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  January 31,
2009  or





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





For the transition period from
_________ to __________





Commission
file number: 33-59380





FINLAY FINE JEWELRY CORPORATION
*








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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§
229.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).


Yes o
                No o


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, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check one):





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o
      (Do not check if a smaller reporting company)
            Smaller
      reporting company 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 24, 2009, 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 1,
2008.










FINLAY
FINE JEWELRY CORPORATION





FORM
10-K





FOR
THE FISCAL YEAR ENDED JANUARY 31, 2009





INDEX





Page(s)





PART
      IItem
      1.
                        Business
                        3Item
      1A.
                        Risk
      Factors
                        10Item
      1B.
                        Unresolved
      Staff Comments
                        14Item
      2.
                        Properties
                        14Item
      3.
                        Legal
      Proceedings
                        14Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        14PART
      IIItem
      5.
                        Market
      for Registrant’s Common Equity, Related Stockholder
Mattersand
      Issuer Purchases of Equity Securities
                        15Item
      6.
                        Selected
      Financial Data
                        15Item
      7.
                        Management’s
      Discussion and Analysis of FinancialCondition
      and Results of Operations
                        16Item
      7A.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        30Item
      8.
                        Financial
      Statements and Supplementary Data
                        31Item
      9.
                        Changes
      in and Disagreements With Accountants onAccounting
      and Financial Disclosure
                        31Item
      9A.
                        Controls
      and Procedures
                        31Item
      9B.
                        Other
      Information
                        32PART
      IIIItem
      10.
                        Directors,
      Executive Officers and Corporate Governance
                        34Item
      11.
                        Executive
      Compensation
                        37Item
      12.
                        Security
      Ownership of Certain Beneficial Owners and Management andRelated
      Stockholder Matters
                        56Item
      13.
                        Certain
      Relationships and Related Transactions, and Director
      Independence
                        58Item
      14.
                        Principal
      Accountant Fees and Services
                        59PART
      IVItem
      15.
                        Exhibits
      and Financial Statement Schedules
                        60SIGNATURES
                        
                        68








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.





As a
result of the decline in our department store based business over the past
several years coupled with the challenging economic conditions under which we
are currently operating, we announced in February 2009, our plan to exit the
licensed department store based business and close approximately half of our
specialty jewelry stores in 2009. The implementation of our strategic plan will
result in a significant reduction in our sales from over $750.0 million from our
two business segments in 2008 to a go forward specialty jewelry store business
that is expected to achieve annual sales in the range of $150.0 million to
$200.0 million.  The plan includes the liquidation of inventory and the
termination of license agreements or leases in the affected department store
based fine jewelry departments and specialty jewelry stores. In addition, we
intend to liquidate excess inventory in our go forward specialty jewelry stores
as a means of generating cash and reducing such excess inventory.





We view
the execution of this strategic plan as crucial to strengthening the financial
condition of our go forward specialty jewelry store business. Our go forward
business will include selected stores anticipated, in management’s opinion, to
provide us with our best opportunity for future success. We intend to reduce our
cost structure to levels appropriate to support the specialty jewelry store
business, which will include significantly reducing headcount in our
administrative and distribution center functions as well as eliminating sales
associate positions in the affected department stores and specialty store
locations. We expect to complete the strategic plan by the end of 2009. There
can be no assurances that the implementation of our strategic plan will be
successful or that the net sales proceeds from the liquidation of inventory in
the closing locations will be sufficient to repay the outstanding balance under
our Revolving Credit Facility (defined below).





In
conjunction with the adoption of this strategic plan, we amended our revolving
credit agreement (the “Revolving Credit Agreement”) in February 2009, as
adjusted in March 2009, to reduce the senior secured revolving line of credit
from $550.0 million to $266.6 million (the “Revolving Credit Facility”) and to
increase the interest rates thereunder.  The amendment also requires
us to comply with various milestones in connection with the strategic plan, to
provide additional financial reporting to the lenders and to maintain compliance
with a variance covenant from the approved restructuring budget. Additionally,
the Revolving Credit Agreement now matures in February 2010. The net sales
proceeds from the liquidation of inventory will be used to repay our outstanding
balance under our Revolving Credit Facility in 2009. As a result of the
liquidation in the locations we plan to close, the outstanding balance under the
Revolving Credit Facility has been reduced from $236.2 million at the end of
2008 to approximately $130.0 million at the end of April 2009.





Effective
with the February 2009 amendment to the Revolving Credit Agreement, we now are
required to achieve certain weekly targeted percentages of our sales and cash
receipts and maintain cash disbursements below certain targeted percentages as
set forth in our operating plan. We are currently in default of this covenant.
Although the lenders reserve all rights and remedies under the Revolving Credit
Agreement and can accelerate repayment of the outstanding balance at any time,
they have not exercised such rights at this time. As a result of cross-default
provisions, such acceleration would enable the holders of our long-term debt to
declare a default and demand repayment as well.





3




Our
ability to continue as a going concern is dependent on the successful
implementation of our strategic plan, the repayment of the amounts due under the
Revolving Credit Facility and our ability to secure a new line of credit on or
before the maturity date of the Revolving Credit Agreement. In addition, we
experienced a significant operating loss in 2008 and are expected to have an
operating loss in 2009. As discussed above, we are in default of certain
covenants under the Revolving Credit Agreement. These uncertainties raise
substantial doubt about our ability to continue as a going concern.





We
entered into a consulting agreement with Gordon Brothers Retail Partners, LLC
(“Gordon Brothers”), to manage the sale of inventory and fixed assets in the
specialty jewelry stores that we plan to close. In consideration of Gordon
Brothers’ services, we will pay them a base consulting fee as well as a
contingent fee based on the achievement of certain profitability thresholds in
the stores that we plan to close. In addition, we have entered into a
consignment agreement with Gordon Brothers for certain merchandise that is
currently being sold through the specialty jewelry stores that we plan to close
and for which Gordon Brothers has the ability to earn a percentage of the
profits on the sale of such merchandise. Further, we have entered into a
consulting agreement with Gordon Brothers to assist with the liquidation of the
inventory in the department store based fine jewelry departments for which we
will pay them a base fee.





In
addition, we have retained the management consulting firm Alvarez & Marsal
North America, LLC (“A&M”) to work with our board of directors and
management in analyzing Finlay’s business strategies, plans and
operations.  David Coles, an A&M employee, is providing consulting
services to our board of directors and management as the Holding Company’s Chief
Restructuring Officer.





Effective
March 22, 2009, we completed the sale of certain assets to Bloomingdale’s. The
assets included inventory and fixed assets for the 34 departments that we
operated in Bloomingdale’s for a purchase price of approximately $33.4
million.  The proceeds from this transaction were used to pay down a
portion of the outstanding balance under our Revolving Credit
Facility.





As a
result of the items discussed above, we recorded a pre-tax charge of $58.9
million in 2008 primarily for the impairment of fixed assets and intangible
assets and the write-down of inventory, including the estimated loss on the sale
of inventory to Bloomingdale’s. With respect to  the exiting of the
department store based business and the anticipated closing of approximately
half of our specialty jewelry stores in 2009, we expect to record a pre-tax
charge  in the range of $12.0 to $15.0 million for severance and
retention costs, lease termination costs and other items.





In 2008,
we executed several agreements to exchange $159.4 million of our $200.0 million
Senior Notes due June 1, 2012 (the “Senior Notes”) held by certain noteholders
(the “Participating Noteholders”), for new 8.375%/8.945% Senior Secured Third
Lien Notes due June 1, 2012 (the “Third Lien Notes”). In addition, the
Participating Noteholders purchased $22.8 million of new 11.375%/12.125% Senior
Secured Second Lien Notes due June 1, 2012 (the “Second Lien Notes,” together
with the Third Lien Notes, the “Secured Notes”). The refinancing of the Senior
Notes enables us to eliminate a significant portion of the cash interest payment
of $16.8 million that would have been payable annually on the Senior Notes as
the Secured Notes include a pay-in-kind interest (“PIK Interest”) feature until
December 1, 2010.





Description
of the Business





In recent
years, we have managed our operations under two business
segments:  licensed department store based fine jewelry departments
and specialty jewelry stores, which consists of Bailey Banks & Biddle,
Carlyle and Congress stores, as described below.  As of January 31,
2009, we operated a total of 674 locations, including 566 departments in seven
host store groups in 38 states, as well as 108 stand-alone jewelry stores
operating as 69 Bailey Banks & Biddle stores in 24 states, 34 Carlyle stores
in nine states and five Congress stores located in southwest
Florida.





4




We
currently operate licensed fine jewelry departments in major department stores
for Macy’s, Inc. (“Macy’s”), The Bon-Ton Stores, Inc. (“Bon-Ton”), Dillard’s,
Inc. (“Dillard’s”) and Gottschalks where we sell 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 $270 per item. In 2008, our department store based fine jewelry
sales comprised 59% of our total sales.





As a
result of Macy’s on-going corporate restructuring initiatives, 93 departments
were phased into existing Macy’s divisions at the end of 2008. Total sales
generated from these departments in 2008 and 2007 were $108.5 million and $120.0
million, respectively.  In February 2008, we received notification
that our Lord & Taylor license agreement would not be renewed as of January
31, 2009, and we would close our departments at the end of 2008.  In
January 2009, we agreed with Lord & Taylor to delay the closing of these
departments until April 2009. In 2008 and 2007, the Lord & Taylor
departments generated $43.2 million and $44.0 million, respectively, in
sales.





We
operated 566 department store based fine jewelry departments at the end of
2008.  Bloomingdale’s began operating 34 of these departments on March
22, 2009 and we plan to liquidate inventory in and close the remaining
department store based fine jewelry departments by the end of the third quarter
of 2009.  We expect the department store based fine jewelry
departments to generate approximately 48% of our total sales in
2009.





In November 2007,wecompletedouracquisition ofsubstantially all of theassets andspecifiedliabilitiesofthe Bailey Banks &
Biddledivision of Zale
Corporation,anationwidechain of69stand-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 $1,275per item and an average store size of
approximately 3,950 square feet.





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, carrying both exclusive and recognized branded and
designer merchandise selections to appeal to the more affluent customer. 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 May
2005, we completed the acquisition of Carlyle & Co. Jewelers (“Carlyle”).
Carlyle currently operates 34 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 $2.5 million in 2008 and
the average size of a store is approximately 2,100 square feet. In November
2006, we completed the acquisition of L. Congress, Inc. (“Congress”), a regional
chain of five stores located in southwest Florida.





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. Carlyle and Congress are each 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.








5





Our
fiscal year ends on the Saturday closest to January 31.  References to
2009, 2008 and 2007 relate to the fiscal years ending or ended on January 30,
2010, January 31, 2009 and February 2, 2008, respectively.





Overview
of Operations





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. In 2009, we plan to complete the transition to a specialty jewelry
store business.





Licensed
Department Store Based Fine Jewelry Departments.In connection
with our licensed fine jewelry departments operation, we sell 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 $270 per item. 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. In 2009, we plan to complete the liquidation of our inventory and close
the remaining department store based fine jewelry departments.





Advertising.  With
respect to our stand-alone jewelry stores, products are promoted through direct
mail, outdoor and regional print advertising and sponsorships. 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. 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. In 2009, we plan to focus on promoting the
merchandise offered in our go forward stand-alone jewelry stores through direct
mail, outdoor and regional print advertising.




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 2008, inventory shrinkage
amounted to approximately 0.5% 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 $66.0 billion on jewelry (including both fine and costume
jewelry) in the United States in 2008, an increase of approximately $22.0
billion over 1998, 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 historical growth of the fine
jewelry retailing industry. However, the current macro-economic environment has
caused a recent, dramatic and continuing decrease in consumer discretionary
spending.





6





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





Transition to
Specialty Jewelry Store Business. We intend to employ the following key
initiatives as we transition to a specialty jewelry store business:





·
            Implement
      our strategic plan;





·
            Refinance
      or replace our Revolving Credit Agreement to improve
      liquidity;





·
            Consolidate
      our specialty jewelry store businesses under one management
      team;





·
            Reduce
      expenses;





·
            Improve
      comparable store sales;





·
            Focus
      on improved marketing initiatives to more efficiently reach and expand our
      customer base; and





·
            Maintain
      high customer service standards.





Merchandising
Strategy.The merchandising strategy for our stand-alone jewelry stores
is built around their customer profiles and partnering 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.





Store
Relationships





Department Store
Based Fine Jewelry Relationships.We expect to exit the licensed
department store based business by the end of the third quarter of
2009.  The following table identifies the host store groups in which
we operated department store based fine jewelry departments at January 31, 2009,
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.   7




Inception
      of
                      
                      
                      Number
      ofHost
      Store Group
                      
                      Relationship
                      
                      
                      DepartmentsMacy’sMacy’s
      Central
      (1)
                      
                      1983
                      
                      
                      
                      216Bloomingdale’s
      (2)
                      
                      2000
                      
                      
                      
                      34Total
      Macy’s
      Departments
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      250Bon-TonThe
      Bon-Ton/Elder-Beerman
      (1)
                      
                      1986
                      
                      
                      
                      77Carson
      Pirie Scott/Bergner’s/Boston Store/Younkers/Herberger’s
(1)
                      
                      1977
                      
                      
                      
                      86Total
      Bon-Ton
      Departments
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      163Other DepartmentsGottschalks
      (1)
                      
                      1969
                      
                      
                      
                      36Lord
      & Taylor
      (3)
                      
                      
                      1978*
                      
                      
                      
                      36Dillard’s
      (1)
                      
                      1997
                      
                      
                      
                      81Total
      Other
      Departments
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      153Total
      Departments
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      566





*
Represents the year in which our relationship began with the host store group
previously owned by May Department Stores
Company  (“May”).


(1)
            We
      expect to exit our licensed department store based business by the end of
      the third quarter of 2009.


(2)
            Effective
      March 22, 2009, Bloomingdale’s operates these
  departments.


(3)
            We
      will close our Lord & Taylor departments in the first quarter of
      2009.





Terms of
Department Store Based Fine Jewelry License Agreements. In exchange for
the right to operate a department within the host store, we pay each host store
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. Each host store group
withholds from the remittance of sales proceeds the 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. 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.  In 2009, the terms of the written and
unwritten agreements will end as we implement our plan to exit the licensed
department store based business by the end of the third quarter of
2009.





Credit.  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 2008, such private
label credit card purchases accounted for approximately 29% of our stand-alone
store sales.





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.





8





Locations
Opened/Closed.  During 2008, location openings offset by
closings resulted in a net decrease of 119 locations.  The openings,
which totaled ten locations, included four departments within existing host
store groups and six specialty jewelry stores. The closings totaled 129
locations, including 125 departments and four specialty jewelry stores. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations-2008 Compared with 2007”.





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 stand-alone jewelry stores emphasize designer jewelry and, for the
Carlyle and Congress stores, the Rolex brand. The department store based fine
jewelry departments emphasize brand name vendors, including Citizen,
Bulova,  Movado  and  Seiko  with  respect
to watches. In connection with our strategic plan, we intend to liquidate excess
inventory in our go forward specialty jewelry stores as a means of generating
cash and reducing excess inventory.





In 2008,
the average price of items sold by our stand-alone jewelry stores was
approximately $1,275, with these stores carrying on average, approximately 3,000
to 4,000 items in stock. The department store based fine jewelry departments
sell merchandise at prices generally ranging from $100 to $1,000. In 2008, the
average price of items sold by these departments was approximately $270 per
item. An average department has over 5,000 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”. In 2009, the focus on products and pricing in our
department store based fine jewelry departments and closing specialty jewelry
stores has shifted to liquidation as we implement our strategic
plan.





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 2008, our net investment in inventory (i.e., the total cost of inventory
owned and paid for) was approximately 65% of the total cost of our on-hand
merchandise. At the end of 2008, approximately 20% of our merchandise was held
on consignment. In addition, we structure our relationships with vendors to
encourage their participation in and responsibility for merchandise management.
In early 2009, in connection with our strategic plan, we began the process of
returning to our vendors substantially all of our merchandise held on
consignment.





In 2008,
approximately 41.9% of sales were generated by merchandise obtained from our ten
largest vendors and approximately 6.2% 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 2008, we regularly employed approximately
9,700 people of which approximately 95% were regional and local sales and
supervisory personnel with the balance employed in administrative or executive
capacities. Of our 9,700 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. None of our employees are
unionized. In 2009, we intend to significantly reduce employee headcount to
support the go forward specialty jewelry store business.





9




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.





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.





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.





There is
substantial doubt about our ability to continue as a going
concern.





Our
ability to continue as a going concern is dependent on the successful
implementation of our strategic plan, the repayment of the amounts due under the
Revolving Credit Facility and our ability to secure a new line of credit on or
before the maturity date of the Revolving Credit Agreement.  In
addition, we experienced a significant operating loss in 2008 and are expected
to have an operating loss in 2009. As discussed above, we are in default of
certain covenants under the Revolving Credit Agreement.  These
uncertainties raise substantial doubt about our ability to continue as a going
concern. As such, the independent auditor’s report accompanying our January 31,
2009 financial statements contains an explanatory paragraph regarding these
factors, which also constitutes a default under our Revolving Credit Agreement.
If we cannot resolve some or all of these factors, we may be unable to maintain
a level of liquidity necessary to continue to operate our business.





If we are unable
to implement our strategic plan, we may be required to further curtail our
operations or pursue other available options,although we can
provide no assurance that any such steps will allow us to meet our obligations
as they become due.





The
current banking and credit crisis, the high unemployment rate, continued home
foreclosures, the rising cost of basic necessities, and the reality that the
U.S. has entered a recession created a highly challenging retail environment
during 2008 that we anticipate will continue through 2009. These current
conditions have negatively impacted our liquidity position and operating
performance. There can be no assurances that the implementation of our strategic
plan or that the net sales proceeds from the liquidation of inventory in the
closing locations will be sufficient to repay the outstanding balance under our
Revolving Credit Facility.  In addition, there can be no assurances
that our business operations, working capital and borrowing availability will be
sufficient to meet current estimates of working capital requirements as well as
allow Finlay Jewelry to maintain compliance with the $30.0 million minimum
unused balance and other covenants required by the Revolving Credit Agreement.
If we are unable to implement our strategic plan and repay the outstanding
balance under the Revolving Credit Facility or to improve our liquidity and/or
operating performance, we may be required to further curtail our operations or
pursue other available options, although we can provide no assurance that any
such steps will allow us to meet our obligations as they become
due.





10




We are highly
leveraged and we may not be able to refinance or restructure our long-term debt
before it becomes due in 2012 or identify a new banking relationship to provide
a revolving line of credit in 2009. In addition, the terms of our debt
instruments impose financial and operating restrictions and we are currently in
default with certain covenants under the Revolving Credit
Agreement.





We
currently have a significant amount of debt. As of January 31, 2009, we had
$232.9 million of long-term debt due 2012, which includes the amounts
outstanding on the Senior Notes and the Secured Notes, and $236.2 million
outstanding under our Revolving Credit Facility due 2010. We may not be able to
refinance or restructure our long-term debt before it becomes due. Additionally,
we may not be able to identify a new banking relationship to provide a revolving
line of credit after we repay the outstanding balance under our Revolving Credit
Facility in 2009.





In
addition, the Revolving Credit Agreement and the indentures relating to our
long-term debt each 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 January 31, 2009, we were in compliance with all of
our covenants.





Effective
with the February 2009 amendment to the Revolving Credit Agreement, we now are
required to achieve certain weekly targeted percentages of our sales and cash
receipts and maintain cash disbursements below certain targeted percentages as
set forth in our operating plan. We are currently in default of this covenant.
Although the lenders reserve all rights and remedies under the Revolving Credit
Agreement and can accelerate repayment of the outstanding balance at any time,
they have not exercised such rights at this time. As a result of cross-default
provisions, such acceleration would enable the holders of our long-term debt to
declare a default and demand repayment as well.




Our senior management team is in
transition.




The
employment agreement of Arthur E. Reiner, our Chairman and Chief Executive
Officer, expired on January 31, 2009 and Mr. Reiner is currently an employee at
will.  Joseph M. Melvin, our Chief Operating Officer, plans to retire
at the end of June 2009 and Leslie A. Philip, our Chief Merchandising Officer,
plans to retire at the end of May 2009.  Accordingly, our go forward
management team is in transition.  Moreover, once the go forward
management team is established, there is no assurance that its members will be
able to successfully implement our strategic plan.  Their failure to
do so or our failure to effectively manage changes in senior management could
have a material adverse effect on our business.





A continuation of
the recent deterioration of significant portions of the global financial
markets, particularly if it worsens, could further negatively impact our
performance, both by affecting the levels of sales to our customers and by
affecting our counterparties and the U.S. economy generally.





Declines
in discretionary spending or in the availability of consumer credit could
further reduce the volume of merchandise we sell, as well as the sales prices
for the merchandise offered, and accordingly, our gross margin.  In
addition, concerns about the stability of the U.S. financial markets generally
have reduced the availability of funding to certain financial institutions,
leading to a tightening of credit, reduction of business activity, and increased
market volatility. These negative economic conditions may result in financial
difficulties for our vendors and the financial institutions that are
counterparties to our credit facilities, which could negatively affect
us.  It is not clear at this time what impact the federal government’s
liquidity and funding initiatives that have been announced or that may be
initiated in the future will have on the financial markets, on the broader U.S.
and global economies, or ultimately on us.





11





Our stand-alone
jewelry store business could be adversely affected if it is unable to
successfully renegotiate certain on going leases on more favorable lease terms
as well as negotiate new leases on acceptable 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 a number
of leases for go forward stores that we intend to renegotiate with landlords in
order to operate them in a profitable manner. 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 renegotiate certain on going
leases on more favorable lease terms as well as negotiate acceptable new and
renewal lease terms.





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





In 2008,
approximately 41.9% of sales were generated by merchandise obtained from our ten
largest vendors, and approximately 6.2% 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, and we expect to earn significantly lower
levels of these allowances in 2009. During 2008, many of our key vendors were
unable to maintain their historical credit terms with us as a result of our
deteriorating liquidity.  Many of these vendors became party to the
Third Lien Notes for $24.9 million of trade payable balances in February
2009.  Additional restrictions on the credit limits or payment terms
that we have with our vendors could have a further adverse impact on our
liquidity position.




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.





A continuing decline in
discretionary consumer spending has adversely affected and may continue to
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 have affected and could continue to affect consumer discretionary
spending, including the financial markets, consumer credit availability,
prevailing interest rates, energy costs, employment levels, salary levels and
tax rates. A continued 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.





Our locations are
heavily dependent on customer traffic and the continued popularity of
malls.





The
success of our specialty jewelry stores depends, in part, on our ability to
generate customer traffic in our stores, and on the continuing popularity of
malls as shopping destinations. Customer traffic, sales
volume  and  earnings  have  been  and
may continue to 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 specialty jewelry stores.








12





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,
department stores which operate their own 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.





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
conjunction with our strategic plan, we are currently evaluating alternatives to
move the distribution of merchandise for our go forward specialty store business
to a new location.  During the transition to a new facility, we could incur
higher costs and longer lead times to distribute merchandise to our
stores.





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.





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.





13





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





None.





Item
2. Properties





We own a
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 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,
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
January 31, 2009, Bailey Banks & Biddle had a total of 69 leased stores,
Carlyle had a total of 34 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. In 2009, we plan to close approximately half of our specialty jewelry
stores and terminate the related leases.





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 24, 2009, 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.





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 2008.   14




PART
II





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





During
2008 and 2007, there were no cash dividends distributed to the Holding Company
by us. Certain restrictive covenants in the indentures relating to our Senior
Notes and Secured 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 24, 2009.





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
2008.





Item
6. Selected Financial
Data





Not
required.








15





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 of Notes 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.





