`================================================================================

                                  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 28, 2006 or

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

            For the transition period from _________ to __________

                        Commission file number: 33-59380

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

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

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

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

        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 [_]                        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 [_]

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

       Yes [X]                        No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant'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. [x]

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

      Large accelerated              Accelerated             Non-accelerated
          filer [_]                   filer [_]                 filer [X]

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

          Yes [_]                      No [X]

As of April 7, 2006, 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.

================================================================================




                         FINLAY FINE JEWELRY CORPORATION

                                    FORM 10-K

                   FOR THE FISCAL YEAR ENDED JANUARY 28, 2006

                                      INDEX

                                                                         PAGE(S)
                                                                         -------

PART I
  Item 1.   Business ....................................................... 3
  Item 1A.  Risk Factors ...................................................14
  Item 1B.  Unresolved Staff Comments ......................................18
  Item 2.   Properties .....................................................18
  Item 3.   Legal Proceedings ..............................................18
  Item 4.   Submission of Matters to a Vote of Security Holders ............18

PART II
  Item 5.   Market for Registrant's Common Equity, Related Stockholder
               Matters and Issuer Purchases of Equity Securities............19
  Item 6.   Selected Consolidated Financial Data............................20
  Item 7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations..........................24
  Item 7A.  Quantitative and Qualitative Disclosures about Market Risk......43
  Item 8.   Financial Statements and Supplementary Data.....................44
  Item 9.   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure..........................44
  Item 9A.  Controls and Procedures.........................................44
  Item 9B.  Other Information...............................................48

PART III
  Item 10.  Directors and Executive Officers of the Registrant..............49
  Item 11.  Executive Compensation..........................................53
  Item 12.  Security Ownership of Certain Beneficial Owners and
               Management and Related Stockholder Matters...................67
  Item 13.  Certain Relationships and Related Transactions..................71
  Item 14.  Principal Accounting Fees and Services..........................73

PART IV
  Item 15.  Exhibits, Financial Statement Schedule..........................73

SIGNATURES .................................................................81


                                        2



                                     PART I

ITEM 1. BUSINESS

THE COMPANY

      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.

      We are one of the leading retailers of fine jewelry in the United States.
We primarily operate licensed fine jewelry departments in major department
stores for retailers such as Federated Department Stores, Inc. ("Federated"),
Belk, Inc. ("Belk's"), The Bon-Ton Stores, Inc. (the "Bon-Ton") and Dillard's,
Inc. ("Dillard's"). We sell a broad selection of moderately priced fine jewelry,
including necklaces, earrings, bracelets, rings and watches, and market these
items principally as fashion accessories with an average sales price of
approximately $213 per item. Average sales per department were $950,000 in 2005
and the average size of a department is approximately 800 square feet.

      In May 2005, we completed the acquisition of Carlyle & Co. Jewelers and
its subsidiaries ("Carlyle"). Carlyle currently operates 32 specialty jewelry
stores located primarily in the southeastern United States under the Carlyle &
Co., J.E. Caldwell & Co. and Park Promenade trade names, which sell luxury
priced jewelry, with an average sales price of approximately $1,000 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 $2.8 million in 2005 and the average size of a store is
approximately 2,100 square feet. Carlyle's sales from the acquisition date
through the end of 2005 totaled $69.5 million. On an annualized basis, sales
were approximately $92.0 million.

      As of January 28, 2006, we operated a total of 1,009 locations, including
977 Finlay departments in 15 host store groups in 46 states and the District of
Columbia, as well as 32 Carlyle specialty jewelry stores in nine states. Our
largest host store relationship is with Federated, for which we have operated
departments since 1983. During 2005, store groups owned by Federated and those
previously owned by The May Department Stores Company ("May") accounted for 72%
of our sales.

      In February 2005, Federated and May announced that they had entered into a
merger agreement whereby Federated would acquire May. In August 2005, Federated
announced that it had completed the merger with May. In September 2005,
Federated announced its integration plans including a divisional realignment and
divestiture of certain stores. Accordingly, effective as of the beginning of
2006, we now operate a total of 401 departments in six of Federated's nine
divisions, which excludes 194 departments in stores that are scheduled to be
closed throughout the Spring 2006 season. As a result, the Fall 2006 season will
be significantly impacted by the loss of business at these locations. In 2005,
we generated sales of approximately $241.0 million from these 194 departments.

