proportionate ownership of Common
      Stock of the surviving corporation immediately after the merger, (b) any sale,
      lease, exchange or other transfer of all or substantially all of our assets,
      or
      (c) the adoption of any plan of liquidation or dissolution of the Holding
      Company; (2) the beneficial ownership by any person or group (or the acquisition
      by any person or group, without the prior consent of the Holding Company’s Board
      of Directors, in the case of the 1993 and 1997 Plans) of 15% or more (30% or
      more in the case of the Executive Deferred Compensation Plan and award
      agreements under the 2007 Plan) of the Holding Company’s issued and outstanding
      common stock; or (3) a change in majority of the Holding Company’s Board of
      Directors not approved by a majority of the directors serving when the plan
      was
      adopted.





61




**DIRECTOR
      COMPENSATION**


**Fiscal
      Year Ended February 2, 2008**





The
      table
      below provides compensation information for the year ended February 2, 2008
      for
      each non-employee member of the Holding Company’s Board of
      Directors.





**Name
                (1)**
            
            **Fees**
              **Earned**
              **or**
              **Paid in**
              **Cash**
              **($) (3)**
            
            **Stock**
              **Awards**
              **($) (4)(5)**
            
            **Option**
              **Awards**
              **($)**
            
            **Non-Equity**
              **Incentive Plan**
              **Compensation**
              **($)**
            
            **Nonqualified**
              **Deferred**
              **Compensation**
              **Earnings ($)**
            
            **All Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**David B.
                Cornstein
            
            $
            32,500
            
            $
            9,377
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            41,877Rohit
                M. Desai
            
            
            32,500
            
            
            24,800
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            57,300Ellen
                R. Levine
            
            
            31,500
            
            
            15,628
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            47,128Louis
                Lipschitz
            
            
            43,000
            
            
            19,375
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            62,375Charles
                E. McCarthy
            
            
            33,900
            
            
            15,628
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            49,528Norman
                S. Matthews (2)
            
            
            62,500
            
            
            27,745
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            90,245Thomas
                M. Murnane
            
            
            40,896
            
            
            27,767
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            68,663John
                D. Kerin
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —







(1)
            Mr. Arthur E. Reiner, Chairman, President
                and Chief Executive Officer of the Holding Company and Chairman and
                Chief
                Executive Officer of Finlay Jewelry, is not included in this table
                as he
                is an employee of Finlay and thus receives no compensation for his
                service
                as a director on the Holding Company’s Board. The compensation received by
                Mr. Reiner as an employee is shown in the Summary Compensation Table.




(2)
            Mr.
                Matthews was appointed Independent Lead Director of the Board of
                Directors
                on February 27, 2007 and beginning in 2007 receives an additional
                $25,000
                per year.




(3)
            During
                2007, the directors deferred the following fees into the Director
                Deferred
                Compensation Plan: Mr. Cornstein: $25,000; Mr. Desai: $25,000; Ms.
                Levine:
                $25,000; Mr. Lipschitz: $31,000; Mr. McCarthy: $25,000; Mr. Matthews:
                $28,000; and Mr. Murnane: $28,000. In each case the grant date fair
                value
                of the matching RSUs awarded to each director equaled the amount
                of the
                fees the director deferred.




(4)
            The
                amounts in this column reflect the compensation costs of matching
                RSUs
                granted under the 1993 Plan, 1997 Plan and/or 2007 Plan for financial
                reporting purposes for 2007 under SFAS 123(R), and thus may include
                amounts from awards granted in and prior to 2007. These amounts reflect
                our accounting expense for these awards, and do not reflect compensation
                actually received by the director. See Note 11, “Stock-Based Compensation”
                to our Consolidated Financial Statements for the assumptions made
                in
                determining SFAS 123(R) values.




(5)
            As
                of February 2, 2008, each non-employee director held the following
                RSUs:
                Mr. Cornstein: 3,634 vested and 3,634 unvested; Mr. Desai: 16,194
                vested
                and 4,278 unvested; Ms. Levine: 8,592 vested and 4,278 unvested;
                Mr.
                Lipschitz: 5,304 vested and 5,304 unvested; Mr. Matthews: 21,137
                vested
                and 4,791 unvested; and Mr. Murnane: 16,305 vested and 4,791 unvested
                and
                Mr. McCarthy: 4,278 vested and 4,278 unvested. In addition, Mr. Kerin,
                who
                resigned from the Holding Company’s Board of Directors in 2007 held 3,085
                vested RSUs as of February 2, 2008.




In
      accordance with its charter, the Compensation Committee is responsible for
      reviewing and recommending to the Board of Directors, compensation arrangements
      for non-employee directors. With the exception of Mr. Cornstein, the current
      compensation arrangement as described below for our independent directors,
      has
      been in effect since May 2003.





Directors
      who are also employees, receive no additional compensation for serving as
      members of the Board.




62




For
      serving as a director during 2007, each non-employee director received aggregate
      compensation at the rate of $25,000 per year plus $1,000 for each meeting of
      the
      Board and each committee meeting attended in person, and $500 for each meeting
      attended by conference telephone call, with the Chairman of the Audit Committee
      receiving an additional annual fee of $6,000 and the Chairman for the
      Compensation and Nominating & Corporate Governance Committees receiving an
      additional annual fee of $3,000 each. Beginning in 2007, Mr. Matthews, as Lead
      Independent Director, receives an additional annual fee of $25,000.





Non-employee
      directors of the Holding Company and Finlay Jewelry will receive compensation
      for board service under the same arrangements for 2008.





Since
      August 2003, each non-employee director has been allowed to elect, under the
      Holding Company’s Director Deferred Compensation and Stock Purchase Plan
      (‘‘Director Deferred Compensation Plan’’), to defer 100% of his or her eligible
      director fees (which are annual retainer fees plus any annual fees received
      by a
      participant for services as chairperson of any committee of the Board of
      Directors, other than the Lead Independent Director’s annual fee) that would
      otherwise be paid in cash, and receive restricted stock units ( *i.e.* ,
      RSUs).
      The Director Deferred Compensation Plan operates in substantially the same
      manner as the Executive Deferred Compensation Plan described above, except
      that
      the directors can defer fees on a quarterly rather than annual basis and the
      matching RSUs vest in one year. The participant RSUs are awarded and credited
      to
      a director participant’s account quarterly in an amount based on a formula which
      divides the cash amount deferred by the fair market value of a share of the
      Holding Company’s common stock on the award date. On each award date, the
      Holding Company credits
      a
      participant’s account with one matching RSU for each participant RSU purchased
      by the director.




The
      following non-employee directors currently own RSUs in the amounts set forth
      below:




**Participant RSUs**
            
            **Matching RSUs****Vested**
            
            **Vested**
            
            **Unvested**David
                B. Cornstein
            
            
            3,634
            
            
            —
            
            
            3,634Rohit
                M. Desai
            
            
            10,236
            
            
            5,958
            
            
            4,278Ellen
                R. Levine
            
            
            6,435
            
            
            2,157
            
            
            4,278Louis
                Lipschitz
            
            
            5,304
            
            
            —
            
            
            5,304Charles
                E. McCarthy
            
            
            4,278
            
            
            —
            
            
            4,278Norman
                S. Matthews
            
            
            12,964
            
            
            8,173
            
            
            4,791Thomas
                M. Murnane
            
            
            10,548
            
            
            5,757
            
            
            4,791





The
      number of RSUs owned by each such director includes the following amounts of
      RSUs acquired during 2007: Mr. Cornstein: 3,634 participant RSUs and 3,634
      matching RSUs; Mr. Desai: 4,278 participant RSUs and 4,278 matching RSUs;
      Ms. Levine: 4,278 participant RSUs and 4,278 matching RSUs; Mr. Lipschitz:
      5,304 participant RSUs and 5,304 matching RSUs; Mr. Matthews: 4,791
      participant RSUs and 4,791 matching RSUs; Mr. Murnane: 4,791 participant
      RSUs and 4,791 matching RSUs and Mr. McCarthy: 4,278 participant RSUs and 4,278
      matching RSUs.


63


**Item
              12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related****Stockholder
                Matters**





The
      following table sets forth certain information with respect to beneficial
      ownership of the Common Stock of the Holding Company as of April 14, 2008 by
      (i)
      each person who, to the knowledge of the Holding Company, was the beneficial
      owner of more than 5% of the outstanding Common Stock of the Holding Company,
      (ii) 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 (iii) all current
      directors and executive officers as a group. The Holding Company owns all of
      our
      issued and outstanding capital stock.




**Shares of Common Stock**
              **Beneficially Owned****(1)****Name**
            
            **Number of**
              **Shares**
            
            **Percentage**
              **of Class**Charles McCarthy(2)
            
            
            1,581,511
            
            
            17.1
            %Prides
                Capital Partners, L.L.C.(3)
            
            
            1,581,511
            
            
            17.1
            %Wells
                Fargo & Company(4)
            
            
            1,179,990
            
            
            12.8
            %Dimensional
                Fund Advisors LLC(5)
            
            
            693,499
            
            
            7.5
            %Phoenix
                Investment Adviser LLC(6)
            
            
            473,648
            
            
            5.1
            %Arthur
                E. Reiner(1)(7)
            
            
            462,610
            
            
            4.9
            %David
                B. Cornstein(1)(8)
            
            
            415,483
            
            
            4.5
            %Leslie
                A. Philip(1)(9)
            
            
            114,397
            
            
            1.2
            %Joseph
                M. Melvin(1)(10)
            
            
            110,897
            
            
            1.2
            %Edward
                J. Stein(1)(11)
            
            
            86,546
            
            
            *Norman
                S. Matthews(1)
                (12)
            
            
            74,602
            
            
            *Bruce
                E. Zurlnick(1)(13)
            
            
            62,914
            
            
            *Thomas
                M. Murnane(1)
                (14)
            
            
            41,588
            
            
            *Rohit
                M. Desai(1)(15)
            
            
            30,919
            
            
            *Ellen
                R. Levine(1)(16)
            
            
            12,922
            
            
            *Louis
                Lipschitz(17)
            
            
            11,557
            
            
            *All
                    directors and executive officers as a group (13
                    persons)(18)
            
            
            3,042,601
            
            
            30.6
            %







*Less
      than one percent .




(1)
            Based
                on 9,216,417 shares outstanding on April 14, 2008. A person is deemed
                to
                be the beneficial owner of securities that can be acquired by such
                person
                within 60 days from April 14, 2008 upon the exercise of options,
                vesting
                of restricted stock awards and vesting of matching RSUs. Each beneficial
                owner’s percentage ownership is determined by assuming that options,
                restricted stock and matching RSUs that are held by such person and
                which
                are exercisable or become vested within 60 days of April 14, 2008
                have
                been exercised or have become vested. Except as noted below, and
                except
                with respect to outstanding shares of restricted stock with respect
                to
                which the beneficial owner does not currently have investment power,
                each
                beneficial owner has sole voting power and sole investment power.
                The
                address for the beneficial owners named in the table, unless specified
                otherwise in a subsequent footnote, is c/o the Holding Company, 529
                Fifth
                Avenue, New York, New York 10017.




(2)
            As
                a controlling shareholder of Prides Capital Partners, L.L.C., Mr.
                McCarthy
                is deemed to beneficially own the shares beneficially owned by Prides
                Capital Partners, L.L.C. Mr. McCarthy shares voting and investment
                control
                over these shares with the other controlling shareholders of Prides
                Capital Partners, L.L.C. Includes 9,321 participant RSUs and excludes
                6,025 matching RSUs, which are not yet
                vested.




64




(3)
            According
                to Amendment No. 5, filed July 27, 2006, to a Schedule 13D dated
                April 18,
                2006, as amended, filed with the Commission by Prides Capital Partners,
                L.L.C., these shares represent shares reported as beneficially owned
                by
                Prides Capital Partners, L.L.C., which has sole voting and investment
                power over these shares. Prides Capital Partners, L.L.C. is the general
                partner of Prides Capital Fund L.P., which directly owns all of the
                shares
                of common stock set forth in the table except for the 9,321 participant
                RSUs owned directly by Holding Company director Charles E. McCarthy.
                Additionally, as the controlling shareholders of Prides Capital Partners,
                L.L.C., Kevin A. Richardson, II, Henry J. Lawlor, Jr., Murray A.
                Indick,
                Charles E. McCarthy and Christian Puscasiu, may also be deemed to
                beneficially own these shares. The address for Prides Capital Partners,
                L.L.C., Kevin A. Richardson, II, Henry J. Lawlor, Jr., Murray A.
                Indick,
                Charles E. McCarthy, and Christian Puscasiu is 200 High Street, Ste.
                700,
                Boston, Massachusetts 02110.




(4)
            According
                to Amendment No. 6, filed January 25, 2008, to a Schedule 13G dated
                January 23, 2004, as amended, filed with the Commission by Wells
                Fargo
                & Company and on behalf of itself and Wells Capital Management
                Incorporated, Wells Fargo Funds Management, LLC and Wells Fargo Bank,
                National Association, Wells Fargo & Company has sole power to vote
                1,177,435 shares and sole power to dispose of 1,131,990 shares and
                Wells
                Capital Management Incorporated has sole power to vote 1,060,035
                shares
                and sole power to dispose of 1,131,990 shares. The address of Wells
                Fargo
                & Company is 420 Montgomery Street, San Francisco, California 94104
                and the address for Wells Capital Management Incorporated is 525
                Market
                Street, 10th Floor, San Francisco, California
                94105.




(5)
            According
                to Amendment No. 3, filed February 6, 2008, to a Schedule 13G dated
                February 9, 2005, as amended, filed with the Commission by Dimensional
                Fund Advisors LP (“Dimensional”), Dimensional may be deemed to
                beneficially own, have sole power to vote or to direct the vote and
                sole
                power to dispose or to direct the disposition of the 693,499 shares.
                Dimensional is an investment advisor registered under Section 203
                of the
                Investment Advisors Act of 1940. Dimensional furnishes investment
                advice
                to four investment companies registered under the Investment Company
                Act
                of 1940 and serves as investment manager to certain other commingled
                group
                trusts and separate accounts (collectively, the investment companies,
                trusts and accounts are the “Funds”). In its role as investment advisor or
                manager, Dimensional may be deemed to be a beneficial owner of the
                693,499
                shares and possesses sole investment and/or sole voting power over
                the
                693,499 shares owned directly by the Funds. The address of Dimensional
                is
                1299 Ocean Avenue, 11th Floor, Santa Monica, California
                90401.




(6)
            According
                to Schedule 13G filed October 12, 2007 with the Commission by Jeffrey
                Peskind, Phoenix Investment Adviser LLC and JLP Credit Opportunity
                Master
                Fund Ltd. (the “Fund”), Jeffrey Peskind has shared power to vote 473,648
                shares and shared power to dispose of 473,648 shares, Phoenix Investment
                Adviser LLC has shared power to vote 473,648 shares and shared power
                to
                dispose of 473,648 shares, and the Fund has shared power to vote
                465,148
                shares and shared power to dispose of 465,148 shares. Jeffrey Peskind
                serves as portfolio manager for the Fund and as managing director
                of
                Phoenix Investment Adviser LLC, which serves as investment manager
                of the
                Fund. The address of the Fund is c/o Walkers SPV Limited, Walkers
                House,
                P.O. Box 908GT, George Town, Grand Cayman, Cayman Islands and the
                address
                for Jeffrey Peskind and Phoenix Investment Adviser LLC is The Graybar
                Building, 420 Lexington Avenue, Suite 2225, New York, New York
                10170.




(7)
            Includes
                options to acquire an aggregate of 160,000 shares of Common Stock
                having
                exercise prices ranging from $7.05 to $12.75 per share. Also includes
                67,570 participant RSUs, and excludes 67,570 matching RSUs, which
                are not
                yet vested.




(8)
            Includes
                355,900 shares pledged by Mr. Cornstein as collateral for a loan.
                Also
                includes 8,033 participant and vested RSU’s and excludes 6,025 matching
                RSU’s, which are not yet vested.




(9)
            Includes
                options to acquire an aggregate of 90,000 shares of Common Stock
                having
                exercise prices ranging from $7.05 to $12.75 per share. Also includes
                8,220 participant RSUs and excludes 8,220 matching RSUs, which are
                not yet
                vested. Excludes 7,200 shares of restricted stock awarded in April
                2005,
                which shares are to be received by Ms. Philip upon completion of
                vesting
                in April 2008 (or an earlier vesting date under certain circumstances)
                if
                then employed by us.




(10)
            Includes
                options to acquire an aggregate of 77,000 shares of Common Stock
                having
                exercise prices ranging from $7.05 to $24.3125 per share. Also includes
                19,936 participant RSUs and excludes 19,936 matching RSUs, which
                are not
                yet vested. Excludes 7,200 shares of restricted stock awarded in
                April
                2005, which shares are to be received by Mr. Melvin upon completion
                of
                vesting in April 2008 (or an earlier vesting date under certain
                circumstances) if then employed by
                us.