Executive
Overview





Our
Business and 2009 Current Events





We
currently have two operating segments – licensed department store based fine
jewelry departments and stand-alone specialty jewelry stores. Our licensed fine
jewelry departments are located in major department stores where we sell
moderately priced jewelry, with an average sales price of approximately $270 per
item. Our stand-alone specialty jewelry stores sell luxury priced jewelry at an
average sales price of approximately $1,275 per item. As of January 31, 2009, we
operated a total of 674 locations, including 566 department store based fine
jewelry departments in seven host store groups, in 38 states, as well as 108
stand-alone jewelry stores operating as 69 Bailey Banks & Biddle stores in
24 states, 34 Carlyle stores in nine states, located principally in the
southeastern United States and five Congress stores in southwest
Florida.





As a
result of the decline in our department store based business over the past
several years coupled with the challenging economic conditions under which we
are currently operating, we announced in February 2009, our plan to exit the
licensed department store based business and close approximately half of our
specialty jewelry stores in 2009. The implementation of our strategic plan will
result in a significant reduction in our sales from over $750.0 million from our
two business segments in 2008 to a go forward specialty jewelry store business
that is expected to achieve annual sales in the range of $150.0 million to
$200.0 million. The plan
includes the liquidation of inventory and the termination of license agreements
or leases in the affected department store based fine jewelry departments and
specialty jewelry stores. In addition, we intend to liquidate excess inventory
in our go forward specialty jewelry stores as a means of generating cash and
reducing such excess inventory.





16





We view
the execution of this strategic plan as crucial to strengthening the financial
condition of our go forward specialty jewelry store business. Our go forward
business will include selected stores anticipated, in management’s opinion, to
provide us with our best opportunity for future success. We intend to reduce our
cost structure to levels appropriate to support the specialty jewelry store
business, which will include significantly reducing headcount in our
administrative and distribution center functions as well as eliminating sales
associate positions in the affected department stores and specialty store
locations. We expect to complete the strategic plan by the end of 2009. There
can be no assurances that the implementation of our strategic plan will be
successful or that the net sales proceeds from the liquidation of inventory in
the closing locations will be sufficient to repay the outstanding balance under
our Revolving Credit Facility.





In
conjunction with the adoption of this strategic plan, we amended our Revolving
Credit Agreement in February 2009, as adjusted in March 2009, to reduce the
senior secured revolving line of credit from $550.0 million to $266.6 million
and to increase the interest rates thereunder. The amendment also requires us to
comply with various milestones in connection with the strategic plan, to provide
additional financial reporting to the lenders and to maintain compliance with a
variance covenant from the approved restructuring budget. Additionally, the
Revolving Credit Agreement now matures in February 2010. The net sales proceeds
from the liquidation of inventory will be used to repay our outstanding balance
under our Revolving Credit Facility in 2009. As a result of the liquidation in
the locations we plan to close, the outstanding balance under the Revolving
Credit Facility has been reduced from $236.2 million at the end of 2008 to
approximately $130.0 million at the end of April 2009.





Effective
with the February 2009 amendment to the Revolving Credit Agreement, we now are
required to achieve certain weekly targeted percentages of our sales and cash
receipts and maintain cash disbursements below certain targeted percentages as
set forth in our operating plan, and we are currently in default of this
covenant.  Although the lenders reserve all rights and remedies under
the Revolving Credit Agreement and can accelerate repayment of the outstanding
balance at any time, they have not exercised such rights at this
time.  As a result of cross-default provisions, such acceleration
would enable the holders of our long-term debt to declare a default and demand
repayment as well.





Our
ability to continue as a going concern is dependent on the successful
implementation of our strategic plan, the repayment of the amounts due under the
Revolving Credit Facility and our ability to secure a new line of credit on or
before the maturity date of the Revolving Credit Agreement. In addition, we
experienced a significant operating loss in 2008 and are expected to have an
operating loss in 2009. As discussed above, we are in default of certain
covenants under the Revolving Credit Agreement. These uncertainties raise
substantial doubt about our ability to continue as a going concern.





We
entered into a consulting agreement with Gordon Brothers to manage the sale of
inventory and fixed assets in the specialty jewelry stores that we plan to
close. In consideration of Gordon Brothers’ services, we will pay them a base
consulting fee as well as a contingent fee based on the achievement of certain
profitability thresholds in the stores that we plan to close. In addition, we
have entered into a consignment agreement with Gordon Brothers for certain
merchandise that is currently being sold through the specialty jewelry stores
that we plan to close and for which Gordon Brothers has the ability to earn a
percentage of the profits on the sale of such merchandise. Further, we have
entered into a consulting agreement with Gordon Brothers to assist with the
liquidation of the inventory in the department store based fine jewelry
departments for which we will pay them a base fee.





In
addition, we have retained the management consulting firm A&M to work with
our board of directors and management in analyzing Finlay’s business strategies,
plans and operations.  David Coles, an A&M employee, is providing
consulting services to our board of directors and management as the Holding
Company’s Chief Restructuring Officer. Effective March 22, 2009, we completed
the sale of certain assets to Bloomingdale’s. The assets included inventory and
fixed assets for the 34 departments that we operated in Bloomingdale’s for a
purchase price of approximately $33.4 million.  The proceeds from this
transaction were used to pay down a portion of the outstanding balance under our
Revolving Credit Facility.








17





As a
result of the items discussed above, we recorded a pre-tax charge of $58.9
million in 2008 primarily for the impairment of fixed assets and intangible
assets and the write-down of inventory, including the estimated loss on the sale
of inventory to Bloomingdale’s. A portion of this charge has been recorded in
cost of sales with the balance in income (loss) from operations. With respect to
the exiting of the department store based business and the anticipated closing
of approximately half of our specialty jewelry stores in 2009, we expect to
record a pre-tax charge in the range of $12.0 to $15.0 million for severance and
retention costs, lease termination costs and other items.





In 2008,
we executed several agreements to exchange $159.4 million of its Senior Notes
held by Participating Noteholders for new Third Lien Notes. In addition, the
Participating Noteholders purchased $22.8 million of new Second Lien Notes. The
refinancing of the Senior Notes enables us to eliminate a significant portion of
the cash interest payment of $16.8 million that would have been payable annually
on the Senior Notes as the Secured Notes include a PIK Interest feature until
December 1, 2010.





In
connection with our strategic plan, a majority of the holders of the Third Lien
Notes entered into agreements with us and a majority of our trade vendors for
$24.9 million of trade accounts payable to be secured in accordance with the
terms of the Third Lien Notes. In addition, these trade vendors agreed to a
deferred payment schedule through August 2009 of the outstanding
amounts.





Total
sales were $754.3 million in 2008 compared to $717.4 million in 2007, an
increase of 5.2%.  Total sales for 2008 included $309.7 million of
sales generated by our stand-alone jewelry stores compared to $223.8 million in
2007. The increase primarily relates to the acquisition of Bailey Banks &
Biddle in November 2007. Comparable store sales decreased 11% as a result of
decreased consumer spending in a weak economic environment during the current
year. Gross margin decreased by $29.9 million compared to 2007, and, as a
percentage of sales, gross margin decreased by 6.2% from 45.2% to
39.0%.  The decrease in gross margin primarily relates to the
impairment charge of $24.3 million on the write-down of inventory as well as
increased volume from the stand-alone jewelry stores at lower margins and lower
margins at the Macy’s departments that closed in January 2009 and the Lord &
Taylor departments scheduled to close at the end of April 2009, as we liquidated
inventory during 2008 in anticipation of these closings. Selling, general and
administrative expenses (“SG&A”) increased $47.5 million, and, as a
percentage of sales, increased 4.2%, from 42.1% to 46.3%, primarily due to the
impact of the stand-alone jewelry store leases at higher lease fees coupled with
lower than anticipated sales levels as compared with the prior
year.  SG&A also includes severance costs of $1.2 million for
field personnel associated with the Macy’s and Lord & Taylor store
closings.  Furthermore, income (loss) from operations in 2008 includes
an impairment charge of $34.6 million primarily for the write down of fixed
assets and intangible assets as compared to $3.0 million in 2007.





Borrowings
under our Revolving Credit Agreement increased by $12.0 million at January 31,
2009 as compared to February 2, 2008, which reflects additional borrowings for
working capital requirements. Our lowest level of availability during the year
ended January 31, 2009 was $38.1 million ($8.1 million of excess availability
after taking into consideration the $30.0 million minimum unused balance
requirement under our Revolving Credit Agreement), at which point the
outstanding borrowings under the Revolving Credit Agreement were $285.6 million.
Refer to Note 8 of Notes to the Consolidated Financial Statements.





Strategies
and Opportunities in the Specialty Jewelry Store Business





We plan
to pursue the following key initiatives:





·
            Implement
      our strategic plan;





·
            Refinance
      or replace our Revolving Credit Agreement to improve
      liquidity;





·
            Consolidate
      our specialty jewelry store businesses under one management
      team;





·
            Reduce
      expenses;





18





·
            Improve
      comparable store sales;





·
            Focus
      on improved marketing initiatives to more efficiently reach and expand our
      customer base; and





·
            Maintain
      high customer service standards.





Risks
and Uncertainties





The risks
and challenges facing our business include:





·
            Our
      ability to continue as a going
concern;





·
            Implementation
      of our strategic plan;





·
            Substantial
      debt leverage and our ability to identify a new banking relationship;
      and





·
            Continued
      decrease in consumer discretionary spending in the current macro-economic
      environment and the impact on our liquidity
  needs.





Our
ability to continue as a going concern is dependent on the successful
implementation of our strategic plan, the repayment of the amounts due under the
Revolving Credit Facility and our ability to secure a new line of credit on or
before the maturity date of the Revolving Credit Agreement. In addition, we
experienced a significant operating loss in 2008 and are expected to have an
operating loss in 2009. As discussed above, we are in default of certain
covenants under the Revolving Credit Agreement. These uncertainties raise
substantial doubt about our ability to continue as a going concern.





The current banking and credit crisis,
the high unemployment rate, continued home foreclosures, the rising cost of
basic necessities, and the reality that the U.S. has entered a recession created
a highly challenging retail environment during 2008 that we anticipate will
continue through 2009. These conditions have negatively impacted our liquidity
position and operating performance. There can be no assurances that the
implementation of our strategic plan will be successful. There can be no
assurancesthat our
business operations, working capital and borrowing availability will be
sufficient to meet current estimates of working capital requirements as well as
allow us to maintain compliance with the $30.0 million minimum unused balance
and other covenants required by the Revolving Credit Agreement. If we are unable
to implement our strategic plan and improve our liquidity and/or operating
performance, we may be required to further curtail our operations or pursue
other available options,
although we can provide no assurance that any such steps will allow us to meet
our obligations as they become due.





We
currently have a significant amount of debt.  As of January 31, 2009,
we had $40.6 million of debt outstanding under the Senior Notes, $169.0 million
outstanding under the Third Lien Notes and $23.3 million outstanding under the
Second Lien Notes. These debt instruments are all due on June 1,
2012.  Additionally, at January 31, 2009, borrowings under the
Revolving Credit Facility were $236.2 million. We may not be able to refinance
or restructure our long-term debt before it becomes due. Additionally, the net
sales proceeds from the liquidation of inventory in the closing locations may
not be sufficient to repay the outstanding balance under our Revolving Credit
Facility, which now matures in February 2010.





A
continuation of the recent deterioration of significant portions of the global
financial markets could further negatively impact our performance. Declines in
discretionary spending or in the availability of consumer credit could further
reduce the volume of merchandise we sell, as well as the sales prices for the
merchandise offered, and accordingly, our gross margin. In addition, concerns
about the stability of the U.S. financial markets generally have reduced the
availability of funding to certain financial institutions, leading to a
tightening of credit, reduction of business activity, and increased market
volatility. These negative economic conditions may result in financial
difficulties for our vendors, the department stores in which we operate and the
financial institutions that are counterparties to our credit facilities, which
could negatively affect us. It is not clear at this time what impact the federal
government’s liquidity and funding initiatives that have been announced or that
may be initiated in the future, will have on the financial markets, on the
broader U.S. and global economies, or ultimately on us.





19




Results
of Operations





The
following discussion relates to our results of operations in 2008 and 2007 when
both of our business segments were in operation.  In 2009, we plan to
exit the licensed department store based business and close approximately half
of our specialty jewelry stores.





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 EndedJanuary
      31,
                              2009
                            
                            
                            February
      2,
                              2008Statement
      of Operations Data:Sales
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %Cost
      of sales (including an inventory write-down of $24.3 million, or 3.2%, in
      2008)
                            
                            
                            61.0
                            
                            
                            
                            54.8Gross
      margin
                            
                            
                            39.0
                            
                            
                            
                            45.2Selling,
      general and administrative
      expenses
                            
                            
                            46.3
                            
                            
                            
                            42.1Impairment
      charges
      (1)
                            
                            
                            4.6
                            
                            
                            
                            0.4Depreciation
      and
      amortization
                            
                            
                            2.3
                            
                            
                            
                            2.0Income
      (loss) from
      operations
                            
                            
                            (14.2
                            )
                            
                            
                            0.7Interest
      expense,
      net
                            
                            
                            5.0
                            
                            
                            
                            4.1Loss
      from continuing operations beforeincome
      taxes
                            
                            
                            (19.2
                            )
                            
                            
                            (3.4
                            )Benefit
      for income
      taxes
                            
                            
                            (5.2
                            )
                            
                            
                            (1.3
                            )Loss
      from continuing operations
                            
                            
                            (14.0
                            )
                            
                            
                            (2.1
                            )Discontinued
      operations, net of tax in 2007
      (2)
                            
                            
                            (0.2
                            )
                            
                            
                            0.7Net
      income
      (loss)
                            
                            
                            (14.2
                            )%
                            
                            
                            (1.4
                            )%







(1)
            Relates
      to the impairment of fixed assets, inventory and intangible
      assets.


(2)
            Relates
      to the closing of 93 Macy’s departments at the end of
  2008.





2008
Compared with 2007





Sales.
Sales increased $37.0 million, or 5.2%, in 2008 compared to 2007. Sales include
$444.6 million from the department store based fine jewelry departments which
represented a 10.0% decrease compared to the $493.5 million in sales for
2007.  Sales also include $309.7 million generated by our stand-alone
specialty jewelry stores in 2008 compared to $223.8 million in 2007 (which
includes sales from the date of acquisition of Bailey Banks & Biddle in
November 2007). Comparable store sales decreased 11%.





During
2008, we opened four departments within existing host store groups, two Bailey
Banks & Biddle stores and four new Carlyle stores. Additionally, in 2008, we
closed 125 departments and four stand-alone jewelry stores. The openings were
comprised of the following:





Store
      Group
                
                Number
      of
                  LocationsBailey
      Banks & Biddle
                
                
                2Macy’s
                
                
                3Carlyle
                
                
                4Herberger’s
                
                
                1Total
                
                
                10








20





The
closings were comprised of the following:





Store
      Group
              
              Number
      of
                Locations
              
              ReasonMacy’s
      North and Northwest
              
              
              93
              
              Host
      decision to phase departments into existing Macy’s
    divisions.Lord
      & Taylor
              
              
              11
              
              Department
      closings as a result of Lord & Taylor’s decision not to renew our
      license agreement.Macy’s
      Central
              
              
              10
              
              Host
      decision to close these stores.Dillard’s
              
              
              8
              
              Management’s
      decision to close unprofitable stores.Gottschalks
              
              
              2
              
              Management’s
      decision to close unprofitable stores.Carlyle
              
              
              2
              
              Management’s
      decision to close unprofitable stores.Bailey
      Banks & Biddle
              
              
              2
              
              Management’s
      decision to close unprofitable stores.Elder
      Beerman
              
              
              1
              
              Includes
      department closings within existing host store groups.Total
              
              
              129





Our major
merchandise categories include diamonds, gold, gemstones, watches and designer
jewelry. With respect to our stand-alone jewelry store business, diamond, watch
and designer sales increased $32.7 million, $21.9 million and $10.3 million,
respectively, or 47.1%, 28.1% and 29.4%, respectively, in 2008 compared to 2007,
primarily as a result of the acquisition of Bailey Banks & Biddle in
November 2007.





Gross
margin.  Gross margin decreased by $29.9 million in 2008
compared to 2007. As a percentage of sales, gross margin decreased by 6.2% from
45.2% to 39.0%.  The components of this net decrease in gross margin
are as follows:





Component
                  
                  %
                  
                  ReasonImpairment
      charge
                  
                  
                  (3.2
                  )%
                  Impairment
      charge on inventory and the estimated loss on the sale of inventory to
      Bloomingdale’s.Merchandise
      cost of sales
                  
                  
                  (3.7
                  )
                  Increase
      in cost of sales is due to increase of stand-alone jewelry segment at
      lower gross margins as well as lower margins at the Macy’s departments
      that closed at year end 2008 and the Lord & Taylor departments that
      are scheduled to close at the end of April  2009, as we
      liquidate inventory.Other
                  
                  
                  0.7
                  
                  Decreases
      in various other components of cost of sales.Net
      decrease
                  
                  
                  (6.2
                  )%





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 $47.5 million, or 15.8%.
SG&A dollars have increased as 2008 includes a full year of Bailey Banks
& Biddle SG&A expenses. As a percentage of sales, SG&A increased by
4.2% from 42.1% to 46.3%. The components of this increase in SG&A are as
follows:





Component
                    
                    %
                    
                    ReasonLicense
      and lease fees
                    
                    
                    1.0
                    %
                    Increase
      is primarily due to the impact of additional stand-alone jewelry store
      leases at higher lease fees as a percentage of sales, as a result of the
      Bailey Banks & Biddle acquisition.Payroll
      expenses
                    
                    
                    1.7
                    
                    Increase
      is primarily due to the unfavorable leverage of payroll expenses on lower
      sales.Other
                    
                    
                    1.5
                    
                    Increase
      is due to consulting fees totaling $1.7 million associated with the
      restructuring of the Senior Notes as well as unfavorable leveraging of
      expenses on lower sales.Net
      increase
                    
                    
                    4.2
                    %





Depreciation and
amortization. Depreciation and amortization increased by $3.1 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 Bailey Bank & Biddle acquisition and accelerated depreciation associated
with the Macy’s and Lord & Taylor department closings, offset by the effect
of certain assets becoming fully depreciated.





Impairment
charges.In connection with our strategic plan, we recorded impairment
charges totaling $34.6 million in the year ended January 31, 2009. Impairment
charges of $28.2 million were recorded to reduce fixed assets to their estimated
fair value due to the shorter period over which they will be in operation.
Additionally, an impairment charge of $6.4 million was recorded to reflect
intangible and other assets, primarily  tradenames,
at  their  fair  value.  During   2007,
based on our annual assessment of the Congress goodwill, we determined that
goodwill was impaired and an impairment of $3.0 million was
recorded.





21




Interest expense,
net. Interest expense increased by $8.0 million primarily as a result of
higher average borrowings under the Revolving Credit Agreement. Average
borrowings, including borrowings under the Revolving Credit Facility, the Senior
Notes and the Secured Notes, increased to $515.4 million for the 2008 period
compared to $346.7 million for the 2007 period. The weighted average interest
rate on all outstanding borrowings was approximately 6.5% for 2008 compared to
8.0% for 2007. Included in 2008 is $10.1 million of PIK Interest related to the
Secured Notes.





Benefit for
income taxes.The income tax benefit for the 2008 and 2007 periods
reflects effective tax rates of 27.1% and 37.8%, respectively. The 2008 benefit
was reduced as a result of a required increase in the valuation allowance
against deferred tax assets. The 2007 period reflects a benefit of approximately
$1.2 million associated with impairment charges, compared to no benefit in 2008.
Additionally, the 2008 and 2007 periods reflect benefits of approximately $0.4
million and $0.2 million, respectively, associated with the reversal of tax
accruals no longer required.





Discontinued
operations.Discontinued operations for 2008 includes the results of
operations of the 93 Macy’s departments which closed in January 2009. Total
sales generated from these departments in 2008 and 2007 were $108.5 million and
$120.0 million, respectively. Discontinued operations for 2007 includes the 33
Parisian departments closed in July 2007.  Sales related to these
closed departments totaled $9.8 million in 2007. Gross margin, as a percentage
of sales, related to discontinued departments decreased 8.2% from 47.4% in 2007
to 39.2% in 2008, as we liquidated inventory.  The net loss from
discontinued operations for 2008 was $2.0 million compared to net income from
discontinued operations of $5.1 million during the comparable period in
2007.





Net income
(loss).Net loss of $107.3 million for the 2008 period compares to net
loss of $10.0 million in the prior period as a result of the factors discussed
above.





Liquidity and Capital
Resources





As
discussed above, in February 2009, we announced the adoption of our strategic
plan to exit the licensed department store based business and close
approximately half of our specialty jewelry stores in 2009. In conjunction with
the adoption of this strategic plan, we amended our Revolving Credit Agreement
in February 2009, as adjusted in March 2009, to reduce the Revolving Credit
Agreement from $550.0 million to $266.6 million and to increase the interest
rates thereunder. The amendment also requires us to comply with various
milestones in connection with the strategic plan, to provide additional
financial reporting to the lenders and to maintain compliance with a variance
covenant from the approved restructuring budget.  Additionally, the
Revolving Credit Agreement now matures in February 2010. The net sales proceeds
from the liquidation of inventory will be used to repay our outstanding balance
under our Revolving Credit Facility in 2009.





Effective
with the February 2009 amendment to the Revolving Credit Agreement, we now are
required to achieve certain weekly targeted percentages of our sales and cash
receipts and maintain cash disbursements below certain targeted percentages as
set forth in our operating plan. We are currently in default of this
covenant.  Although the lenders reserve all rights and remedies under
the Revolving Credit Agreement and can accelerate repayment of the outstanding
balance at any time, they have not exercised such rights at this
time.  As a result of cross-default provisions, such acceleration
would enable the holders of our long-term debt to declare a default and demand
repayment as well.





Our
ability to continue as a going concern is dependent on the successful
implementation of our strategic plan, the repayment of the amounts due under the
Revolving Credit Facility and our ability to secure a new line of credit on or
before the maturity date of the Revolving Credit Agreement. In addition, we
experienced a significant operating loss in 2008 and are expected to have an
operating loss in 2009. As discussed above, we are in default of certain
covenants under the Revolving Credit Agreement. These uncertainties raise
substantial doubt about our ability to continue as a going concern. Accordingly,
the independent auditor’s report accompanying our January 31, 2009 financial
statements contains a going concern explanatory paragraph, which also
constitutes a default under the Revolving Credit Agreement.





22





As a
result of these defaults, the lenders under the Revolving Credit Agreement are
no longer obligated to permit us to borrow under the facility or issue letters
of credit for our account.  We received a letter dated as of March 12,
2009, from General Electric Capital Corporation (as agent under the Revolving
Credit Agreement) (“GE”), pursuant to which GE, on behalf of all the lenders,
reserved all rights and remedies under the Revolving Credit Agreement. GE and
the lenders may, but are not obligated to, continue to issue letters of credit
and permit us to borrow under the Revolving Credit Facility and GE and the
lenders may terminate the Revolving Credit Agreement and/or demand immediate
repayment at any time.





If GE and
the lenders were to demand immediate repayment, there can be no assurances that
we will be able to obtain alternate financing on terms acceptable to
us.  In the event that we are unable to secure adequate borrowing
under the Revolving Credit Agreement or an alternate financing source, our cash
balance and cash flows from operations may be inadequate to meet our
obligations, which may prevent us from operating. As a result of cross-default
provisions, such acceleration would enable the holders of our long-term debt to
declare a default and demand repayment as well.





Effective
March 22, 2009, we completed the sale of certain assets to Bloomingdale’s. The
assets included inventory and fixed assets for the 34 departments that we
operated in Bloomingdale’s for a purchase price of approximately $33.4
million.  The proceeds from this transaction were used to pay down a
portion of the outstanding balance under our Revolving Credit
Facility.





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





January
      31,
                  2009
                
                
                February
      2,
                  2008(dollars
      in thousands)Cash
      and cash
      equivalents
                
                $
                2,754
                
                
                $
                4,701Working
      capital
                
                
                157,499
                
                
                
                214,773Short-term
      debt
                
                
                236,241
                
                
                
                224,231Long-term
      debt
                
                
                232,947
                
                
                
                200,000Stockholder’s
      equity (deficiency)
                
                
                (1,805
                )
                
                
                105,525





Our
primary capital requirements are to repay the amounts outstanding under the
Revolving Credit Facility and to fund working capital of go forward locations,
as well as license fees to host store groups and rent payments for the
stand-alone jewelry stores. For 2008 and 2007, capital expenditures totaled
$24.7 million and $13.4 million, respectively, exclusive of fixed assets
acquired.