      In November 2005, we signed a new agreement with Federated, effective as
of the beginning of 2006, for four Macy's divisions including Macy's South,
Macy's Midwest, Macy's North and Macy's Northwest. This new agreement is three
years in length and expires January 31, 2009. Approximately 348 stores are
covered by this agreement. The new agreement has no impact on the Bloomingdale's
and Lord & Taylor divisions whose license agreements, which cover a total of 87
departments, currently run through February 3, 2007. In addition to extending
our agreement for three years, the new agreement eliminates all non-compete
provisions from the previous May contracts that required us to obtain May's
permission before opening a new department or store within a certain radius of a
May store.


                                        3



      In January 2006, Federated announced that it intends to divest its Lord &
Taylor division prior to the end of 2006. Further, in March 2006, Federated
announced its intention to divest an additional five underperforming Lord &
Taylor stores and convert one store to Macy's. We cannot anticipate the impact
of the proposed transaction on our future results of operations and there is no
assurance that we will not be adversely impacted.

      During the second quarter of 2004, we and the Holding Company completed
the redemption of our then-outstanding 8-3/8% Senior Notes, due May 1, 2008,
having an aggregate principal amount of $150.0 million (the "Old Senior Notes")
and the 9% Senior Debentures, due May 1, 2008, having an aggregate principal
amount of $75.0 million (the "Old Senior Debentures"). Additionally, in June
2004, we completed the sale of the 8-3/8% Senior Notes, due June 1, 2012, having
an aggregate principal amount of $200.0 million (the "Senior Notes"). These
transactions were undertaken to decrease our overall interest rate, extend our
debt maturities and decrease total long-term debt as well as simplify our
capital structure by eliminating debt at the parent company level.

      In May 2005, in connection with the acquisition of Carlyle, we amended and
restated our revolving credit agreement with General Electric Capital
Corporation ("G.E. Capital") and certain other lenders (the "Revolving Credit
Agreement") and we entered into a consent and amendment to the amended and
restated gold consignment agreement (the "Gold Consignment Agreement"), to,
among other things, permit the acquisition transaction. In addition, Carlyle and
its subsidiaries, together with us, entered into supplemental indentures and
guarantees (the "Supplemental Indentures") to guarantee our obligations under
the Senior Notes.

      Our fiscal year ends on the Saturday closest to January 31. References to
2006, 2005, 2004, 2003, 2002 and 2001 relate to the fiscal years ending on
February 3, 2007, January 28, 2006, January 29, 2005, January 31, 2004, February
1, 2003 and February 2, 2002, respectively. Each of the fiscal years includes 52
weeks except 2006, which includes 53 weeks.

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

GENERAL

OVERVIEW

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

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


                                        4



      As a result of our strong relationships with our vendors, our management
believes that our working capital requirements are lower than those of many
other jewelry retailers. In recent years, on average, approximately 50% of our
merchandise has been carried on consignment. The use of consignment merchandise
also reduces our inventory exposure to changing fashion trends because unsold
consigned merchandise can be returned to the vendor.

      CARLYLE STORES. Carlyle operates luxury jewelry stores, primarily located
in shopping malls and lifestyle centers, and offers a compelling shopping
environment for the high-end luxury consumer. Carlyle carries both exclusive and
recognized branded and designer merchandise selections and merchandise
assortments focus on watches, gold, designer jewelry, diamonds and precious
gemstones, complemented by an assortment of giftware.

      Carlyle strives to provide its customers with a premier shopping
experience by utilizing knowledgeable, professional and well-trained sales
associates, marketing programs designed to promote customer awareness of its
merchandise assortments and extending credit to its customers through its credit
card programs, which are managed by a third-party.

      INDUSTRY. Consumers spent approximately $59.0 billion on jewelry
(including both fine and costume jewelry) in the United States in 2005, an
increase of approximately $21.0 billion over 1995, according to the United
States Department of Commerce. In the department store and specialty jewelry
store sectors in which we operate, consumers spent an estimated $11.4 billion on
fine jewelry in 2004. We believe that demographic factors such as the maturing
U.S. population and an increase in the number of working women, have resulted in
greater disposable income, thus contributing to the growth of the fine jewelry
retailing industry. Our management also believes that jewelry consumers today
increasingly perceive fine jewelry as a fashion accessory, resulting in
purchases which augment our gift and special occasion sales.