65




(11)
            Includes
                options to acquire an aggregate of 55,000 shares of Common Stock
                having
                exercise prices ranging from $7.05 to $13.4219 per share. Also includes
                20,876 participant RSUs and excludes 20,876 matching RSUs, which
                are not
                yet vested. Excludes 3,600 shares of restricted stock awarded in
                April
                2005, which shares are to be received by Mr. Stein upon completion
                of
                vesting in April 2008 (or an earlier vesting date under certain
                circumstances) if then employed by
                us.




(12)
            Includes
                options to acquire an aggregate of 20,000 shares of Common Stock
                having
                exercise prices ranging from $9.85 to $12.75 per share. Also includes
                22,982 participant and vested matching RSUs and excludes 2,946 matching
                RSUs, which are not yet vested.




(13)
            Includes
                options to acquire an aggregate of 35,000 shares of Common Stock
                having
                exercise prices ranging from $7.05 to $13.5625 per share. Also includes
                18,459 participant and vested matching RSUs and excludes 13,625 matching
                RSUs, which are not yet vested. Excludes 3,600 shares of restricted
                stock
                awarded in April 2005, which shares are to be received by Mr. Zurlnick
                upon completion of vesting in April 2008 (or an earlier vesting date
                under
                certain circumstances) if then employed by
                us.




(14)
            Includes
                options to acquire an aggregate of 5,000 shares of Common Stock having
                an
                exercise price of $12.939 per share. Also includes 21,122 participant
                and
                vested matching RSUs and excludes 6,748 matching RSUs, which are
                not yet
                vested.




(15)
            Includes
                options to acquire an aggregate of 5,000 shares of Common Stock having
                an
                exercise price of $15.877 per share. Also includes 21,237 participant
                and
                vested matching RSUs and excludes 6,025 matching RSUs, which are
                not yet
                vested.




(16)
            Includes
                9,500 participant and vested matching RSUs and excludes 2,630 matching
                RSUs, which are not yet vested.




(17)
            Includes
                11,557 participant RSUs and excludes 7,471 matching RSUs, which are
                not
                yet vested.




(18)
            Includes
                7,557 shares of Common Stock owned by Joyce Manning Magrini, Executive
                Vice President-Administration of Finlay Jewelry, 500 of which Ms.
                Magrini
                owns jointly with her spouse, and options to acquire 15,000 shares
                of
                Common Stock having exercise prices ranging from $7.05 to $12.75
                per
                share, and 14,098 participant RSUs and excludes 14,098 matching RSUs,
                which are not yet vested. Includes options to acquire an aggregate of
                462,000 shares of Common Stock having exercise prices ranging from
                $7.05
                to $24.3125 per share. Also includes an aggregate of 252,911
                participant and vested matching RSUs and excludes an aggregate
                of 182,195 matching RSUs, which are not yet vested. Excludes an
                aggregate of 26,600 shares of restricted stock awarded in April 2005,
                which shares are to be received upon completion of vesting in April
                2008
                (or an earlier vesting date under certain circumstances) if the respective
                officers are then employed by us.




66


**Equity
      Compensation Plan Information**





Options
      to purchase Common Stock, restricted stock and RSUs have been granted by the
      Holding Company to employees and non-employee directors under various
      stock-based compensation plans. See Note 11 of Notes to Consolidated Financial
      Statements. The following table summarizes the number of stock options issued,
      shares of restricted stock and RSUs awarded, the weighted-average exercise
      price
      and the number of securities remaining to be issued under all outstanding equity
      compensation plans as of February 2, 2008.




**Plan
                Category**
            
            **(a)**
              **Number of securities**
              **to be issued upon**
              **exercise of**
              **outstanding options,**
              **warrants and rights**
            
            **(b)**
              **Weighted-average**
              **exercise price of**
              **outstanding**
              **options, warrants**
              **and rights**
            
            **(c)**
              **Number of securities**
              **remaining available for**
              **future issuance under**
              **equity compensation**
              **plans (excluding**
              **securities reflected in**
              **column (a))**Equity
                compensation plans approved bysecurity
                holders (1)
            
            
            1,441,618
            (2)
            $
            8.27
            (3)
            
            155,628
            (4)Equity
                  compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            1,441,618
            
            $
            8.27
            
            
            155,628







(1)
            Reflects
                information relating to the 1993, 1997 and 2007 Plans.


(2)
            Includes
                48,367 shares of restricted stock to be issued to certain executive
                officers and key employees on April 30, 2008 (or an earlier vesting
                date
                under certain circumstances, provided the respective officers are
                then
                employed by us) pursuant to awards made in April 2005 under the 1997
                Plan.


(3)
            RSUs
                are settled for shares of the Holding Company’s Common Stock on a
                one-for-one basis. Accordingly, RSUs have been excluded for purposes
                of
                computing the weighted-average exercise price in column
                (b).


(4)
            Awards
                are permitted under the 2007 Plan in the form of (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, including purchases and awards under
                the
                Executive Deferred Compensation Plan and Director Deferred Compensation
                Plan, subject to such terms and conditions as the Holding Company’s
                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 Holding Company’s Compensation
                Committee; or (vi) any combination of the foregoing. See “Item 11. –
                Executive Compensation”. In connection with the adoption of the 2007 Plan,
                no further awards may be granted under the 1993 or 1997
                Plan.




67


**Item
              13.**
            **Certain
                Relationships and Related Transactions, and Director Independence**





**Certain
      Other Transactions**





Finlay
      has entered into indemnification agreements which require, among other things,
      that Finlay indemnify directors and officers who are parties to such agreements
      against certain liabilities and associated expenses arising from their service
      as directors and officers of Finlay and reimburse certain related legal and
      other expenses. In the event of a Change of Control (as defined in such
      agreements), Finlay will, upon request by an indemnitee under his or her
      agreements, create and fund a trust for the benefit of such indemnitee
      sufficient to satisfy reasonably anticipated claims for indemnification. Finlay
      also covers all directors and 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 Holding Company's Restated Certificate
      of Incorporation and the Delaware General Corporation Law, they provide greater
      assurance to directors and officers that 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.





We
      have
      operated under our Codes of Ethics for many years.  As part of our Codes of
      Ethics, directors and employees are expected to make business decisions and
      take
      actions based upon the best interests of the Holding Company and Finlay Jewelry
      and not based upon personal relationships or benefits.  The Codes of Ethics
      reflect our commitment to requiring the highest standards of professional and
      ethical conduct from our employees and directors and to fostering a culture
      of
      honesty, integrity and accountability.  The Codes of Ethics outline the
      basic principles and policies with which all employees and directors are
      expected to comply.  Activities that could give rise to conflicts of
      interest are prohibited unless specifically approved in advance by the Audit
      Committees of the Boards of Directors of the Holding
      Company and Finlay Jewelry.





The
      Audit Committees of the Boards of Directors of the Holding Company and Finlay Jewelry
      are responsible for reviewing, approving and ratifying related party
      transactions pursuant to the companies’ related party transactions policy. We
      may enter into a related party transaction only if the Audit Committees approve
      or ratify such transaction and if the transaction is beneficial to the companies
      and on terms comparable to those that could be obtained in arm’s length dealings
      with an unrelated third party.





**Corporate
      Governance, Board of Directors and Committees of the Board**





**** The
      following directors of the Holding Company and Finlay Jewelry have been
      determined by the Boards of Directors of the Holding Company and Finlay Jewelry
      to be independent under the listing standards of The Nasdaq Stock Market, Inc.
      ("Nasdaq"): David B. Cornstein, Rohit M. Desai, Ellen R. Levine, Louis
      Lipschitz, Norman S. Matthews, Charles E. McCarthy and Thomas M.
      Murnane.





The
      Boards of Directors of the Holding Company and Finlay Jewelry have standing
      combined Audit, Compensation and Nominating & Corporate Governance
      Committees. No director who serves on those committees is an officer or employee
      of the Holding Company or any of its subsidiaries.





The
      current members of the Audit Committee of the Holding Company and Finlay Jewelry
      are Mr. Lipschitz, its Chairman, and Messrs. Desai and Murnane, none of whom
      are
      employees of the Holding Company or Finlay Jewelry and each of whom is
      independent under Commission regulations and Nasdaq listing standards applicable
      to audit committee members.





The
      current members of the Compensation Committee of the Holding Company and Finlay
      Jewelry are Mr. Matthews, its Chairman, Ms. Levine and Mr. McCarthy, each of
      whom is independent under Nasdaq listing standards applicable to compensation
      committee members.




68




The
      current members of the Nominating & Corporate Governance Committee of the
      Holding Company and Finlay Jewelry are Mr. Murnane, its Chairman, and Messrs.
      Cornstein, Desai and Matthews, each of whom is independent under Nasdaq listing
      standards applicable to nominating committee members.





**Item
              14.**
            **Principal
                Accountant Fees and
                Services**





**Audit
      Fees.**  Audit
      fees totaling $870,000 were billed by Eisner LLP for professional services
      in
      connection with our annual audit and quarterly reviews of our financial
      statements as well as the audit of internal controls over financial reporting
      for the year ended February 2, 2008.





Audit
      fees totaling $1,065,000 were billed by Deloitte & Touche LLP for
      professional services in connection with our annual audit and quarterly reviews
      of our financial statements as well as the audit of internal controls over
      financial reporting for the year ended February 3, 2007. The
      year
      ended February 3, 2007 includes fees billed by Cherry, Bekaert & Holland LLP
      totaling $106,000 for professional services rendered for the audit of Carlyle’s
      annual financial statements and management’s assessment of the effectiveness of
      internal control over financial reporting for the fiscal year ended February
      3,
      2007 and the reviews of the financial statements included in our Forms 10-Q
      for
      2006.





**Audit-Related
      Fees.**  Audit-related
      fees billed by Eisner LLP for assurance and related services that are reasonably
      related to the performance of the audit or review of our financial statements,
      and which are not included in the above caption “Audit Fees”, were $28,000 for
      the year ended February 2, 2008.  In 2007, audit related services were
      performed by Eisner LLP in connection with their audit of our 401(k)
      plan.





Audit-related
      fees billed by Deloitte & Touche LLP for assurance and related services that
      are reasonably related to the performance of the audit or review of our
      financial statements, and which are not included in the above caption “Audit
      Fees”, were $30,000 for the year ended February 3, 2007. In 2006, audit-related
      services were performed by Deloitte & Touche LLP in connection with Eisner
      LLP’s review of the Deloitte & Touche LLP’s 2006 audit workpapers and their
      audit of our 401(k) plan, respectively .





**Tax
      Fees.** There
      were no fees billed by Eisner LLP for professional services rendered for tax
      compliance and tax advice for the fiscal year ended February 2, 2008. The
      aggregate fees billed by Deloitte & Touche LLP for professional services
      rendered for tax compliance and tax advice for the fiscal year ended February
      3,
      2007 were $39,000.





**All
      Other Fees.** No other
      fees were billed by Eisner LLP, Deloitte & Touche LLP or Cherry, Bekaert
& Holland L.L.P. in the fiscal years ended February 2, 2008 or February 3,
      2007.





The
      Audit
      Committee has established pre-approval policies and procedures pursuant to
      which
      the Audit Committee approved the foregoing audit, audit-related and permissible
      non-audit services provided in 2007 and 2006. The Audit Committee, or a
      designated member of the Audit Committee, must pre-approve all audit (including
      audit-related) and permitted non-audit services performed by the independent
      registered public accounting firms to assure that the provision of such services
      does not impair the independent registered public accounting firms’
independence. The Audit Committee has delegated interim pre-approval authority
      to Louis Lipschitz, Audit Committee Chairman. Any interim pre-approval of
      permitted non-audit services is required to be reported to the Audit Committee
      at its next scheduled meeting. The Audit Committee does not delegate to
      management its responsibility to pre-approve services performed by the
      independent registered public accounting firms.




69


**PART
      IV**





**Item
              15.**
            **Exhibits
                and Financial Statement Schedules**





(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.





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





**Item****Number**
            
            **Description**1.1
            
            Purchase
                Agreement, dated as of May 27, 2004, among Finlay Jewelry, the Holding
                Company, Credit Suisse First Boston LLC, J.P. Morgan Securities Inc.
                and
                SG Americas Securities, LLC (incorporated by reference to Exhibit
                1.1
                filed as part of the Quarterly Report on Form 10-Q for the period
                ended
                May 1, 2004 filed by Finlay Jewelry on June 10, 2004).2.1
            
            Agreement
                and Plan of Merger, dated May 19, 2005, by and among Finlay Jewelry,
                FFJ
                Acquisition Corp., Carlyle & Co. Jewelers, certain stockholders of
                Carlyle & Co. Jewelers and Russell L. Cohen (as stockholders’ agent)
                (incorporated by reference to Exhibit 2.1 filed as part of the Current
                Report on Form 8-K filed by Finlay Jewelry on May 25,
                2005).2.2(a)
            
            Asset
                Purchase Agreement, dated September 27, 2007, by and among Zale
                Corporation, Zale Delaware, Inc., TXDC, L.P., Finlay Jewelry and,
                for
                limited purposes, the Holding Company (incorporated by reference
                to
                Exhibit 2.2(a) filed as part of the Quarterly Report on Form 10-Q
                for the
                period ended November 3, 2007 filed by Finlay Jewlery on December
                13,
                2007).2.2(b)
            
            Letter
                Agreement, dated November 9, 2007, amending the Asset Purchase Agreement,
                dated September 27, 2007, by and among Zale Corporation, Zale Delaware,
                Inc., TXDC, L.P., Finlay Jewelry and, for limited purposes, the Holding
                Company (incorporated by reference to Exhibit 2.2(b) filed as part
                of the
                Quarterly Report on Form 10-Q for the period ended November 3, 2007
                filed
                by Finlay Jewelry on December 13, 2007).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.
                33-59580 filed by Finlay Jewelry on March 11, 1993).3.2
            
            Amended
                and Restated By-Laws of Finlay Jewelry, dated as of December 4, 2007
                (incorporated by reference to Exhibit 3.2 filed as part of the Current
                Report on Form 8-K filed by Finlay Jewelry on December 10,
                2007).4.1
            
            Article
                Fourth of the Certificate of Incorporation, as amended, and Articles
                II
                and VI of the Amended and Restated
                By-Laws.




70




4.2(c)
            
            Omnibus
                Agreement to Terminate Registration Rights Agreement and Stockholders’
                Agreement, dated November 12, 2007, among the Holding Company and
                David B.
                Cornstein and Arthur E. Reiner on behalf of certain stockholders
                (incorporated by reference to Exhibit 4.2(c) filed as part of the
                Current
                Report on Form 8-K filed by Finlay Jewelry on November 16,
                2007).4.4(a)
            
            Indenture
                dated as of June 3, 2004 between Finlay Jewelry and HSBC Bank USA,
                as
                Trustee, relating to Finlay Jewelry’s 8-3/8% Senior Notes due June 1, 2012
                (incorporated by reference to Exhibit 4.1 filed as part of the Quarterly
                Report on Form 10-Q for the period ended May 1, 2004 filed by Finlay
                Jewelry on June 10, 2004).4.4(b)
            
            Supplemental
                Indenture dated as of May 19, 2005 among Carlyle & Co. Jewelers,
                Finlay Jewelry and HSBC Bank USA, as Trustee, together with Subsidiary
                Guarantee (incorporated by reference to Exhibit 10.5 filed as part
                of the
                Current Report on Form 8-K filed by Finlay Jewelry on May 25,
                2005).4.4(c)
            
            Supplemental
                Indenture dated as of May 19, 2005 among J.E. Caldwell Co., Finlay
                Jewelry
                and HSBC Bank USA, as Trustee, together with Subsidiary Guarantee
                (incorporated by reference to Exhibit 10.6 filed as part of the Current
                Report on Form 8-K filed by Finlay Jewelry on May 25,
                2005).4.4(d)
            
            Supplemental
                Indenture dated as of May 19, 2005 among Carlyle & Co. of Montgomery,
                Finlay Jewelry and HSBC Bank USA, as Trustee, together with Subsidiary
                Guarantee (incorporated by reference to Exhibit 10.7 filed as part
                of the
                Current Report on Form 8-K filed by Finlay Jewelry on May 25,
                2005).4.4(e)
            
            Supplemental
                Indenture dated as of May 19, 2005 among Park Promenade, Inc., Finlay
                Jewelry and HSBC Bank USA, as Trustee, together with Subsidiary Guarantee
                (incorporated by reference to Exhibit 10.8 filed as part of the Current
                Report on Form 8-K filed by Finlay Jewelry on May 25,
                2005).4.5
            
            Form
                of Finlay Jewelry’s 8-3/8% Senior Notes due June 1, 2012 (incorporated by
                reference to Exhibit 4.2 filed as part of the Form S-4 Registration
                Statement, Registration No. 333-117288 filed by Finlay Jewelry on
                July 12,
                2004).4.6
            
            Registration
                Rights Agreement, dated as of June 3, 2004, between Finlay Jewelry
                and
                Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and SG
                Americas Securities, LLC (incorporated by reference to Exhibit 4.4
                filed
                as part of the Quarterly Report on Form 10-Q for the period ended
                May 1,
                2004 filed by Finlay Jewelry on June 10, 2004).10.1*
            
            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 filed by Finlay Jewelry on
                March 11, 1993).10.2(a)*
            
            Employment
                Agreement, dated as of January 30, 2005, among the Holding Company,
                Finlay
                Jewelry and Arthur E. Reiner (including the forms of restricted stock
                agreements annexed thereto) (incorporated by reference to Exhibit
                10.5
                filed as part of the Quarterly Report on Form 10-Q for the period
                ended
                October 30, 2004 filed by Finlay Jewelry on December 9,
                2004).10.2(a)(i)*
            
            Amendment
                No. 1 to Employment Agreement, dated as of March 11, 2008, among
                the
                Holding Company, Finlay Jewelry and Arthur E. Reiner (incorporated
                by
                reference to Exhibit 10.1 filed as part of the Current Report on
                Form 8-K
                filed by Finlay Jewelry on March 14,
                2008).