Cash
flows provided by (used in) operating, investing and financing activities for
the fiscal years ended January 31, 2009 and February 2, 2008, were as
follows:





Fiscal
      Years EndedJanuary
      31,
                  2009
                
                
                February
      2,
                  2008(dollars
      in thousands)Operating
      Activities
                
                $
                1,292
                
                
                $
                73,298Investing
      Activities
                
                
                (30,346
                )
                
                
                (243,619
                )Financing
      Activities
                
                
                27,107
                
                
                
                173,318Net
      increase (decrease) in cash and cash equivalents
                
                $
                (1,947
                )
                
                $
                2,997





Operating
Activities





During
2009,the primary
source of our liquidity is expected to be cash flows from operating activities
as we liquidate inventory in the closing department store and specialty jewelry
store locations as well as excess inventory in the go forward specialty jewelry
stores. The key components 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 operating activities were $1.3
million and $73.3 million for 2008 and 2007, respectively. Inventory levels at
January 31, 2009 decreased by $168.8 million, or 28%, as compared to February 2,
2008, primarily related to a decrease in inventory of $161.5 million in our
licensed fine jewelry departments in anticipation of certain department closings
at the end of 2008 and inventory write-down charges of $24.3 million associated
with our strategic plan.  Our strategy during 2008 was to reduce our
owned inventory receipts and liquidate inventory in the closing departments, in
an effort to reduce the on hand inventory levels and positively impact cash
flows. Accounts receivable increased to $28.5 million from $13.8 million
primarily related to increased sales in the closing departments in January 2009
as compared to the prior year. Additionally, the decrease in accounts payable to
$34.1 million at January 31, 2009, from $110.5 million at February 2, 2008,
reflects significantly reduced owned inventory receipts in 2008, lower
consignment sales in the 2008 holiday season as compared to 2007 as well as the
reduced payment terms required by our vendors compared with our historical
credit terms.





23




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 2008, approximately 20%
of our merchandise was held on consignment. Our working capital balance was
$157.5 million at January 31, 2009, a decrease of $57.3 million from February 2,
2008.





The
seasonality of our business causes working capital requirements, and therefore,
borrowings under the Revolving Credit Agreement, to reach their highest level in
the months of October, November and December in anticipation of the year-end
holiday season. Accordingly, we experience seasonal cash needs as inventory
levels peak.





Investing
Activities





For 2008,
net cash used in investing activities of $30.3 million primarily relates to cash
used for capital expenditures. 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 paid in February 2008. Capital expenditures in 2008 and
2007 totaling $24.7 million and $13.4 million, respectively, related primarily
to expenditures for opening new locations and renovating existing
locations.





Financing
Activities





Net cash
provided by financing activities was $27.1 million in 2008, consisting primarily
of proceeds from, and principal repayments on, the Revolving Credit Facility and
proceeds from the issuance of the Second Lien Notes. Net cash provided by
financing activities was $173.3 million in 2007, and was used primarily for the
acquisition of Bailey Banks & Biddle.





The
Revolving Credit Agreement, recently amended in February 2009, as adjusted in
March 2009, provides us with a line of credit up to $266.6 million to finance
working capital needs. Effective February 25, 2009, the loans under Tranche A
(up to $229.1 million) will bear interest  at a floating rate equal to
a margin of 3.00% over the Index Rate or 4.75% over LIBOR. Additionally, Tranche
B (up to $37.5 million) will bear interest at a floating rate equal to a margin
of 5.50% over the Index Rate or 7.25% over LIBOR. Prior to February 25, 2009,
the loans under Tranche A bore interest in accordance with a graduated pricing
matrix based on the average excess availability under the facility for the
previous quarter. Additionally, Tranche B bore interest at a floating rate equal
to a margin of 3.50% over the Index Rate or 5.25% over LIBOR. The Index Rate is
equal to the higher of (i) the federal funds rate plus 125 basis points and (ii)
the publicly quoted rate as published by the Wall Street Journal as the “prime
rate”. The weighted average interest rate was 5.0% and 7.5% for 2008 and 2007,
respectively.





Borrowings
under the Revolving Credit Facility were $236.2 million at January 31, 2009,
compared to $224.2 million at February 2, 2008. The average amounts outstanding
under the Revolving Credit Facility were $310.1 million and $146.7 million for
2008 and 2007, respectively.  At January 31, 2009, we had $42.7
million of availability ($12.7 million of excess availability after taking into
consideration the $30.0 million minimum unused balance requirement). Our lowest
level of excess availability during 2008 was $38.1 million, at which point
outstanding borrowings under the Revolving Credit Facility were $285.6 million
($8.1 million of excess availability after taking into consideration the $30.0
million minimum unused balance requirement). The decrease in our borrowing
availability under the Revolving Credit Facility was primarily a result of
inventory appraisals performed by our lenders at the end of 2008 as well as
lower than anticipated sales from the 2008 holiday selling period.  As
a result of the liquidation in the locations we plan to close, the outstanding
balance under the Revolving Credit Facility has been reduced from $236.2 million
at the end of 2008 to approximately $130.0 million at the end of April
2009.





24




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. As of January 31, 2009, the only financial covenant
was the maintenance of a minimum of $30.0 million of availability under the
facility. As of January 31, 2009, we were in compliance with this requirement.
Effective with the February 2009 amendment to the Revolving Credit Agreement, we
now are required to achieve certain weekly targeted percentages of our sales and
cash receipts and maintain cash disbursements below certain targeted percentages
as set forth in our operating plan, and we are currently in default of this
covenant.  Although the lenders reserve all rights and remedies under
the Revolving Credit Agreement and can accelerate repayment of the outstanding
balance at any time, they have not exercised such rights at this
time.





In 2008,
we executed several agreements to exchange $159.4 million of our Senior Notes
held by the Participating Noteholders for new Third Lien Notes. In
addition, the Participating Noteholders purchased $22.8 million of new Second
Lien Notes.





Interest
on the Secured Notes is payable semi-annually in arrears on June 1 and December
1 of each year.  Interest on the Second Lien Notes began to accrue as of
the issuance date and is payable beginning on June 1, 2009 in pay-in-kind
interest or PIK Interest at 12.125% per annum from the issuance date until
December 1, 2010, and thereafter in cash at 11.375% per annum.  Interest on
the Third Lien Notes began to accrue PIK Interest at 8.945% per annum as of June
1, 2008, which was paid in PIK Interest on December 1, 2008, and will be payable
in PIK Interest at 8.945% per annum from December 2, 2008 until December 1,
2010, and thereafter in cash at 8.375% per annum.  The PIK Interest on
the Secured Notes is payable upon maturity of the Secured Notes. Interest on the
Senior Notes continues to be payable in cash semi-annually on June 1 and
December 1 of each year.





As a
result of the above transactions, as of January 31, 2009, there were
approximately $192.4 million of Secured Notes outstanding and $40.6 million of
Senior Notes outstanding. The amounts required to satisfy the aggregate of our
interest expense totaled $26.3 million and $28.9 million for 2008 and 2007,
respectively. The refinancing of the Senior Notes enables us to eliminate a
significant portion of the cash interest payment of $16.8 million that would
have been payable annually on the Senior Notes as the Secured Notes include PIK
Interest until December 1, 2010.





The
indentures related to the Senior Notes and the Secured Notes contain
restrictions relating to, among other things, the payment of dividends,
redemptions or repurchases of capital stock, the incurrence of additional
indebtedness, the making of certain investments, the creation of certain liens,
the sale of certain assets, entering into transactions with affiliates, engaging
in mergers and consolidations and the transfer of all or substantially all
assets.  We were in compliance with all such covenants as of January
31, 2009.





Although
we have been and continue to work closely with our vendors, several factors have
impacted our ability to continue our historical credit terms, including our
recent restructuring announcement, the Holding Company’s Common Stock being
delisted from NASDAQ and the downgrade of our credit rating on the Senior Notes,
coupled with the increase in our debt in conjunction with the acquisition of
Bailey Banks & Biddle and recent bankruptcies in the retail and jewelry
industries.   During 2008, many of our key vendors reduced their
historical credit terms with us based on our deteriorating liquidity
situation.  Further, many of these vendors are party to the secured
position negotiated in February 2009 under the terms of the Third Lien Notes for
$24.9 million of trade payable balances.  Additional restrictions on
the credit limits or payment terms that we have with our vendors could have an
adverse impact on our liquidity position.





25





There can
be no assurances that we can successfully implement our strategic plan or that
the net sales proceeds will be sufficient to repay the outstanding balance under
the Revolving Credit Facility. Additionally, there can be no assurances that we
will be able to secure a new line of credit on or before the date of maturity of
the Revolving Credit Agreement in February 2010, and, accordingly our liquidity
and ability to timely pay our obligations when due could be adversely
affected.  If we cannot successfully implement our strategic plan,
repay amounts due under the Revolving Credit Facility and secure such new
financing, we may be unable to maintain a level of liquidity necessary to
continue to operate our business.





Further,
we are a highly leveraged company. We may not be able to refinance or
restructure our long-term debt before it becomes due in 2012. A significant
amount of our operating cash flows will be used to pay interest with respect to
the Revolving Credit Facility, the Secured Notes (beginning on December 1, 2010)
and the Senior Notes.





In November2007, we completed theacquisitionof substantially all of the assets andspecified liabilities that
comprisedthe Bailey Banks & Biddle division
of Zale Corporation, a chain of67stand-alone retail stores in 24 states
with a focus on the luxury market, offering jewelry and watches under high-end
name brands.  The purchase priceofapproximately $231.6million, plus transaction feesof approximately
$4.1 million,was
financed with borrowings under the Revolving CreditFacility. Since the date of acquisition,
Bailey Banks & Biddle’s cash requirements have been, and will continue to
be, funded under the Revolving Credit Facility.





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 2008 and 2007 each accounted
for an average of approximately 41% 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 18 of Notes to the 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 of Notes to the Consolidated Financial
Statements.





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. In 2008, we recorded an impairment charge of $24.3
million on inventory and the estimated loss on the sale of inventory to
Bloomingdale’s. Adjustments to
earnings resulting from changes in historical loss trends were insignificant for
2007.





26




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 forestimating shrinkage.
As of January 31, 2009 and February 2, 2008, our shrink reserve totaled $0.4
million in each year. Additionally, during 2008 and 2007, inventory shrinkage
amounted to approximately 0.5% and 0.4%, 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. In 2009, we expect to earn
significantly lower levels of vendor allowances.





Vendor
allowances have been accounted for in accordance with the provisions of the
Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force,
Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor”. Vendor allowances provided as a
reimbursement of specific, incremental and identifiable costs incurred to
promote a 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 incost of sales when the
related product is sold. In 2008 and 2007, $6.6 million and $8.1 million,
respectively, of vendor allowances have been reflected as a reduction to cost of
sales.





As of
January 31, 2009 and February 2, 2008, deferred vendor allowances totaled (i)
$5.4 million and $7.1 million, respectively, for owned merchandise, which
allowances are included as an offset to merchandise inventories on the
Consolidated Balance Sheets, and (ii) $0.2 million and $4.4 million,
respectively, for merchandise received on consignment, which allowances are
included as deferred income on the Consolidated Balance Sheets.





Long-Lived
Assets





Our
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:





·
            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 berecoverable 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 bywhich the asset’s carrying value exceeds
itsfair value. To the extent future cash flows are less than
anticipated, additional impairment charges may result.





27




As a
result of our strategic plan, we evaluated our long-lived assets for potential
impairment as of January 31, 2009.  The evaluation considered
information available at January 31, 2009, and resulted in the determination
that the carrying value of the
fixed assets ofourlicensed departmentstores and certain unprofitable
specialty store locations would likely not be recovered through estimated future
cash flows, considering assumptions regarding the expected lives of those
assets.  As a result,werecordedanasset impairment charge of $28.2million to reduce the carrying value offixedassets to their estimated fair valuedue tothe shorter period over which they will
bein operation. Additionally, an impairment
charge of $6.4 million was recorded to reflect intangible and other assets,
primarily tradenames, at their fair value. In 2007, we recorded an impairment
charge of $3.0 million to write-off the goodwill related to
Congress.





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  January 31, 2009 and February 2, 2008, our allowance for sales
returns totaled $2.1 million in each year.  Adjustments to earnings
resulting from revisions to estimates on our sales return provision have been
insignificant for 2008 and 2007. 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 $8.8million and $7.7million atJanuary 31, 2009andFebruary2, 2008, 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 our 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. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets unless it is more
likely than not that such assets will be realized. Due to continued losses, a
valuation allowance in the amount of $17.4 million was required at January 31,
2009. 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, we completed the acquisition of Bailey Banks & Biddle. This
acquisition has been accounted for under the purchase method of accounting in
accordance with SFAS No. 141, “Business Combinations”.  As such, we
completed our analysis of the fair value of identified tangible and intangible
assets and liabilities.





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





28




New
Accounting Pronouncements:In April 2008, the FASB issued Staff Position No. 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other
Intangible  Assets”.  FSP  No.  142-3  is  effective  for  financial  statements  issued  for  fiscal
years beginning after December 15, 2008. We are currently assessing the
potential effect of FSP No. 142-3 on our consolidated
financial statements.





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
      ability to successfully implement our strategic plan to exit the licensed
      department store based business and close approximately half of our
      specialty jewelry stores;





·
            Our
      high degree of leverage and our ability to refinance our long-term debt
      and/or obtain a  new revolving line of credit to operate our go
      forward specialty jewelry stores;





·
            Our
      ability to continue as a going
concern;





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





·
            Our
      senior management team is in
transition;





·
            Our
      ability to renegotiate certain on going leases for specialty jewelry
      stores on more favorable terms or to negotiate new leases with acceptable
      terms;





·
            The
      seasonality of the retail jewelry
business;





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





·
            The
      impact of fluctuations in gold and diamond
  prices;





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








29





·
            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;





·
            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





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





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 Securities and Exchange Commission (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 Facility for 2008, a 100
basis point increase in interest rates would have resulted in an increase in
interest expense of approximately $3.1 million in 2008. In seeking to minimize
the risks from interest rate fluctuations, we manage exposures through our
regular operating and financing activities.





Commodity
Risk





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








30





Item
8.  Financial Statements and
Supplementary Data




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




PageManagement’s
      Report on Internal Control Over Financial Reporting
              F-2Report
      of Independent Registered Public Accounting Firm
              F-3Consolidated
      Statements of Operations for the years ended January 31, 2009 and
      February 2, 2008
              F-4Consolidated
      Balance Sheets as of January 31, 2009 and February 2, 2008
              F-5Consolidated
      Statements of Changes in Stockholder’s Equity (Deficiency) and
      Comprehensive Lossfor
      the years ended January 31, 2009 and February 2, 2008
              F-6Consolidated
      Statements of Cash Flows for the years ended January 31, 2009 and
      February 2, 2008
              F-7Notes
      to Consolidated Financial Statements for the years ended January 31, 2009
      and February 2, 2008
              F-8





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.





Disclosure Controls and
Procedures





Our
management evaluated, with the participation of our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the
end of the period covered by this report. Based upon that evaluation, the CEO
and CFO concluded that the disclosure controls and procedures are effective as
of the end of the period covered by this report to ensure that information
required to be disclosed 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 and that such information
is accumulated and communicated to our management, including the CEO and CFO, as
appropriate, to allow timely decisions regarding required
disclosure.





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 required to be set forth in our periodic
reports.








31





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 January 31, 2009 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 January 31, 2009.





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





Finlay Executive
Severance Pay Plan





The
Finlay Executive Severance Pay Plan (the “Severance Plan”) was amended and
restated effective December 31, 2008, and further amended and restated effective
March 19, 2009.  The Severance Plan is a retention tool to encourage
executives of Finlay Jewelry and Finlay Merchandising & Buying, Inc., a
wholly-owned subsidiary of Finlay Jewelry (“FM&B”) to remain focused on the
business, by providing temporary and short-term benefits to eligible “executive”
employees whose employment with Finlay Jewelry or Finlay Merchandising &
Buying, Inc. is involuntarily terminated in connection with a layoff or
reduction in force and who are not offered comparable employment with one of
Finlay’s affiliates or subsidiaries.





The
Severance Plan does not provide for severance benefits in the event an executive
resigns, quits or retires, or is covered by an employment agreement that
provides for severance.  Certain of Finlay’s named executive officers
are eligible to receive severance benefits under the Severance Plan in the event
of a covered termination.








Service(1)
                              
                              BenefitŸLess
      than two (2) years
                              
                              Four
      (4) weeksŸTwo (2) years but less than five (5) years
                              
                              Six
      (6) weeksŸFive (5) years but less than ten (10) years
                              
                              Eight
      (8) weeksŸTen (10) years but less than fifteen (15) years
                              
                              Twelve
      (12) weeksŸFifteen (15) years but less than twenty (20) years
                              
                              Sixteen
      (16) weeksŸTwenty (20) years but less than twenty-five (25)
    years
                              
                              Eighteen
      (18) weeksŸTwenty-five (25) years but less than thirty (30)
    years
                              
                              Twenty
      (20) weeksŸThirty (30) years or more
                              
                              Twenty-six
      (26)
weeks





(1) "Service"
means an executive's completed full years of employment as of the last
anniversary of the last date of hire of the executive.








32





Any
benefit under the Severance Plan in excess of eight weeks to an executive whose
annual base salary was $75,000 or greater on his or her date of termination (the
"Mitigated Benefits") will be reduced by an amount equal to the gross amounts
received or earned by the executive from employment or engagement in any other
business or activity during the period for which the Mitigated Benefits are
payable ("Other Income").  As a condition to receipt of payment of the
Mitigated Benefits, the executive shall, no later than seven days prior to the
date such payment is due, certify in writing all amounts of Other Income earned
by the executive during the preceding payroll period so that the appropriate
offsets can be made.





An
executive who accepts severance payments under the Severance Plan will also be
required to sign a release.





The
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.




The
foregoing description of the Severance Plan is only a summary and is qualified
in its entirety by reference to the plan itself, a copy of which is attached as
Exhibit 10.22 to this Form 10-K and is incorporated by reference into this Item
9B.


33





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
            
            PositionArthur E.
      Reiner
            
            68
            
            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
            
            58
            
            Executive Vice President and Chief
      Operating Officer of the Holding Company and President and Chief Operating
      Officer of Finlay JewelryLeslie A.
      Philip
            
            62
            
            Executive Vice President and Chief
      Merchandising Officer of the Holding Company and Finlay
      JewelryJoyce Manning
      Magrini
            
            54
            
            Executive Vice President –
      Administration of Finlay JewelryBruce E.
      Zurlnick
            
            57
            
            Senior Vice President, Treasurer
      and Chief Financial Officer of the Holding Company and Finlay
      JewelryDavid B.
      Cornstein
            
            70
            
            DirectorRohit M.
      Desai
            
            70
            
            DirectorLouis
      Lipschitz
            
            64
            
            DirectorNorman S.
      Matthews
            
            76
            
            DirectorThomas M.
      Murnane
            
            62
            
            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 Mr.
Matthews is a Class III director.  The terms of the Class II, Class
III and Class I directors expire at the Holding Company’s annual meeting of
stockholders to be held in 2009, 2010 and 2011,
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 has been a
director of the Holding Company since 1995, 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 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.





Joseph M. Melvin has been
Executive Vice President and Chief Operating Officer of the Holding Company and
President and Chief Operating Officer of Finlay Jewelry since 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). Mr. Melvin plans to retire from Finlay on June 30,
2009.





34





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. Ms. Philip
plans to retire from Finlay on May 26, 2009.





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 Jewelry’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 between $325.0 million and $410.0
million.  All of these partnerships have now successfully completed
their investment programs.  Mr. Desai serves as a director of Atlas
Acquisition Holdings Corp. and Alphatec Holdings, Inc.





Louis Lipschitz has been a
director of the Holding Company and Finlay Jewelry since 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 currently serves on the
boards of The Children's Place Retail Stores, Inc., 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, Henry Schein, Inc. and The Children’s Place Retail Stores,
Inc.





Thomas M. Murnane has been a
director of the Holding Company and Finlay Jewelry since December
2002.  Mr. Murnane is a retired partner of PricewaterhouseCoopers,
LLP, serving 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. and Pacific Sunwear of California,
Inc.





35





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 amendments to, or waivers 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.





Audit Committee




The Audit
Committees of the Boards of Directors consist 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 listing standards of the NASDAQ Stock Market (“Nasdaq”) and
Commission regulations applicable to audit committee members. The Boards of
Directors of both the Holding Company and Finlay Jewelry have determined that
Mr. Lipschitz, Chairman of the Audit Committees, qualifies as an “audit
committee financial expert” as defined in Item 407(d)(5) of Regulation
S-K.








36





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 2008 and does not currently
plan to engage one for 2009.





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.





During
2008 and prior years, the compensation of the Chief Executive Officer was fixed
by his employment agreement, which expired in accordance with its terms on
January 31, 2009, and was replaced by a retention bonus agreement, effective as
of March 6, 2009.  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.





37





Components of
Executive Compensation





During
2008 and prior years, our executive compensation program included a mix of
short-term and long term incentives, consisting 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 Compensation and Stock Purchase Plan (the “Executive Deferred
Compensation Plan”), and limited
supplemental executive benefits.  The Chief Executive Officer’s compensation mix
was established by his
employment agreement.





Due to
the limited liquidity of the Holding Company’s Common Stock, base salary and
cash incentive compensation may have represented a higher percentage of total
compensation for our executive officers than was the case with our
competitors.  In 2008, in recognition of a challenging economic
environment and the impact of host-store consolidations on our business, the
Committee approved a reduction in our annual cash incentive compensation
program. In 2009, the Committee determined that there would be no annual cash
incentive compensation and approved additional reductions in certain executive
severance benefits.





Compensation of
Chief Executive Officer





Through
the end of 2008, Mr. Reiner’s compensation was governed by the terms of his
employment agreement dated as of January 30, 2005 and amended March 11, 2008 and
April 25, 2008.  The term of that agreement was January 30, 2005 to
January 31, 2009. 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.  For 2006 through 2008, his employment agreement
provided 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.  In addition, Mr. Reiner was 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.  On
April 25, 2008, Mr. Reiner’s employment agreement was amended to provide for his
participation in the 2008 annual cash bonus pool established under the Holding
Company’s Cash Bonus Plan in lieu of the Cash Incentive Compensation otherwise
payable under his employment agreement with respect to 2008.





The term
of Mr. Reiner’s employment agreement expired in accordance with its terms on
January 31, 2009.  We have not entered into a replacement employment
agreement with Mr. Reiner.  However, on March 11, 2009, Mr. Reiner and
the Holding Company entered into a retention bonus agreement, providing for
Mr. Reiner to receive two retention bonus payments of $500,000 each in
2009, in lieu of approximately $2,100,000 in certain severance benefits to which
Mr. Reiner would otherwise have been entitled under the terms of his
employment agreement.  The first $500,000 payment was made on March
11, 2009, and the second $500,000 payment was made on April 1,
2009.








38




Summary
Compensation Table


Fiscal
Year Ended January 31, 2009





The table
below summarizes the total compensation paid to or earned by each of our named
executive officers during the fiscal years ended January 31, 2009 and February
2, 2008.