      GROWTH STRATEGY. We intend to continue to pursue the following key
initiatives to increase sales and earnings:

   o    INCREASE COMPARABLE DEPARTMENT SALES. In our Finlay departments, our
        merchandising and marketing strategy includes emphasizing key
        merchandise items, increasing focus on holiday and event-driven
        promotions, participating in host store marketing programs and
        positioning our departments as "destination locations" for fine jewelry.
        We believe that comparable department sales (sales from departments open
        for the same months during the comparable period) will continue to
        benefit from these strategies. Over the past decade, we have experienced
        comparable department sales increases (in nine out of ten years) and
        have consistently outperformed our host store groups with respect to
        these increases.

   o    OPEN NEW CHANNELS OF DISTRIBUTION. An important initiative and focus of
        management is finding new opportunities for growth, such as the recent
        acquisition of Carlyle. We will continue to seek to identify
        complementary businesses, such as additional regional jewelry chains, to
        leverage our core competencies in the jewelry industry.

   o    ESTABLISH NEW HOST STORE RELATIONSHIPS. We have an opportunity to grow
        by establishing new relationships with department stores that presently
        operate their own fine jewelry departments or have an interest in
        opening jewelry departments. We seek to establish these new
        relationships by demonstrating to department store management the
        potential for improved financial performance. Through acquisitions, we
        have added the former Marshall Field's, now Macy's North, Parisian,
        Dillard's and Bloomingdale's to our host store relationships.

   o    ADD DEPARTMENTS WITHIN EXISTING HOST STORE GROUPS. Our well established
        relationships with many of our host store groups have enabled us to add
        departments in their new store locations. We also seek to add
        departments within existing host stores that do not currently operate
        jewelry departments. Such opportunities exist within Dillard's and
        Belk's. Over the past three years, we


                                        5



        have added 36 departments in Dillard's and Belk's and we plan to add 41
        departments within these host store groups in 2006. In addition, we plan
        to open ten departments with Federated, including three Bloomingdale's
        stores, two stores that will be transferred to us from Macy's East and
        two stores that will be transferred to us from Macy's West.

   o    ADD NEW CARLYLE STORES AND INCREASE COMPARABLE STORE SALES. Opening new
        Carlyle stores and increasing comparable store sales (sales from stores
        open for the same months during the comparable period) is part of our
        long-term growth plan for Carlyle. We plan to open one new Carlyle store
        in 2006 and project opening an additional three stores in 2007,
        primarily in lifestyle centers in affluent suburban areas, in the
        southeastern United States.

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

   o    ENHANCE CUSTOMER SERVICE STANDARDS AND STRENGTHEN SELLING TEAMS. We are
        continuously developing and evaluating our selling teams. One of our
        priorities is to effectively manage personnel at our store locations, as
        they are the talent driving our business at the critical point of sale.
        We place strong emphasis on training and customer service. We have
        expanded our interactive, web-based training programs to provide our
        associates with a uniform training experience. In order to further our
        goals of optimizing service levels and driving sales growth, we will
        continue to incentivize our sales associates by providing
        performance-based compensation and recognition.

      MERCHANDISING STRATEGY. The Finlay departments seek to maximize sales and
profitability through a unique merchandising strategy known as the "Finlay
Triangle", which integrates store management (including host store management
and our store group management), vendors and our central office. By coordinating
efforts and sharing access to information, each Finlay Triangle participant
plays a role which emphasizes its area of expertise in the merchandising
process, thereby increasing productivity. Within guidelines set by the central
office, our store group management contributes to the selection of the specific
merchandise most appropriate to the demographics and customer tastes within
their particular geographical area. Our advertising initiatives and promotional
planning are closely coordinated with both host store management and our store
group management to ensure the effective use of our marketing programs. Vendors
participate in the decision-making process with respect to merchandise
assortment, including the testing of new products, marketing, advertising and
stock levels. By utilizing the Finlay Triangle, opportunities are created for
the vendor to assist in identifying fashion trends thereby improving inventory
turnover and profitability, both for the vendor and us. As a result, our
management believes it capitalizes on economies of scale by centralizing certain
activities, such as vendor selection, advertising and planning, while allowing
store management the flexibility to implement merchandising programs tailored to
the host store environments and clientele.


                                        6



                               THE FINLAY TRIANGLE

                               -----------------
                                     FINLAY
                                 MERCHANDISING
                                      TEAM
                               -----------------

          ----------                                 --------------
            VENDORS                                      STORE
                                                       MANAGEMENT
          ----------                                 --------------

      We have structured our relationships with vendors to encourage sharing of
responsibility for marketing and merchandise management. We furnish to vendors,
through on-line access to our information systems, the same sales, stock and
gross margin information that is available to our store group management and
central office for each of the vendor's styles in our merchandise assortment.
Using this information, vendors are able to participate in decisions to
replenish inventory which has been sold and to return or exchange slower-moving
merchandise. New items are tested in specially selected "predictor" departments
where sales experience can indicate an item's future performance in our other
departments. Our management believes that the access and input which vendors
have in the merchandising process results in a better assortment, more timely
replenishment, higher turnover and higher sales of inventory, differentiating us
from our competitors.