71




10.2(b)*
            
            Employment
                Agreement dated as of June 16, 2005 between Joseph M. Melvin and
                Finlay
                Jewelry (incorporated by reference to Exhibit 10.1 filed as part
                of the
                Current Report on Form 8-K filed by Finlay Jewelry on June 22,
                2005).10.2(c)*
            
            Employment
                Agreement dated as of June 16, 2005 between Leslie A. Philip and
                Finlay
                Merchandising & Buying, Inc. (incorporated by reference to Exhibit
                10.2 filed as part of the Current Report on Form 8-K filed by Finlay
                Jewelry on June 22, 2005).10.2(d)*
            
            Employment
                Agreement dated as of June 16, 2005 between Joyce Manning Magrini
                and
                Finlay Jewelry (incorporated by reference to Exhibit 10.3 filed as
                part of
                the Current Report on Form 8-K filed by Finlay Jewelry on June 22,
                2005).10.2(e)*
            
            Employment
                Agreement dated as of February 28, 2006 between Bruce E. Zurlnick
                and
                Finlay Jewelry (incorporated by reference to Exhibit 10.1 filed as
                part of
                the Current Report on Form 8-K filed by Finlay Jewelry on March 8,
                2006).10.2(f)*
            
            Employment
                Agreement dated as of February 28, 2006 between Edward J. Stein and
                Finlay
                Jewelry (incorporated by reference to Exhibit 10.2 filed as part
                of the
                Current Report on Form 8-K filed by Finlay Jewelry on March 8,
                2006).10.3
            
            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).10.4(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 July 1,
                1993).10.4(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 filed by the Holding Company on January 31,
                1995).10.4(c)*
            
            Amendment
                to the Holding Company’s Long Term Incentive Plan, effective September 28,
                2001 (incorporated by reference to Exhibit 10.11(c) filed as part
                of the
                Annual Report on Form 10-K for the period ended February 2, 2002
                filed by
                Finlay Jewelry on April 29, 2002).10.4(d)*
            
            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).10.5(a)*
            
            1997
                Long Term Incentive Plan of the Holding Company, as amended (incorporated
                by reference to Exhibit 10.12 filed as part of the Annual Report
                on Form
                10-K for the period ended February 2, 2002 filed by Finlay Jewelry
                on
                April 29, 2002).10.5(b)*
            
            Amendment
                to the Holding Company’s 1997 Long Term Incentive Plan, effective July 30,
                2004 (incorporated by reference to Exhibit 10.2 filed as part of
                the
                Current Report on Form 8-K filed by Finlay Jewelry on September 10,
                2004).




72




10.5(c)*
            
            Amendment
                to the Holding Company’s 1997 Long Term Incentive Plan, effective May 8,
                2006 (incorporated by reference to Exhibit 10.1 filed as part of
                the
                Current Report on Form 8-K filed by Finlay Jewelry on June 26,
                2006).10.5(d)*
            
            Amendment,
                dated February 27, 2007, to the Holding Company’s 1997 Long Term Incentive
                Plan (incorporated by reference to Exhibit 10.5(d) filed as part
                of the
                Annual Report on Form 10-K for the period ended February 3, 2007
                filed by
                Finlay Jewelry on April 19, 2007).10.6(a)*
            
            The
                Holding Company’s Executive Deferred Compensation and Stock Purchase Plan
                (incorporated by reference to Exhibit 10.1 filed as part of the Quarterly
                Report on Form 10-Q for the period ended August 2, 2003 filed by
                Finlay
                Jewelry on September 16, 2003).10.6(b)*
            
            Amendment
                No. 1, dated June 19, 2003, to the Holding Company’s Executive Deferred
                Compensation and Stock Purchase Plan (incorporated by reference to
                Exhibit
                10.2 filed as part of to the Quarterly Report on Form 10-Q for the
                period
                ended August 2, 2003 filed by Finlay Jewelry on September 16,
                2003).10.6(c)*
            
            Form
                of Deferral Agreement under the Holding Company’s Executive Deferred
                Compensation and Stock Purchase Plan (incorporated by reference to
                Exhibit
                10.5 filed as part of the Quarterly Report on Form 10-Q for the period
                ended November 1, 2003 filed by Finlay Jewelry on December 10,
                2003).10.6(d)*
            
            Amendment,
                dated February 27, 2007, to the Holding Company's Executive Deferred
                Compensation and Stock Purchase Plan (incorporated by reference to
                Exhibit
                10.6(d) filed as part of the Annual Report on Form 10-K for the period
                ended February 3, 2007 filed by Finlay Jewelry on April 19,
                2007).10.7(a)*
            
            The
                Holding Company’s Director Deferred Compensation and Stock Purchase Plan
                (incorporated by reference to Exhibit 10.3 filed as part of the Quarterly
                Report on Form 10-Q for the period ended August 2, 2003 filed by
                Finlay
                Jewelry on September 16, 2003).10.7(b)*
            
            Form
                of Deferral Agreement under the Holding Company’s Director Deferred
                Compensation and Stock Purchase Plan (incorporated by reference to
                Exhibit
                10.4 filed as part of the Quarterly Report on Form 10-Q for the period
                ended November 1, 2003 filed by Finlay Jewelry on December 10, 2003).10.8(g)
            
            Fourth
                Amended and Restated Credit Agreement, dated November 9, 2007, among
                Finlay Jewelry, Carlyle & Co. Jewelers LLC, L. Congress, Inc., the
                Holding Company, General Electric Capital Corporation, individually
                and in
                its capacity as administrative agent, Wachovia Bank, N.A., individually
                and in its capacity as documentation agent, and certain other lenders
                and
                financial institutions parties thereto (incorporated by reference
                to
                Exhibit 10.8(a) filed as part of the Quarterly Report on Form 10-Q
                for the
                period ended November 3, 2007 filed by Finlay Jewelry on December
                13,
                2007).10.9
            
            Amended
                and Restated Guaranty, dated as of January 22, 2003, by Finlay Jewelry,
                Inc. (“FJI”), Finlay Merchandising & Buying, Inc. (“Finlay
                Merchandising & Buying”) and eFinlay, Inc. (“eFinlay”) (incorporated
                by reference to Exhibit 10.11 filed as part of the Annual Report
                on Form
                10-K for the period ended February 1, 2003 filed by Finlay Jewelry
                on May
                1, 2003).10.10(a)
            
            Amended
                and Restated Security Agreement dated as of January 22, 2003, by
                and among
                Finlay Jewelry, FJI, Finlay Merchandising & Buying, eFinlay and G.E.
                Capital, individually and as agent (incorporated by reference to
                Exhibit
                10.12 filed as part of the Annual Report on Form 10-K for the period
                ended
                February 1, 2003 filed by Finlay Jewelry on May 1, 2003).




73




10.10(b)
            
            Amendment
                to Amended and Restated Security Agreement, dated as of May 19, 2005,
                by
                and among Finlay Jewelry, FJI, Finlay Merchandising & Buying, eFinlay,
                Carlyle & Co. Jewelers, Carlyle and Co. of Montgomery, Park Promenade,
                Inc. and J.E. Caldwell Co., and G.E. Capital, individually and as
                agent
                (incorporated by reference to Exhibit 10.2 filed as part of the Current
                Report on Form 8-K filed by Finlay Jewelry on May 25, 2005).10.11
            
            Amended
                and Restated Pledge Agreement dated as of January 22, 2003, by and
                among
                Finlay Jewelry, FJI, Finlay Merchandising & Buying, eFinlay and G.E.
                Capital, as agent (incorporated by reference to Exhibit 10.13 filed
                as
                part of the Annual Report on Form 10-K for the period ended February
                1,
                2003 filed by Finlay Jewelry on May 1, 2003).10.12
            
            Amended
                and Restated Trademark Security Agreement dated as of January 22,
                2003 by
                Finlay Jewelry, FJI, Finlay Merchandising & Buying, eFinlay and in
                favor of G.E. Capital, as agent (incorporated by reference to Exhibit
                10.14 filed as part of the Annual Report on Form 10-K for the period
                ended
                February 1, 2003 filed by Finlay Jewelry on May 1, 2003).10.13
            
            Amended
                and Restated Patent Security Agreement dated as of January 22, 2003
                by
                Finlay Jewelry, FJI, Finlay Merchandising & Buying and eFinlay in
                favor of G.E. Capital, as agent (incorporated by reference to Exhibit
                10.15 filed as part of the Annual Report on Form 10-K for the period
                ended
                February 1, 2003 filed by Finlay Jewelry on May 1, 2003).10.14
            
            Amended
                and Restated Copyright Security Agreement dated as of January 22,
                2003 by
                Finlay Jewelry, FJI, Finlay Merchandising & Buying and eFinlay in
                favor of G.E. Capital, as agent (incorporated by reference to Exhibit
                10.16 filed as part of the Annual Report on Form 10-K for the period
                ended
                February 1, 2003 filed by Finlay Jewelry on May 1, 2003).10.15
            
            Second
                Amended and Restated Open-End Mortgage Deed and Security Agreement
                from
                Finlay Jewelry to G.E. Capital, dated February 20, 2003, effective
                as of
                January 22, 2003 (incorporated by reference to Exhibit 10.17 filed
                as part
                of the Annual Report on Form 10-K for the period ended February 1,
                2003
                filed by Finlay Jewelry on May 1, 2003).10.16
            
            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).10.17*
            
            Restricted
                Stock Agreement, dated as of August 14, 2003, between the Holding
                Company
                and Arthur E. Reiner (incorporated by reference to Exhibit 10.2 filed
                as
                part of the Quarterly Report on Form 10-Q for the period ended November
                1,
                2003 filed by Finlay Jewelry on December 10, 2003).10.18*
            
            Form
                of Restricted Stock Agreement entered into by the Holding Company
                in
                connection with October 2003 restricted stock awards under the Holding
                Company’s 1997 Long Term Incentive Plan (incorporated by reference to
                Exhibit 10.3 filed as part of the Quarterly Report on Form 10-Q for
                the
                period ended November 1, 2003 filed Finlay Jewelry on December 10,
                2003).




74




10.19*
            
            Form
                of Restricted Stock Agreement entered into by the Holding Company
                in
                connection with restricted stock awards under the Holding Company’s 1997
                Long Term Incentive Plan (incorporated by reference to Exhibit 10.1
                filed
                as part of the Quarterly Report on Form 10-Q for the period ended
                May 1,
                2004 filed by Finlay Jewelry on June 10, 2004).10.21*
            
            Description
                of Director and Named Executive Officer Compensation.10.22*
            
            Finlay
                Executive Severance Pay Plan, effective February 28, 2006
                (incorporated by reference to Exhibit 10.22 filed as part of the
                Annual
                Report on Form 10-K for the period ended February 3, 2007 filed by
                Finlay
                Jewelry on April 19, 2007).10.23*
            
            The
                Holding Company’s 2007 Long Term Incentive Plan (incorporated by reference
                to Exhibit 10.23 filed as part of the Current Report on Form 8-K
                filed by
                Finlay Jewelry on June 25, 2007).10.23(a)*
            
            Form
                of Restricted Stock Agreement under the Holding Company’s 2007 Long Term
                Incentive Plan (incorporated by reference to Exhibit 10.23(a) filed
                as
                part of the Current Report on Form 8-K filed by Finlay Jewelry on
                June 25,
                2007).10.23(b)*
            
            Form
                of Restricted Stock Agreement under the Holding Company’s 2007 Long Term
                Incentive Plan (incorporated by reference to Exhibit 10.23(b) filed
                as
                part of the Current Report on Form 8-K filed by Finlay Jewelry on
                June 25,
                2007).10.23(c)*
            
            Form
                of Agreement and Certificate of Option pursuant to the Holding Company’s
                2007 Long Term Incentive Plan (incorporated by reference to Exhibit
                10.23(c) filed as part of the Current Report on Form 8-K filed by
                Finlay
                Jewelry on June 25, 2007).10.23(d)*
            
            Form
                of Agreement and Certificate of Option pursuant to the Holding Company’s
                2007 Long Term Incentive Plan (incorporated by reference to Exhibit
                10.23(d) filed as part of the Current Report on Form 8-K filed by
                Finlay
                Jewelry on June 25, 2007).10.24*
            
            The
                Holding Company’s Cash Bonus Plan, effective as of June 19, 2007
                (incorporated by reference to Exhibit 10.24 filed as part of the
                Current
                Report on 8-K filed by Finlay Jewelry on June 25,
                2007).10.25*
            
            Severance
                Agreement and General Release between Finlay Jewelry and Edward J.
                Stein,
                dated March 27, 2008 (incorporated by reference to Exhibit 10.25
                filed as
                part of the Current Report on Form 8-K filed by Finlay Jewelry on
                March
                31, 2008).10.26*
            
            Finlay
                Jewelry Change of Control Executive Severance Plan, effective March
                11,
                2008 (incorporated by reference to Exhibit 10.2 filed as part of
                the
                Current Report on Form 8-K filed by Finlay Jewelry on March 14,
                2008).18.1
            
            Preferability
                letter from Deloitte & Touche LLP regarding change in inventory
                valuation methodology (incorporated by reference to Exhibit 18 filed
                as
                part of the Quarterly Report on Form 10-Q for the period ended October
                30,
                2004 filed by Finlay Jewelry on December 9, 2004).21.1
            
            Subsidiaries
                of Finlay Jewelry.31.1
            
            Certification
                of principal executive officer pursuant to the Sarbanes-Oxley Act
                of 2002,
                Section 302.31.2
            
            Certification
                of principal financial officer pursuant to the Sarbanes-Oxley Act
                of 2002,
                Section 302.




75




32.1
            
            Certification
                of principal executive officer pursuant to the Sarbanes-Oxley Act
                of 2002,
                Section 906.32.2
            
            Certification
                of principal financial officer pursuant to the Sarbanes-Oxley Act
                of 2002,
                Section 906.




*
            Indicates
                management contract or compensatory plan or arrangement.





(b)
            Exhibits
                – See exhibit index included in Item 15(a)(3) of Part IV of this Form
                10-K.





(c)
            Financial
                Statement Schedules – See Item 15(a)(2) of Part IV of this Form
                10-K.




76


**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 CorporationDate:
                  April 17, 2008
              By:
              /s/
                  ARTHUR E. REINERArthur
                  E. ReinerChairman
                  of the Board





**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/
                ARTHUR E. REINER
            
            Chairman
                of the Board,
            
            April
                17, 2008Arthur
                E. Reiner
            
            Chief
                Executive Officer and Director(Principal
                Executive Officer)/s/
                BRUCE E. ZURLNICK
            
            Senior
                Vice President, Treasurer and
            
            April
                17, 2008Bruce
                E. Zurlnick
            
            Chief
                Financial Officer (PrincipalFinancial
                and Accounting Officer)/s/
                DAVID B. CORNSTEIN
            
            Director
            
            April
                17, 2008David
                B. Cornstein/s/
                ROHIT M. DESAI
            
            Director
            
            April
                17, 2008Rohit
                M. Desai/s/
                ELLEN R. LEVINE
            
            Director
            
            April
                17, 2008Ellen
                R. Levine/s/
                LOUIS LIPSCHITZ
            
            Director
            
            April
                17, 2008Louis
                Lipschitz/s/
                NORMAN S. MATTHEWS
            
            Director
            
            April
                17, 2008Norman
                S. Matthews/s/
                CHARLES E. MCCARTHY
            
            Director
            
            April
                17, 2008Charles
                E. McCarthy/s/
                THOMAS M. MURNANE
            
            Director
            
            April
                17, 2008Thomas
                M. Murnane





77


**FINLAY
      FINE JEWELRY CORPORATION**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





PAGEManagement’s
                Report on Internal Control Over Financial Reporting
            
            F-2Reports
                of Independent Registered Public Accounting Firms
            
            F-3Consolidated
                Statements of Operations for the years ended February 2, 2008, February
                3,
                2007 and January 28, 2006
            
            F-8Consolidated
                Balance Sheets as of February 2, 2008 and February 3, 2007
            
            F-9Consolidated
                Statements of Changes in Stockholder’s Equity and Comprehensive Income
                (Loss) for the years ended February 2, 2008, February 3, 2007 and
                January
                28, 2006
            
            F-10Consolidated
                Statements of Cash Flows for the years ended February 2, 2008, February
                3,
                2007 and January 28, 2006
            
            F-11Notes
                to Consolidated Financial Statements for the years ended February
                2, 2008,
                February 3, 2007 and January 28, 2006
            
            F-12




F-1





**Management’s
      Report on Internal Control Over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rule
      13a-15(f). Under the supervision and with the participation of our management,
      including our Chief Executive Officer (“CEO”) and Chief Financial Officer
      (“CFO”), we conducted an evaluation of the effectiveness of our internal control
      over financial reporting based on the framework in Internal Control – Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission. Based on our evaluation under the framework in Internal Control
–
Integrated Framework, our management concluded that our internal control over
      financial reporting was effective as of February 2, 2008.