Name
      and Principal Position
                Year
                
                Salary
                  ($)
                
                
                Bonus
                  ($)
                
                
                Stock
      Awards
                  ($)
      (4)
                
                
                Option
      Awards
                  ($)
      (5)
                
                
                Non-Equity
      Incentive Plan Compensation
                  ($)
                
                
                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
                2008
                
                $
                1,005,000
                
                
                
                500,000
                (1)
                
                $
                140,484
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                $
                82,784
                
                
                $
                1,728,2682007
                
                
                1,005,000
                
                
                
                500,000
                (2)
                
                
                451,393
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                83,396
                
                
                
                2,039,789Bruce
      E. Zurlnick
                  Senior
      Vice President, Treasurer and Chief Financial Officer of the Holding
      Company and Finlay Jewelry
                2008
                
                
                315,500
                
                
                
                --
                
                
                
                30,748
                
                
                
                11,917
                
                
                
                --
                
                
                
                --
                
                
                
                12,602
                
                
                
                370,7672007
                
                
                310,000
                
                
                
                --
                
                
                
                57,540
                
                
                
                1,986
                
                
                
                --
                
                
                
                --
                
                
                
                12,052
                
                
                
                381,578Joseph
      M. Melvin
                  Executive
      Vice President and Chief Operating Officer of the Holding Company and
      President and Chief Operating Officer of Finlay Jewelry
                2008
                
                
                458,556
                
                
                
                226,028
                (3)
                
                
                46,841
                
                
                
                21,450
                
                
                
                --
                
                
                
                --
                
                
                
                12,611
                
                
                
                765,4862007
                
                
                452,056
                
                
                
                --
                
                
                
                95,762
                
                
                
                3,575
                
                
                
                --
                
                
                
                --
                
                
                
                12,052
                
                
                
                563,445Leslie
      A. Philip
                  Executive
      Vice President and Chief Merchandising Officer of the Holding Company and
      Finlay Jewelry
                2008
                
                
                478,690
                
                
                
                235,845
                (3)
                
                
                24,172
                
                
                
                21,450
                
                
                
                --
                
                
                
                --
                
                
                
                13,853
                
                
                
                774,0102007
                
                
                471,690
                
                
                
                --
                
                
                
                79,797
                
                
                
                3,575
                
                
                
                --
                
                
                
                --
                
                
                
                13,294
                
                
                
                568,356Joyce
      M. Magrini
                  Executive
      Vice President – Administration of Finlay Jewelry
                2008
                
                
                330,000
                
                
                
                162,500
                (3)
                
                
                33,254
                
                
                
                11,917
                
                
                
                --
                
                
                
                --
                
                
                
                11,531
                
                
                
                549,2022007
                
                
                325,000
                
                
                
                --
                
                
                
                63,680
                
                
                
                1,986
                
                
                
                --
                
                
                
                --
                
                
                
                10,972
                
                
                
                401,638Edward
      J. Stein
                  Former
      Senior Vice President and Director of Stores of Finlay Jewelry
      (6)
                2008
                
                
                169,941
                
                
                
                --
                
                
                
                17,628
                (7)
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                656,047
                
                
                
                843,6162007
                
                
                390,056
                
                
                
                --
                
                
                
                79,890
                
                
                
                1,192
                
                
                
                --
                
                
                
                --
                
                
                
                13,294
                
                
                
                484,432




39







(1)
              This amount represents the cash
      payment to Mr. Reiner in February 2009 of his Restricted Stock Time-Based
      Bonus award for 2008 pursuant to the terms of his employment agreement, as
      modified by the agreement to pay in cash for
  2008.(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 in cash for
  2007.




(3)
            This amount represents a special
      retention bonus equal to 50% of the executive’s then-current base salary,
      pursuant to the terms of the executive’s employment agreement. The bonus
      was paid on July 25, 2008 to these
  executives.




(4)
            The amounts in this column reflect
      the compensation expense of restricted stock and matching restricted stock
      units (“RSUs”) granted under the Holding Company’sLong Term Incentive Plan (adopted
      in 1993) (the “1993 Plan”), 1997 Long Term Incentive Plan (the “1997
      Plan”) and/or 2007 Long Term Incentive Plan (the “2007 Plan”)for financial reporting purposes
      for 2008 and 2007, respectively, and 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 to our Consolidated
      Financial Statements for the assumptions made in determining SFAS No.
      123(R) “Stock-Based Compensation”
values.




(5)
            The amounts in this column reflect
      the compensation expense of stock options granted under the 1993, 1997
      and/or 2007 Plans for financial reporting purposes for 2008 and 2007,
      respectively, and 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 to our Consolidated
      Financial Statements for the assumptions made in determining SFAS No.
      123(R) “Stock-Based Compensation”
values.




(6)
            Mr. Stein retired on June 23,
      2008.




(7)
            This amount includes a reversal of
      $7,220 in compensation expense previously recognized in connection with
      RSUsawardedin2005 and 2006 which Mr. Stein
      forfeited in connection with his
  retirement.




(8)
            The amounts in this column for
      2008 are reflected in the All Other Compensation table below, which
      includes perquisites, employee benefits and company matching contributions
      to the 401(k) plan and, in the case of Mr. Stein, payments required
      pursuant to his Severance Agreement and General
      Release.




All
Other Compensation





Name
                
                Perquisites
      and Other Personal Benefits ($)
                
                
                Tax
      Gross-Ups andReimbursements
                  ($)
                
                
                Medical
      Benefits ($) (3)
                
                
                Company
      Contributions to Defined Contribution Plans ($) (4)
                
                
                Company-paid
      Insurance Premiums
                  ($)
      (5)
                
                
                Severance
      Benefits
                  ($)
      (6)
                
                
                Total
      ($)Arthur
      E. Reiner
                
                $
                8,714
                (1)
                
                $
                30,282
                (2)
                
                $
                -
                
                
                $
                5,750
                
                
                $
                38,038
                
                
                $
                -
                
                
                $
                82,784Bruce
      E. Zurlnick
                
                
                --
                
                
                
                --
                
                
                
                4,539
                
                
                
                5,750
                
                
                
                2,313
                
                
                
                --
                
                
                
                12,602Joseph
      M. Melvin
                
                
                --
                
                
                
                --
                
                
                
                4,539
                
                
                
                5,750
                
                
                
                2,322
                
                
                
                --
                
                
                
                12,611Leslie
      A. Philip
                
                
                --
                
                
                
                --
                
                
                
                4,539
                
                
                
                5,750
                
                
                
                3,564
                
                
                
                --
                
                
                
                13,853Joyce
      M. Magrini
                
                
                --
                
                
                
                --
                
                
                
                4,539
                
                
                
                5,750
                
                
                
                1,242
                
                
                
                --
                
                
                
                11,531Edward
      J. Stein
                
                
                --
                
                
                
                --
                
                
                
                2,270
                
                
                
                --
                
                
                
                1,485
                
                
                
                652,292
                
                
                
                656,047







(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
      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.


(6)
            Amounts
      in this column reflect payments required pursuant to Mr. Stein’s Severance
      Agreement and General Release in connection with his retirement on June
      23, 2008, for severance ($595,420), interest on the severance payment
      ($6,872), and a relocation allowance
($50,000).




40





Base
Salaries





We
believe we must offer a competitive base salary in order to retain talented
senior officers.  For this reason, base salary constitutes a
significant portion of each named executive officer’s total
compensation.  It is the Committee’s objective to maintain base
salaries that are reflective of the individual executive’s experience, position,
responsibility level and performance, and that are generally competitive with
salary levels of executives at other companies engaged in the same or similar
lines of business with revenues in a range comparable to those of the Holding
Company.  The Committee monitors the salaries of all Senior Vice
Presidents and above following the close of each fiscal year and makes annual
adjustments as it deems necessary and appropriate based, except with respect to
his own base salary, on compensation recommendations from the Chief Executive
Officer. As part of Finlay’s expense reduction efforts during the past few
years, none of the named executive officers received annual base salary
increases for 2006 or 2007.  However, the named executive officers
other than Mr. Reiner each received a cost of living adjustment in annual base
salary, effective August 1, 2008.  For 2008, Mr. Reiner’s base salary
was fixed by the terms of his employment agreement and he continues to receive
the same annual base salary in 2009.





Annual Cash
Bonuses





Annual
cash bonuses for our named executive officers are awarded under the Holding
Company’s Cash Bonus Plan 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 2007 and
prior years, 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, provided
that the maximum bonus paid under the plan to any individual in respect of any
fiscal year could 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 through
2008 was 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.





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.





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




41




Under the
Cash Bonus Plan, for 2007 and prior years, if EBITA was 100% of the Target
Level, cash bonuses would be payable to each of the named executive officers
(other than the Chief Executive
Officer  whose  incentive  compensation  formula  was  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 was no maximum amount that could be earned
under this award formula, other than the stated plan maximum.  The
incentive targets would not result in a payout if our performance was below 80%
of the Target Level.  These targets were scaled so that if EBITA was
80% of the Target Level, cash bonuses would be payable in the amount of 20% of
each executive officer’s then-current base salary, and if EBITA exceeded 80%,
then the bonus payout would be 20% of the executive officer’s base salary plus
2% for each percentage point by which EBITA exceeded 80% of the Target
Level.  Receipt of any cash incentive compensation under this plan was
contingent on the executive officer’s continued employment through the payment
date.


As
provided in his employment agreement for 2007 and prior years, the target amount
of Mr. Reiner’s annual Cash Incentive Compensation was 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 was met for such year.  The target EBITA
level for each year had to be determined by the Committee during the first 90
days of the fiscal year and could subsequently be 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 was 80% of the
Target Level, his Cash Incentive Compensation would be 33.333% of his base
salary.  If EBITA exceeded 80% of the Target Level, the percentage
payable would increase 3.333% for each percentage point by which EBITA exceeded
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 exceeded 100% of the Target Level,
Mr. Reiner’s Cash Incentive Compensation could exceed his base
salary.  Mr. Reiner was not entitled to any Cash Incentive
Compensation payment for any fiscal year in which EBITA was less than 80% of the
Target Level for such fiscal year. Because EBITA for 2007 was below the minimum
performance level required under the Cash Bonus Plan, none of the named
executive officers received cash bonuses under the Cash Bonus Plan for
2007.





In April
2008, the Committee approved a reduced bonus program under the Cash Bonus Plan
for 2008 in recognition of the challenging economic environment and the impact
of host-store consolidations. The reduced bonus program formula applied to all
eligible executive officers under the Cash Bonus Plan, including Mr. Reiner, and
made it significantly more difficult for executives to earn an annual cash bonus
than in prior years.





For bonus
opportunities for 2008 under the Cash Bonus Plan, the Committee established
guidelines for an annual cash bonus pool that could be paid for 2008, rather
than tying cash bonus awards solely to the participant’s base salary based on
his or her achievement of the selected performance goal. Under the cash bonus
pool, cash bonus awards would be paid for 2008 only if Finlay Jewelry’s
performance exceeded 100% of the target level of EBITA, rather than
80%.  For 2008, the potential cash bonus payout for each executive
officer was based on a percentage of the overall bonus pool, with the individual
percentages determined by the Committee using a formula that took into account
the individual’s 2008 base salary and the percentage of base salary the
individual was entitled to receive as a cash bonus for 2007 for achieving 100%
of the Target Level of EBITA.





The
overall amount of the bonus pool was determined based on the achievement by
Finlay Jewelry of the Target Level for 2008, as follows:




(i)
              if
      EBITA was less than or equal to 100% of the Target Level, then the bonus
      pool was zero;(ii)
              if
      EBITA exceeded 100% of the Target Level, the bonus pool consisted of the
      following:  (a)
              100%
      of the amount by which EBITA exceeded 100% of the Target Level up to $2.0
      million;





(b)
            50%
      of the amount by which EBITA exceeded 100% of the Target Level from $2.0
      million to $3.0 million; and








42





(c)
            25%
      of the amount by which EBITA exceeded 100% of the Target Level above $3.0
      million.





Along
with the other eligible participants in the Cash Bonus Plan, each of
Messrs. Reiner, Zurlnick and Melvin, and Mmes. Philip and Magrini were
entitled to receive annual cash bonuses for 2008 equal to a specified percentage
of the overall bonus pool for 2008.  Mr. Stein was not eligible to
participate in the Cash Bonus Plan for 2008.





Because
EBITA for 2008 was below the minimum performance level required under the Cash
Bonus Plan, none of the named executive officers received cash bonuses under the
Cash Bonus Plan for 2008.  In connection with the decline in our
department store based business over the past several years, the challenging
economic conditions under which we are currently operating, and the strategic
plan we announced in February 2009, the Committee determined that there would be
no Cash Bonus Plan for 2009.





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.





Stock
option grants in prior years were made in the discretion and 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 trading price of the
Holding Company’s Common Stock on such grant date.  All options
granted to senior management vest in three to five years beginning with the
first anniversary of the date of the grant and expire after ten
years.





Under his
employment agreement, through 2008, Mr. Reiner was entitled to receive 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 was met for such year (“Performance-Based Stock
Award”).  For purposes of this Performance-Based Stock Award, fair
market value was the mean between the high and low sales price of the Holding
Company’s Common Stock on the date on which our audited financial statements
were completed by our independent public accountants, or, if there was 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 were the same as for
Mr. Reiner’s Cash Incentive Compensation, except that his Performance-Based
Stock Award could 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 vested immediately.  Because EBITA for
2007 and 2008 was below the minimum performance level required for the
Performance-Based Stock Award, Mr. Reiner did not receive any Performance-Based
Stock Award for 2007 or 2008.





As noted
above, through 2008, Mr. Reiner was also entitled to receive annually 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 was determined in the same
manner as for the Performance-Based Stock Award except that the relevant
measurement date was the last day of the fiscal year on which the Holding
Company’s Common Stock traded.  This award of restricted stock was
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 and 2008 awards in stock, Mr. Reiner and the Holding
Company agreed that he would receive his 2007 and 2008 Restricted Stock
Time-Based Bonuses in cash.





43




401(k) Plan





The
Holding Company maintains a 401(k) plan to provide retirement benefits for our
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 profit-sharing contributions under the plan.





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 may make additional contributions to its plan;
however, no additional contributions were made during 2007 or 2008.





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 1993,
1997 and 2007 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.





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 or 1997
Plan, and all shares that were available to be granted as awards under the 1993
and 1997 Plans became available to be granted as awards under the 2007
Plan.  Shares from forfeited awards made under the 1993 or 1997 Plan
or shares from awards made under the 1993 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.





44





As of
January 31, 2009, an aggregate of 649,874 shares of the Holding Company’s Common
Stock has been reserved for issuance pursuant to the 2007 Plan.  As of
January 31, 2009, no shares have been issued in connection with exercises of
options granted under the 2007 Plan, 250,000 shares are reserved for issuance
upon the exercise of outstanding options at an exercise price of $2.71 per
share, and 207,630 shares have been issued or are subject to purchases and
awards of restricted stock and restricted stock units. As of January 31, 2009,
192,244 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)  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 January 31, 2009, 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 the exercise of outstanding
options, and 145,699 shares have been issued or are subject to purchases and
awards of restricted stock and restricted stock units. No future grants may be
made under the 1993 Plan.





The 1997
Plan permitted us to grant the same types of awards as permitted under the 1993
Plan. As of January 31, 2009, 294,494 shares of the Holding Company’s Common
Stock have been issued in connection with exercises of options granted under the
1997 Plan, 395,300 shares are reserved for issuance upon the exercise of
outstanding options, and 820,928 shares have been issued or are subject to
purchases and awards of restricted stock and restricted stock
units.  No future grants may be made under the 1997 Plan.


Executive
Deferred Compensation and Stock Purchase Plan


In
addition to giving the Holding Company the ability to make stock-based awards to
current or future designated executives, the Executive Deferred Compensation
Plan provided 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 were 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 were 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.




The
shares issued upon distribution of RSUs under the Executive Deferred
Compensation Plan are  provided by the 2007 Plan. As a result of the
unavailability of shares of the Holding Company’s Common Stock under the 2007
Plan, the Executive Deferred Compensation Plan was amended to provide that no
new deferral agreements may be entered into after May 22, 2008 and that any
executive deferral agreements regarding the 2008 bonus payable on April 25, 2009
were effectively cancelled; such bonus amounts were paid to the participants in
cash on April 25, 2009. In addition, no additional matching awards have been or
will be made under the Executive Deferred Compensation Plan after May 22,
2008.





Prior to
2008, participant RSUs were credited under the Executive Deferred Compensation
Plan to a participant’s account on April 25th 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 the Holding Company’s 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 the Holding Company’s Common Stock for such date or,
if there was no sale on that date, then on the last preceding date on which a
sale was reported).





45





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.”





46





Outstanding Equity Awards at 2008Fiscal Year End





The table below sets
forth information regarding outstanding equity awards held by our named
executive officers at the end of 2008.


Option
      Awards (1)
                                                            
                                                            Stock
      AwardsName
                                                            
                                                            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
                                                              ($)
      (2)
                                                            
                                                            
                                                            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
                                                            
                                                            
                                                            60,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            $
                                                            12.75
                                                            
                                                            2/16/2010
                                                            
                                                            
                                                            13,439
                                                            (3)
                                                            
                                                            $
                                                            403
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --60,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            7.05
                                                            
                                                            9/28/2011
                                                            
                                                            
                                                            44,704
                                                            (4)
                                                            
                                                            
                                                            1,341
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --Bruce
      E. Zurlnick
                                                            
                                                            
                                                            10,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            13.5625
                                                            
                                                            12/20/2009
                                                            
                                                            
                                                            2,487
                                                            (3)
                                                            
                                                            
                                                            75
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --5,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            12.75
                                                            
                                                            2/16/2010
                                                            
                                                            
                                                            8,273
                                                            (4)
                                                            
                                                            
                                                            248
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --15,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            7.05
                                                            
                                                            9/28/20118,333
                                                            
                                                            
                                                            
                                                            16,667
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            2.7122
                                                            
                                                            12/4/2017Joseph
      M. Melvin
                                                            
                                                            
                                                            20,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            12.75
                                                            
                                                            2/16/2010
                                                            
                                                            
                                                            3,627
                                                            (3)
                                                            
                                                            
                                                            109
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --27,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            7.05
                                                            
                                                            9/28/2011
                                                            
                                                            
                                                            12,065
                                                            (4)
                                                            
                                                            
                                                            362
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --15,000
                                                            
                                                            
                                                            
                                                            30,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            2.7122
                                                            
                                                            12/4/2017Leslie
      A.  Philip
                                                            
                                                            
                                                            30,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            12.75
                                                            
                                                            2/16/2010
                                                            
                                                            
                                                            3,785
                                                            (3)
                                                            
                                                            
                                                            114
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --30,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            7.05
                                                            
                                                            9/28/201115,000
                                                            
                                                            
                                                            
                                                            30,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            2.7122
                                                            
                                                            12/4/2017Joyce
      M. Magrini
                                                            
                                                            
                                                            5,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            12.75
                                                            
                                                            2/16/2010
                                                            
                                                            
                                                            2,608
                                                            (3)
                                                            
                                                            
                                                            260
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --10,000
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            7.05
                                                            
                                                            9/28/2011
                                                            
                                                            
                                                            8,674
                                                            (4)
                                                            
                                                            
                                                            78
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --8,333
                                                            
                                                            
                                                            
                                                            16,667
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            2.7122
                                                            
                                                            12/4/2017Edward
      J.
                                                              Stein
      (5)
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            --
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            ----
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            --
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --








(1)
            Optionswith expiration dates before 2017generally vestin five equal annual
      installments beginning on the first anniversary of their grant dateand becomefullyexercisable 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 generally vest  in three annual installments
      beginning on the first anniversary of their grant date 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
      RSUs held as ofJanuary 31, 2009multiplied by $0.03, the closing price of the Holding
      Company’s Common Stock onJanuary 30, 2009, the last trading
      day of the 2008 fiscal year.




(3)
            Reflects the number of unvested
      matching RSUs as ofJanuary 31, 2009awarded in April 2006 held for
      the account of the named executive officer pursuant to the Executive
      DeferredCompensationPlan.  These matching
      RSUs vest on the third anniversary of their award
    date.




(4)
            Reflects the number of unvested
      matching RSUs as ofJanuary 31, 2009awarded 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.




(5)
            In connection with his retirement,
      Mr. Stein forfeited any unexercisable options and unvested RSUs on June
      23, 2008.  Mr. Stein’s remaining exercisable options expired on
      July 14, 2008.




47





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 Plans and individual award agreements under those plans, our named
executive officers are, or were, 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 Jewelry and Mr. Stein entered into a Severance Agreement and
General Release which replaced his prior employment agreement and governs his
termination compensation.





With the
exception of Mr. Stein, the following discussion generally describes the
payments that could have been made to our named executive officers upon various
events of termination, including termination in connection with a change of
control, assuming the termination event occurred on January 31,
2009.  In Mr. Stein’s case, the following discussion describes the
payments to which Mr. Stein is entitled pursuant to his Severance Agreement and
General Release in connection with his retirement on June 23, 2008. The
following discussion generally does not address payments and benefits provided
on a nondiscriminatory basis to salaried employees generally upon termination of
employment.





Chief Executive
Officer





As noted
above, Mr. Reiner’s employment agreement expired in accordance with its terms on
January 31, 2009.  Prior to its expiration, as most recently amended
on April 25, 2008, his employment agreement provided that if, at the expiration
of the employment term (or earlier under specified circumstances), we and Mr.
Reiner could not agree upon terms to continue Mr. Reiner's employment, or if his
employment were terminated without “cause” or by Mr. Reiner for “good reason”
(as defined in his employment agreement), he would have been 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 have been 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 were terminated prior to a “change of control” (as defined
in his employment agreement) either by us without “cause” or by Mr. Reiner for
“good reason,” Mr. Reiner would have continued to receive his base salary for
the balance of the term and Incentive Compensation (calculated as though 110.0%
of the Target Level had been achieved) as if such termination had not
occurred.  Mr. Reiner would also have been 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 occurred within 90 days prior to a
“change of control” then Mr. Reiner would also have received the amounts
described below that would be payable upon a change of control but only to the
extent such amounts exceeded the amounts described in this
paragraph.





In the
event Mr. Reiner's employment were terminated by us 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 have been entitled to a lump sum payment of 299.0% 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.





Mr.
Reiner’s employment agreement defined “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 notified the Board of Directors in
writing of the occurrence of such event and the Board of Directors failed 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 was 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).





48




Mr.
Reiner’s employment agreement defined “cause” to include: (1) the executive’s
failure substantially to perform his job duties (or to follow reasonable
directions from the Board of Directors within ten business days after receiving
written notice of such failure, in Mr. Reiner’s case); (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 failed to cure
within ten business days after receiving notice of the breach.





Mr.
Reiner’s employment agreement defined “change of control” to include: (1) any
transaction or series of transactions that resulted in any person or group
(other than Mr. Reiner and his related entities) becoming the beneficial owner
of more than 50.0% 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.





As noted
above, the term of Mr. Reiner’s employment agreement expired in accordance with
its terms on January 31, 2009.  We have not entered into a replacement
employment agreement with Mr. Reiner, although Mr. Reiner and the Holding
Company did enter into a retention bonus agreement, providing for
Mr. Reiner to receive two retention bonus payments of $500,000 each in
2009, in lieu of approximately $2,100,000 in severance benefits to which
Mr. Reiner would otherwise have been entitled under the terms of his
employment agreement.





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. 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, and
Finlay Jewelry entered into an employment agreement with Joyce Manning Magrini,
Executive Vice President – Administration of Finlay Jewelry.  We
entered into these agreements for the purposes of retention and
stability.





Each of
these employment agreements had a term of three years, which expired on June 30,
2008 in accordance with the provisions of the employment agreements. Under these
agreements, Mr. Melvin received a minimum annual base salary of $452,056, Ms.
Philip received a minimum annual base salary of $471,690, and Ms. Magrini
received a minimum base salary of $325,000.  In addition to annual
base salary, each of the executives was entitled to receive an annual cash
bonus, as described under “Annual Cash Bonuses” above.  As an
additional retention tool, each employment agreement also provided that the
executive would receive, in the event he or she remained employed by Finlay
Jewelry or FM&B, as applicable, on June 30, 2008, a special retention bonus
equal to 50% of the executive’s then-current base salary.  These
special retention bonuses were paid to each of Mr. Melvin, and Mmes. Philip and
Magrini on June 30, 2008. These agreements also contained non-compete and
non-solicitation provisions.





Under
these agreements, if the executive had been terminated without “good cause” (as
defined in the employment agreements), the executive would have been 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).