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

      Carlyle's merchandising strategy is built around its customer profiles and
its partnerships with suppliers. Through detailed analysis of its customer
demographics, Carlyle seeks to maximize sales and profitability by merchandising
to the customer tastes within its geographic areas. By considering fashion
trends, industry trends, competitor activity and vendor and store management
recommendations, Carlyle is able to create varying assortments for specific
markets.

      Carlyle is committed to developing strong relationships with its vendors.
These partnerships allow Carlyle to improve inventory turn, maintain appropriate
inventory levels throughout the year and maximize vendor support.

STORE RELATIONSHIPS

      HOST STORE RELATIONSHIPS. The following table identifies the host store
groups in which we operated departments at January 28, 2006, 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 OF
HOST STORE GROUP                                                        RELATIONSHIP   DEPARTMENTS
----------------                                                        ------------   -----------

FEDERATED
Robinsons-May/Meier & Frank .........................................      1948*            76
Filene's/Kaufmann's .................................................      1977*           101
Lord & Taylor .......................................................      1978*            57
Famous-Barr/L.S. Ayres/Jones ........................................      1979*            42
Rich's-Macy's/Lazarus-Macy's/Goldsmith's-Macy's .....................      1983             59
Foley's .............................................................      1986*            72
Hecht's/Strawbridge's ...............................................      1986*            82
Bon-Macy's ..........................................................      1993             23
Marshall Field's ....................................................      1997*            53
Bloomingdale's ......................................................      2000             30
                                                                                          -----
    Total Federated Departments .....................................                                  595

SAKS INCORPORATED
Carson Pirie Scott/Bergner's/Boston Store/Younkers/Herberger's**.....      1973             83
Parisian ............................................................      1997             33
                                                                                          -----
    Total Saks Incorporated Departments .............................                                  116

OTHER DEPARTMENTS
Gottschalks .........................................................      1969             38
Belk's ..............................................................      1975             74
The Bon-Ton/Elder Beerman ...........................................      1986             80
Dillard's ...........................................................      1997             74
                                                                                          -----
    Total Other Departments .........................................                                  266
                                                                                                      -----
   Total Departments ................................................                                  977
                                                                                                      =====


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

** As a result of the sale by Saks Incorporated ("Saks") of their Northern
Department Store Group to the Bon-Ton in March 2006, these stores will be
consolidated under the Bon-Ton store group.

      As a result of the Federated/May merger, effective as of the beginning of
2006, we now operate in six of Federated's nine divisions; for a total of 401
departments, as follows:

                Macy's South (1)                          136
                Macy's Midwest (2)                         87
                Macy's North (3)                           53
                Macy's Northwest (4)                       38
                Bloomingdale's                             30
                Lord & Taylor                              57
                                                       --------
                                                          401
                                                       ========
       ____________________
      (1)   Primarily comprised of the former
            Rich's-Macy's/Lazarus-Macy's/Goldsmith's-Macy's division of
            Federated and certain of May's former Foley's and Hecht's stores.

      (2)   Primarily comprised of the former Famous-Barr/L.S. Ayres/Jones and
            Kaufmann's divisions of May.

      (3)   Primarily comprised of the former Marshall Field's division of May.

      (4)   Primarily comprised of the former Bon-Macy's division of Federated
            and certain of May's former Meier & Frank stores.

As a result of Federated's integration plans, we will no longer operate in the
following 194 departments:

      o  150 stores under various regional nameplates that will be phased into
         the Macy's East and Macy's West divisions, which are Federated
         divisions in which we have not historically operated the fine jewelry
         departments. The transition of these departments is expected to begin
         after Mother's Day and be completed by the end of July 2006;

      o  40 stores that will be divested by Federated primarily in the first
         quarter of 2006; and

      o  4 stores that will be closed in preparation for reopening as
         Bloomingdale's stores.


                                        8



      TERMS OF FINLAY LICENSE AGREEMENTS. Our license agreements typically have
an initial term of one to five years. Substantially all of our license
agreements contain renewal options or provisions for automatic renewal absent
prior notice of termination by either party. License agreement renewals are
generally for one to three year periods. In exchange for the right to operate a
department within the host store, we pay each host store group a license fee,
calculated as a percentage of sales.