We
      excluded from our assessment any changes in internal control over financial
      reporting with respect to Bailey Banks & Biddle, which was acquired in
      November 2007, and whose financial statements reflect total assets and net
      sales
      constituting 31% and 12%, respectively, of the related consolidated financial
      statement amounts as of and for the year ended February 2, 2008.





The
      effectiveness of our internal control over financial reporting as of February
      2,
      2008 has been audited by Eisner LLP, independent registered public accounting
      firm, as stated in its report which is set forth on page F-3 of this
      report.





/s/
                ARTHUR E. REINERArthur
                E. ReinerChief
                Executive Officer/s/
                BRUCE E. ZURLNICKBruce
                E. ZurlnickSenior
                Vice President, Treasurerand
                Chief Financial Officer




F-2





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Stockholder and Board of Directors


Finlay
      Fine Jewelry Corporation:





We
      have
      audited Finlay Fine Jewelry Corporation and subsidiaries’ (the "Company")
      internal control over financial reporting as of February 2, 2008, based on
      the
      criteria established in Internal Control - Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
      The
      Company's management is responsible for maintaining effective internal control
      over financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting, included in the accompanying Management's
      Report on Internal Control over Financial Reporting. Our responsibility is
      to
      express an opinion on the Company's internal control over financial reporting
      based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists, and
      testing and evaluating the design and operating effectiveness of internal
      control based on the assessed risk. Our audit also included performing such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company's internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company's internal control
      over
      financial reporting includes those policies and procedures that (i) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (ii)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (iii) provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use, or disposition of the
      company's assets that could have a material effect on the financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





Our
      audit
      did not include the internal controls over financial reporting of Bailey Banks
      & Biddle because they were acquired by the Company in November 2007. Bailey
      Banks & Biddle constituted approximately $225,795,000 of total assets and
      approximately $97,408,000 of net sales of the related consolidated financial
      statement amounts as of and for the year ended February 2, 2008.





In
      our
      opinion, the Company maintained, in all material respects, effective internal
      control over financial reporting as of February 2, 2008, based on criteria
      established in Internal Control-Integrated Framework issued by
      COSO.


F-3





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet of the Company
      as of February 2, 2008, and the related consolidated statements of operations,
      stockholder’s equity and comprehensive income (loss), and cash flows for the
      year then ended, and our report dated April 14, 2008 expressed an unqualified
      opinion thereon.





/s/
      Eisner LLP





New
      York,
      New York


April
      14,
      2008


F-4





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Stockholder and Board of Directors


Finlay
      Fine Jewelry Corporation:





We
      have
      audited the accompanying consolidated balance sheet of Finlay Fine Jewelry
      Corporation and subsidiaries (the "Company") as of February 2, 2008, and the
      related consolidated statements of operations, stockholder’s equity and
      comprehensive income (loss), and cash flows for the year then ended. 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 audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). 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 audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Finlay Fine Jewelry
      Corporation and subsidiaries as of February 2, 2008 and the consolidated results
      of their operations and their cash flows for the year then ended in conformity
      with U.S. generally accepted accounting principles.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the Company’s internal control over financial
      reporting as of February 2, 2008, based on the criteria established in Internal
      Control – Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission, and our report dated April 14, 2008
      expressed an unqualified opinion thereon.





/s/
      Eisner LLP





New
      York,
      New York


April
      14,
      2008


F-5





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Stockholder and Board of Directors


Finlay
      Fine Jewelry Corporation:





We
      have
      audited the accompanying consolidated balance sheet of Finlay Fine Jewelry
      Corporation and subsidiaries (the “Company”) as of February 3, 2007, and the
      related consolidated statements of operations, stockholder’s equity and
      comprehensive income (loss), and cash flows for each of the two years in the
      period ended February 3, 2007. 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 did not audit the financial
      statements of Carlyle & Co. Jewelers (a wholly-owned subsidiary of the
      Company), which statements reflect total assets constituting $75,634,000 and
      $62,323,000 of consolidated total assets as of February 3, 2007 and January
      28,
      2006, respectively, and total net sales constituting $101,572,000 and
      $69,490,000 of consolidated total net sales for the years ended February 3,
      2007
      and January 28, 2006, respectively. Such financial statements were audited
      by
      other auditors whose report has been furnished to us, and our opinion, insofar
      as it relates to the amounts included for Carlyle & Co. Jewelers, is based
      solely on the report of such other auditors.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). 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 and the report
      of
      other auditors provide a reasonable basis for our opinion.





In
      our
      opinion, based on our audits and the report of other auditors, such consolidated
      financial statements present fairly, in all material respects, the financial
      position of Finlay Fine Jewelry Corporation and subsidiaries as of February
      3,
      2007, and the results of their operations and their cash flows for each of
      the
      two years in the period ended February 3, 2007, in conformity with accounting
      principles generally accepted in the United States of America.





As
      discussed in Note 2 to the Notes to Consolidated Financial Statements, the
      Company adopted the provisions of Statement of Financial Accounting Standards
      No. 123(R), *Share-Based
      Payment,* on
      January 29, 2006.





Also
      as
      discussed in Note 2, the accompanying February 3, 2007 and January 28,
      2006 Statements of Operations have been restated for discontinued
      operations, in accordance with Statement of Financial Accounting Standards
      No.
      144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .




/s/
                DELOITTE & TOUCHE LLPNew
                York, New YorkApril
                19, 2007 (April 14, 2008 as to the effects of the restatement and
                discontinued operations discussed in Note
                2)


F-6





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors


Carlyle
      & Co. Jewelers


Greensboro,
      North Carolina





We
      have
      audited the balance sheet of Carlyle & Co. Jewelers, a wholly-owned
      subsidiary of Finlay Fine Jewelry Corporation, (the “Company”), as of February
      3, 2007 and the related statements of operations and retained earnings, and
      cash
      flows for the year ended February 3, 2007 and the 37 week period ended January
      28, 2006. 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 the standards of the Public Company
      Accounting Oversight Board (United States). 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 Carlyle & Co. Jewelers, a
      wholly-owned subsidiary of Finlay Fine Jewelry Corporation, as of February
      3,
      2007 and the results of their operations and their cash flows for the year
      ended
      February 3, 2007 and the 37 week period ended January 28, 2006 in conformity
      with accounting principles generally accepted in the United States of
      America.





/s/CHERRY,
      BEKAERT & HOLLAND L.L.P.





Raleigh,
      North Carolina


April
      19,
      2007


F-7


**FINLAY
      FINE JEWELRY CORPORATION**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(in
      thousands)**





**Year
                Ended****February
                2,**
              **2008**
            
            **February
                3,**
              **2007**
            
            **January
                28,**
              **2006**Sales
            
            $
            835,892
            
            $
            739,021
            
            $
            689,495Cost
                of sales
            
            
            455,664
            
            
            392,012
            
            
            352,407Gross
                margin
            
            
            380,228
            
            
            347,009
            
            
            337,088Selling,
                general and administrative expenses
            
            
            347,255
            
            
            322,676
            
            
            304,525Depreciation
                and amortization
            
            
            15,545
            
            
            14,756
            
            
            14,524Impairment
                of goodwill
            
            
            3,009
            
            
            -
            
            
            77,288Income
                (loss) from operations
            
            
            14,419
            
            
            9,577
            
            
            (59,249
            )Interest
                expense, net
            
            
            30,596
            
            
            23,388
            
            
            21,848Other
                expense
            
            
            -
            
            
            -
            
            
            79Loss
                from continuing operations before income taxes
            
            
            (16,177
            )
            
            (13,811
            )
            
            (81,176
            )Benefit
                for income taxes
            
            
            (5,887
            )
            
            (5,754
            )
            
            (6,955
            )Loss
                from continuing operations
            
            
            (10,290
            )
            
            (8,057
            )
            
            (74,221
            )Discontinued
                operations, net of tax
            
            
            236
            
            
            12,457
            
            
            18,456Net
                income (loss)
            
            $
            (10,054
            )
            $
            4,400
            
            $
            (55,765
            )





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


F-8





**FINLAY
      FINE JEWELRY CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


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





**February
                2,**
              **2008**
            
            **February
                3,**
              **2007****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            4,701
            
            $
            1,704Accounts
                receivable
            
            
            13,793
            
            
            26,271Other
                receivables
            
            
            1,591
            
            
            2,314Merchandise
                inventories
            
            
            611,488
            
            
            430,479Prepaid
                expenses and other
            
            
            7,236
            
            
            4,356Total
                current assets
            
            
            638,809
            
            
            465,124Fixed
                assets:Building,
                equipment, fixtures and leasehold improvements
            
            
            112,079
            
            
            98,229Less –
                accumulated depreciation and amortization
            
            
            41,887
            
            
            43,236Fixed
                assets, net
            
            
            70,192
            
            
            54,993Deferred
                charges and other assets, net
            
            
            27,431
            
            
            13,517Goodwill
            
            
            -
            
            
            3,009Total
                assets
            
            $
            736,432
            
            $
            536,643**LIABILITIES
                AND STOCKHOLDER’S EQUITY**Current
                liabilities:Short-term
                borrowings
            
            $
            224,231
            
            $
            45,876Accounts
                      payable – trade (including cash overdraft of $7,209 and $4,891 at
                      February 2, 2008 and February 3, 2007,
                      respectively)
            
            
            110,475
            
            
            85,053Accrued
                liabilities:Accrued
                salaries and benefits
            
            
            15,799
            
            
            16,940Accrued
                miscellaneous taxes
            
            
            7,162
            
            
            7,226Accrued
                interest
            
            
            3,494
            
            
            2,874Deferred
                income
            
            
            4,364
            
            
            5,206Deferred
                income taxes
            
            
            16,009
            
            
            13,322Other
            
            
            29,515
            
            
            16,394Income
                taxes payable
            
            
            5,580
            
            
            13,396Due
                to parent
            
            
            7,407
            
            
            4,989Total
                current liabilities
            
            
            424,036
            
            
            211,276Long-term
                debt
            
            
            200,000
            
            
            200,000Deferred
                income taxes
            
            
            3,593
            
            
            7,827Other
                non-current liabilities
            
            
            3,278
            
            
            936Total
                liabilities
            
            
            630,907
            
            
            420,039Commitments
                and contingencies (Note 16)Stockholder’s
                equity:Common
                  Stock, par value $.01 per share; authorized 5,000 shares: issued
                  and
                  outstanding 1,000 shares
            
            
            -
            
            
            -Additional
                paid-in capital
            
            
            85,975
            
            
            85,975Retained
                earnings
            
            
            19,550
            
            
            30,629Total
                stockholder’s equity
            
            
            105,525
            
            
            116,604Total
                liabilities and stockholder’s equity
            
            $
            736,432
            
            $
            536,643





The
      accompanying notes are an integral part of these consolidated balance
      sheets.


F-9





**FINLAY
      FINE JEWELRY CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY**


**AND
      COMPREHENSIVE INCOME (LOSS)**


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


**Accumulated****Common Stock**
              
              **Additional**
              
              
              
              **Restricted**
              
              **Total****Number**
              
              
              
              **Paid-in**
              
              **Retained**
              
              **Stockholder’s**
              
              **Treasury**
              
              **Comprehensive****of Shares**
              
              **Amount**
              
              **Capital**
              
              **Earnings**
              
              **Equity**
              
              **Stock**
              
              **Income (Loss)**Balance,
                  January 29, 2005
              
              
              1,000
              
              $
              -
              
              $
              82,975
              
              $
              81,994
              
              $
              (112)
              
              $
              164,857Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (55,765)
              
              
              -
              
              
              (55,765)
              
              $
              (55,765)Change
                  in fair value of gold forward contracts, net of tax
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              476
              
              
              476
              
              
              476Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (55,289)Capital
                  contribution
              
              
              -
              
              
              -
              
              
              3,000
              
              
              **-**
              
              
              -
              
              
              3,000Balance,
                  January 28, 2006
              
              
              1,000
              
              
              -
              
              
              85,975
              
              
              26,229
              
              
              364
              
              
              112,568Net
                  income
              
              
              -
              
              
              **-**
              
              
              **-**
              
              
              4,400
              
              
              **-**
              
              
              4,400
              
              $
              4,400Change
                  in fair value of gold forward contracts, net of tax
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (364)
              
              
              (364)
              
              
              (364)Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              4,036Balance,
                  February 3, 2007
              
              
              1,000
              
              
              **-**
              
              
              85,975
              
              
              30,629
              
              
              **-**
              
              
              116,604Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (10,054)
              
              
              -
              
              
              (10,054
              )
              $
              (10,054)Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (10,054)Effect
                  of adoption of FIN 48
              
              
              -
              
              
              **-**
              
              
              **-**
              
              
              (1,025)
              
              
              **-**
              
              
              (1,025
              )Balance,
                  February 2, 2008
              
              
              1,000
              
              $
              -
              
              $
              85,975
              
              $
              19,550
              
              $
              -
              
              $
              105,525





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


F-10


**FINLAY
      FINE JEWELRY CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**




**Year
                Ended****February
                2,**
              **2008**
            
            
            **February
                3,**
              **2007**
            
            
            **January
                28,**
              **2006**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income (loss)
            
            $
            (10,054
            )
            $
            4,400
            
            $
            (55,765
            )Adjustments
                to reconcile net income (loss) to net cash provided
              by
                (used in) operating activities:Impairment
                of goodwill
            
            
            3,009
            
            
            -
            
            
            77,288Depreciation
                and amortization
            
            
            15,718
            
            
            18,397
            
            
            19,125Loss
                on disposal of fixed assets
            
            
            330
            
            
            6,072
            
            
            182Write-off
                of deferred financing costs
            
            
            1,213
            
            
            -
            
            
            -Amortization
                of deferred financing costs
            
            
            1,206
            
            
            1,319
            
            
            1,185Deferred
                income tax provision
            
            
            (1,547
            )
            
            (1,409
            )
            
            (5,457
            )Other,
                net
            
            
            199
            
            
            (411
            )
            
            (288
            )Changes
                in operating assets and liabilities, net of effects from
                acquisitions(Note
                3):(Increase)
                decrease in accounts and other receivables
            
            
            13,202
            
            
            4,810
            
            
            (23,002
            )(Increase)
                decrease in merchandise inventories
            
            
            29,953
            
            
            (33,069
            )
            
            1,989(Increase)
                decrease in prepaid expenses and other
            
            
            96
            
            
            87
            
            
            (262
            )Increase
                (decrease) in accounts payable and accrued liabilities
            
            
            17,556
            
            
            (45,528
            )
            
            10,050Increase
                (decrease) in due to parent
            
            
            2,417
            
            
            1,893
            
            
            1,203NET
                CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
            
            
            73,298
            
            
            (43,439
            )
            
            26,248CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of equipment, fixtures and leasehold improvements
            
            
            (13,406
            )
            
            (11,834
            )
            
            (11,869
            )Acquisition
                of Bailey Banks & Biddle, net of cash acquired
            
            
            (230,131
            )
            
            -
            
            
            -Acquisition
                of Congress, net of cash acquired
            
            
            -
            
            
            (6,260
            )
            
            -Acquisition
                of Carlyle, net of cash acquired
            
            
            -
            
            
            -
            
            
            (28,790
            )Deferred
                charges and other assets
            
            
            (82
            )
            
            -
            
            
            -NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (243,619
            )
            
            (18,094
            )
            
            (40,659
            )CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from revolving credit facility
            
            
            914,911
            
            
            794,138
            
            
            733,314Principal
                repayments on revolving credit facility
            
            
            (736,556
            )
            
            (748,262
            )
            
            (733,314
            )Payment
                of Congress debt assumed upon acquisition
            
            
            -
            
            
            (10,031
            )
            
            -Payment
                of Carlyle debt assumed upon acquisition
            
            
            -
            
            
            -
            
            
            (17,137
            )Capitalized
                financing costs
            
            
            (7,355
            )
            
            (700
            )
            
            (311
            )Bank
                overdraft
            
            
            2,318
            
            
            594
            
            
            (5,600
            )Capital
                contribution
            
            
            -
            
            
            -
            
            
            3,000NET
                CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
            
            
            173,318
            
            
            35,739
            
            
            (20,048
            )INCREASE
                (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            2,997
            
            
            (25,794
            )
            
            (34,459
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR
            
            
            1,704
            
            
            27,498
            
            
            61,957CASH
                AND CASH EQUIVALENTS, END OF YEAR
            
            $
            4,701
            
            $
            1,704
            
            $
            27,498SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONInterest
                paid
            
            $
            28,866
            
            $
            23,044
            
            $
            23,260Income
                taxes paid
            
            $
            3,265
            
            $
            11,066
            
            $
            7,130


SUPPLEMENTAL
                DISCLOSURE OF NON-CASH ACTIVITIES:Tax
                benefit from exercise of stock options
            
            $
            -
            
            $
            -
            
            $
            63Award
                of vested participant restricted stock units
            
            $
            864
            
            $
            643
            
            $
            734Accrual
                for purchases of fixed assets
            
            $
            1,347
            
            $
            3,436
            
            $
            2,548Reclassification
                of other receivables to merchandise inventories
            
            $
            -
            
            $
            49,068
            
            $
            -




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


F-11


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
      1 – DESCRIPTION OF BUSINESS**





Finlay
      Fine Jewelry Corporation, a Delaware corporation (together with its wholly-owned
      subsidiaries (“Finlay Jewelry”, the “Registrant”, “we”, “us” and “our”), is a
      wholly-owned subsidiary of Finlay Enterprises, Inc. (the “Holding Company”).
      References to “Finlay” mean collectively, the Holding Company and Finlay
      Jewelry. We are a retailer of fine jewelry products and operate licensed fine
      jewelry departments in department stores and specialty jewelry stores throughout
      the United States. All references herein to licensed departments refer to fine
      jewelry departments operated pursuant to license agreements with host department
      stores and all references herein to stand-alone jewelry stores refer to our
      specialty jewelry stores.