49





Because
each of their agreements had expired before January 31, 2009, Mmes. Philip and
Magrini would not have been entitled to receive any termination benefits under
these agreements if they
had  been  terminated  without  “good
cause”  as  of January 31, 2009.  We have not
entered into replacement employment agreements with Ms. Philip or Ms.
Magrini.  Ms. Philip is scheduled to retire on May 26,
2009.





Although
Mr. Melvin’s June 2005 employment agreement also expired before January 31,
2009, on December 4, 2008, Finlay Jewelry entered into a letter agreement with
Mr. Melvin that amended and revised his earlier April 18, 1997 employment
agreement.  As amended December 4, 2008 and in place as of January 31,
2009, Mr. Melvin’s employment agreement provides that upon termination of his
employment by Finlay Jewelry without cause or if Mr. Melvin terminates his
employment because he is given a lesser title, he will be entitled to receive
one year of his then-current base salary payable in accordance with Finlay
Jewelry’s payroll practices.





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 provided for his
continued employment as Senior Vice President, Treasurer and Chief Financial
Officer, for a term which ended February 28, 2009 in accordance with the
provisions of the employment agreement.  Under the agreement, Mr.
Zurlnick received a minimum annual base salary of $310,000. In addition, Mr.
Zurlnick was entitled to receive an annual cash bonus, as described under
“Annual Cash Bonuses” above.  The agreement with Mr. Zurlnick also
provided that, in the event he remained employed by us on February 28, 2009, he
would receive a special retention bonus equal to 50% of his then-current base
salary.  This special retention bonus was paid to Mr. Zurlnick on
February 28, 2009.  Under the agreement, if Mr. Zurlnick had been
terminated without “good cause” (as defined in his agreement), he would have
been 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).  We
have not entered into a replacement employment agreement with Mr.
Zurlnick.





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





Change of Control Executive Severance
Plan




The
employment agreements for Mssrs. Melvin and Zurlnick, and Mmes. Philip and
Magrini did not contain change of control provisions.  However, on
March 11, 2008, the Holding Company adopted a Change of Control Executive
Severance Plan (the “Change of Control Severance Plan”), which applies to Mssrs.
Melvin and Zurlnick, and Mmes. Philip and Magrini.





The
Change of Control 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, in addition to certain accrued amounts:
(i) a lump sum cash payment in an amount equal to two times the sum of 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 retention 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 us or our 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
Change of Control Severance Plan defines “change of control” to include: (1) any
transaction or series of transactions which result in a person or group, other
than Mr. Reiner and certain persons or entities related to Mr. Reiner, becoming
the beneficial owner of more than 50% of the Holding Company’s voting stock
and/or warrants or options to acquire the Holding Company’s voting stock; (2) a
change in the composition of the Holding Company’s Board of Directors during any
twelve-month period, which is not brought about by Mr. Reiner or certain persons
or entities related to Mr. Reiner, such that the individuals who constituted the
Holding Company’s Board of Directors at the beginning of the twelve-month period
(together with any new directors whose election or nomination was approved by a
vote of a majority of the directors then still in office who either were
directors at the beginning of such period or whose election or nomination was
previously so approved) no longer constitute a majority of the directors then in
office; or (3) a sale of assets constituting all or substantially all of the
assets of the Holding Company or Finlay Jewelry, determined on a consolidated
basis.  Only one change of control may occur under the Change of
Control Severance Plan.





50




The
Change of Control Severance Plan defines “cause” to include: (1) the executive’s
failure to substantially perform his or her customary duties within ten business
days after written notice of such failure; (2) willful misconduct or
willful malfeasance by the executive in connection with his or her employment;
(3) the executive’s conviction of, or plea of guilty or nolo contendere to, any
crime constituting a felony under federal or state law, or any crime
constituting a misdemeanor under any such law involving moral turpitude; or (4)
the executive’s breach of any of the provisions of his or her employment
agreement if the executive fails to cure the breach within ten business days
after written notice of such breach.





The
Change of Control 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 Change of Control Severance Plan will be
required to sign a release and will be subject to certain restrictive
covenants.  The Change of Control 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.





Non-Change of Control Executive
Severance Pay Plan





Because
the employment agreements for Mmes. Philip and Magrini had expired as of January
31, 2009, they both would have been eligible to receive severance benefits under
the Severance Plan in the event they had been involuntarily terminated in
connection with a layoff or reduction in force and were not offered comparable
employment with one of Finlay Jewelry’s affiliates or
subsidiaries.  Because they had effective employment agreements as of
January 31, 2009 that provided for different severance benefits, Messrs. Reiner,
Zurlnick and Melvin were not eligible to receive severance benefits under the
Severance  Plan as of January 31, 2009.





The
Severance Plan is a retention tool to encourage executives of Finlay Jewelry and
Finlay Merchandising & Buying, Inc. to remain focused on the business, by
providing temporary and short-term benefits to eligible “executive” employees
whose employment with Finlay Jewelry or FM&B is involuntarily terminated in
connection with a layoff or reduction in force and who are not offered
comparable employment with one of Finlay’s affiliates or
subsidiaries.  The Severance Plan does not provide for severance
benefits in the event an executive resigns, quits or retires, or is covered by
an employment agreement that provides for severance.








51





Under the
Severance Plan, benefits for an involuntarily terminated executive would equal a
multiple of the executive's monthly base salary at his or her then current rate
as of his or her date of termination, as described below, reduced by any
compensation paid to the executive in lieu of any notice period required under
the Worker Adjustment and Retraining Notification Act or applicable
laws.




Years
      of Service
                        
                        Benefit
      (monthly base salary)Less
      than 3
                        
                        2
      months3 –
      6
                        
                        1
      month for each year of serviceMore
      than 6 but less than 20
                        
                        6
      monthsAt
      least 20 but less than 25
                        
                        7
      monthsAt
      least 25 but less than 30
                        
                        9
      months30
      or more
                        
                        12
      months





Any
Mitigated Benefits would be reduced by an amount equal to the gross amounts
received or earned by the executive from employment or engagement in any other
business or activity during the period for which the Mitigated Benefits are
payable ("Other Income").  As a condition to receipt of payment of the
Mitigated Benefits, the executive shall, no later than seven days prior to the
date such payment is due, certify in writing all amounts of Other Income earned
by the executive during the preceding payroll period so that the appropriate
offsets can be made.





Executives
who accept severance payments under the Severance Plan will be required to sign
a release and will be subject to certain restrictive covenants. The 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.  As of
January 31, 2009, Mmes. Philip and Magrini were credited with 13 and 14 years of
service, respectively, under the Severance Plan.





The
Severance Plan was further amended and restated effective March 19, 2009 to
provide severance benefits as follows.  Except as noted below, the
Severance Plan operates as described above.  Under the plan as amended
and restated March 19, 2009, benefits for an involuntarily terminated executive
will equal a multiple of the executive's weekly base salary at his or her then
current rate as of his or her date of termination, as described below, reduced
by any compensation paid to the executive in lieu of any notice period required
under the Worker Adjustment and Retraining Notification Act or applicable
laws.





Service
      (1)
                            
                            BenefitŸLess than two (2) years
                            
                            Four
      (4) weeksŸTwo (2) years but less than five (5) years
                            
                            Six
      (6) weeksŸFive (5) years but less than ten (10) years
                            
                            Eight
      (8) weeksŸTen (10) years but less than fifteen (15) years
                            
                            Twelve
      (12) weeksŸFifteen (15) years but less than twenty (20) years
                            
                            Sixteen
      (16) weeksŸTwenty (20) years but less than twenty-five (25)
    years
                            
                            Eighteen
      (18) weeksŸTwenty-five (25) years but less than thirty (30)
    years
                            
                            Twenty
      (20) weeksŸThirty (30) years or more
                            
                            Twenty-six
      (26)
weeks
 
 (1)           "Service"
      means an executive's completed full years of employment as of the last
      anniversary of the last date of hire of the
  executive.





Any
benefit under the amended plan in excess of eight weeks to an executive whose
annual base salary was $75,000 or greater on his or her date of termination (the
"Mitigated Benefits") will be reduced by any Other Income.





Currently,
Mr. Zurlnick and Mmes. Philip and Magrini are eligible to receive severance
benefits under the Severance Plan as amended and restated March 19,
2009.





52




Senior Vice President and Director of
Stores




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





Under the
agreement, upon Mr. Stein’s retirement, Mr. Stein received 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 receive his vested RSUs under the Executive Deferred
Compensation Plan.





Under the
terms of the agreement, Mr. Stein 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
our employees for a period of one year after the retirement date for which Mr.
Stein will receive a severance payment in the amount of $595,420 (plus
interest), payable as follows:  (1) on December 24, 2008, a lump sum
of $297,710.00 (plus accrued interest from June 24, 2008 through December 23,
2008), and (2) commencing January 25, 2009, six monthly payments of $49,618.33
each.  Mr. Stein also received a payment of $50,000 on December 24,
2008, in lieu of any relocation allowance to which Mr. Stein may otherwise
have been 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.





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
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, the 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 15.0% or
more (30.0% 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.







53





DIRECTOR
COMPENSATION


Fiscal
Year Ended January 31, 2009





The table
below provides compensation information for the year ended January 31, 2009 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
                
                $
                36,999
                
                
                $
                20,318
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                $
                57,317Rohit M.
    Desai
                
                
                40,500
                
                
                
                20,314
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                60,814Louis
    Lipschitz
                
                
                51,000
                
                
                
                25,190
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                76,190Norman S. Matthews
      (6)
                
                
                70,500
                
                
                
                10,500
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                81,000Thomas M.
      Murnane
                
                
                46,500
                
                
                
                22,747
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                69,247Ellen R. Levine
      (2)
                
                
                29,333
                
                
                
                9,378
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                38,711Charles E. McCarthy
      (2)
                
                
                33,333
                
                
                
                9,376
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                42,709





(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 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)
            Ms.
      Levine and Mr. McCarthy resigned from the Holding Company’s Board of
      Directors on December 8, 2008.




(3)
            During
      2008, the directors deferred the following fees into the Director Deferred
      Compensation Plan: Mr. Cornstein: $12,500; Mr. Desai: $12,500; Mr.
      Lipschitz: $15,500; Mr. Murnane: $14,000; and Mr. McCarthy:
      $12,500.  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.  Mr. Matthews and Ms. Levine did not defer any fees
      into the Director Deferred Compensation Plan during
  2008.




(4)
            The amounts in this column reflect
      the compensationexpenseof matching RSUs granted under the1993, 1997 and/or
      2007 Plansfor
      financial reporting
      purposes for 2008,and may include amounts from
      awards granted in and prior to 2008. These amounts reflect our accounting
      expense for these awards, and do not reflect compensation
      actually received by
      the director.  See Note 11 to our Consolidated Financial
      Statements for the assumptions made in determining SFAS No. 123(R)
      “Stock-Based Compensation”
values.




(5)
            As of January 31, 2009, each
      non-employee director held the following RSUs: Mr. Cornstein:22,966vested and15,698unvested; Mr. Desai:36,170vested and15,698unvested; Mr. Lipschitz:30,074vested and19,466unvested; Mr. Matthews:25,928vested and0unvested; and Mr. Murnane:33,848vested and17,582unvested.




(6)
            Mr.
      Matthews receives an additional $25,000 per year as Independent Lead
      Director of the Holding Company’s Board of
  Directors.




In
accordance with its charter, the 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.




For
serving as a director of the Holding Company and Finlay Jewelry during 2008,
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.  Mr. Matthews, as
Lead Independent Director, receives an additional annual fee of
$25,000.






54




Non-employee
directors of the Holding Company and Finlay Jewelry will receive compensation
for board service under the same arrangements for 2009.




From
August 2003 until May 22, 2008, each non-employee director has been allowed to
elect, under the Holding Company’s Director Deferred Compensation and Stock
Purchase Plan (the ‘‘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
RSUs.  The Director Deferred Compensation Plan operates in
substantially the same manner as the Executive Deferred Compensation Plan
described above, except that the directors could defer fees on a quarterly
rather than annual basis and the matching RSUs vest in one year. The participant
RSUs were awarded and credited to a director participant’s account quarterly in
an amount based on a formula which divided 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 credited a participant’s account with
one matching RSU for each participant RSU purchased by the
director.




The
shares issued upon distribution of RSUs under the Director Deferred Compensation
Plan are provided by the 2007 Plan. As a result of the unavailability of shares
of the Holding Company’s Common Stock under the 2007 Plan, the Director Deferred
Compensation Plan was amended to provide that no new deferral agreements may be
entered into after May 22, 2008 and that cash, rather than RSUs, would be paid
for eligible directors’ fees deferred with respect to the third and fourth
quarters of 2008.  In addition, no additional matching awards have
been or will be made under the Director Deferred Compensation Plan after May 22,
2008.




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





Participant
      RSUs
                Matching
      RSUsVested
                Vested
                
                UnvestedDavid B.
      Cornstein
                
                19,332
                19,332
                
                -Rohit M.
    Desai
                
                25,258
                25,258
                
                -Louis
    Lipschitz
                
                24,770
                24,770
                
                -Norman S.
      Matthews
                
                12,964
                12,964
                
                -Thomas M.
      Murnane
                
                24,958
                24,958
                
                -





The number of RSUs owned by each such
director includes the following amounts of RSUs acquired during 2008: Mr. Cornstein:15,698participant RSUs and15,698matching RSUs; Mr. Desai:15,698participant RSUs and15,698matching RSUs; Mr. Lipschitz:19,466participant RSUs and19,466matching RSUs;andMr. Murnane:17,582participant RSUs and17,582matchingRSUs.








55





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 25, 2009 by (i) each person who, to the knowledge of
the Holding Company, was the beneficial owner of more than 5.0% of the
outstanding Common Stock of the Holding Company, (ii) each of the Holding
Company’s directors and named executive officers, 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
      OwnedName and
      Address
                      
                      Number of
                        Shares
                      
                      
                      Percentage
                        of ClassDavid W. Rose(1)
                      
                      
                      900,100
                      
                      
                      
                      9.5
                      %David B. Cornstein(2)(3)
                      
                      
                      446,114
                      
                      
                      
                      4.7
                      %Arthur E. Reiner(2)(4)
                      
                      
                      428,521
                      
                      
                      
                      4.5
                      %Joseph M. Melvin(2)(5)
                      
                      
                      108,569
                      
                      
                      
                      1.1
                      %Leslie A. Philip(2)(6)
                      
                      
                      106,945
                      
                      
                      
                      1.1
                      %Norman S. Matthews(2)
      (7)
                      
                      
                      77,548
                      
                      
                      
                      *Thomas M. Murnane(2)
      (8)
                      
                      
                      75,896
                      
                      
                      
                      *Bruce E. Zurlnick(2)(9)
                      
                      
                      73,554
                      
                      
                      
                      *Rohit M. Desai(2)(10)
                      
                      
                      61,550
                      
                      
                      
                      *Louis Lipschitz(2)
      (11)
                      
                      
                      49,540
                      
                      
                      
                      *Joyce Manning Magrini(2)
      (12)
                      
                      
                      35,498
                      
                      
                      
                      *Edward J. Stein(2)(13)
                      
                      
                      34,402
                      
                      
                      
                      *All directors and executive
      officers as a group (10 persons)(2) (14)
                      
                      
                      1,463,735
                      
                      
                      
                      14.5
                      %





*Less than one
percent.




(1)
            Based
      on 9,436,105 shares outstanding on April 25, 2009.  Information
      concerning the common stock beneficially owned as of December 17, 2008,
      was obtained from a Schedule 13D filed with the Commission on December 19,
      2008.  According to the Schedule 13D, Mr. David W. Rose has sole
      power to vote and sole power to dispose of these 900,100 shares of common
      stock.  The address for Mr. Rose is 310 East 70th
      Street, New York, New York 10021.




(2)
            Based
      on 9,436,105 shares outstanding on April 25, 2009.  A person is
      deemed to be the beneficial owner of securities that can be acquired by
      such person within 60 days from April 25, 2009 upon the exercise of
      options and vesting of matching RSUs. Each beneficial owner’s percentage
      ownership is determined by assuming that options and matching RSUs that
      are held by such person and which are exercisable or become vested within
      60 days of April 25, 2009 have been exercised or have become vested.
      Except as noted below, 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.




(3)
            Includes
      38,664 participant and vested matching
RSUs.




(4)
            Includes
      options to acquire an aggregate of 120,000 shares of Common Stock having
      exercise prices ranging from $7.05 to $12.75 per share.  Also
      includes 44,704 participant RSUs and excludes 44,704 matching RSUs which
      are not yet vested.




(5)
            Includes
      options to acquire an aggregate of 62,000 shares of Common Stock having
      exercise prices ranging from $2.71 to $12.75 per share. Also includes
      12,065 participant RSUs and excludes 12,065 matching RSUs which are not
      yet vested.




(6)
            Includes
      options to acquire an aggregate of 75,000 shares of Common Stock having
      exercise prices ranging from $2.71 to $12.75 per
  share.







56





(7)
            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 25,928 participant and vested matching
  RSUs.




(8)
            Includes
      options to acquire an aggregate of 5,000 shares of Common Stock having an
      exercise price of $12.939 per share. Also includes 49,916 participant and
      vested matching RSUs.




(9)
            Includes
      options to acquire an aggregate of 38,333 shares of Common Stock having
      exercise prices ranging from $2.71 to $13.5625 per share. Also includes
      13,107 participant and vested matching RSUs and excludes 8,273 matching
      RSUs which are not yet vested.




(10)
            Includes
      options to acquire an aggregate of 5,000 shares of Common Stock having an
      exercise price of $15.877 per share.  Also includes 50,516
      participant and vested matching
RSUs.




(11)
            Includes
      49,540 participant and vested matching
RSUs.




(12)
            Includes
      options to acquire an aggregate of 23,333 shares of Common Stock having
      exercise prices ranging from $2.71 to $12.75 per share. Also includes
      8,674 participant RSUs and excludes 8,674 matching RSUs which are not yet
      vested.




(13)
            Mr.
      Stein retired June 23, 2008.




(14)
            Includes
      options to acquire an aggregate of 348,666 shares of Common Stock having
      exercise prices ranging from $2.71 to $13.5625 per share. Also includes an
      aggregate of 293,114 participant and vested matching RSUs and excludes an
      aggregate of 73,716 matching RSUs which are not yet
  vested.




Equity
Compensation Plan Information





Options to purchase the Holding
Company’s Common Stock, restricted stock and RSUs have been granted by the
Holding Company to employees and non-employee directors under various equity
compensation plans. The following table sets forth information regarding
outstanding stock options and RSUs and the number of securities remaining to be
issued under all outstanding equity compensation plans as of January 31,
2009.




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  by
                security holders
      (1)
              
              
              1,198,602
              (2)
              
              $
              7.46
              (3)
              
              
              192,244
              (4)Equity compensation plans not
      approvedby security
      holders
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              
              1,198,602
              
              
              $
              7.46
              
              
              
              192,244





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


(2)
            Reflects
      outstanding stock options and RSUs as of January 31, 2009, issued under
      the 1993, 1997 and 2007 Plans, and shares of restricted stock to be issued
      under the 2007 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 non-incentive stock
      options, restricted and nonrestricted stock, RSUs, including awards under
      the Executive Deferred Compensation Plan and Director Deferred
      Compensation Plan and performance awards, including awards that qualify as
      “performance-based compensation” under Section 162(m) of the Code, subject
      to such terms and conditions as the Holding Company’s Compensation
      Committee shall determine.  In connection with the adoption of
      the 2007 Plan, no further awards may be granted under the 1993 or 1997
      Plan.








57





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 Audit Committees determine the transaction
to be beneficial to the companies and on terms comparable to those that could be
obtained in arm’s length dealings with an unrelated third party.





Gorporate Governance,
Board of Directors and Committees of the Board


The following current 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
Nasdaq listing standards: David B. Cornstein, Rohit M. Desai, Louis Lipschitz,
Norman S. Matthews and Thomas M. Murnane.  Until their resignations
effective December 8, 2008, former directors Ellen R. Levine and Charles E.
McCarthy had also been determined by the Boards of Directors of the Holding
Company and Finlay Jewelry to be independent under the Nasdaq listing
standards.




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





The current members of the Audit
Committees 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 the
Nasdaq listing standards applicable to audit committee
members.





The current members of the Compensation
Committees of the Holding Company and Finlay Jewelry are Mr. Matthews, its
Chairman, andMr.
Lipschitz, each of whom is
independent under the Nasdaq listing standards applicable to compensation
committee members.  Until December 8, 2008, the members of
the Compensation Committees of the Holding Company and Finlay Jewelry wereMr. Matthews, its Chairman,
and former directors Ms. Levine and Mr. McCarthy, each of whom was independent
under the Nasdaq listing standards applicable to compensation committee
members.








58




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





Item 14.Principal
Accountant Fees and Services





Eisner LLPaudited our consolidated financial
statements for the fiscal years ended January 31, 2009 and February 2,
2008.





Audit
Fees.Audit
fees totaling $750,000 were billed by Eisner LLP for professional services in
connection with our annual audit and quarterly reviews of our financial
statements for the year ended January 31, 2009.  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 our internal control over financial reporting for the year ended
February 2, 2008.





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 $31,000 for the year
ended January 31, 2009 and $28,000 for the year ended February 2,
2008.  In 2008 and 2007, audit-related services were performed by
Eisner LLP in connection with their audit of our 401(k) plan.





Tax
Fees.No fees
were billed by Eisner LLP for professional services rendered for tax compliance
and tax advice for the fiscal years ended January 31, 2009 or February 2,
2008.





All Other
Fees.No other fees were
billed by Eisner LLP in the fiscal years ended January 31, 2009 or February 2,
2008.





The Audit
Committees have established pre-approval policies and procedures pursuant to
which the Audit Committees approved the foregoing audit, audit-related and
permissible non-audit services provided in 2008 and 2007. The Audit Committees,
or a designated member of the Audit Committees, must pre-approve all audit
(including audit-related) and permitted non-audit services performed by the
independent registered public accounting firm to assure that the provision of
such services does not impair the independent registered public accounting
firm’s independence. The Audit Committees have 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
Committees at their next scheduled meeting. The Audit Committees do not delegate
to management their responsibility to pre-approve services performed by the
independent registered public accounting firm.














59





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
                Description1.1
                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 Jewelry 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 of Finlay Jewelry, as amended (incorporated by reference
      to Exhibit 3.1 filed as part of the 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).





3.2(a)
            Amendment
      to the Amended and Restated By-Laws of Finlay Jewelry dated as of December
      3, 2008 (incorporated by reference to Exhibit 3.2(a) filed as part of the
      Current Report on Form 8-K filed by Finlay Jewelry on December 9,
      2008).





60




4.1
            Article
      Fourth of the Certificate of Incorporation, as amended, and Articles II
      and VI of the Amended and Restated By-Laws (incorporated by reference to
      Exhibit 4.1 filed as part of the Annual Report on Form 10-K for the period
      ended February 2, 2008 filed by Finlay Jewelry on April 17,
      2008).





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).





4.4(f)
            Supplemental
      Indenture dated as of November 26, 2008 between Finlay Jewelry and HSBC
      Bank USA, National Association, 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 Current Report on Form 8-K filed by Finlay
      Jewelry on December 3, 2008).





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).





4.7
            Indenture
      dated as of November 26, 2008 between Finlay Jewelry and HSBC Bank USA,
      National Association, as trustee, relating to Finlay Jewelry’s
      11.375%/12.125% Senior Secured Second Lien Notes due June 1, 2012
      (incorporated by reference to Exhibit 4.2 filed as part of the Current
      Report on Form 8-K filed by Finlay Jewelry on December 3,
      2008).





4.8
            Indenture
      dated as of November 26, 2008 between Finlay Jewelry and HSBC Bank USA,
      National Association, as trustee, relating to Finlay Jewelry’s
      8.375%/8.945% Senior Secured Third Lien Notes due June 1, 2012
      (incorporated by reference to Exhibit 4.3 filed as part of the Current
      Report on Form 8-K filed by Finlay Jewelry on December 3,
      2008).