      Our license agreements typically require host stores to remit sales
proceeds for each month (without regard to whether such sales were cash, store
credit or national credit card) to us approximately three weeks after the end of
such month. However, we cannot ensure the collection of sales proceeds from our
host stores. Additionally, substantially all of our license agreements provide
for accelerated payments during the months of November and December, which
require the host store groups to remit to us 75% of the estimated months' sales
prior to or shortly following the end of each such month. Each host store group
withholds from the remittance of sales proceeds a license fee and other
expenditures, such as advertising costs, which the host store group may have
incurred on our behalf.

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

      TERMS OF CARLYLE LEASE AGREEMENTS. All of the Carlyle stores are leased.
As of January 28, 2006, Carlyle had a total of 32 leased stores. Carlyle's store
leases are generally for a term of ten years, with rent being a fixed minimum
base plus, for certain stores, a percentage of store sales in excess of a
specified threshold.

      CREDIT. In the Finlay 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.

      Carlyle maintains private label credit card programs that are managed by a
third-party under an agreement that expires in September 2007. Carlyle has no
liability to the card issuer for bad debt expense, provided that purchases are
made in accordance with the issuing banks' procedures. Carlyle's credit programs
are intended to complement its overall merchandising and marketing strategy by
encouraging larger and more frequent sales. Carlyle's credit card holders
receive special offers and advance notice of in-store sales events. The names
and addresses of "preferred" customers are added to Carlyle's customer database,
which is used for direct mail purposes. During 2005, Carlyle's private label
credit card purchases accounted for approximately 22% of Carlyle's sales.

      LOCATIONS OPENED/CLOSED. During 2005, location openings offset by closings
resulted in a net increase of 47 locations. The openings, which totaled 62
locations, included 28 Finlay departments, within existing host store groups and
34 stores as a result of the acquisition of Carlyle in May 2005. The closings
totaled 15 locations, including 13 Finlay departments and two Carlyle stores.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-2005 Compared with 2004".


                                        9



      The following table sets forth data regarding the number of locations
which we have operated from the beginning of 2001:



                                                             FISCAL YEAR ENDED
                                        ------------------------------------------------------------
                                        JAN. 28,     JAN. 29,     JAN. 31,     FEB. 1,      FEB. 2,
                                          2006         2005         2004         2003         2002
                                        --------     --------     --------     --------     --------

      LOCATIONS (A):
      Open at beginning of year ....         962          972        1,011        1,006        1,053
      Opened during year ...........          62           28           32           21           33
      Closed during year ...........         (15)         (38)         (71)         (16)         (80)
                                        --------     --------     --------     --------     --------
      Open at end of year ..........       1,009          962          972        1,011        1,006
                                        --------     --------     --------     --------     --------
      Net increase (decrease) ......          47          (10)         (39)           5          (47)
                                        ========     ========     ========     ========     ========


___________________
      (a)   The openings and closings for the year ended January 28, 2006
            reflect the acquisition of Carlyle in May 2005.

      For the years presented in the table above, closings were primarily
attributable to: ownership changes in host store groups; internal consolidation
within host store groups; the closing or sale by host store groups of individual
stores; host store group decisions to consolidate with one licensee or to
operate departments themselves; and our decision to close unprofitable
locations. To our management's knowledge, none of the department closings during
the periods presented in the table above resulted from dissatisfaction of a host
store group with our performance.

PRODUCTS AND PRICING

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

      The following table sets forth the sales and percentage of sales by
category of merchandise for 2005, 2004 and 2003 (dollars in millions):



                                                FISCAL YEAR ENDED
                   ----------------------------------------------------------------------------
                            JAN. 28, 2006 (1)               JAN. 29, 2005       JAN. 31, 2004
                   ------------------------------------    ----------------    ----------------
                        FINLAY             CARLYLE              FINLAY              FINLAY
                   ----------------    ----------------    ----------------    ----------------
                              % OF                 % OF                % OF                % OF
                    SALES     SALES     SALES     SALES     SALES     SALES     SALES     SALES
                   ------    ------    ------    ------    ------    ------    ------    ------

Diamonds ......    $249.9      27.1%   $ 19.5      28.1%   $244.0      26.4%   $232.6      25.8%
Gold ..........     182.8      19.9       1.1       1.6     197.3      21.4     196.9      21.8
Gemstones .....     189.9      20.6       5.2       7.5     196.8      21.3     198.0      22.0
Watches .......     128.7      14.0      26.3      37.8     132.0      14.3     134.0      14.8
Designer ......      56.9       6.2      13.3      19.1      53.2       5.8      42.6       4.7
Other (2) .....     112.4      12.2       4.1       5.9     100.3      10.8      98.3      10.9
                   ------    ------    ------    ------    ------    ------    ------    ------
Total Sales ...    $920.6     100.0%   $ 69.5     100.0%   $923.6     100.0%   $902.4     100.0%
                   ======    ======    ======    ======    ======    ======    ======    ======


___________________
      (1)   Sales for 2005 includes Carlyle since the date of acquisition.

      (2)   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.