In
      May
      2005, we completed the acquisition of Carlyle & Co. Jewelers (“Carlyle”).
      Carlyle currently operates 32 specialty jewelry stores in nine states located
      primarily in the southeastern United States under the Carlyle & Co., J.E.
      Caldwell & Co. and Park Promenade trade names.





In
      November 2006, we completed the acquisition of L. Congress, Inc. (“Congress”).
      Congress currently operates five specialty jewelry stores in southwest Florida.





In
      November 2007, we completed the acquisition of substantially all of the assets
      and specified liabilities of the Bailey Banks & Biddle division of Zale
      Corporation, a chain of 70 stand-alone stores in 24 states with a focus on
      the
      luxury market, offering jewelry and watches under high-end name
      brands.





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





As
      a
      result of the store closings in 2006 associated with Macy’s, Inc. (“Macy’s”)
      formerly known as Federated Department Stores, Inc. and The May Department
      Stores Company (“May”) merger, the results of operations for the 194 departments
      that were either divested or phased into the Macy’s East or Macy’s West
      divisions have been segregated from those of continuing operations, net of
      tax,
      and classified as discontinued operations. Additionally, as a result of the
      decision by Belk, Inc. (“Belk”) not to renew our license agreement, the results
      of operations of the 75 Belk departments that closed in January 2007 have been
      segregated from those of continuing operations, net of tax, and classified
      as
      discontinued operations. Further,
      as a result of Belk’s acquisition of Parisian from Saks, Inc. (“Saks”) in
      October 2006, 33 Parisian departments closed in July 2007. The results of
      operations for these departments have also been reclassified as discontinued
      operations. Unless otherwise indicated, the following discussion relates to
      our
      continuing operations. See Note 14 for additional information regarding
      discontinued operations and Note 18 for subsequent events.




In
      November 2007, our revolving credit agreement with General Electric Capital
      Corporation (“G.E. Capital”) and certain other lenders was amended and restated
      (the “Revolving Credit Agreement”). The Revolving Credit Agreement, which
      matures in November 2012, provides us with a senior secured revolving line
      of
      credit up to $550.0 million (the “Revolving Credit Facility”).


F-12


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES**





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





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





***Fiscal
      Year:*** Our
      fiscal year ends on the Saturday closest to January 31. References to 2008,
      2007, 2006 and 2005 relate to the fiscal year ending on January 31, 2009 and
      the
      fiscal years ended on February 2, 2008, February 3, 2007 and January 28, 2006,
      respectively. Each of the fiscal years includes 52 weeks, except 2006, which
      includes 53 weeks.





***Cash
      and Cash Equivalents:*** We
      consider cash on hand and deposits in money market funds as cash and cash
      equivalents. The
      majority of payments due from third-parties for credit card and debit card
      transactions process within 24-48 hours, and, as such, are classified as cash
      and cash equivalents. Amounts due from third parties for these transactions
      totaled $2.7 million and $0.6 million at February 2, 2008 and February 3, 2007,
      respectively.





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





In
      past
      years, we have from time to time entered into forward contracts based upon
      the
      anticipated sales of consigned gold merchandise. These contracts aided our
      efforts in hedging against the risk of gold price fluctuations, as the cost
      of
      gold for our consigned gold merchandise was not fixed until the merchandise
      was
      sold. For the years ended February 3, 2007 and January 28, 2006, the gain/loss
      on open forward contracts was not material.





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





We
      designated our existing derivative instruments, consisting of gold forward
      contracts, as cash flow hedges. For derivative instruments designated as cash
      flow hedges, the effective portion of the change in the fair value of the
      derivative is recorded in accumulated other comprehensive income, a separate
      component of stockholder’s equity, and is reclassified into cost of sales when
      the offsetting effects of the hedged transaction impact earnings. Changes in
      the
      fair value of the derivative attributable to hedge ineffectiveness are recorded
      in earnings immediately.




F-13




**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





***Stock
      Based Compensation:*** Effective
      January 29, 2006, we began recording compensation expense associated with stock
      options and other forms of equity compensation in accordance with SFAS
      No. 123R, ** “Share-Based
      Payment” (“SFAS No. 123R”), as interpreted by the Securities and Exchange
      Commission (the “Commission”) Staff Accounting Bulletin No. 107 (“SAB No.
      107”). Prior to January 29, 2006, we had accounted for stock options according
      to the provisions of Accounting Principles Board (“APB”) Opinion No.
      25, ** “Accounting
      for Stock Issued to Employees”, and related interpretations, under which no
      compensation expense was recorded for awards granted without intrinsic value.
      We
      adopted the modified prospective transition method provided for under SFAS
      No.
      123R, and, consequently, have not retroactively adjusted results from prior
      periods. Under this method, compensation cost recorded for stock options during
      2006 included amortization of the remaining unvested portion of the stock option
      awards granted prior to January 29, 2006, based on the estimated fair
      value.





***Depreciation
      and Amortization:*** Depreciation and amortization are computed by the straight-line method over
      the
      estimated useful lives of the fixed assets; generally, four years for displays,
      three to 15 years for fixtures, computers and equipment and 30 to 39 years
      for
      buildings. Leasehold improvements and other fixed assets are depreciated over
      the shorter of their estimated useful lives or the expected term of the license
      or lease agreements.





***Software
      Development Costs:*** Software
      development costs have been accounted for in accordance with Statement of
      Position (the “SOP”) No. 98-1, “Accounting for the Costs of Computer Software
      Developed or Obtained for Internal Use”. The SOP states that software
      development costs that are incurred in the preliminary project stage are
      expensed as incurred. Once the specified criteria of the SOP have been met,
      internal and external direct costs incurred in developing or obtaining computer
      software as well as related interest costs are capitalized. Training and data
      conversion costs are expensed as incurred. In addition, costs incurred for
      the
      routine operation and maintenance of management information systems and software
      are expensed as incurred. Amortization is computed by the straight-line method
      over the estimated useful lives of the software ranging from three to seven
      years.





Included
      in Deferred charges and other assets, net in the accompanying Consolidated
      Balance Sheets at both February 2, 2008 and February 3, 2007, are capitalized
      software costs of $20.6 million and $23.0 million, respectively, and accumulated
      amortization of $19.7 million and $19.0 million, respectively.





****** ***Deferred
      Financing Costs:*** Deferred
      financing costs are amortized over the term of the related debt agreements
      using
      the straight line method, which approximates the effective interest method.
      Net
      deferred financing costs totaled $9.4 million at February 2, 2008 and $4.4
      million at February 3, 2007, net of accumulated amortization of $2.6 million
      and
      $3.5 million, respectively. The deferred financing costs are reflected as a
      component of Deferred charges and other assets, net in the accompanying
      Consolidated Balance Sheets. Amortization of deferred financing costs for 2007,
      2006 and 2005 totaled $1.2 million, $1.3 million and $1.2 million, respectively,
      and have been recorded as a component of Interest expense, net in the
      accompanying Consolidated Statements of Operations. In 2007, we recorded a
      $1.2
      million write-off of deferred financing costs in connection with the amended
      and
      restated Revolving Credit Agreement, which is also included in interest expense,
      net. Refer to Note 8 for additional information regarding deferred financing
      costs.





***Revenue
      Recognition:*******We recognize revenue upon the
      sale of merchandise, either owned or consigned, to our customers, net of
      anticipated returns and net of sales taxes collected. The provision for sales
      returns is based on our historical return rate. Our stand-alone jewelry stores
      offer its customers a layaway plan that allows them to set merchandise aside
      and
      pay for it over a period of time with no finance charges. Receipts of layaway
      deposits are recorded as a liability on the accompanying Consolidated Balance
      Sheets and are included in other current liabilities, which totaled
      approximately $1.6 million and $0.7 million at February 2, 2008, and February
      3,
      2007, respectively. Layaway deposits  are not recognized as sales until
      fully paid for by the customer and the customer claims the
      merchandise.




F-14




**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





***Cost
      of Sales:*** Cost of
      sales includes the cost of merchandise sold, repair expense, shipping, shrinkage
      and inventory losses. Store payroll, buying and occupancy costs such as license
      fees and lease expense are reflected in Selling, general and administrative
      expenses (“SG&A”) in the accompanying Consolidated Statements of
      Operations.





***Advertising
      Costs:*** All
      costs associated with advertising are expensed in the month that the advertising
      takes place. For 2007, 2006 and 2005, gross advertising expenses were $38.9
      million, $32.8 million and $31.1 million, respectively, and are included in
      SG&A in the accompanying Consolidated Statements of Operations.





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





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





As
      of
      February 2, 2008 and February 3, 2007, deferred vendor allowances totaled (i)
      $7.1 million and $9.4 million, respectively, for owned merchandise, which
      allowances are included as an offset to Merchandise inventories in the
      accompanying Consolidated Balance Sheets, and (ii) $4.4 million and $5.2
      million, respectively, for merchandise received on consignment, which allowances
      are included as Deferred income in the accompanying Consolidated Balance Sheets.





***Store
      Opening Costs:*** The cost
      of opening new locations are expensed as incurred.





***Fair
      Value of Financial Instruments:*** Cash,
      accounts receivable, short-term borrowings, accounts payable and accrued
      liabilities are reflected in the accompanying Consolidated Financial Statements
      at fair value due to the short-term maturity of these instruments. The fair
      value of our debt is disclosed in Note 8.





***Accounting
      for the Impairment of Long-Lived Assets:*** SFAS
      No.
      144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.
      144”), addresses financial accounting and reporting for the impairment or
      disposal of long-lived assets. This Statement extends the reporting requirements
      to include reporting separately as discontinued operations, components of an
      entity that have either been disposed of or classified as held-for-sale. Refer
      to Note 14 for additional information regarding discontinued
      operations.





***Discontinued
      Operations:*** We
      account for closing stores as discontinued operations when the operations and
      cash flows of a store being disposed of are eliminated from on-going operations
      and we do not
      have
      any significant continuing involvement in its operations. In reaching the
      determination as to whether the cash flows of a store will be eliminated from
      ongoing operations, we consider whether it is likely that customers will migrate
      to similar stores in the same geographic market and our consideration includes
      an evaluation of the proximity to the disposed
      store.


F-15


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





***Accounting
      for Costs Associated with Exit or Disposal Activities:*** **** We
      record
      liabilities for costs associated with exit or disposal activities when the
      liabilities are incurred.





***Goodwill:*** As
      goodwill has an indefinite life, we are required to perform an assessment of
      goodwill impairment each year or as impairment indicators arise in accordance
      with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). As
      of January 29, 2005, we had $77.3 million of goodwill. During 2005, an
      impairment of goodwill was recorded and the entire balance was eliminated.
      Further, as a result of the Congress acquisition in 2006, goodwill of $3.0
      million was recorded. During the fourth quarter of 2007, an impairment of
      goodwill was recorded and the Congress goodwill was eliminated. Refer to Note
      7.





***Intangible
      Assets:*** As
      a
      result of the acquisitions discussed in Note 3, tradenames and other intangible
      assets were recorded and are included in Deferred charges and other assets,
      net
      in the accompanying Consolidated Balance Sheets. Indefinite lived intangible
      assets, consisting of tradenames, are tested for impairment each year or as
      impairment indicators arise in accordance with SFAS No. 142. The other
      intangible assets are amortized on a straight-line basis over their useful
      lives
      and the weighted average amortization period is 6.0 years. The amortization
      over
      the next five years is approximately $0.3 million per year. Following is a
      summary of our intangible assets (dollars in thousands):





**Trade-**
              **names**
            
            **Other**
            
            **Total**Balance
                at January 28, 2006
            
            $
            580
            
            $
            192
            
            $
            772Intangible
                assets acquired
            
            
            1,700
            
            
            600
            
            
            2,300Amortization
            
            
            -
            
            
            (55
            )
            
            (55
            )Balance
                at February 3, 2007
            
            
            2,280
            
            
            737
            
            
            3,017Intangible
                assets acquired
            
            
            11,041
            
            
            1,107
            
            
            12,148Amortization
            
            
            -
            
            
            (188
            )
            
            (188
            )Balance
                at February 2, 2008
            
            $
            13,321
            
            $
            1,656
            
            $
            14,977





The
      increase in intangible assets during 2007 is due to the acquisition of Bailey
      Banks & Biddle in November 2007.





***Seasonality:*** A
      significant portion of our revenues are generated in the fourth quarter due
      to
      the seasonality of the retail industry. As such, results for interim periods
      are
      not indicative of annual results. Refer to Note 17 for unaudited quarterly
      financial data.




***New
      Accounting Pronouncements:*** In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements”, (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a
      framework for measuring fair value in accordance with accounting principles
      generally accepted in the United States, and expands disclosures about fair
      value measurements. On December 14, 2007, the FASB issued proposed FASB
      Staff Position No. FAS 157-b, “Effective Date of FASB Statement
      No. 157” (the “proposed FSP”). The proposed FSP would amend SFAS No. 157,
      to delay the effective date for all nonfinancial assets and nonfinancial
      liabilities, except those that are recognized or disclosed at fair value in
      the
      financial statements on a recurring basis (that is, at least annually). The
      proposed FSP defers the effective date of SFAS No. 157 to fiscal years beginning
      after January 31, 2009. We are subject to the remaining provisions of SFAS
      No.
      157 beginning December 30, 2007. We have not yet determined the impact, if
      any, that the implementation of SFAS No. 157 will have on our results of
      operations or financial condition.


F-16


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
      permits companies to voluntarily choose to measure many financial instruments
      and certain other items at fair value. SFAS No. 159 is effective beginning
      February 4, 2008. We have decided not to adopt this optional
      standard.




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007),
‘‘Business Combinations’’ (‘‘SFAS No. 141(R)’’) which establishes
      principles and requirements for how an acquirer recognizes and measures in
      its
      financial statements the identifiable assets acquired, the liabilities assumed
      and any noncontrolling interest in an acquiree, including the recognition and
      measurement of goodwill acquired in a business combination. Certain forms of
      contingent consideration and certain acquired contingencies will be recorded
      at
      fair value at the acquisition date. SFAS No. 141(R) also states acquisition
      costs will generally be expensed as incurred, and restructuring costs will
      be
      expensed in periods after the acquisition date. SFAS No. 141(R) applies
      prospectively to business combinations for which the acquisition date is on
      or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008. We have not yet determined the impact, if any, that the
      implementation of SFAS No. 141(R) will have on our results of operations or
      financial condition.





**NOTE
      3 –** **BUSINESS**  **ACQUISITIONS**





***Bailey
      Banks & Biddle Acquisition***





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





The
      Bailey Banks & Biddle acquisition has been accounted for as a purchase, and
      accordingly, the operating results of Bailey Banks & Biddle have been
      included in our consolidated financial statements since the date of acquisition.
      The following table summarizes the fair values of the assets and liabilities
      at
      the date of acquisition (dollars in thousands):





Cash
            
            $
            42Merchandise
                inventories
            
            
            210,962Prepaid
                expenses and other current assets
            
            
            2,976Property
                and equipment
            
            
            16,718Tradenames
                and other intangible assets
            
            
            12,148Liabilities
                assumed
            
            
            (7,114
            )Net
                assets acquired
            
            $
            235,732





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





**Fiscal
                Year Ended****February
                2,**
              **2008**
            
            **February
                3,**
              **2007****(in
                thousands)**Sales
            
            $
            1,008,131
            
            $
            1,022,747Loss
                from continuing operations
            
            
            (18,408
            )
            
            (13,084
            )Net
                income (loss)
            
            
            (18,172
            )
            
            (627
            )





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




F-17




**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      3 – BUSINESS ACQUISITIONS (continued)**





***Congress
      Acquisition***





In
      November 2006, we completed the acquisition of Congress. The purchase price
      was
      approximately $6.0 million, plus transaction fees of approximately $0.4 million,
      and was financed with additional borrowings under the Revolving Credit
      Agreement. In connection with the purchase, Congress’ revolving credit facility
      and outstanding debt totaling $10.0 million was terminated and paid in full
      at
      the closing. Since the date of the acquisition, Congress’ cash requirements have
      been, and will continue to be, funded under the Revolving Credit Agreement,
      although any additional payment is unlikely.