61




4.9
            Intercreditor
      Agreement dated as of November 26, 2008 between General Electric Capital
      Corporation, as first lien agent, HSBC Bank USA, National Association, as
      second lien agent and as third lien agent (incorporated by reference to
      Exhibit 4.4 filed as part of the Current Report on Form 8-K filed by
      Finlay Jewelry on December 3,
2008).





10.1*
            Executive
      Medical Benefits Plan of Finlay Jewelry and the Holding Company
      (incorporated by reference to Exhibit 10.3 filed as part of the 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).





10.2(a)(ii)*
            Amendment
      No. 2 to Employment Agreement dated as of April 25, 2008 among the Holding
      Company, Finlay Jewelry and Arthur E. Reiner (incorporated by reference to
      Exhibit 10.2(a)(ii) filed as part of the Current Report on Form 8-K filed
      by Finlay Jewelry on April 28,
2008).





10.2(a)(iii)*
            Retention
      Bonus Agreement dated as of March 11, 2009 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 12, 2009).





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(b)(i)*
            Employment
      Agreement dated as of April 18, 1997 between Joseph M. Melvin and Finlay
      Jewelry (incorporated by reference to Exhibit 10.8 filed as part of the
      Annual Report on Form 10-K for the period ended January 31, 1998 filed by
      Finlay Jewelry on March 24, 1998).





10.2(b)(ii)*
            Letter
      Agreement dated as of December 4, 2008 amending Employment Agreement
      between Joseph M. Melvin and Finlay Jewelry dated as of April 18,
      1997.





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).








62





10.2(e)(i)*
            Amendment
      No. 1 to Employment Agreement dated as of November 7, 2008 between Bruce
      E. Zurlnick and Finlay Jewelry.





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 June 30,
      1993).





10.4(b)*
            Amendment
      No. 1 to the Holding Company’s Long Term Incentive Plan (incorporated by
      reference to Exhibit 10.14(b) filed as part 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).





10.5(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).





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
      to the Holding Company’s 1997 Long Term Incentive Plan, effective February
      27, 2007 (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 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).





63




10.6(e)*
            Amendment No. 4to theHoldingCompany’s Executive Deferred
      Compensation and Stock Purchase Plan, effective May 22, 2008
      (incorporated by reference to Exhibit 10.2 filed as part of the Current
      Report on Form 8-K filed by Finlay Jewelry on June 9,
    2008).





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).





10.7(c)*
            Amendment No. 1to theHoldingCompany’s Director Deferred
      Compensation and Stock Purchase Plan, effective May 22, 2008(incorporated by reference to Exhibit 10.3 filed as part of the
      Current Report on Form 8-K filed by Finlay Jewelry on June 9,
      2008).





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).





10.8(h)
            Amendment
      No. 1 dated as of November 18, 2008 to Fourth Amended and Restated Credit
      Agreement, among Finlay Jewelry, Carlyle & Co. Jewelers LLC, and L.
      Congress, Inc., as borrowers, the Holding Company, Finlay Jewelry, Inc.,
      Finlay Merchandising & Buying LLC, eFinlay, Inc. and Park Promenade
      LLC, as credit parties, General Electric Capital Corporation, as agent for
      the lenders, and the lenders parties thereto (incorporated by reference to
      Exhibit 10.2 filed as part of the Current Report on Form 8-K filed by
      Finlay Jewelry on December 3,
2008).





10.8(i)
            Limited
      Consent and Amendment No. 2 dated as of February 25, 2009 to Fourth
      Amended and Restated Credit Agreement, among Finlay Jewelry, Carlyle &
      Co. Jewelers LLC, and L. Congress, Inc., as borrowers, the Holding
      Company, Finlay Jewelry, Inc., Finlay Merchandising & Buying LLC,
      eFinlay, Inc. and Park Promenade LLC, as credit parties, General Electric
      Capital Corporation, as agent for the lenders, and the lenders parties
      thereto (incorporated by reference to Exhibit 10.1 filed as part of the
      Current Report on Form 8-K filed by Finlay Jewelry on March 3,
      2009).





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”) in favor of General Electric
      Capital Corporation (“G.E. Capital”), individually and as agent
      (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).





64




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 and eFinlay 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).





10.21*
            Description
      of Director and Named Executive Officer
  Compensation.





10.22*
            Finlay
      Executive Severance Pay Plan, amended and restated effective March 19,
      2009.





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 pursuant to 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).








65





10.23(b)*
            Form
      of Restricted Stock Agreement pursuant to 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 Form 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).





10.27*
            Letter
      agreement between the Holding Company and Arthur E. Reiner dated as of
      June 5, 2008 (incorporated by reference to Exhibit 10.1 filed as part of
      the Current Report on Form 8-K filed by Finlay Jewelry on June 9,
      2008).





10.28
            Exchange
      and Purchase Agreement dated as of November 26, 2008 by and among Finlay
      Jewelry and certain beneficial holders of Finlay Jewelry’s 8-3/8% Senior
      Notes due June 1, 2012 parties thereto (incorporated by reference to
      Exhibit 10.1 filed as part of the Current Report on Form 8-K filed by
      Finlay Jewelry on December 3,
2008).





10.29
            Second
      Lien Security Agreement dated as of November 26, 2008 among Finlay
      Jewelry, Finlay Jewelry, Inc., Finlay Merchandising & Buying LLC,
      eFinlay, Inc., Carlyle & Co. Jewelers LLC, Park Promenade, LLC, L.
      Congress, Inc. and the Holding Company, as grantors, and HSBC Bank USA,
      National Association, as collateral agent (incorporated by reference to
      Exhibit 10.3 filed as part of the Current Report on Form 8-K filed by
      Finlay Jewelry on December 3,
2008).





10.30
            Third
      Lien Security Agreement dated as of November 26, 2008 among Finlay
      Jewelry, Finlay Jewelry, Inc., Finlay Merchandising & Buying LLC,
      eFinlay, Inc., Carlyle & Co. Jewelers LLC, Park Promenade, LLC, L.
      Congress, Inc. and the Holding Company, as grantors, and HSBC Bank USA,
      National Association, as collateral agent (incorporated by reference to
      Exhibit 10.4 filed as part of the Current Report on Form 8-K filed by
      Finlay Jewelry on December 3,
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 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.





66




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





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





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





*
            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 – None.








67




SIGNATURES





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


Finlay
      Fine Jewelry Corporation.Date:
      May 12, 2009
                  By:
                  /s/
      ARTHUR E. REINERArthur
      E. Reiner
                    Chairman
      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, Chief
            
            May
      12, 2009Arthur
      E. Reiner
            
            Executive
      Officer and Director(Principal
      Executive Officer)/s/
      BRUCE E. ZURLNICK
            
            Senior
      Vice President, Treasurer and
            
            May
      12, 2009Bruce
      E. Zurlnick
            
            Chief
      Financial Officer (PrincipalFinancial
      and Accounting Officer)/s/
      DAVID B. CORNSTEIN
            
            Director
            
            May
      12, 2009David
      B. Cornstein/s/
      ROHIT M. DESAI
            
            Director
            
            May
      12, 2009Rohit
      M. Desai/s/
      LOUIS LIPSCHITZ
            
            Director
            
            May
      12, 2009Louis
      Lipschitz/s/
      NORMAN S. MATTHEWS
            
            Director
            
            May
      12, 2009Norman
      S. Matthews/s/
      THOMAS M. MURNANE
            
            Director
            
            May
      12, 2009Thomas
      M. Murnane




68




FINLAY
FINE JEWELRY CORPORATION
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
   PAGE
 
 Management’s
      Report on Internal Control Over Financial Reporting
                        F-2Report
      of Independent Registered Public Accounting Firm
                        F-3Consolidated
      Statements of Operations for the years ended January 31,
    2009and
      February 2, 2008
                        F-4Consolidated
      Balance Sheets as of January 31, 2009 and February 2, 2008
                        F-5Consolidated
      Statements of Changes in Stockholder’s Equity (Deficiency) and
      Comprehensive Lossfor
      the years ended January 31, 2009 and February 2, 2008
                        F-6Consolidated
      Statements of Cash Flows for the years ended January 31,
    2009and
      February 2, 2008
                        F-7Notes
      to Consolidated Financial Statements for the years ended January 31,
      2009and
      February 2, 2008
                        F-8
  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 defined in Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), our management 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 January
31, 2009.
 
 This Form
10-K does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting pursuant to temporary
rules of the Commission that permit us to provide only management’s report in
this Form 10-K.
 
 /s/ ARTHUR E.
REINER
 Arthur E.
Reiner
 Chief
Executive Officer
 
 
 /s/ BRUCE E.
ZURLNICK
 Bruce E.
Zurlnick
 Senior
Vice President, Treasurer
 and Chief
Financial Officer
  F-2
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To theStockholder and Board of Directors
 FinlayFine Jewelry
Corporation
 
 We have audited the accompanying
consolidated balance sheets of FinlayFine Jewelry Corporationand subsidiaries (the “Company”) as of
January 31, 2009 and February 2, 2008, and the related consolidated
statements of operations,changes instockholder’sequity (deficiency) and comprehensive
loss, and cash flows for the years 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 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting as of January 31, 2009.  Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.  Accordingly we
express no such opinion.  An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, 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 consolidated
financial position of FinlayFine Jewelry Corporationand subsidiaries as of January 31, 2009
and February 2, 2008 and the consolidated results of their operations and
their cash flows for the years then ended in conformity with U.S. generally
accepted accounting principles.
 
 The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern.
As more fully described in Note 1, the Company has incurredasignificant operating lossin 2008, and as a result of current economic
conditions has implemented a strategic plan to significantly reduce the size of
its business.  Further, as described in Note 1, the Company’s line of
credit has been reduced and the net proceeds fromtheliquidation of inventory are to be used
to repay the outstanding balance under the line by its maturity date in February
2010.  In connection therewith, the Company was required to achieve
certain weekly targeted percentages ofsales andcash receiptsandcash disbursements as set forth in
their operating plan which have not been met.  As a result thereof,
the lender is no longer obligated to permit the Company to borrow under the line
and may accelerate payment of the outstanding balance.Further, the Company presently does not
have a credit facility to replace its existing credit line.These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 
 /s/Eisner LLP
 
 New York,New York
 April30, 2009
 
  F-3
  FINLAY
FINE JEWELRY CORPORATION
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (in
thousands)
 
 
 
 Year
      EndedJanuary
      31,
                                    2009
                                  
                                  
                                  February
      2,
                                    2008Sales
                                  
                                  $
                                  754,305
                                  
                                  
                                  $
                                  717,352Cost
      of sales (including an inventory write-down of$24.3
      million in
      2008)
                                  
                                  
                                  460,134
                                  
                                  
                                  
                                  393,293Gross
      margin
                                  
                                  
                                  294,171
                                  
                                  
                                  
                                  324,059Selling,
      general and administrative
      expenses
                                  
                                  
                                  348,992
                                  
                                  
                                  
                                  301,447Impairment
      charges
                                  
                                  
                                  34,633
                                  
                                  
                                  
                                  3,009Depreciation
      and
      amortization
                                  
                                  
                                  17,511
                                  
                                  
                                  
                                  14,456Income (loss) from
      operations
                                  
                                  
                                  (106,965
                                  )
                                  
                                  
                                  5,147Interest
      expense,
      net
                                  
                                  
                                  37,499
                                  
                                  
                                  
                                  29,526Loss
      from continuing operations beforeincome
      taxes
                                  
                                  
                                  (144,464
                                  )
                                  
                                  
                                  (24,379
                                  )Benefit
      for income
      taxes
                                  
                                  
                                  (39,179
                                  )
                                  
                                  
                                  (9,206
                                  )Loss
      from continuing operations
                                  
                                  
                                  (105,285
                                  )
                                  
                                  
                                  (15,173
                                  )Discontinued
      operations, net of tax in
      2007
                                  
                                  
                                  (2,045
                                  )
                                  
                                  
                                  5,119Net
      loss
                                  
                                  $
                                  (107,330
                                  )
                                  
                                  $
                                  (10,054
                                  )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
   F-4
  FINLAY
FINE JEWELRY CORPORATION
 CONSOLIDATED
BALANCE SHEETS
 (in
thousands, except share and per share data)
 
 January
      31,
                      2009
                    
                    
                    February
      2,
                      2008ASSETSCurrent
      assets:Cash and cash
      equivalents
                    
                    $
                    2,754
                    
                    
                    $
                    4,701Accounts
      receivable
                    
                    
                    28,451
                    
                    
                    
                    13,793Other
      receivables
                    
                    
                    10,444
                    
                    
                    
                    1,591Merchandise
      inventories
                    
                    
                    442,738
                    
                    
                    
                    611,488Prepaid expenses and
      other
                    
                    
                    3,817
                    
                    
                    
                    7,236Total current
      assets
                    
                    
                    488,204
                    
                    
                    
                    638,809Fixed
      assets:Building, equipment, fixtures
      and leasehold
      improvements
                    
                    
                    50,882
                    
                    
                    
                    112,079Less – accumulated depreciation
      and
      amortization
                    
                    
                    8,212
                    
                    
                    
                    41,887Fixed assets,
      net
                    
                    
                    42,670
                    
                    
                    
                    70,192Deferred
      charges and other assets,
      net
                    
                    
                    36,177
                    
                    
                    
                    27,431Total
      assets
                    
                    $
                    567,051
                    
                    
                    $
                    736,432LIABILITIES
      AND STOCKHOLDER’S EQUITY (DEFICIENCY)Current
      liabilities:Short-term
      borrowings
                    
                    $
                    236,241
                    
                    
                    $
                    224,231Accounts payable – trade
      (including cash overdraft of  $4,315 and $7,209at
      January 31, 2009 and February 2, 2008, respectively)
                    
                    
                    34,116
                    
                    
                    
                    110,475Accrued
    liabilities:Accrued salaries and
      benefits
                    
                    
                    14,304
                    
                    
                    
                    15,799Accrued miscellaneous
      taxes
                    
                    
                    8,907
                    
                    
                    
                    7,162Accrued
      interest
                    
                    
                    1,417
                    
                    
                    
                    3,494Deferred
      income
                    
                    
                    155
                    
                    
                    
                    4,364Deferred
      income
      taxes
                    
                    
                    11,232
                    
                    
                    
                    16,009Other
                    
                    
                    16,183
                    
                    
                    
                    29,515Income taxes
      payable
                    
                    
                    -
                    
                    
                    
                    5,580Due
      to
      parent
                    
                    
                    8,150
                    
                    
                    
                    7,407Total current
      liabilities
                    
                    
                    330,705
                    
                    
                    
                    424,036Senior
      Notes
                    
                    
                    40,582
                    
                    
                    
                    200,000Second
      Lien
      Notes
                    
                    
                    23,334
                    
                    
                    
                    -Third
      Lien
      Notes
                    
                    
                    169,031
                    
                    
                    
                    -Total
      long-term
      debt
                    
                    
                    232,947
                    
                    
                    
                    200,000Deferred
      income
      taxes
                    
                    
                    -
                    
                    
                    
                    3,593Other
      non-current
      liabilities
                    
                    
                    5,204
                    
                    
                    
                    3,278Total
      liabilities
                    
                    
                    568,856
                    
                    
                    
                    630,907Commitments
      and contingencies (Note 17)Stockholder’s
      equity (deficiency):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 (Accumulated
      deficit)
                    
                    
                    (87,780
                    )
                    
                    
                    19,550Total stockholder’s
      equity (deficiency)
                    
                    
                    (1,805
                    )
                    
                    
                    105,525Total liabilities and
      stockholder’s equity (deficiency)
                    
                    $
                    567,051
                    
                    
                    $
                    736,432
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5
  FINLAY
FINE JEWELRY CORPORATION
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY (DEFICIENCY)
 AND
COMPREHENSIVE LOSS
 (in
thousands, except share data)
 
 Retained
                                  
                                  
                                  TotalCommon
      Stock
                                  
                                  
                                  Additional
                                  
                                  
                                  Earnings
                                  
                                  
                                  Stockholder’sNumber
                                  
                                  
                                  
                                  
                                  
                                  Paid-in
                                  
                                  
                                  (Accumulated
                                  
                                  
                                  Equity
                                  
                                  
                                  Comprehensiveof
      Shares
                                  
                                  
                                  Amount
                                  
                                  
                                  Capital
                                  
                                  
                                  Deficit)
                                  
                                  
                                  (Deficiency)
                                  
                                  
                                  LossBalance,
      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
                                  
                                  
                                  
                                  105,525Net
      loss
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (107,330
                                  )
                                  
                                  
                                  (107,330
                                  )
                                  
                                  $
                                  (107,330
                                  )Comprehensive
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (107,330
                                  )Balance,
      January 31, 2009
                                  
                                  
                                  1,000
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  85,975
                                  
                                  
                                  $
                                  (87,780
                                  )
                                  
                                  $
                                  (1,805
                                  )
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
  F-6
  FINLAY
FINE JEWELRY CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
 
 
 Year
      EndedJanuary
      31,
                                2009
                              
                              
                              February
      2,
                                2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                              
                              $
                              (107,330
                              )
                              
                              $
                              (10,054
                              )Adjustments to reconcile net
      loss to net cash provided by operating activities:Impairment
      charges and inventory
      write-down
                              
                              
                              58,901
                              
                              
                              
                              3,009Depreciation
      and
      amortization
                              
                              
                              20,109
                              
                              
                              
                              15,718Write-off
      of deferred financing
      costs
                              
                              
                              -
                              
                              
                              
                              1,213Amortization
      of deferred financing
      costs
                              
                              
                              2,267
                              
                              
                              
                              1,206Payment-in-kind
      interest on Secured
      Notes
                              
                              
                              10,114
                              
                              
                              
                              -Deferred
      income tax
      benefit
                              
                              
                              (19,602
                              )
                              
                              
                              (1,547
                              )Other,
      net
                              
                              
                              5,485
                              
                              
                              
                              529Changes
      in operating assets and liabilities, net of effects from
      acquisition(Note
      3):(Increase) decrease in accounts
      and other
      receivables
                              
                              
                              (22,871
                              )
                              
                              
                              13,202Decrease in merchandise
      inventories
                              
                              
                              142,151
                              
                              
                              
                              29,953Decrease in prepaid expenses
      and
      other
                              
                              
                              238
                              
                              
                              
                              96Increase (decrease) in accounts
      payable and accrued liabilities
                              
                              
                              (88,913
                              )
                              
                              
                              17,556Increase
      in due to
      parent
                              
                              
                              743
                              
                              
                              
                              2,417NET CASH PROVIDED BY OPERATING
      ACTIVITIES
                              
                              
                              1,292
                              
                              
                              
                              73,298CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases of equipment, fixtures
      and leasehold improvements
                              
                              
                              (24,696
                              )
                              
                              
                              (13,406
                              )Acquisition of Bailey Banks
      & Biddle, net of cash
      acquired
                              
                              
                              (5,559
                              )
                              
                              
                              (230,131
                              )Deferred
      charges and other
      assets
                              
                              
                              (91
                              )
                              
                              
                              (82
                              )NET CASH USED IN INVESTING
      ACTIVITIES
                              
                              
                              (30,346
                              )
                              
                              
                              (243,619
                              )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from revolving credit
      facility
                              
                              
                              799,831
                              
                              
                              
                              914,911Principal
      repayments on revolving credit
      facility
                              
                              
                              (787,821
                              )
                              
                              
                              (736,556
                              )Proceeds
      from issuance of Second Lien
      Notes
                              
                              
                              22,833
                              
                              
                              
                              -Capitalized
      financing
      costs
                              
                              
                              (4,842
                              )
                              
                              
                              (7,355
                              )Bank
      overdraft
                              
                              
                              (2,894
                              )
                              
                              
                              2,318NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                              
                              
                              27,107
                              
                              
                              
                              173,318INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                              
                              
                              (1,947
                              )
                              
                              
                              2,997CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                              
                              
                              4,701
                              
                              
                              
                              1,704CASH
      AND CASH EQUIVALENTS, END OF
      YEAR
                              
                              $
                              2,754
                              
                              
                              $
                              4,701SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONInterest
      paid
                              
                              $
                              26,280
                              
                              
                              $
                              28,866Income
      taxes paid
      (refund)
                              
                              $
                              (5,034
                              )
                              
                              $
                              3,265
 
 SUPPLEMENTAL
      DISCLOSURE OF NON-CASH ACTIVITIES:Award
      of vested participant restricted stock
      units
                    
                    $
                    57
                    
                    
                    $
                    864Accrual
      for purchases of fixed
      assets
                    
                    $
                    -
                    
                    
                    $
                    1,347Exchange
      of Senior Notes for Third Lien
      Notes
                    
                    $
                    159,418
                    
                    
                    $
                    -Adjustment
      of purchase price
      allocation
                    
                    $
                    811
                    
                    
                    $
                    -
  The accompanying notes are an integral
part of these consolidated financial statements.
  F-7
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 – MANAGEMENT’S STRATEGIC PLAN AND LIQUIDITY ISSUES
 
 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.
 
 As a
result of the decline in our department store based business over the past
several years coupled with the challenging economic conditions under which we
are currently operating, we announced in February 2009, our plan to exit the
licensed department store based business and close approximately half of our
specialty jewelry stores in 2009.  The implementation of our strategic
plan will result in a significant reduction in our sales. The plan includes the
liquidation of inventory and the termination of license agreements or leases in
the affected department store based fine jewelry departments and specialty
jewelry stores. In addition, we intend to liquidate excess inventory in our
go-forward specialty jewelry stores as a means of generating cash and reducing
such excess inventory.
 
 We view
the execution of this strategic plan as crucial to strengthening the financial
condition of our go forward specialty jewelry store business. We intend to
reduce our cost structure to levels appropriate to support the specialty jewelry
store business, which will include significantly reducing headcount in our
administrative and distribution center functions as well as eliminating sales
associate positions in the affected department stores and specialty store
locations. These current conditions have negatively impacted our liquidity
position and operating performance. We expect to complete the strategic plan by
the end of 2009. There can be no assurances that the implementation of our
strategic plan will be successful or that the net sales proceeds from the
liquidation of inventory in the closing locations will be sufficient to repay
the outstanding balance under our Revolving Credit Facility.
 
 In
conjunction with the adoption of this strategic plan, we amended its revolving
credit agreement (the “Revolving Credit Agreement”) in February 2009, as
adjusted in March 2009, to reduce the senior secured revolving line of credit
from $550.0 million to $266.6 million (the “Revolving Credit Facility”) and to
increase the interest rates thereunder.  The amendment also requires
us to comply with various milestones in connection with the strategic plan, to
provide additional financial reporting to the lenders and to maintain compliance
with a variance covenant from the approved restructuring
budget.   Additionally, the Revolving Credit Agreement now
matures in February 2010 instead of the previous maturity date of November 2012.
The net sales proceeds from the liquidation of inventory will be used to repay
our outstanding balance under our Revolving Credit Facility in
2009.
 
 Effective
with the February 2009 amendment to the Revolving Credit Agreement, we now are
required to achieve certain weekly targeted percentages of our sales and cash
receipts and maintain cash disbursements below certain targeted percentages as
set forth in our operating plan, and we are currently in default of this
covenant.  Although the lenders reserve all rights and remedies under
the Revolving Credit Agreement and can accelerate repayment of the outstanding
balance, at any time, they have not exercised such rights at this
time.  As a result of cross-default provisions, such acceleration
would enable the holders of our long-term debt to declare a default and demand
repayment as well. Refer to Note 19 for a discussion of our failure to comply in
2009 with certain covenants under the Revolving Credit Agreement.
 
 There can
be no assurances that we will be able to obtain alternate financing on terms
acceptable to us. In the event that we are unable to secure adequate borrowing
under the Revolving Credit Agreement or an alternate financing source, our cash
flows from operations may be inadequate to meet our obligations, which may
prevent us from operating.
   F-8
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 – MANAGEMENT’S STRATEGIC PLAN AND LIQUIDITY ISSUES (continued)
 
 Our
ability to continue as a going concern is dependent on the successful
implementation of our strategic plan, the repayment of the amounts due under the
Revolving Credit Facility and our ability to secure a new line of credit on or
before the maturity date of the Revolving Credit Agreement. In addition, we
experienced a significant operating loss in 2008 and are expected to have an
operating loss in 2009. As discussed above, we are in default of certain
covenants under the Revolving Credit Agreement. These uncertainties raise
substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments to
reflect possible future effects on the recoverability and classification of
assets or the amounts and the classifications of liabilities that may result
should we be unable to continue as a going concern.
 