      The Finlay departments sell merchandise at prices generally ranging from
$50 to $1,000. In 2005, the average price of items sold by the Finlay
departments was approximately $213 per item. An average Finlay department has
over 5,000 items in stock. Many of our license agreements with host store groups
restrict us from selling certain types of merchandise or, in some cases, selling
particular merchandise below certain price points. In 2005, the average price of
items sold by Carlyle was approximately $1,000


                                       10



per item and an average Carlyle store has approximately 3,000 items in stock.
Consistent with fine jewelry retailing in general, a substantial portion of our
sales are made at prices discounted from listed retail prices. Our advertising
and promotional planning are closely coordinated with our pricing strategy.
Publicized sales events are an important part of our marketing efforts. A
substantial portion of our sales occur during such promotional events. The
amount of time during which merchandise may be offered at discount prices is
limited by applicable laws and regulations. See "Legal Proceedings".

PURCHASING AND INVENTORY

      GENERAL. A key element of our strategy has been to lower the working
capital investment required for operating our existing locations and opening new
locations. In recent years, on average, approximately 50% of our merchandise has
been obtained on consignment and certain additional inventory has been purchased
with extended payment terms. In 2005, our net monthly investment in inventory
(i.e., the total cost of inventory owned and paid for) averaged 40% of the total
cost of our on-hand merchandise. We are generally granted exchange privileges
which permit us to return or exchange unsold merchandise for new products at any
time. In addition, we structure our relationships with vendors to encourage
their participation in and responsibility for merchandise management. By making
the vendor a participant in our merchandising strategy, we have created
opportunities for the vendor to assist in identifying fashion trends, thereby
improving inventory turnover and profitability. As a result, our direct capital
investment in inventory has been reduced to levels which we believe are low for
the retail jewelry industry. In addition, our inventory exposure to changing
fashion trends is reduced because unsold consignment merchandise can be returned
to the vendor.

      In 2005, approximately 82% of sales related to the Finlay departments were
generated by merchandise obtained from their 40 largest vendors (out of a total
of approximately 500 vendors), and approximately 10% of sales related to the
Finlay departments were generated by merchandise obtained from their largest
vendor. Additionally, merchandise obtained from Carlyle's two largest vendors
generated approximately 52% of its sales in 2005.

      GOLD CONSIGNMENT AGREEMENT. We are a party to the Gold Consignment
Agreement, which enables us to receive consignment merchandise by providing
gold, or otherwise making payment, to certain vendors. While the merchandise
involved remains consigned, title to the gold content of the merchandise
transfers from the vendors to the gold consignor. In July 2005, we further
amended the Gold Consignment Agreement to, among other things, extend the
maturity date to October 31, 2007 (October 31, 2008 should our Revolving Credit
Agreement be extended on terms acceptable to the gold consignor) and to
establish new financial covenants (including minimum earnings and fixed charge
coverage ratio requirements and certain maximum debt limitations). Our Gold
Consignment Agreement permits us to consign up to the lesser of (i) 165,000 fine
troy ounces or (ii) $50.0 million worth of gold, subject to a formula as
prescribed by the Gold Consignment Agreement. At January 28, 2006, amounts
outstanding under the Gold Consignment Agreement totaled 89,103 fine troy
ounces, valued at approximately $50.0 million. The average amount outstanding
under the Gold Consignment Agreement was $49.6 million for the fiscal year ended
January 28, 2006. In the event this arrangement is terminated, we will be
required to return the gold or purchase the outstanding gold at the prevailing
gold rate in effect on that date. For financial statement purposes, the Gold
Consignment Agreement is an off-balance sheet arrangement. As such, the
consigned gold is not included in merchandise inventories on the Consolidated
Balance Sheets and, therefore, no related liability has been recorded.