The
      Congress acquisition has been accounted for as a purchase, and accordingly,
      the
      operating results of Congress have been included in our consolidated financial
      statements since the date of acquisition. The following table summarizes the
      fair value of the assets and liabilities at the date of acquisition (dollars
      in
      thousands):




Cash
            
            $
            62Merchandise
                inventories
            
            
            16,574Prepaid
                  expenses and other current assets
            
            
            448Property
                and equipment
            
            
            3,155Goodwill
            
            
            3,009Other
                assets
            
            
            2,413Liabilities
                assumed
            
            
            (19,259
            )Net
                assets acquired
            
            $
            6,402





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





Refer
      to
      Note 7 for a discussion of goodwill impairment in 2007.





***Carlyle
      Acquisition***





In
      May
      2005, we completed the acquisition of Carlyle. The purchase price was
      approximately $29.0 million, plus transaction fees of approximately $1.7
      million, and was financed with additional borrowings under the Revolving Credit
      Agreement. In connection with the purchase, Carlyle’s revolving credit facility
      totaling $17.1 million was terminated and paid in full at the closing. Since
      the
      date of the acquisition, Carlyle’s cash requirements have been, and will
      continue to be, funded under the Revolving Credit Agreement.





The
      Carlyle acquisition has been accounted for as a purchase, and, accordingly,
      the
      operating results of Carlyle have been included in our consolidated financial
      statements since the date of acquisition. The following table summarizes the
      fair values of the assets and liabilities at the date of acquisition (dollars
      in
      thousands):




Cash
            
            $
            1,695Merchandise
                inventories
            
            
            55,157Prepaid
                expenses and other current assets
            
            
            2,308Property
                and equipment
            
            
            1,751Other
                assets
            
            
            7,284Liabilities
                assumed
            
            
            (37,710
            )Net
                assets acquired
            
            $
            30,485


F-18


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      3 – BUSINESS ACQUISITIONS (continued)**





***Carlyle
      Acquisition (continued)***





The
      following consolidated unaudited pro forma information presents our sales and
      net loss as if the Carlyle acquisition had taken place at the beginning of
      2005:





**Fiscal
                Year Ended****January
                28,**
              **2006****(in thousands)**Sales
            
            $
            733,181Loss
                from continuing operations
            
            
            (80,027
            )Net
                loss
            
            
            (73,605
            )





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





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





In
      August
      2005, Macy’s announced that it had completed a merger with May. In September
      2005, Macy’s announced its integration plans including a divisional realignment
      and divestiture of certain stores. As of February 2, 2008, we operated a total
      of 350 departments in five of Macy’s eight divisions, as follows:




Macy’s
                  South
              
              
              123Macy’s
                  Midwest
              
              
              99Macy’s
                  North(a)
              
              
              57Macy’s
                  Northwest(a)
              
              
              37Bloomingdale’s
              
              
              34Total
              
              
              350


____________________________


(a)  We
      will
      close 94 Macy’s departments at the end of 2008. Refer to Note 18.




During
      the first half of 2006, 194 stores were divested or phased into the Macy’s East
      or Macy’s West divisions and have been classified as discontinued operations in
      accordance with SFAS No. 144. See Note 14 for additional information regarding
      discontinued operations. During 2006 and 2005, we recorded charges associated
      with accelerated depreciation of fixed assets and severance related to our
      field
      operations totaling approximately $4.1 million and $3.8 million, respectively,
      related to these departments. These costs are included in discontinued
      operations in the accompanying Consolidated Statements of Operations.





In
      May
      2006, the Holding Company announced that Belk would not renew our license
      agreement due to Belk’s acquisition of a privately-held company that licensed
      fine jewelry departments in certain of the Belk stores. The termination of
      the
      license agreement, effective at the end of 2006, resulted in the closure of
      75
      departments. In 2006, we generated sales of approximately $51.9 million from
      the
      Belk departments. During 2006, we recorded charges of approximately $0.3 million
      related to the accelerated depreciation of fixed assets and severance related
      to
      our field operations. These costs are included in discontinued operations in
      the
      accompanying Consolidated Statements of Operations.





Further,
      as a result of Belk’s acquisition of Parisian from Saks in October 2006, 33
      Parisian departments closed in July 2007. In 2007 and 2006, we generated sales
      of approximately $9.8 million and $22.8 million, respectively from those
      departments. During 2006, we recorded charges of approximately $0.2
      million related to the accelerated depreciation of fixed assets. These costs
      are
      included in discontinued operations in the accompanying Consolidated Statements
      of Operations.




F-19




**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





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





**Severance and**
              **Termination**
              **Benefits**Balance
                at January 29, 2005
            
            $
            168Charges
            
            
            1,233Payments
            
            
            (143
            )Balance
                at January 28, 2006
            
            $
            1,258Charges**(1)**
            
            
            3,458Payments
            
            
            (4,131
            )Balance
                at February 3, 2007
            
            
            585Payments
            
            
            (398
            )Reversal
                of accrual
            
            
            (70
            )Balance
                at February 2, 2008
            
            $
            117





(1)
            Includes
                $2.5 million of charges recorded in discontinued operations and $0.9
                million of charges recorded in SG&A in the accompanying Consolidated
                Statements of Operations.





**NOTE
      5 – MERCHANDISE INVENTORIES**





Merchandise
      inventories consisted of the following:





**February
                2,**
              **2008**
            
            **February
                3,**
              **2007****(in
                thousands)**Jewelry
                goods – rings, watches and other fine jewelry (first-in, first-out
                (“FIFO”) basis) (a)
            
            $
            649,960
            
            $
            458,920Less:
                Excess of FIFO cost over LIFO inventory value
            
            
            38,472
            
            
            28,441$
            611,488
            
            $
            430,479


______________________________


(a)
            Merchandise
                inventories include $279.0 million and $81.7 million, respectively,
                for
                2007 and 2006 of inventory related to our stand-alone jewelry stores,
                of
                which $191.5 million at February 2, 2008 relates to the Bailey Banks
&
                Biddle stand-alone jewelry stores that were acquired in November
                2007.





We
      determine our LIFO inventory value by utilizing internally developed indices.
      During 2007 and 2006, we recorded LIFO charges totaling $10.0 million and $7.2
      million, respectively.





As
      of
      February 2, 2008 and February 3, 2007, merchandise received on consignment
      approximating a fair value of $217.9 million and $204.0 million, respectively,
      were not included in Merchandise inventories or Accounts payable-trade in the
      accompanying Consolidated Balance Sheets. The increase in consignment inventory
      is primarily associated with the consignment merchandise transferred to us
      in
      conjunction with the Bailey Banks & Biddle acquisition offset by reductions
      in other divisions.





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





F-20






**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      5 – MERCHANDISE INVENTORIES (continued)**


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





**NOTE
      6 – FIXED ASSETS**





Fixed
      assets consists of the following:




**February 2,**
              **2008**
            
            **February 3,**
              **2007****(in
                thousands)**Land
                and building
            
            $
            10,042
            
            $
            10,027Fixtures
            
            
            72,296
            
            
            59,702Displays
            
            
            6,613
            
            
            6,487Computers
                and equipment
            
            
            16,629
            
            
            16,567Leasehold
                improvements
            
            
            6,461
            
            
            5,411Automobiles
            
            
            38
            
            
            35112,079
            
            
            98,229Less:
                accumulated depreciation and amortization
            
            
            (41,887
            )
            
            (43,236
            )Net
                fixed assets
            
            $
            70,192
            
            $
            54,993





Depreciation
      and amortization expense was $12.3 million, $11.6 million and $11.3 million
      for
      2007, 2006 and 2005, respectively.





**NOTE
      7 – GOODWILL IMPAIRMENT**





SFAS
      No.
      142 requires an impairment-only approach to accounting for goodwill. During
      2005, Macy’s announced its intention to divest, beginning in 2006, certain
      stores in **** which
      we
      operated the fine jewelry departments. Based upon this business indicator,
      we utilized our SFAS No. 142 model to evaluate the carrying value of the
      goodwill recorded on our department store based fine jewelry departments segment
      as of July 30, 2005.





The
      goodwill **** impairment
      analysis took into consideration our results for the first half of the year
      and
      estimates for the balance of the year and beyond, as well as Macy’s announcement
      to divest certain stores. We performed our impairment analysis in accordance
      with SFAS No. 142, the provisions of which require, similar to the recognition
      of goodwill in a business combination, an allocation of the fair value to all
      of
      our assets and liabilities (excluding Carlyle and including any unrecognized
      intangible assets) as if we had been acquired in a business combination and
      the
      fair value was the price paid to acquire us. As a result of this analysis,
      an
      impairment of goodwill of $77.3 million, on a pre-tax basis, was recorded as
      a
      component of income (loss) from continuing operations in the accompanying
      Consolidated Statements of Operations for 2005, which eliminated all of the
      goodwill that was on our balance sheet at that time.





As
      a
      result of the Congress acquisition in 2006, goodwill of $3.0 million was
      recorded. Based upon our annual assessment of goodwill, which included an
      analysis of the fair value of the division based on a discounted cash flow
      model
      of projected earnings, we determined that a write-down was required. A pre-tax
      non-cash charge of $3.0 million was recorded in the fourth quarter of
      2007.





**NOTE
      8 – SHORT AND LONG TERM DEBT**





In
      November 2007, we replaced our existing revolver with a new Revolving Credit
      Agreement with certain banks to provide financing in the form of a senior
      secured revolving line of credit up to $550.0 million. The Revolving Credit
      Facility, provides a five-year $512.5 million (“Tranche A”) and $37.5 million
      (“Tranche B”) revolving credit facility and it replaced the May 19, 2005 credit
      facility.





F-21


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      8 – SHORT AND LONG TERM DEBT (continued)**





At
      our
      option, Tranche A bears interest at a floating rate equal to a margin of 0.25%
      over the Index Rate or 2.00% over the LIBOR (London Interbank Offer Rate) from
      November 9, 2007 through January 1, 2009. After January 1, 2009, the loans
      under
      Tranche A will bear interest in accordance with a graduated pricing matrix
      based
      on the average excess availability under the facility for the previous quarter.
      Tranche B bears interest at a floating rate equal to a margin of 2.75% over
      the
      Index Rate or 4.50% over LIBOR. The Index Rate is equal to the higher of (i)
      the
      federal funds rate plus 50 basis points and (ii) the publicly quoted rate as
      published by the Wall Street Journal as the “prime rate”. The Revolving Credit
      Agreement has a $75 million letter of credit sub-limit, which reduces
      availability when utilized.





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





**** At
      February 2, 2008 and February 3, 2007, $224.2 million and $45.9 million was
      outstanding under the Revolving Credit Agreement, at which point the available
      borrowings were $144.2 million and $167.4 million, respectively, after adjusting
      for letters of credit in both years and the $30.0 million unused balance
      requirement in 2007. The maximum amounts outstanding under the Revolving Credit
      Agreement during 2007, 2006 and 2005 were $368.2 million, $175.5 million and
      $158.2 million, respectively. The average amounts outstanding for the same
      periods were $146.7 million, $69.2 million and $79.4 million, respectively.
      The
      weighted average interest rates were 7.5%, 7.7% and 5.9% for 2007, 2006 and
      2005, respectively.





At
      February 2, 2008 and February 3, 2007, we had letters of credit outstanding
      totaling $6.2 million and $6.1 million, respectively, which guarantee various
      trade activities. The contract amounts of the letters of credit approximate
      their fair value.





Long-term
      debt consisted of the following:




**February 2,**
              **2008**
            
            **February 3,**
              **2007****(in
                thousands)**Senior
                Notes (a)
            
            $
            200,000
            
            $
            200,000





(a)
            The
                fair value of the Senior Notes, determined based on market quotes,
                was
                approximately $103.8 million atFebruary
                2, 2008 and $190.5 million at February 3,
                2007.





During
      2004, we completed the sale of 8-3/8% Senior Notes, due June 1, 2012, having
      an
      aggregate principal amount of $200.0 million (the “Senior Notes”). Interest on
      the Senior Notes is payable semi-annually on June 1 and December 1 of each
      year.
      We incurred approximately $5.2 million in costs associated with the sale of
      the
      Senior Notes, of which $5.0 million was deferred and is being amortized over
      the
      term of the Senior Notes.







F-22


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      8** **–
      SHORT AND LONG TERM DEBT (continued)**




The
      Senior Notes are unsecured senior obligations and rank equally in right of
      payment with all of our existing and future unsubordinated indebtedness and
      senior to any of our future indebtedness that is expressly subordinated to
      the
      Senior Notes. The Senior Notes are effectively subordinated to our secured
      indebtedness, including obligations under our Revolving Credit Agreement, to
      the
      extent of the value of the assets securing such indebtedness, and effectively
      subordinated to the indebtedness and other liabilities (including trade
      payables) of our subsidiaries. We may redeem the Senior Notes, in whole or
      in
      part, at any time on or after June 1, 2008 at specified redemption prices,
      plus
      accrued and unpaid interest, if any, to the date of the redemption. Upon certain
      change of control events, each holder of the Senior Notes may require us to
      purchase all or a portion of such holder's Senior Notes at a purchase price
      equal to 101% of the principal amount thereof, plus accrued interest to the
      purchase date.





The
      indenture governing the Senior Notes contains restrictions relating to, among
      other things, the payment of dividends, redemptions or repurchases of capital
      stock, the incurrence of additional indebtedness, the making of certain
      investments, the creation of certain liens, the sale of certain assets, entering
      into transactions with affiliates, engaging in mergers and consolidations and
      the transfer of all or substantially all assets. We
      were
      in compliance with all of our covenants as of and for the year ended February
      2,
      2008.





Since
      all
      of our assets are pledged to lenders and are subject to certain debt covenants,
      only an insubstantial amount of funds can be transferred, in limited
      circumstances, by us to the Holding Company in the form of
      dividends.




Interest
      expense for 2007, 2006 and 2005 was $30.6 million, $23.4 million and $22.0
      million, respectively. Interest income for the same periods was $3,000, $12,000
      and $0.2 million, respectively.





**NOTE
      9 – INCOME TAXES**





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





Deferred
      tax assets and liabilities at year end are as follows:




**February
                2,**
              **2008**
            
            **February
                3,**
              **2007****(in
                thousands)**Deferred
                Tax AssetsUniform
                inventory capitalization
            
            $
            4,120
            
            $
            3,678Expenses
                not currently deductible
            
            
            4,615
            
            
            3,753Net
                operating losses – current
            
            
            -
            
            
            503Total
                current
            
            
            8,735
            
            
            7,934Net
                operating losses – non-current
            
            
            3,319
            
            
            1,772Tax
                deductible goodwill
            
            
            3,164
            
            
            2,215Valuation
                allowance
            
            
            (113
            )
            
            -Total
                non-current
            
            
            6,370
            
            
            3,987Total
                deferred tax assets
            
            
            15,105
            
            
            11,921Deferred
                Tax LiabilitiesLIFO
                inventory valuation
            
            
            24,744
            
            
            21,256Total
                current
            
            
            24,744
            
            
            21,256Depreciation
                and amortization
            
            
            9,963
            
            
            11,814Total
                non-current
            
            
            9,963
            
            
            11,814Total
                deferred tax liabilities
            
            
            34,707
            
            
            33,070Net
                deferred income tax liabilities
            
            $
            19,602
            
            $
            21,149Net
                current deferred income tax liabilities
            
            $
            16,009
            
            $
            13,322Net
                non-current deferred income tax liabilities
            
            
            3,593
            
            
            7,827Net
                deferred income tax liabilities
            
            $
            19,602
            
            $
            21,149




F-23


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      9 – INCOME TAXES (continued)**





The
      components of income tax expense are as follows (in thousands):





**Fiscal Year Ended****February 2,**
              **2008**
            
            **February 3,**
              **2007**
            
            **January 28,**
              **2006**Current
                taxes – Federal
            
            $
            (2,805
            )
            $
            (3,044
            )
            $
            (1,315
            )Current
                taxes – State and local
            
            
            (1,239
            )
            
            (1,301
            )
            
            (29
            )Current
                taxes – Foreign
            
            
            (296
            )
            
            -
            
            
            (154
            )Deferred
                taxes – Federal
            
            
            (1,414
            )
            
            (1,113
            )
            
            (4,073
            )Deferred
                taxes – State and local
            
            
            (133
            )
            
            (296
            )
            
            (1,384
            )Benefit
                for income taxes
            
            $
            (5,887
            )
            $
            (5,754
            )
            $
            (6,955
            )





A
      reconciliation of the income tax benefit computed by applying the federal
      statutory rate to Loss from continuing operations before income taxes to the
      Benefit for income taxes on the accompanying Consolidated Statements of
      Operations is as follows (in thousands):





**Fiscal Year Ended****February 2,**
              **2008**
            
            **February 3,**
              **2007**
            
            **January 28,**
              **2006**Federal statutory
                provision
            
            $
            (5,661
            )
            $
            (4,834
            )
            $
            (28,412
            )Impairment
                of goodwill
            
            
            -
            
            
            -
            
            
            23,258Reversal
                of foreign tax accrual
            
            
            (296
            )
            
            -
            
            
            -Redetermination
                of foreign tax credits
            
            
            -
            
            
            -
            
            
            (154
            )State
                and local taxes, net of federal effect
            
            
            (664
            )
            
            (1,085
            )
            
            (1,346
            )Reversal
                of tax accruals no longer required
            
            
            (209
            )
            
            (50
            )
            
            (425
            )Other
            
            
            943
            
            
            215
            
            
            124Benefit
                for income taxes
            
            $
            (5,887
            )
            $
            (5,754
            )
            $
            (6,955
            )





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





We
      adopted FIN 48 on the first day of the current fiscal year. As required by
      FIN48, we applied the “more-likely-than-not” recognition threshold to all tax
      positions, commencing at the adoption date, which resulted in an increase of
      $1.0 million in the liability for unrecognized tax benefits that was accounted
      for as a decrease to opening retained earnings. As of the date of adoption
      and
      after the impact of recognizing the increase in liability noted above, our
      unrecognized tax benefits totaled $2.6 million.