 Effective
March 22, 2009, we completed the sale of certain assets to Bloomingdale’s. The
assets included inventory and fixed assets for the 34 departments that we
operated in Bloomingdale’s for a purchase price of approximately $33.4
million.  The proceeds from this transaction were used to pay down a
portion of the outstanding balance under our Revolving Credit
Facility.
 
 As a
result of the items discussed above, we recorded a pre-tax charge of $58.9
million in 2008 for the impairment of fixed assets and intangible assets and the
write-down of inventory, including the estimated loss on the sale of inventory
to Bloomingdale’s (See Note 7).
 
 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 2009, 2008 and 2007 relate to the fiscal year ending on
January 30, 2010 and the fiscal years ended on January 31, 2009 and February 2,
2008, respectively.
 
 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 anddebit card
transactions process within 24-48 hours,and, as such, areclassified as cash and cash
equivalents. Amounts due fromthird partiesfor these transactions totaled
$1.5million and $2.7million atJanuary 31, 2009 andFebruary 2, 2008,
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.
 
 Stock Based
Compensation:We record compensation expense associated with stock
options and other forms of equity compensation in accordance with SFAS
No. 123R,“Share-Based
Payment”.
  F-9
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (continued)
  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 February 2, 2008, are capitalized software costs of $20.6
million and accumulated amortization of $19.7 million. These assets were fully
amortized at January 31, 2009.
 
 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 $18.6
million at January 31, 2009 and $9.4 million at February 2, 2008, net of
accumulated amortization of $6.6 million and $2.6 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 2008 and 2007 totaled $2.3 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, which is
included in Interest expense, net.
 
 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 our 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. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets unless it is more
likely than not that such assets will be realized. 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.
 
 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 their customers a layaway plan that allows them to set merchandise aside
and pay for it over a period of time with no financecharges.
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   $1.5 million and $1.6 million
at January 31, 2009 and February 2, 2008,  respectively. Layaway
deposits are not recognized as sales until fully paid for by the customer and
the customer claims the merchandise.
   F-10
  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 2008 and 2007, gross advertising expenses
were $30.2 million and $32.6 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
wouldincrease 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 pricesof  the
vendors’ product and should therefore be shown as a reduction in the purchase
price of themerchandise. 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 January 31, 2009 and February 2,
2008, deferred vendor allowances totaled (i) $5.4 million and $7.1 million,
respectively, for owned merchandise, which allowances are included as an offset
to merchandise inventories in the accompanying Consolidated Balance Sheets, and
(ii) $0.2 million and $4.4 million, respectively, for merchandise received on
consignment, which allowances are included as Deferred income in the
accompanying Consolidated Balance Sheets.
  Store Opening
Costs: The costs of opening new locations are expensed as
incurred.
 
 Fair Value of
Financial Instruments: The carrying amounts of cash, accounts receivable,
short-term borrowings, accounts payable and accrued liabilities reflected in the
accompanying Consolidated Financial Statements approximate fair value due to the
short-term maturity of these instruments. The fair value of our long-term 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”, 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 7 for
asset impairment charges recorded in 2008 and 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 ongoing operations
and we do
not  have  any  significant  continuing  involvement  in  its  operations.
In  reaching the determination as towhether 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-11
  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”. As a result of the L.
Congress, Inc. (“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 our recent acquisitions, 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. An impairment
charge of $6.8 million was recorded in 2008 to reflect intangible assets at
their fair value based on our strategic plan to restructure our business
operations.
 
 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. Accumulated
amortization amounted to $0.5 million and $0.3 million at January 31, 2009 and
February 2, 2008, respectively. The amortization over the next five years is
approximately $0.2 million per year. Following is a summary of our intangible
assets (dollars in thousands):
 Trade-
                        names
                      
                      
                      Other
                      
                      
                      TotalBalance
      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
                      
                      
                      
                      14,977Adjustment
      of purchase price allocation
                      
                      
                      (311
                      )
                      
                      
                      (31
                      )
                      
                      
                      (342
                      )Impairment
                      
                      
                      (6,341
                      )
                      
                      
                      (471
                      )
                      
                      
                      (6,812
                      )Amortization
                      
                      
                      -
                      
                      
                      
                      (277
                      )
                      
                      
                      (277
                      )Balance
      at January 31, 2009
                      
                      $
                      6,669
                      
                      
                      $
                      877
                      
                      
                      $
                      7,546
 
 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 18 for unaudited
quarterly financial data.
 
 Accounting
Standards Adopted in 2008: On February 3, 2008, we adopted certain
provisions of SFAS No. 157, “Fair Value Measurements”, which establishes a
single authoritative definition of fair value, sets a framework for measuring
fair value and expands on required disclosures about fair value measurement. The
provisions of SFAS No. 157 adopted relate to financial assets and liabilities as
well as other assets and liabilities carried at fair value on a recurring basis
and did not have any effect on our consolidated financial statements. The
provisions of SFAS No. 157 related to other nonfinancial assets and liabilities
were effective for us on February 1, 2009, and will be applied
prospectively.  We are currently evaluating the impact that these
additional SFAS No. 157 provisions will have on our consolidated financial
statements.
 
 New
Accounting Pronouncements:In April 2008, the Financial Accounting Standards Board (“FASB”) issued
Staff Position No. 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets”. FSP No. 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. We are currently
assessing the potential effect of FSP No. 142-3 on our consolidated
financial statements.
  F-12
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
3 – BAILEY BANKS & BIDDLE ACQUISITION
 
 In November 2007,wecompleted the acquisition ofsubstantially all of the
assets and specified liabilities ofBailey 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 CreditAgreement.
A post-closing inventory
adjustment of approximately
$31.6 million was also financed undertheRevolving Credit Agreement, with $26.0
million paid in November 2007 and the balance paid in February
2008.
 
 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
                    
                    
                    16,248Tradenames
      and other intangible
      assets
                    
                    
                    11,807Liabilities
      assumed
                    
                    
                    (6,303
                    )Net
      assets
      acquired
                    
                    $
                    235,732
 
 In 2008,
a severance cost accrual included in liabilities assumed was reduced by $0.8
million resulting in a corresponding reduction of $0.5 million in property and
equipment and $0.3 million in tradenames and other intangible assets from
amounts previously allocated.
 
 The following consolidatedunauditedpro forma information presents our sales
and net loss as if the Bailey Banks & Biddle acquisition had taken place at
the beginning of the period presented:
 
 Fiscal
      Year EndedFebruary
      2,
                        2008(in
      thousands)Sales
                      
                      $
                      1,008,131Loss
      from continuing operations
                      
                      
                      (18,408
                      )Net
      loss
                      
                      
                      (18,172
                      )
 
 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 period 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
 
 In
February 2008, Macy’s announced its integration plans including a divisional
realignment. As a result of Macy’s corporate restructuring initiatives, 93
departments were closed at the end of 2008. Total sales generated from these
departments in 2008 and 2007 were $108.5 million and $120.0 million,
respectively. As of January 31, 2009, we operated a total of 250 departments in
two of Macy’s eight divisions. Additionally, 33 Parisian departments closed in
July 2007. In 2007, we generated sales of approximately $9.8 million from those
departments. These departments are included in discontinued operations in the
accompanying Consolidated Statements of Operations.
  F-13
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
4 – CONSOLIDATION OF HOST STORE GROUPS (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
                        BenefitsBalance
      at February 3, 2007
                      
                      $
                      585Payments
                      
                      
                      (398
                      )Reversal
      of accrual
                      
                      
                      (70
                      )Balance
      at February 2, 2008
                      
                      
                      117Charges
                      
                      
                      1,776Payments
                      
                      
                      (612
                      )Balance
      at January 31, 2009
                      
                      $
                      1,281
 
 NOTE
5 – MERCHANDISE INVENTORIES
 
 Merchandise
inventories consisted of the following:
 
 January
      31,
                          2009
                        
                        
                        February
      2,
                          2008(in
      thousands)Jewelry
      goods – rings, watches and other fine jewelry (first-in, first-out
      (“FIFO”) basis) (a)
                        
                        $
                        491,616
                        
                        
                        $
                        649,960Less:  Excess
      of FIFO cost over LIFO inventory
      value
                        
                        
                        48,878
                        
                        
                        
                        38,472$
                        442,738
                        
                        
                        $
                        611,488
  
 (a)
                Merchandise
      inventories include $277.5 million and $281.6 million, respectively, at
      January 31, 2009 and February 2, 2008 related to our stand-alone jewelry
      stores.
 
 We
determine our LIFO inventory value by utilizing internally developed indices.
During 2008 and 2007, we recorded LIFO charges totaling $10.4 million and $10.0
million, respectively.
 
 As of January 31, 2009 and February 2,
2008, merchandise received on consignment approximating a fair value of $126.4
million and $217.9 million, respectively, was not included in Merchandise
inventories or Accounts payable-trade in the accompanying Consolidated Balance
Sheets.
 
 NOTE 6 – FIXED
ASSETS
 
 Fixed
assets consists of the following:
 January
      31,
                          2009
                        
                        
                        February
      2,
                          2008(in
      thousands)Land
      and building
                        
                        $
                        9,420
                        
                        
                        $
                        10,042Fixtures
                        
                        
                        26,122
                        
                        
                        
                        72,296Displays
                        
                        
                        2,757
                        
                        
                        
                        6,613Computers
      and equipment
                        
                        
                        5,505
                        
                        
                        
                        16,629Leasehold
      improvements
                        
                        
                        7,061
                        
                        
                        
                        6,461Automobiles
                        
                        
                        17
                        
                        
                        
                        3850,882
                        
                        
                        
                        112,079Less:  accumulated
      depreciation and amortization
                        
                        
                        8,212
                        
                        
                        
                        41,887Net
      fixed assets
                        
                        $
                        42,670
                        
                        
                        $
                        70,192
 
 Depreciation
and amortization expense was $16.4 million and $11.2 million for 2008 and 2007,
respectively.
  F-14
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
7 – IMPAIRMENT CHARGES IN 2008 AND 2007
 
 As of
result of our recent announcement to restructure our business by exiting the
licensed department store based business and close approximately half of our
specialty store locations, we evaluated our long-lived assets for potential
impairment as of January 31, 2009.  The evaluation considered
information available at January 31, 2009, and resulted in the determination
that the carrying value of the
fixed assets ofourlicensed departmentstores and certain unprofitable
specialty store locations would likely not be recovered through estimated future
cash flows, considering assumptions regarding the expectedremaining usefullives of those assets.  As a
result,werecordedanasset impairment charge of $28.2million to reduce the carrying value of
storefixedassets to their estimated fair valuedue tothe shorter period over which they will
bein operation.Additionally, an impairment charge of
$6.4 million was recorded to reflect intangible and other assets, primarily
tradenames, at fair value. Further, we recorded a write-down to inventory for
$24.3 million, of which $21.0 million was associated with the estimated loss on
the sale of inventory to Bloomingdale’s in March 2009.
 
 As a
result of the Congress acquisition in November 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 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.  Throughout
2008, the Revolving Credit Agreement, as amended in November 2008, provided a
five-year $512.5 million (“Tranche A”) and $37.5 million (“Tranche B”) revolving
credit facility (“Revolving Credit Facility”). Refer to Note 19 for a discussion
of the 2009 amendment to the Revolving Credit Agreement, including the reduction
of our commitment, the increase in our interest rates and the imposition of
additional financial covenants as well as a discussion of our defaults of such
covenants.
 
 As of
January 31, 2009, at our option, Tranche A bore interest in accordance with a
graduated pricing matrix based on the average excess availability under the
facility for the previous quarter.  Tranche B bore interest at a
floating rate equal to a margin of 3.50% over the Index Rate or 5.25% over LIBOR
(London Interbank Offer Rate).  The Index Rate is equal to the higher
of (i) the federal funds rate plus 125 basis points and (ii) the publicly quoted
rate as published by the Wall Street Journal as the “prime rate”.  The
Revolving Credit Agreement has a $75.0 million letter of credit sub-limit, which
reduces availability when utilized.
 
 As of
January 31, 2009, the Revolving Credit Agreement was 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 contained 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 included
a requirement to maintain an unused balance of not less than $30.0 million at
all times. As of January 31, 2009, we were in compliance with this
requirement.
 
 At
January 31, 2009 and February 2, 2008, $236.2 million and $224.2 million was
outstanding under the Revolving Credit Facility, at which point the available
borrowings were $42.7 million and $174.2 million, respectively, ($12.7 million
and $144.2 million, respectively, of excess availability after taking into
consideration the $30.0 million minimum unused balance requirement discussed
above). The average amounts outstanding for the same periods were $310.1 million
and $146.7 million, respectively. The weighted average interest rates were 5.0%
and 7.5% for 2008 and 2007, respectively. Our lowest level of excess
availability during 2008 was $38.1 million at which point outstanding borrowings
under the Revolving Credit Facility were $285.6 million ($8.1 million of excess
availability after taking into consideration the $30.0 million minimum unused
balance requirement discussed above).
  F-15
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 8– SHORT AND LONG TERM DEBT
(continued)
  At
January 31, 2009 and February 2, 2008, we had letters of credit outstanding
totaling $8.5 million and $6.2 million, respectively, which guarantee various
trade activities. The contract amounts of the letters of credit approximate
their fair value.
 
 Long-term debt consisted of the
following:
 January
      31,
                      2009
                    
                    
                    February
      2,
                      2008(in
      thousands)Senior
      Notes
      (a)
                    
                    $
                    40,582
                    
                    
                    $
                    200,000Second
      Lien Notes
      (b)
                    
                    
                    23,334
                    
                    
                    
                    -Third
      Lien Notes
      (b)
                    
                    
                    169,031
                    
                    
                    
                    -Total
                    
                    $
                    232,947
                    
                    
                    $
                    200,000
  
 (a)
                The
      fair value of the Senior Notes, determined based on market quotes, was
      approximately $1.6 million at January 31, 2009 and $103.8 million at
      February 2, 2008.
 (b)
                It
      was not practicable to estimate the fair value of the Secured Notes as
      there is no readily available market value and current rates for similar
      debt could not be determined.
 
 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.
 
 In
November and December 2008, we executed several agreements (the “Exchange and
Purchase Agreements”) to exchange our Senior Notes held by certain noteholders
(the “Participating Noteholders”) for new 8.375%/8.945% Senior Secured Third
Lien Notes due June 1, 2012 (the “Third Lien Notes”).  In addition, the
Participating Noteholders purchased new 11.375%/12.125% Senior Secured Second
Lien Notes due June 1, 2012 (the “Second Lien Notes,” together with the Third
Lien Notes, the “Secured Notes”).
 
 As part
of this transaction, the Participating Noteholders, who beneficially owned or
had investment management authority of approximately 80% of the Senior Notes,
(a) exchanged $159.4 million in principal amount of their Senior Notes for new
Third Lien Notes, and (b) purchased $22.8 million in principal amount of new
Second Lien Notes.
 
 Interest
on the Secured Notes is payable semi-annually in arrears on June 1 and December
1 of each year.  Interest on the Second Lien Notes began to accrue as of
the issuance date and is payable beginning on June 1, 2009 in pay-in-kind
interest or PIK Interest at 12.125% per annum from the issuance date until
December 1, 2010, and thereafter in cash at 11.375% per annum.  Interest on
the Third Lien Notes began to accrue PIK Interest at 8.945% per annum as of June
1, 2008, which was paid in PIK Interest on December 1, 2008, and will be payable
in PIK Interest at 8.945% per annum from December 2, 2008 until December 1,
2010, and thereafter in cash at 8.375% per annum.  The PIK Interest on
the Secured Notes is payable upon maturity of the Secured Notes. Interest on the
Senior Notes continues to be payable in cash semi-annually on June 1 and
December 1 of each year.
 
 As a
result of the above transactions, as of January 31, 2009, there were
approximately $192.4 million of Secured Notes outstanding and $40.6 million of
Senior Notes outstanding. The refinancing of the Senior Notes enables us to
eliminate a significant portion of the cash interest payment of $16.8 million
that would have been payable annually on the Senior Notes as the Secured Notes
include PIK Interest until December 1, 2010.
  F-16
  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  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
Secured Notes are guaranteed on a senior basis by substantially all of our
wholly-owned subsidiaries and the Company.  The Second Lien Notes are
secured by perfected second priority liens and the Third Lien Notes are secured
by perfected third priority liens in the assets of all of our wholly-owned
subsidiaries and the Holding Company.
 
 The
indenture governing the Senior Notes and Secured 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 its covenants as of and for the year ended January 31,
2009.
 
 In
connection with our strategic plan, a majority of the holders of the Third Lien
Notes entered into agreements with us and a majority of our trade vendors for
$24.9 million of trade accounts payable to be secured in accordance with the
terms of the Third Lien Notes. In addition, these trade vendors agreed to a
deferred payment schedule through August 2009 of the outstanding
amounts.
 
 Interest
expense, net for 2008 and 2007 was $37.5 million and $29.5 million,
respectively.
 
  F-17
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 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:
 January
      31,
                                        2009
                                      
                                      
                                      February 2,
                                        2008(in
      thousands)Deferred
      Tax AssetsUniform inventory
      capitalization
                                      
                                      $
                                      4,327
                                      
                                      
                                      $
                                      4,120Expenses not currently
      deductible
                                      
                                      
                                      5,038
                                      
                                      
                                      
                                      4,615Valuation
      allowance
                                      
                                      
                                      (4,935
                                      )
                                      
                                      
                                      -Total
      current
                                      
                                      
                                      4,430
                                      
                                      
                                      
                                      8,735Net
      operating losses - non-current
                                      
                                      
                                      17,509
                                      
                                      
                                      
                                      3,319Tax
      deductible goodwill
                                      
                                      
                                      5,136
                                      
                                      
                                      
                                      3,164Depreciation
      and amortization
                                      
                                      
                                      1,096
                                      
                                      
                                      
                                      -Valuation
      allowance
                                      
                                      
                                      (12,509
                                      )
                                      
                                      
                                      (113
                                      )Total
      non-current
                                      
                                      
                                      11,232
                                      
                                      
                                      
                                      6,370Total deferred tax
      assets
                                      
                                      
                                      15,662
                                      
                                      
                                      
                                      15,105Deferred
      Tax LiabilitiesLIFO
      inventory valuation
                                      
                                      
                                      15,662
                                      
                                      
                                      
                                      24,744Total current
                                      
                                      
                                      15,662
                                      
                                      
                                      
                                      24,744Depreciation
      and amortization
                                      
                                      
                                      -
                                      
                                      
                                      
                                      9,963Total
    non-current
                                      
                                      
                                      -
                                      
                                      
                                      
                                      9,963Total deferred tax
      liabilities
                                      
                                      
                                      15,662
                                      
                                      
                                      
                                      34,707Net deferred income tax
      liabilities
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      19,602Net current deferred income tax
      liabilities
                                      
                                      $
                                      11,232
                                      
                                      
                                      $
                                      16,009Net non-current deferred income
      tax (assets) liabilities (a)
                                      
                                      
                                      (11,232
                                      )
                                      
                                      
                                      3,593Net deferred income tax
      liabilities
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      19,602
 
 (a)
                The
      $11,232,000 non-current deferred tax asset for 2008 is included in
      Deferred charges and other assets, net on the accompanying consolidated
      balance sheets.
 
 The
components of benefit for income taxes are as follows (in
thousands):
 
 Fiscal
      Year EndedJanuary
      31,
                        2009
                      
                      
                      February
      2,
                        2008Current
      taxes –
      Federal
                      
                      $
                      (17,064
                      )
                      
                      $
                      (5,674
                      )Current
      – State and
      local
                      
                      
                      (2,513
                      )
                      
                      
                      (1,689
                      )Current
      taxes – Foreign
                      
                      
                      -
                      
                      
                      
                      (296
                      )Deferred
      taxes –
      Federal
                      
                      
                      (15,489
                      )
                      
                      
                      (1,414
                      )Deferred
      taxes – State and
      local
                      
                      
                      (4,113
                      )
                      
                      
                      (133
                      )Benefit
      for income
      taxes
                      
                      $
                      (39,179
                      )
                      
                      $
                      (9,206
                      )
 
 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 EndedJanuary
      31,
                        2009
                      
                      
                      February
      2,
                        2008Federal
      statutory
      provision
                      
                      $
                      (50,562
                      )
                      
                      $
                      (8,531
                      )Reversal
      of foreign tax
      accrual
                      
                      
                      -
                      
                      
                      
                      (296
                      )State
      and local taxes, net of federal
      effect
                      
                      
                      (5,203
                      )
                      
                      
                      (1,113
                      )Reversal
      of tax accruals no longer
      required
                      
                      
                      (410
                      )
                      
                      
                      (209
                      )Valuation
      allowance
                      
                      
                      17,329
                      
                      
                      
                      113Other
                      
                      
                      (333
                      )
                      
                      
                      830Benefit
      for income
      taxes
                      
                      $
                      (39,179
                      )
                      
                      $
                      (9,206
                      )
 
 In June
2006, the 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.
   F-18
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
9 – INCOME TAXES (continued)
 
 
 We
adopted FIN 48 on the first day of 2007. As required by FIN 48, 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, 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):
 UnrecognizedTax
      BenefitsBalance
      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
                        
                        
                        1,736Additions
      based on tax positions related to current year
                        
                        
                        145Reductions
      for tax positions of prior
      years
                        
                        
                        (410
                        )Balance
      at January 31,
      2009
                        
                        $
                        1,471
 
 Included
in the balance at January 31, 2009 are $1.3 million of tax positions that if
recognized would affect the annual effective tax rate.
 
 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 $0.3 million in potential interest and
penalties are included as a component of the $1.7 million at February 2, 2008
and the $1.5 million at January 31, 2009, respectively. We anticipate that
approximately $0.3 million of unrecognized state and local tax benefits will be
recognized prior to February 2, 2010 as a result of the expiration of the
statute of limitations.
 
 As a
result of the acquisition of Carlyle & Co. Jewelers (“Carlyle”), we acquired
net operating loss carryforwards that are subject to an annual limitation of
$1.3 million. At October 31, 2008, the end of our tax year, we had available net
operating loss carryforwards for federal income tax reporting purposes of
approximately $23.0 million of which approximately $5.7 million is subject to
the limitation. The carryfowards expire from 2021 through 2028.
 
 A
valuation allowance against deferred tax assets is required when it is more
likely than not that a tax benefit will not be realized. Due to continued
losses, a valuation allowance in the amount of $17.4 million and $0.1 million
was required at January 31, 2009 and February 2, 2008,
respectively.
 
 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 2007 and 2008 are currently under
examination by the Internal Revenue Service. The tax years 2003 through 2008
remain open to examination by the various major state and local taxing
jurisdictions to which we are subject.
 
  F-19
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
10 – THE HOLDING COMPANY’S STOCKHOLDERS’ EQUITY
 
 The
Holding Company’s stock repurchase program expired in 2005 and has not been
renewed. The Holding Company repurchased a total of 2,207,904 shares for $27.4
million under the stock repurchase program from inception through 2005. During
2008 and 2007, the Holding Company repurchased a total of 32,791 shares and
75,231 shares, respectively, for approximately $12,600 and $264,000,
respectively, pursuant to our long-term incentive plans, to satisfy tax
withholding obligations related to the issuance of the Holding Company’s Common
Stock to certain executives.
 
 NOTE
11 – STOCK-BASED COMPENSATION
 
 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 Planor 1997 Plan that are settled in cash or
which otherwise terminate after June 19, 2007 are available to begranted as awards under the 2007
Plan.
 