      Under the Gold Consignment Agreement, we are required to pay a daily
consignment fee on the dollar equivalent of the fine gold value of the ounces of
gold consigned thereunder. The daily consignment fee as of January 28, 2006 was
3.0% per annum. In conjunction with the Gold Consignment Agreement, we granted
to the gold consignor a first priority perfected lien on, and a security
interest in, specified gold jewelry of participating vendors approved under the
Gold Consignment Agreement and a lien on proceeds and products of such jewelry,
subject to the terms of an intercreditor agreement between the gold consignor
and the Revolving Credit Agreement lenders.


                                       11



OPERATIONS

GENERAL

      FINLAY DEPARTMENTS. 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 the host stores.
Each department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Each department is open for business
during the same hours as its host store.

      To parallel host store operations, we have established separate group
service organizations responsible for managing departments operated for each
host store. Staffing for each group organization varies with the number of
departments in each group. Typically, we service each host store group with a
group manager, an assistant group manager, one group buyer, three or more
regional supervisors who oversee the individual department managers and a number
of clerical employees. Each group manager reports to a regional vice president,
who is responsible for the supervision of up to seven host store groups. In our
continued efforts to improve comparable department sales through improved
operating efficiency, we have taken steps to minimize administrative tasks at
the department level, to improve customer service and, as a result, sales.

      We had average sales per linear foot of approximately $11,700 in 2005,
$12,000 in 2004, and $11,700 in 2003. We determine average sales per linear foot
by dividing our sales by the aggregate estimated measurements of the outer
perimeters of the display cases of our departments. We had average sales per
department of approximately $950,000, $955,000 and $932,000 in 2005, 2004 and
2003, respectively.

      CARLYLE STORES. Each Carlyle store is supervised by a manager whose
primary responsibilities include customer sales and service, scheduling and
training of personnel, maintaining security controls and merchandise
presentation. Each store manager reports to one of four regional vice
presidents, who are responsible for the supervision of up to eight stores.
Carlyle had average sales per store of $2.8 million in 2005.

      MANAGEMENT INFORMATION AND INVENTORY CONTROL SYSTEMS. The Finlay licensed
business, along with its vendors, use our management information systems to
monitor sales, gross margin and inventory performance by location, merchandise
category, style number and vendor. Using this information, the Finlay licensed
business is able to monitor merchandise trends and variances in performance and
improve the efficiency of our inventory management. Additionally, both the
Finlay licensed business and Carlyle measure the productivity of their sales
forces by maintaining current statistics for each employee such as sales per
hour, transactions per hour and transaction size. Our merchandising and
inventory control systems and point-of-sale systems for our locations have
provided improved analysis and reporting capabilities.

      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 2005, we regularly employed approximately 6,000 people of
which approximately 95% were regional and local sales and supervisory personnel
and the balance were employed in administrative or executive capacities. Of our
6,000 employees, approximately 3,000 were part-time employees, working less than
32 hours per week. Our labor requirements fluctuate because of the seasonal
nature of our business. Our management believes that relations with our
employees are good. Less than 1% of our employees are unionized.

      ADVERTISING. With respect to our licensed department store business, we
promote our products primarily through four-color direct mail catalogs using
targeted mailing lists developed by our host stores, and newspaper advertising.
We maintain an in-house advertising staff responsible for preparing a majority
of our advertisements and for coordinating the finished advertisements with our
host stores. We also


                                       12



participate in the majority of our host stores' promotional activities including
direct mail postcards and coupons. Our gross advertising expenditures over the
past five fiscal years have been approximately 5% of sales. The majority of our
license agreements with host store groups require us to expend certain specified
minimum percentages of the respective department's annual sales on advertising
and promotional activities. With respect to our Carlyle stores, their products
are promoted through direct mail, outdoor and regional print advertising and
sponsorships.

      INVENTORY LOSS PREVENTION AND INSURANCE. We undertake substantial efforts
to safeguard our merchandise from loss or theft, including the installation of
safes and lockboxes at each location and the taking of a daily diamond inventory
count. Additionally, with respect to Carlyle, each store has a sophisticated
security system in place. During 2005, inventory shrinkage amounted to
approximately 0.4% of sales. We maintain insurance covering the risk of loss of
merchandise in transit or on our premises (whether owned or on consignment) in
amounts that management believes are reasonable and adequate for the types and
amounts of merchandise we carry.