A
      reconciliation of the beginning and ending amount of unrecognized tax benefits
      is as follows (in thousands):





**Fiscal Year Ended****February 2,**
              **2008**Balance at
                February 3, 2007
            
            $
            2,625Additions
                based on tax positions related to current year
            
            
            424Additions
                for tax positions of prior years
            
            
            203Reductions
                for tax positions of prior years
            
            
            (708
            )Settlements
            
            
            (808
            )Balance
                at February 2, 2008
            
            $
            1,736





Included
      in the balance at February 2, 2008 are $1.5 million of tax positions that if
      recognized would affect the annual effective tax rate.





F-24


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      9 – INCOME TAXES (continued)**





We
      recognize accrued interest and penalties related to unrecognized tax benefits
      in
      income tax expense, which is a continuation of our historical accounting policy.
      Approximately $0.4 million and $0.3 million in potential interest and penalties
      are included as a component of the $2.6 million at the date of adoption and
      the
      $1.7 million at February 2, 2008, respectively. We anticipate that approximately
      $0.3 million of unrecognized state and local tax benefits will be recognized
      prior to February 2, 2009 as a result of the expiration of the statute of
      limitations.





During
      2006 and 2005, a benefit of approximately $50,000 and $425,000, respectively,
      was recorded associated with the reversal of tax accruals no longer required,
      primarily as the result of the closing of open tax years. The 2005 period
      reflects a benefit of approximately $4.4 million associated with the impairment
      of goodwill.





As
      a
      result of the acquisition of Carlyle, we acquired net operating loss
      carryforwards that are subject to an annual limitation of $1.3 million. At
      October 31, 2007, the end of our tax year, we had available net operating loss
      carryforwards for federal income tax reporting purposes of approximately $5.7
      million that expire from 2021 through 2024.





As
      a
      result of limitations by various state and local taxing jurisdictions on the
      carryback of losses, certain state and local net operating loss carryforwards
      were available at October 31, 2007. Management determined at February 2, 2008,
      that based on our history of earnings and our expectations for the future,
      a
      valuation allowance of $ 0.1 million is warranted.





For
      income tax reporting purposes, we have an October 31, year end. We file a
      consolidated federal income tax return and numerous consolidated and separate
      income tax returns with the Holding Company and our wholly-owned subsidiaries
      in
      many state and local jurisdictions. During 2007, the Internal Revenue Service
      concluded the examination of our consolidated federal income tax return for
      the
      tax years 2005 and 2006. The results had no material impact on our Consolidated
      Statements of Operations. The tax years 2002 through 2006 remain open to
      examination by the various major taxing jurisdictions to which we are subject.





**NOTE
      10 – PROFIT SHARING PLAN**




We
      maintain a defined contribution profit-sharing plan to provide retirement
      benefits for all personnel. Effective with the 2006 plan year, the plan provides
      for company matching contributions of $0.50 for each $1.00 of employee
      contribution, up to 5% of the employee’s salary, as limited by the Code, which
      begins to vest upon the completion of two years of employment and accrues at
      the
      rate of 20% per year. Prior to 2006, the plan provided for company matching
      contributions of $0.25 for each $1.00 of employee contribution, up to 5% of
      the
      employee’s salary, as limited by the Code. Additionally, the plan provided for
      optional company paid contributions of 2% of each employee’s earnings annually,
      as limited by the Code. Company contributions totaled $0.8 million, $2.1 million
      and $2.2 million in 2007, 2006 and 2005, respectively.





In
      addition, Carlyle maintains a separate employee tax savings plan under Section
      401(k) of the Code, which provides for matching contributions of 25% of employee
      contributions, up to 5% of each participating employee’s earnings. Matching
      contributions for 2007, 2006 and 2005 each totaled approximately $0.1 million.
      Carlyle may make additional contributions to the plan, however, no additional
      contributions were made during 2007, 2006 and 2005.




F-25




**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      11 – LONG-TERM INCENTIVE PLANS**





On
      February 27, 2007, the Holding Company’s Board of Directors approved, subject to
      stockholder approval, an amendment to the 1997 Long Term Incentive Plan (the
      “1997 Plan”), to extend the term of the plan beyond its March 5, 2007
      termination date. On February 27, 2007, the Holding Company’s Board of Directors
      also approved, subject to stockholder approval, the merger of the 1997 Plan
      (as
      extended) and the Holding Company’s Long Term Incentive Plan (adopted in 1993)
      (the “1993 Plan”), to form the Finlay Enterprises, Inc. 2007 Long Term Incentive
      Plan (the “2007 Plan”). The Holding Company’s stockholders approved the
      extension of the term of the 1997 Plan and the merger of the 1997 Plan (as
      extended) and the 1993 Plan into the 2007 Plan on June 19, 2007. The 1993 Plan,
      1997 Plan and 2007 Plan are referred to, collectively, as the stock incentive
      plans.





The
      2007
      Plan permits the Holding Company to grant non-incentive stock options,
      restricted and nonrestricted stock, restricted stock units and performance
      awards, including awards that qualify as “performance-based compensation” under
      Section 162(m) of the Internal Revenue Code, as amended (the “Code”). The 2007
      Plan has no termination date.





In
      connection with approval of the 2007 Plan, beginning June 19, 2007, no new
      awards may be made under the 1993 Plan or 1997 Plan, and all shares that were
      available to be granted as awards under the 1993 Plan and the 1997 Plan became
      available to be granted as awards under the 2007 Plan. Shares from forfeited
      awards made under the 1993 Plan or 1997 Plan or shares from awards made under
      the 1993 Plan or 1997 Plan that are settled in cash or which otherwise terminate
      after June 19, 2007 are available to be granted as awards under the 2007 Plan.




An
      aggregate of 469,974 shares of the Holding Company’s Common Stock has been
      reserved for issuance pursuant to the 2007 Plan. As of February 2, 2008, no
      shares have been issued in connection with exercises of options granted under
      the 2007 Plan, 275,000 shares are reserved for issuance upon the exercise of
      currently outstanding options at an exercise price of $2.71 per share and 39,346
      shares have been issued or are subject to purchases and awards of restricted
      stock and restricted stock units. As of February 2, 2008, 155,628 shares of
      the
      Holding Company’s Common Stock are available for future grants under the 2007
      Plan.





The
      1993
      Plan permitted the Holding Company to grant to key employees, directors,
      consultants and certain other persons 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; (v) performance units 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; or (vi) any combination
      of
      the foregoing. Under the 1993 Plan, the Holding Company could grant stock
      options which were either incentive stock options within the meaning of Section
      422 of the Code, or non-incentive stock options. As of February 2, 2008, 511,111
      shares of the Holding Company’s Common Stock have been issued in connection with
      exercises of options granted under the 1993 Plan, 13,000 shares are reserved
      for
      issuance upon exercise of outstanding options and 145,699 shares have been
      issued or are subject to purchase and awards of restricted stock and restricted
      stock units. The exercise prices of such stock options range from $7.23 per
      share to $16.50 per share. No future awards may be granted under the 1993 Plan,
      which was merged into the 2007 Plan.





The
      1997
      Plan was similar to the 1993 Plan and permitted the Holding Company to grant
      the
      same types of **** awards
      as
      permitted under the 1993 Plan. As of February 2, 2008, 294,494 shares of the
      Holding Company’s Common Stock have been issued in connection with exercises of
      options granted under the 1997 Plan, 575,200 shares are reserved for issuance
      upon exercise of outstanding options and 848,118 shares have been issued or
      are
      subject to purchases and awards of restricted stock and restricted stock units.
      The exercise prices of such stock options range from $2.71 per share to $24.31
      per share. No future awards may be granted under the 1997 Plan, which was merged
      into the
      2007
      Plan.




F-26


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


****


**NOTE
      11 – LONG-TERM INCENTIVE PLANS (continued)**





***Stock
      Options***





Stock
      options outstanding under our stock incentive plans have been granted at prices
      which are equal to the market value of our stock on the date of grant, generally
      vest over three or five years and expire no later than ten years after the
      grant
      date.




Prior
      to
      the adoption of SFAS No. 123R, we presented all tax benefits resulting from
      the
      exercise of stock options as operating cash flows on our Consolidated Statements
      of Cash Flows. SFAS No. 123R requires that cash flows resulting from tax
      deductions in excess of the cumulative compensation cost recognized for options
      exercised be classified as financing cash flows. During 2007 and 2006, excess
      tax benefits realized from the exercise of stock options were
      insignificant.





On
      January 23, 2006, the Holding Company’s Compensation Committee of the Board
      of Directors approved accelerating the vesting of all out-of-the-money, unvested
      stock options held by employees and independent directors. An option was
      considered out-of-the-money if the stated option exercise price was greater
      than
      the closing price of the Holding Company’s Common Stock on the day before the
      Compensation Committee approved the acceleration. Unvested out-of-the-money
      options to purchase approximately 35,400 shares became exercisable as a result
      of the vesting acceleration. The vesting acceleration did not result in the
      recognition of compensation expense for 2005.





During
      2006, we recognized approximately $95,000 in share-based compensation expense,
      on a pre-tax basis.  No share-based compensation expense was recognized
      prior to January 29, 2006. Had compensation expense for our share-based plans
      been determined consistent with SFAS No. 123R during 2005, our net loss would
      have been restated to the following pro forma amounts (in
      thousands):





**January 28,****2006**Reported
                net loss
            
            $
            (55,765
            )Add:
                    Stock-based employee compensation expense included in reported
                    net loss,
                    net of tax
            
            
            566Deduct:
                    Stock-based employee compensation expense determined under the
                    fair value
                    method, net of tax, and stock-based employee compensation expense
                    included
                    in reported net loss,
                  net
                    of tax
            
            
            (706
            )Pro
                forma net loss
            
            $
            (55,905
            )





The
      Holding Company uses the Black-Scholes option pricing model to determine the
      fair value of stock option awards under SFAS No. 123R, which is consistent
      with
      the model used for the previous proforma disclosure under SFAS No. 123. The
      weighted average estimated fair value of stock options granted in the year
      ended
      February 2, 2008 and January 28, 2006 was $1.43 and $4.64, respectively. There
      were no stock options granted by the Holding Company during the year ended
      February 3, 2007.





Principal
      assumptions used in applying the Black-Scholes model in 2007 and 2005
      were:





**2007**
            
            **2005**Risk-free
                interest rate
            
            
            3.54
            %
            
            4.20
            %Expected
                life, in years
            
            
            6
            
            
            7Expected
                volatility
            
            
            51.68
            %
            
            59.45
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %





F-27


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      11 – LONG-TERM INCENTIVE PLANS (continued)**




The
      weighted average expected option life reflects the application of the simplified
      method set out in SAB No. 107, which defines the expected life as the average
      of
      the contractual term of the options and the weighted average vesting period
      for
      all option tranches. This method was applied instead of analyzing historical
      information to estimate an option expected life because we believe that the
      Holding Company’s historical exercise behavior is not reflective of an option’s
      expected life and would not be representative of future exercise behavior.
      Expected stock price volatility was estimated based on the Holding Company’s
      historical volatility. The risk-free interest rates are based on U.S. Treasury
      yields at the time of grant.





The
      below
      table summarizes the changes in stock options outstanding during 2007, as
      follows:





**Number**
              **Outstanding**
            
            **Wtd. Avg.**
              **Ex. Price**
            
            **Wtd. Avg.**
              **Remaining**
              **Contractual Life**
            
            **Aggregate**
              **Intrinsic**
              **Value (000’s)****(1)**Balance at
                February 3, 2007
            
            
            1,016,334
            
            $
            12.10
            
            
            2.24
            
            $
            618Granted
            
            
            275,000
            
            
            2.71
            
            
            2.84
            
            
            -Cancelled
            
            
            (428,134
            )
            
            14.18
            
            
            -
            
            
            -Outstanding at February 2, 2008
            
            
            863,200
            
            $
            8.07
            
            
            4.94
            
            $
            -Exercisable at February 2, 2008
            
            
            588,200
            
            $
            10.58
            
            
            2.65
            
            $
            -







(1)
            The
                aggregate intrinsic values in the table above are based on the closing
                price of the Common Stock as of the last business day of the periods
                ended
                February 2, 2008 and February 3, 2007, which were $1.85 and $9.54,
                respectively.





As
      of
      February 2, 2008, there was $0.4 million of total unrecognized compensation
      expense related to nonvested stock options granted; such cost is expected to
      be
      recognized over a weighted average period of 2.8 years. There were no options
      exercised during 2007 as all options were out-of-the-money. The total intrinsic
      value of options exercised during 2006 and 2005 was $0 and $0.1 million,
      respectively. Except for the 2007 awards granted, all outstanding stock options
      are fully vested and therefore are currently exercisable.





***Restricted
      Stock***





Commencing
      in February 2005 and continuing through January 2009, an executive officer
      of
      Finlay became entitled to receive stock incentive compensation based on the
      attainment of annual financial objectives established by senior management
      and
      approved by the Board of Directors. Pursuant to the executive’s employment
      contract, the maximum amount of stock incentive compensation payable in any
      fiscal year is equal to the number of restricted shares of the Holding Company’s
      Common Stock having an aggregate value nearest to $400,000 with the actual
      amount to be based on whether specified financial results are met for each
      fiscal year, except that for 2006, the maximum aggregate value was $200,000.
      Compensation expense related to this executive’s 2007, 2006 and 2005 stock
      incentive compensation totaled $0, $0.2 million and $0.2 million,
      respectively.





Additionally,
      for each fiscal year during the employment term, the same executive officer
      is
      eligible to receive Restricted Stock having an aggregate value nearest to
      $500,000, subject to the terms of the employment agreement.




F-28


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      11 – LONG-TERM INCENTIVE PLANS (continued)**





***Restricted
      Stock (continued)***





In
      2007,
      2006 and 2005, 55,261, 54,437 and 48,300 shares of restricted stock were awarded
      to the executive officer referred to above and certain other executives and
      key
      employees with a weighted average fair value of $9.32, $9.19 and $11.92,
      respectively. During 2007 and 2006, total amortization of restricted stock
      compensation was $1.1 million and $0.7 million, respectively. The total fair
      value of shares vested during 2007, 2006 and 2005 were $0.5 million, $0.7
      million and $0, respectively. As of February 2, 2008, there was $63,000 of
      total
      unrecognized compensation expense related to nonvested restricted stock awards,
      which will be recognized over the next twelve months.





The
      below
      table summarizes the changes in restricted stock outstanding during 2007, as
      follows:





**Restricted**
              **Stock**
            
            **Wtd. Avg. Grant Date Fair Value**
              **Per Award**Nonvested balance
                at February 3, 2007
            
            
            157,487
            
            $
            12.17Granted
            
            
            55,261
            
            
            9.32Vested
            
            
            (164,381
            )
            
            11.32Nonvested
                balance at February 2, 2008
            
            
            48,367
            
            $
            11.78





***Restricted
      Stock Units***





For
      2007, 2006 and 2005, 296,059, 136,006 and 118,308 restricted stock units
      (“RSUs”), respectively, were awarded with a weighted average fair value of
      $5.80, $9.49 and $12.40, respectively. Refer to Note 12 for additional
      information regarding RSUs. During 2007 and 2006, total amortization of RSUs
      in
      each year was $0.7 million. As of February 2, 2008, there was $0.8 million
      of
      total unrecognized compensation cost related to nonvested RSUs, which is
      expected to be recognized over a weighted average period of 1.76
      years.