 As of
January 31, 2009, an aggregate of 649,874 shares of the Holding Company’s Common
Stock has been reserved for issuance pursuant to the 2007 Plan.  As of
January 31, 2009, no shares have been issued in connection with exercises of
options granted under the 2007 Plan, 250,000 shares are reserved for issuance
upon the exercise of outstanding options at an exercise price of $2.71 per share
and 207,630 shares have been issued or are subject to purchases and awards of
restricted stock and restricted stock units. As of January 31, 2009, 192,244
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 January 31, 2009, 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 the exercise of outstanding options
and 145,699 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 $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.
   F-20
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
11 – STOCK-BASED COMPENSATION (continued)
  The 1997
Plan was similar to the 1993 Plan and permitted the Holding Company to grant the
same types ofawards as permitted
under the 1993 Plan. As of January 31, 2009, 294,494 shares of the Holding
Company’s Common Stock have been issued in connection with exercises of options
granted under the 1997 Plan, 395,300 shares are reserved for issuance upon the
exercise of outstanding options and 820,928 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.
 
 Stock
Options
 
 Stock
options outstanding under the stock incentive plans have been granted at prices
which are equal to the market value of the Holding Company’s 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.
 
 The
Holding Company uses the Black-Scholes option pricing model to determine the
fair value of stock option awards under SFAS No. 123R. The weighted average
estimated fair value of stock options granted in the year ended February 2, 2008
was $1.43. There were no stock options granted by the Holding Company during the
year ended January 31, 2009.
 
 Principal
assumptions used in applying the Black-Scholes model in 2007 were:
 
 2007Risk-free
      interest rate
                    
                    
                    3.54
                    %Expected
      life, in years
                    
                    
                    6Expected
      volatility
                    
                    
                    51.68
                    %Expected
      dividend yield
                    
                    
                    0
                    %
 
 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’s 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.
 
  F-21
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
11 – STOCK-BASED COMPENSATION (continued)
 
 The below
table summarizes the changes in stock options outstanding during 2008, as
follows:
 
 Number
                    Outstanding
                  
                  
                  Wtd.
      Avg.
                    Ex.
      Price
                  
                  
                  Wtd.
      Avg.
                    Remaining
                    Contractual
      Life
                  
                  
                  Aggregate
                    Intrinsic
                    Value
                    (000’s)(1)Balance
      at February 2, 2008
                  
                  
                  863,200
                  
                  
                  $
                  8.07
                  
                  
                  
                  4.94
                  
                  
                  $
                  -Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cancelled
                  
                  
                  (204,900
                  )
                  
                  
                  8.73
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at January 31, 2009
                  
                  
                  658,300
                  
                  
                  $
                  7.46
                  
                  
                  
                  4.70
                  
                  
                  $
                  -Exercisable
      at January 31, 2009
                  
                  
                  496,633
                  
                  
                  $
                  9.13
                  
                  
                  
                  3.30
                  
                  
                  $
                  -
 
 (1)
                The
      aggregate intrinsic values in the table above are based on the closing
      price of the Holding Company’s Common Stock as of the last business day of
      the periods ended January 31, 2009 and February 2, 2008, which were $0.03
      and  $1.85, respectively.
  As of
January 31, 2009 and February 2, 2008, there was $0.3 million and $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 1.8 years. There were no options exercised during 2008 or 2007, as all
options were out-of-the-money. Except for the option awards granted in 2007, 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 was 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 was 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 were met for
each fiscal year. In 2008 and 2007, there was no compensation expense related to
this executive’s stock incentive compensation.
 
 Additionally,
for each fiscal year during the employment term, the same executive officer was
eligible to receive restricted shares of Common Stock having an aggregate value
nearest to $500,000, subject to the terms of the employment
agreement.
 
 In 2007,
55,261 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 per share. There were no shares of restricted stock awarded
in 2008. During 2008 and 2007, total amortization of restricted stock
compensation was approximately $61,000 and $1.1 million, respectively. The total
fair value of shares vested during 2008 and 2007 was approximately $20,000 and
$0.5 million, respectively. As of January 31, 2009, there was $1,000 of total
unrecognized compensation expense related to nonvested restricted stock awards,
which will be recognized over the first three months of 2009.
 
 The below
table summarizes the changes in restricted stock outstanding during 2008, as
follows:
 
 Restricted
                    Stock
                  
                  
                  Wtd.
      Avg. Grant Date Fair Value
                    Per
      AwardNonvested
      balance at February 2, 2008
                  
                  
                  48,367
                  
                  
                  $
                  11.78Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (47,321
                  )
                  
                  
                  11.85Nonvested
      balance at January 31, 2009
                  
                  
                  1,046
                  
                  
                  $
                  8.70
 
 
  F-22
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
11 – STOCK-BASED COMPENSATION (continued)
 
 Restricted Stock
Units
 
 For 2008
and 2007, 168,284 and 296,059 restricted stock units (“RSUs”), respectively,
were awarded with a weighted average fair value of $0.80 and $5.80 per unit,
respectively. Refer to Note 12 for additional information regarding RSUs. During
2008 and 2007, total amortization of RSUs was $0.6 million and $0.7 million,
respectively. As of January 31, 2009, there was $0.3 million of total
unrecognized compensation cost related to nonvested RSUs, which is expected to
be recognized over a weighted average period of 1.1 years. There was no
intrinsic value associated with the RSUs converted into Common Stock in 2008 or
2007.
 
 The below
table summarizes the changes in RSUs outstanding during 2008, including
nonvested RSUs, as follows:
 RSUs
                  
                  
                  Wtd.
      Avg. Grant Date
                    Fair
      Value
                    Per
      AwardBalance
      at February 2, 2008
                  
                  
                  530,051
                  
                  
                  $
                  8.29Granted
                  
                  
                  168,284
                  
                  
                  
                  0.80Shares
      issued
                  
                  
                  (131,889
                  )
                  
                  
                  8.25Cancelled
                  
                  
                  (27,190
                  )
                  
                  
                  4.91Balance
      at January 31, 2009
                  
                  
                  539,256
                  
                  
                  $
                  5.76
 
 The below
table summarizes the changes in nonvested RSU awards during 2008, as
follows:
 
 RSUs
                  
                  
                  Wtd.
      Avg. Grant Date Fair Value
                    Per
      AwardNonvested
      balance at February 2, 2008
                  
                  
                  236,665
                  
                  
                  $
                  7.80Granted
                  
                  
                  84,142
                  
                  
                  
                  0.80Vested
                  
                  
                  (70,864
                  )
                  
                  
                  9.63Cancelled
                  
                  
                  (27,190
                  )
                  
                  
                  4.91Nonvested
      balance at January 31, 2009
                  
                  
                  222,753
                  
                  
                  $
                  5.11
 
 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 were 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 credits 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 January 31,
2009, 539,256 RSUs were outstanding under the RSU Plans.
 
 The
shares of Common Stock issued upon distribution of RSUs under the RSU Plans are
provided by the 2007 Plan.  As a result of the unavailability of
shares of Common Stock under the 2007 Plan, effective as of May 22, 2008, the
RSU Plans were amended to provide that no new deferral agreements may be entered
into after May 22, 2008 and that any executive deferral agreements regarding the
2008 bonus payable on April 25, 2009 would be effectively cancelled and such
bonus amounts would be paid to the participants in cash on April 25, 2009, and
that cash, rather than RSUs, would be paid for eligible directors’ fees deferred
with respect to the third and fourth quarters of 2008.  In addition,
no additional matching awards will be made under the RSU Plans after May 22,
2008.
   F-23
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  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
January 31, 2009 and February 2, 2008 (dollars in thousands):
 
 Fiscal
      Year EndedJanuary
      31, 2009
                    
                    
                    February
      2, 2008Department
      Store
                      Based
      Fine Jewelry
                      Departments
      (a)
                    
                    
                    Specialty
                      Jewelry
                      Stores
                    
                    
                    Total
                    
                    
                    Department
      Store
                      Based
      Fine Jewelry
                      Departments
      (a)
                    
                    
                    Specialty
                      Jewelry
                      Stores
      (b)
                    
                    
                    TotalSales
                    
                    $
                    444,632
                    
                    
                    $
                    309,673
                    
                    
                    $
                    754,305
                    
                    
                    $
                    493,547
                    
                    
                    $
                    223,805
                    
                    
                    $
                    717,352Depreciation
      and amortization
                    
                    
                    11,307
                    
                    
                    
                    6,204
                    
                    
                    
                    17,511
                    
                    
                    
                    11,857
                    
                    
                    
                    2,599
                    
                    
                    
                    14,456Income
      (loss) from operations (c)
                    
                    
                    (75,676
                    )
                    
                    
                    (31,289
                    )
                    
                    
                    (106,965
                    )
                    
                    
                    (12,244
                    )
                    
                    
                    17,391
                    
                    
                    
                    5,147Interest
      expense, net
                    
                    
                    25,398
                    
                    
                    
                    12,101
                    
                    
                    
                    37,499
                    
                    
                    
                    23,547
                    
                    
                    
                    5,979
                    
                    
                    
                    29,526Provision
      (benefit) for income taxes
                    
                    
                    (22,196
                    )
                    
                    
                    (16,983
                    )
                    
                    
                    (39,179
                    )
                    
                    
                    (13,759
                    )
                    
                    
                    4,553
                    
                    
                    
                    (9,206
                    )Total
      assets
                    
                    
                    252,845
                    
                    
                    
                    314,206
                    
                    
                    
                    567,051
                    
                    
                    
                    405,500
                    
                    
                    
                    330,932
                    
                    
                    
                    736,432Capital
      expenditures
                    
                    
                    8,466
                    
                    
                    
                    16,230
                    
                    
                    
                    24,696
                    
                    
                    
                    10,300
                    
                    
                    
                    3,106
                    
                    
                    
                    13,406
 
 (a)
                Included
      in Interest expense, net for 2008 and 2007 is $18.0 million and $16.8
      million, respectively, related to the Senior Notes and Secured
      Notes.  Refer to Note 8.
 (b)
                Information
      for Bailey Banks & Biddle is included since the date of acquisition in
      November 2007.
 (c)
                The
      loss from operations for 2008 includes $58.9 million of impairment charges
      and an inventory write-down, of which $39.5 million relates to the
      department store based fine jewelry business and $19.4 million relates to
      the specialty jewelry store business. The income from operations for 2007
      for the specialty jewelry stores includes a charge of $3.0 million related
      to the impairment of Congress’
goodwill.
 
 Additionally,
our sales mix by merchandise category was as follows for 2008 and 2007 (dollars
in thousands):
 Fiscal
      Year EndedJanuary
      31, 2009
                        
                        
                        February
      2, 2008Department
      Store Based
                          Fine
      Jewelry Departments
                        
                        
                        Specialty
                          Jewelry
      Stores
                        
                        
                        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 salesDiamonds
                        
                        $
                        108,340
                        
                        
                        
                        24
                        %
                        
                        $
                        102,067
                        
                        
                        
                        33
                        %
                        
                        $
                        119,393
                        
                        
                        
                        24
                        %
                        
                        $
                        69,404
                        
                        
                        
                        31
                        %Gemstones
                        
                        
                        74,723
                        
                        
                        
                        17
                        
                        
                        
                        23,872
                        
                        
                        
                        8
                        
                        
                        
                        86,174
                        
                        
                        
                        18
                        
                        
                        
                        20,645
                        
                        
                        
                        9Gold
                        
                        
                        80,159
                        
                        
                        
                        18
                        
                        
                        
                        3,406
                        
                        
                        
                        1
                        
                        
                        
                        85,855
                        
                        
                        
                        17
                        
                        
                        
                        4,416
                        
                        
                        
                        2Watches
                        
                        
                        62,116
                        
                        
                        
                        14
                        
                        
                        
                        99,557
                        
                        
                        
                        32
                        
                        
                        
                        70,840
                        
                        
                        
                        14
                        
                        
                        
                        77,706
                        
                        
                        
                        35Designer
                        
                        
                        59,533
                        
                        
                        
                        13
                        
                        
                        
                        45,402
                        
                        
                        
                        15
                        
                        
                        
                        64,357
                        
                        
                        
                        13
                        
                        
                        
                        35,085
                        
                        
                        
                        16Other
      (b)
                        
                        
                        59,761
                        
                        
                        
                        14
                        
                        
                        
                        35,369
                        
                        
                        
                        11
                        
                        
                        
                        66,928
                        
                        
                        
                        14
                        
                        
                        
                        16,549
                        
                        
                        
                        7Total
      Sales
                        
                        $
                        444,632
                        
                        
                        
                        100
                        %
                        
                        $
                        309,673
                        
                        
                        
                        100
                        %
                        
                        $
                        493,547
                        
                        
                        
                        100
                        %
                        
                        $
                        223,805
                        
                        
                        
                        100
                        %
 
 (a)
                Information
      for Bailey Banks & Biddle is included since the date of acquisition in
      November 2007.
 (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.
 
  F-24
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
14 – DISCONTINUED OPERATIONS
 
 As a
result of the store closings associated with Macy’s corporate restructuring
initiatives, the results of operations of the departments closed during 2008
have been segregated from those of continuing operations and classified as
discontinued operations for 2008 and 2007. Additionally, as a result of the
33Parisian store
closings in July 2007, the results of operations for these departments have also
been classified as discontinued operations for 2007.
 
 A summary
of the statement of operations information relating to the discontinued
operations is as follows (in thousands):
 
 January
      31,
                          2009
                        
                        
                        February
      2,
                          2008Sales
                        
                        $
                        108,528
                        
                        
                        $
                        128,372Income
      (loss) before income taxes (1) (2)
                        
                        
                        (2,045
                        )
                        
                        
                        8,601Discontinued
      operations, net of tax of $3.3 millionin
      2007
                        
                        
                        (2,045
                        )
                        
                        
                        5,119
 
 (1)
                Includes
      an allocation of $0.8 million and $1.2 million of interest expense related
      to the Revolving Credit Agreement for 2008 and 2007,
      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 and the Secured
  Notes.
 
 NOTE
15 – PROFIT SHARING PLAN
 
 We maintain a defined contribution
profit-sharing plan to provide retirement benefits for all personnel. At our
option, 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. Additionally, until 2007, the plan
provided for optional company paid contributions of 2% of each employee’s
earnings annually, as limited by the Code. Our contributions totaled $1.1
million and $0.8 million, in 2008 and 2007, respectively. We have chosen not to
make matching contributions for the 2009 plan year.
 
 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 2008 and
2007 totaled approximately $0.2 million and $0.1 million, respectively. Carlyle
may make additional contributions to the plan, however, no additional
contributions were made during 2008 and 2007.
 
 NOTE
16 – LICENSE AGREEMENTS WITH DEPARTMENT STORES AND LEASE AGREEMENTS
 
 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. See Note 7 and
Note 19, respectively, with respect to fixed asset impairment charges recorded
in 2008 and expected restructuring charges in 2009. We have a number of leases
for go forward specialty jewelry stores that we intend to renegotiate with
landlords.  License fees and lease expense, included in SG&A, are
as follows (in thousands):
 
 Fiscal
      Year EndedJanuary
      31,
                          2009
                        
                        
                        February
      8,
                          2008Minimum
      fees
                        
                        $
                        39,941
                        
                        
                        $
                        15,988Contingent
      fees
                        
                        
                        73,902
                        
                        
                        
                        82,868Total
                        
                        $
                        113,843
                        
                        
                        $
                        98,856
  F-25
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
16 – LICENSE AGREEMENTS WITH DEPARTMENT STORES AND LEASE AGREEMENTS
(continued)
 
 Future minimum
payments under noncancellable operating leases having initial or remaining
noncancellable lease terms in excess of one year are as follows as of January
31, 2009:
 
 (in
      thousands)2009
                    
                    $
                    28,5162010
                    
                    
                    21,7662011
                    
                    
                    20,0762012
                    
                    
                    15,4592013
                    
                    
                    14,786Thereafter
                    
                    
                    66,528Total minimum payments
      required
                    
                    $
                    167,131
 
 NOTE
17 – COMMITMENTS, CONTINGENCIES AND OTHER
 
 From time
to time, we are involved in litigation arising out of our operations in the
normal course of business. We are not a party to any legal proceedings that,
individually or in the aggregate, are reasonably expected to have a material
adverse effect on our business, results of operations,
financial  condition or cash flows. However, the results of these
matters cannot be predicted with certainty, and an unfavorable resolution of one
or more of these matters could have a material adverse effect on our
consolidated financial statements.
 
 The
Senior Notes, the Secured 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 2008, jewelry departments in store groups owned
by Macy’s accounted for approximately 41% 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 2008, approximately 41.9% of sales
were generated by merchandise obtained from our ten largest vendors and
approximately 6.2% of sales were generated by merchandise obtained from our
largest vendor.
 
 We have not provided any third-party
financial guarantees as of January 31, 2009.
 
 Refer to Note 8 for a discussion of
letters of credit outstanding.
 
 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 is expected to be paid based on the operating results to
date.
  F-26
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
18– QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 The following table summarizes the
quarterly financial data for 2008 and 2007 (dollars in thousands, except per
share data). The 2008 and 2007 quarterly financial data has been restated to
reflect discontinued operations:
 
 Fiscal
      Year Ended January 31, 2009First
                      Quarter
                    
                    
                    Second
                      Quarter
                    
                    
                    Third
                      Quarter
                    
                    
                    Fourth
                      QuarterSales
                    
                    $
                    180,940
                    
                    
                    $
                    168,109
                    
                    
                    $
                    142,740
                    
                    
                    $
                    262,516Gross
      margin
                    
                    
                    80,751
                    
                    
                    
                    74,436
                    
                    
                    
                    59,423
                    
                    
                    
                    79,561Selling,
      general and administrative expenses
                    
                    
                    85,912
                    
                    
                    
                    82,497
                    
                    
                    
                    80,293
                    
                    
                    
                    100,290Loss
      from operations
      (b)
                    
                    
                    (9,517
                    )
                    
                    
                    (11,865
                    )
                    
                    
                    (24,739
                    )
                    
                    
                    (60,844
                    )Loss  from
      continuing operations
      (b)
                    
                    
                    (11,450
                    )
                    
                    
                    (12,420
                    )
                    
                    
                    (19,550
                    )
                    
                    
                    (61,865
                    )Discontinued
      operations
                    
                    
                    439
                    
                    
                    
                    138
                    
                    
                    
                    (1,223
                    )
                    
                    
                    (1,399
                    )Net
      loss
                    
                    
                    (11,011
                    )
                    
                    
                    (12,282
                    )
                    
                    
                    (20,773
                    )
                    
                    
                    (63,264
                    )
 
 Fiscal
      Year Ended February 2, 2008First
                      Quarter
                    
                    
                    Second
                      Quarter
                    
                    
                    Third
                      Quarter
                    
                    
                    Fourth (a)
                      QuarterSales
                    
                    $
                    136,458
                    
                    
                    $
                    123,991
                    
                    
                    $
                    118,610
                    
                    
                    $
                    338,293Gross
      margin
                    
                    
                    63,816
                    
                    
                    
                    56,753
                    
                    
                    
                    53,215
                    
                    
                    
                    150,275Selling,
      general and administrative expenses
                    
                    
                    66,908
                    
                    
                    
                    60,483
                    
                    
                    
                    59,327
                    
                    
                    
                    117,738Income
      (loss) from operations
      (b)
                    
                    
                    (6,377
                    )
                    
                    
                    (7,165
                    )
                    
                    
                    (9,461
                    )
                    
                    
                    28,150Income
      (loss) from continuing operations (b)
                    
                    
                    (8,481
                    )
                    
                    
                    (9,228
                    )
                    
                    
                    (7,740
                    )
                    
                    
                    10,276Discontinued
      operations, net of
      tax
                    
                    
                    878
                    
                    
                    
                    860
                    
                    
                    
                    219
                    
                    
                    
                    3,162Net
      income
      (loss)
                    
                    
                    (7,604
                    )
                    
                    
                    (8,368
                    )
                    
                    
                    (7,521
                    )
                    
                    
                    13,439
 
 
 (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
      loss from operations and the loss from continuing operations includes a
      charge of $58.9 million related to the impairment of fixed assets and
      intangible assets and the write-down of inventory in the fourth quarter of
      2008. The income (loss) from operations and the income (loss) from
      continuing operations includes a charge of $3.0 million related to the
      impairment of goodwill in the fourth quarter of
  2007.
 
 NOTE 19 – SUBSEQUENT
EVENTS
 
 As
described in Note 1, in February 2009, we announced the adoption of our
strategic plan to exit the licensed department store based business and close
approximately half of our specialty jewelry stores in 2009. In conjunction with
the adoption of this strategic plan, we amended our Revolving Credit Agreement
in February 2009, as adjusted in March 2009, to reduce the Revolving Credit
Facility from $550.0 million to $266.6 million and to increase the interest
rates thereunder. The amendment also requires us to comply with various
milestones in connection with the strategic plan, to provide additional
financial reporting to the lenders and to maintain compliance with a variance
covenant from the approved restructuring budget. Additionally, the Revolving
Credit Agreement now matures in February 2010. The net sales proceeds from the
liquidation of inventory will be used to repay our outstanding balance under our
Revolving Credit Facility in 2009.
 
 We are in
default of the weekly financial covenants as stated in the February 2009
amendment to the Revolving Credit Agreement.  In addition, our
management has determined that there is substantial doubt about our ability to
continue as a going concern, and as such, the independent auditor’s report
accompanying our January 31, 2009 financial statements contains a going concern
explanatory paragraph, which also constitutes a default under our Revolving
Credit Agreement.
 
 As a
result of these defaults, the lenders under the Revolving Credit Agreement are
no longer obligated to permit us to borrow under the facility or issue letters
of credit for our account.  We received a letter dated as of March 12,
2009, from General Electric Capital Corporation (as agent under the Revolving
Credit Agreement) (“GE”), pursuant to which GE, on behalf of all the lenders,
reserved all rights and remedies under the Revolving Credit Agreement. GE and
the lenders may, but are not obligated to, continue to issue letters of credit
and permit us to borrow under the Revolving Credit Facility and GE and the
lenders may terminate the Revolving Credit Agreement and/or demand immediate
repayment at any time.
  F-27
  FINLAY
FINE JEWELRY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
19 – SUBSEQUENT EVENTS (continued)
  If GE and
the lenders were to demand immediate repayment, there can be no assurances that
we will be able to obtain alternate financing on terms acceptable to
us.  In the event that we are unable to secure adequate borrowing
under the Revolving Credit Agreement or an alternate financing source, our cash
balance and cash flows from operations may be inadequate to meet our
obligations, which may prevent us from operating. As a result of cross-default
provisions, such acceleration would enable the holders of our long-term debt to
declare a default and demand repayment as well.
 
 We
entered into a consulting agreement with Gordon Brothers Retail Partners, LLC
(“Gordon Brothers”), to manage the sale of inventory and fixed assets in the
specialty jewelry stores that we plan to close. In consideration of Gordon
Brothers’ services, we will pay them a base consulting fee as well as a
contingent fee based on the achievement of certain profitability thresholds in
the stores that we plan to close. In addition, we have entered into a
consignment agreement with Gordon Brothers for certain merchandise that is
currently being sold through the specialty jewelry stores that we plan to close
and for which Gordon Brothers has the ability to earn a percentage of the
profits on the sale of such merchandise. Further, we have entered into a
consulting agreement with Gordon Brothers to assist with the liquidation of the
inventory in the department store based fine jewelry departments for which we
will pay them a base fee.
 
 In
addition, we have retained the management consulting firm Alvarez & Marsal
North America, LLC (“A&M”) to work with our board of directors and
management in analyzing Finlay’s business strategies, plans and
operations.  David Coles, an A&M employee, is providing consulting
services to our board of directors and management as the Holding Company’s Chief
Restructuring Officer.
 
 Effective
March 22, 2009, we completed the sale of certain assets to Bloomingdale’s. The
assets included inventory and fixed assets for the 34 departments that we
operated in Bloomingdale’s for a purchase price of approximately $33.4
million.  The proceeds from this transaction were used to pay down a
portion of the outstanding balance under our Revolving Credit
Facility.
 
 With
respect to the exiting of the department store based business and the
anticipated closing of approximately half of our specialty jewelry stores in
2009, we expect to record charges in 2009 for severance and retention costs,
lease termination costs and other items.
 
  F-28