The
      below
      table summarizes the changes in RSUs outstanding during 2007, including
      nonvested RSUs, as follows:





**RSUs**
            
            **Wtd.
                Avg.Grant Date**
              **Fair
                Value****Per
                Award**Balance
                at February 3, 2007
            
            
            317,546
            
            $
            13.01Granted
            
            
            296,059
            
            
            5.80Shares
                issued
            
            
            (81,398
            )
            
            17.26Cancelled
            
            
            (2,156
            )
            
            12.74Balance
                at February 2, 2008
            
            
            530,051
            
            $
            8.29





The
      below
      table summarizes the changes in nonvested RSU awards during 2007, as
      follows:





**RSUs**
            
            **Wtd. Avg. Grant Date Fair Value****Per Award**Nonvested
                balance at February 3, 2007
            
            
            133,697
            
            $
            12.79Granted
            
            
            147,226
            
            
            5.80Vested
            
            
            (42,102
            )
            
            16.41Cancelled
            
            
            (2,156
            )
            
            12.74Nonvested
                balance at February 2, 2008
            
            
            236,665
            
            $
            7.80





F-29


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      12** **–** **EXECUTIVE
      AND DIRECTOR DEFERRED COMPENSATION AND STOCK** **PURCHASE
      PLANS**





In
      April
      2003, the Board of Directors of the Holding Company adopted the Executive
      Deferred Compensation and Stock Purchase Plan and the Director Deferred
      Compensation and Stock Purchase Plan, which was approved by the Holding
      Company’s stockholders on June 19, 2003 (the “RSU Plans”). Under the RSU Plans,
      key executives and non-employee directors, as directed by the Holding Company’s
      Compensation Committee, are eligible to acquire RSUs. An RSU is a unit of
      measurement equivalent to one share of common stock, but with none of the
      attendant rights of a stockholder of a share of Common Stock. Two types of
      RSUs
      are awarded under the RSU Plans: (i) participant RSUs, where a plan participant
      may elect to defer, in the case of an executive employee, a portion of his
      or
      her actual or target bonus, and in the case of a non-employee director, his
      or
      her retainer fees and Committee chairmanship fees, and receive RSUs in lieu
      thereof and (ii) matching RSUs, where the Holding Company will credit a
      participant’s plan account with one matching RSU for each participant RSU that a
      participant elects to purchase. While participant RSUs are fully vested at
      all
      times, matching RSUs are subject to vesting and forfeiture as set forth in
      the
      RSU Plans. At the time of distribution under the RSU Plans, RSUs are converted
      into actual shares of the Holding Company’s Common Stock. As of February 2,
      2008, 530,051 RSUs have been awarded under the RSU Plans.





**NOTE
      13 – SEGMENT INFORMATION**





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





The
      following table provides segment level financial information for the years
      ended
      February 2, 2008, February 3, 2007 and January 28, 2006 (dollars in
      thousands): ****





**Fiscal Year Ended****February 2, 2008**
            
            **February 3, 2007**
            
            **January 28, 2006****Department Store**
              **Based Fine Jewelry**
              **Departments (a)**
            
            **Specialty**
              **Jewelry**
              **Stores (b)**
            
            **Total**
            
            **Department Store**
              **Based Fine Jewelry**
              **Departments (a)**
            
            **Specialty**
              **Jewelry**
              **Stores (b)**
            
            **Total**
            
            **Department Store**
              **Based Fine Jewelry**
              **Departments (a)**
            
            **Specialty**
              **Jewelry**
              **Stores (b)**
            
            **Total**Sales
            
            $
            612,087
            
            $
            223,805
            
            $
            835,892
            
            $
            630,871
            
            $
            108,150
            
            $
            739,021
            
            $
            620,005
            
            $
            69,490
            
            $
            689,495Depreciation
                and amortization
            
            
            12,946
            
            
            2,599
            
            
            15,545
            
            
            14,024
            
            
            732
            
            
            14,756
            
            
            14,177
            
            
            347
            
            
            14,524Income
                (loss) from
              operations
                (c)
            
            
            (2,972
            )
            
            17,391
            
            
            14,419
            
            
            1,370
            
            
            8,207
            
            
            9,577
            
            
            (65,028
            )
            
            5,779
            
            
            (59,249
            )Interest
                expense, net
            
            
            24,617
            
            
            5,979
            
            
            30,596
            
            
            21,564
            
            
            1,824
            
            
            23,388
            
            
            20,985
            
            
            863
            
            
            21,848Provision
                (benefit) for
              income
                taxes
            
            
            (10,440
            )
            
            4,553
            
            
            (5,887
            )
            
            (8,315
            )
            
            2,561
            
            
            (5,754
            )
            
            (8,922
            )
            
            1,967
            
            
            (6,955
            )Total
                assets
            
            
            405,500
            
            
            330,932
            
            
            736,432
            
            
            435,534
            
            
            101,109
            
            
            536,643
            
            
            458,466
            
            
            62,323
            
            
            520,789Capital
                expenditures
            
            
            10,300
            
            
            3,106
            
            
            13,406
            
            
            9,445
            
            
            2,389
            
            
            11,834
            
            
            10,100
            
            
            1,769
            
            
            11,869







(a)
            Included
                in Interest expense, net for 2007, 2006 and 2005 is $16.8 million
                in each
                year related to the Senior Notes. Refer to Note
                8.


(b)
            Information
                for each acquired entity is included since the date of
                acquisition.


(c)
            The
                income from operations for 2007 for the specialty jewelry stores
                includes
                a pre-tax charge of $3.0 million related to the impairment of Congress’
                goodwill. The loss from operations for 2005 for the department store
                based
                fine jewelry departments includes a pre-tax charge of $77.3 million
                related to the impairment of goodwill. See Note
                7.




F-30


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





Additionally,
      our sales mix by merchandise category was as follows for 2007, 2006 and 2005
      (dollars in thousands):




**Fiscal Year Ended****February 2, 2008**
                          
                          **February 3, 2007**
                          
                          **January 28, 2006****Department Store Based**
                            **Fine Jewelry Departments**
                          
                          **Stand-alone**
                            **Jewelry Stores (a)**
                          
                          **Department Store Based**
                            **Fine Jewelry Departments**
                          
                          **Specialty**
                            **Jewelry Stores (a)**
                          
                          **Department Store Based**
                            **Fine Jewelry Departments**
                          
                          **Specialty**
                            **Jewelry Stores (a)****Total sales**
                          
                          **% of sales**
                          
                          **Total sales**
                          
                          **% of sales**
                          
                          **Total sales**
                          
                          **% of sales**
                          
                          **Total sales**
                          
                          **% of sales**
                          
                          **Sales**
                          
                          **% of sales**
                          
                          **Total sales**
                          
                          **% of sales**Diamonds
                          
                          $
                          152,655
                          
                          
                          25
                          %
                          $
                          69,404
                          
                          
                          31
                          %
                          $
                          168,082
                          
                          
                          26
                          %
                          $
                          29,847
                          
                          
                          28
                          %
                          $
                          162,932
                          
                          
                          26
                          %
                          $
                          19,462
                          
                          
                          28
                          %Gemstones
                          
                          
                          110,192
                          
                          
                          18
                          
                          
                          20,645
                          
                          
                          9
                          
                          
                          118,026
                          
                          
                          19
                          
                          
                          10,710
                          
                          
                          10
                          
                          
                          119,193
                          
                          
                          19
                          
                          
                          5,159
                          
                          
                          7Gold
                          
                          
                          104,580
                          
                          
                          17
                          
                          
                          4,416
                          
                          
                          2
                          
                          
                          112,623
                          
                          
                          18
                          
                          
                          1,637
                          
                          
                          2
                          
                          
                          123,813
                          
                          
                          20
                          
                          
                          1,130
                          
                          
                          2Watches
                          
                          
                          96,880
                          
                          
                          16
                          
                          
                          77,706
                          
                          
                          35
                          
                          
                          91,961
                          
                          
                          15
                          
                          
                          43,185
                          
                          
                          40
                          
                          
                          83,879
                          
                          
                          14
                          
                          
                          26,290
                          
                          
                          38Designer
                          
                          
                          67,212
                          
                          
                          11
                          
                          
                          35,085
                          
                          
                          16
                          
                          
                          60,976
                          
                          
                          10
                          
                          
                          15,798
                          
                          
                          15
                          
                          
                          56,898
                          
                          
                          9
                          
                          
                          13,278
                          
                          
                          19Other
                              (b)
                          
                          
                          80,568
                          
                          
                          13
                          
                          
                          16,549
                          
                          
                          7
                          
                          
                          79,203
                          
                          
                          12
                          
                          
                          6,973
                          
                          
                          5
                          
                          
                          73,290
                          
                          
                          12
                          
                          
                          4,171
                          
                          
                          6Total
                              Sales
                          
                          $
                          612,087
                          
                          
                          100
                          %
                          $
                          223,805
                          
                          
                          100
                          %
                          $
                          630,871
                          
                          
                          100
                          %
                          $
                          108,150
                          
                          
                          100
                          %
                          $
                          620,005
                          
                          
                          100
                          %
                          $
                          69,490
                          
                          
                          100
                          %


(a)
            Sales
                for each acquired entity are included since the date of
                acquisition.


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





**NOTE
      14 – DISCONTINUED OPERATIONS**





As
      a
      result of the 33 Parisian store closings in July 2007, the results of operations
      for these departments have been segregated from those of continuing operations,
      net of tax, and classified as discontinued operations for all periods presented.
      Additionally, as a result of the store closings associated with the Macy’s/May
      merger as well as the Belk store closings, the results of operations of the
      departments closed during 2006 have been segregated from those of continuing
      operations, net of tax, and classified as discontinued operations for all
      periods presented. All of the closed stores were operated in our department
      store based fine jewelry departments segment.





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




**February 2,**
              **2008**
            
            **February 3,**
              **2007**
            
            **January 28,**
              **2006**Sales
            
            $
            9,833
            
            $
            180,561
            
            $
            300,639Income before income taxes (1) (2)
            
            
            394
            
            
            20,789
            
            
            30,749Discontinued
                operations, net of tax (3)
            
            
            236
            
            
            12,457
            
            
            18,456







(1)
            Includes
                an allocation of $0.1 million, $0.8 million and $1.4 million of interest
                expense related to the Revolving Credit Agreement for 2007, 2006
                and 2005,
                respectively.


(2)
            The
                results of operations of the closed departments excludes allocations
                of
                general and administrative expenses and interest expense related
                to the
                Senior Notes.


(3)
            Included
                in discontinued operations, net of tax, for 2007, 2006 and 2005 are
                charges totaling $0.3 million, $4.4 million and $3.8 million,
                respectively, associated with accelerated depreciation of fixed assets
                and
                severance.





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





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




F-31




**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      15 – LICENSE AGREEMENTS WITH DEPARTMENT STORES AND
      LEASE** **AGREEMENTS
      (continued)**





Our
        operating leases consist primarily of office space rentals and the specialty
        jewelry store locations, which leases expire on various dates through 2023.
        The
        department store license agreements provide for the payment of fees based
        on
        sales (i.e., contingent fees in the table below). Additionally, certain of
        the
        specialty jewelry store leases require payment of contingent rent based on
        a
        percentage of store sales in excess of a specified threshold. License fees
        and
        lease expense, included in Selling, general and administrative expenses,
        are as
        follows (in thousands):




**Fiscal Year Ended****February 2,**
              **2008**
            
            **February 3,**
              **2007**
            
            **January 28,**
              **2006**Minimum fees
            
            $
            15,987
            
            $
            7,791
            
            $
            5,798Contingent
                fees
            
            
            104,908
            
            
            107,265
            
            
            105,226Total
            
            $
            120,895
            
            $
            115,056
            
            $
            111,024




Future
      minimum payments under noncancellable operating leases having initial or
      remaining noncancellable lease terms in excess of one year are as follows as
      of
      February 2, 2008:





**(in thousands)**2008
            
            $
            26,5242009
            
            
            24,2542010
            
            
            19,1772011
            
            
            16,5102012
            
            
            12,070Thereafter
            
            
            62,344Total
                minimum payments required
            
            $
            160,879





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





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





We
      have
      entered into various employment agreements with certain senior executives which
      provide for future minimum compensation aggregating $2.2 million at February
      2,
      2008. These agreements, each expiring after a three year period, guarantee
      a
      minimum annual salary level and special incentive compensation upon achieving
      specific financial goals. Several agreements provide for a special bonus equal
      to 50% of the executive’s salary if the executive remains employed with us for
      the duration of the agreement.




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





Our
      concentration of credit risk consists principally of accounts receivable. In
      the
      department store based jewelry departments, substantially all consumer credit
      risk is borne by the host store rather than by us. During 2007, jewelry
      departments in store groups owned by Macy’s accounted for approximately 52.0% of
      our sales. We believe that the inability of Macy’s to pay its receivables could
      have a material adverse effect on our financial position or results of
      operations.





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





We
      have
      not provided any third-party financial guarantees as of February 2, 2008 and
      February 3, 2007 and for each of the three fiscal years in the period ended
      February 2, 2008.





F-32


**FINLAY
      FINE JEWELRY CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      16 – COMMITMENTS, CONTINGENCIES AND OTHER (continued)**





Refer
      to
      Note 3 for a discussion of the contingent purchase price relating to the
      Congress acquisition.





Refer
      to
      Note 8 for a discussion of letters of credit outstanding.





**NOTE
      17 – QUARTERLY FINANCIAL DATA (UNAUDITED)**




The
      following table summarizes the quarterly financial data for 2007 and 2006
      (dollars in thousands). The 2007 and 2006 quarterly financial data has been
      restated to reflect discontinued operations:





**Fiscal Year Ended February 2, 2008****First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter (a)**Sales
            
            $
            162,871
            
            $
            148,004
            
            $
            141,918
            
            $
            383,099Gross
                margin
            
            
            76,366
            
            
            68,376
            
            
            63,972
            
            
            171,514Selling,
                general and administrative expenses
            
            
            77,779
            
            
            70,274
            
            
            69,133
            
            
            130,069Income
                (loss) from operations (b)
            
            
            (4,956
            )
            
            (5,602
            )
            
            (8,772
            )
            
            33,749Income
                (loss) from continuing operations (b)
            
            
            (7,755
            )
            
            (8,457
            )
            
            (7,522
            )
            
            13,444Discontinued
                operations, net of tax
            
            
            149
            
            
            87
            
            
            -
            
            
            -Net
                income (loss)
            
            
            (7,606
            )
            
            (8,370
            )
            
            (7,522
            )
            
            13,444





**Fiscal Year Ended February 3, 2007****First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter (c)**Sales
            
            $
            144,389
            
            $
            149,270
            
            $
            136,377
            
            $
            308,985Gross
                margin
            
            
            69,867
            
            
            70,975
            
            
            63,232
            
            
            142,935Selling,
                general and administrative expenses
            
            
            72,066
            
            
            70,301
            
            
            67,490
            
            
            112,819Income
                (loss) from operations
            
            
            (5,856
            )
            
            (2,917
            )
            
            (7,889
            )
            
            26,239Income
                (loss) from continuing operations
            
            
            (6,700
            )
            
            (5,150
            )
            
            (8,420
            )
            
            12,213Discontinued
                operations, net of tax
            
            
            6,822
            
            
            1,165
            
            
            511
            
            
            3,959Net
                income (loss)
            
            
            122
            
            
            (3,985
            )
            
            (7,909
            )
            
            16,172





(a)
            The
                fourth quarter of 2007 reflect the results of operations of Bailey
                Banks
                & Biddle since the date of acquisition in November
                2007.


(b)
            The
                income (loss) from operations and the income (loss) from continuing
                operations includes a charge of $3.0 million, on a pre-tax basis,
                related
                to the impairment of goodwill in the fourth quarter of
                2007.


(c)
            The
                fourth quarter of 2006 reflects the results of operations of Congress
                since the date of acquisition in November
                2006.





**NOTE
      18 – SUBSEQUENT EVENTS**





In
      February 2008, Macy’s announced corporate restructuring initiatives impacting
      three divisional changes including the consolidation of Macy's North into Macy's
      East, Macy's Northwest into Macy's West, and Macy's Midwest into Macy's South.
      The consolidation of Macy's North as well as that of Macy's Northwest, will
      result in the non-renewal of these license agreements with Finlay Jewelry and
      the loss of 57 departments and 37 departments, respectively, on January 31,
      2009. In March 2008, Macy's signed a two-year extension of our license agreement
      for Macy’s Central (the newly-merged division of Macy's Midwest and Macy's
      South), which will consist of 222 doors. The amended license agreement extends
      our current contract until January 29, 2011. In 2007, the Macy's North and
      Macy's Northwest locations generated approximately $120.0 million in combined
      revenue.





In
      October 2006, Macy’s sold its Lord & Taylor division to NRDC Equity Partners
      LLC (“NRDC”). In February 2008, we received notification from NRDC that our
      license agreement would not be renewed upon expiration on January 31, 2009,
      and
      we will close a total of 47 Lord & Taylor departments at the end of 2008. In
      2007, the Lord & Taylor departments generated approximately $44.0 million in
      sales.





We
      will
      account for these locations as discontinued operations upon closing at the
      end
      of 2008. During 2008, we estimate that we will record approximately $3.7 million
      for severance and accelerated depreciation related to these
      locations.




F-33