      GOLD HEDGING. The cost to us of gold merchandise sold on consignment in
some cases is not fixed until the sale is reported to the vendor or the gold
consignor in the case of merchandise sold pursuant to the Gold Consignment
Agreement. In such cases, the cost of merchandise varies with the price of gold
and we are exposed to the risk of fluctuations in the price of gold between the
time we establish the advertised or other retail price of a particular item of
merchandise and the date on which the sale of the item is reported to the vendor
or the gold consignor. In order to hedge against this risk and to enable us to
determine the cost of such goods prior to their sale, we may elect to fix the
price of gold prior to the sale of such merchandise. Accordingly, we, at times,
enter into forward contracts, based upon the anticipated sales of gold product
in order to hedge against the risk arising from our payment arrangements. The
value of gold hedged under such contracts represented approximately 7% of our
cost of goods sold in 2005. Under such contracts, we obtain the right to
purchase a fixed number of fine troy ounces of gold at a specified price per
ounce for a specified period. Such contracts typically have durations ranging
from one to nine months and are generally priced at the spot gold price plus an
amount based on prevailing interest rates plus customary transaction costs. When
sales of such merchandise are reported to the consignment vendors and the cost
of such merchandise becomes fixed, we sell our related hedge position. At
January 28, 2006, we had two open positions in gold forward contracts totaling
10,000 fine troy ounces, to purchase gold for $5.1 million, which expire during
2006. The fair market value of gold under such contracts was approximately $5.7
million at January 28, 2006.

      We manage the purchase of forward contracts by estimating and monitoring
the quantity of gold that we anticipate will be required in connection with our
anticipated level of sales of the type described above. Our gold hedging
transactions are entered into in the ordinary course of business. Our gold
hedging strategies are determined and monitored on a regular basis by our senior
management and our Board of Directors.

COMPETITION

      We face competition for retail jewelry sales from national and regional
jewelry chains, other department stores, 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.

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


                                       13



also fluctuate significantly as a result of a variety of other factors,
including the timing of new store openings and store closings.

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 "Forward Looking Statements" in Item 7 for additional
risk factors.

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

      In August 2005, Federated announced that it had completed a merger with
May. In September 2005, Federated announced its integration plans and,
accordingly, effective as of the beginning of 2006, we now operate a total of
401 departments in six of Federated's nine divisions, which excludes 194
departments in stores that are scheduled to be closed throughout the Spring 2006
season. Additionally, in January 2006, Federated announced its intention to
divest its Lord & Taylor division. Further, in March 2006, Federated announced
its intention to divest an additional five underperforming Lord & Taylor stores
and convert one store to Macy's. A decision by Federated, or certain of our
other host store groups, to terminate existing relationships, transfer the
operation of some or all of their departments to a competitor, assume the
operation of those departments themselves, or close a significant number of
stores, could have a material adverse effect on our business and financial
condition. During 2005, approximately 72% of our sales were generated by
departments operated in store groups owned by Federated and those stores
previously owned by May.

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

      Our business is highly seasonal, with a significant portion of our sales
and income from operations generated during the fourth quarter of each year,
which includes the year-end holiday season. The fourth quarter of 2005 accounted
for 43% of our 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 our revolving credit facility.
This pattern is expected to continue. A substantial decrease in sales during the
fourth quarter, whether resulting from adverse weather conditions, natural
disasters or any other cause, would have a material adverse effect on our
profitability.

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

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

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

      We may from time to time examine opportunities to acquire or invest in
companies or businesses that complement our existing core business, such as our
acquisition of Carlyle. There can be no assurance that the Carlyle acquisition
or any other future acquisitions by us will be successful or improve our
operating results. In addition, our ability to complete acquisitions will depend
on the availability of both suitable


                                       14



target businesses and acceptable financing. Any acquisitions may result in a
potentially dilutive issuance of additional equity securities, the incurrence of
additional debt or increased working capital requirements. Such acquisitions
could involve numerous additional risks, including difficulties in the
assimilation of the operations, products, services and personnel of any acquired
company, diversion of our management's attention from other business concerns,
and expansion into new businesses with which we may have no prior experience.

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

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

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

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

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

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

      THE RETAIL JEWELRY BUSINESS IS HIGHLY COMPETITIVE.

      We face competition for retail jewelry sales from national and regional
jewelry chains, other department stores, local independently owned jewelry
stores, 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.


                                       15



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

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

      WE ARE DEPENDENT ON SEVERAL KEY VENDORS AND OTHER SUPPLIERS.

      In 2005, approximately 31% of sales related to the Finlay departments were
generated by merchandise obtained from their five largest vendors, and
approximately 10% of sales related to the Finlay departments were generated by
merchandise obtained from its largest vendor. Additionally, merchandise obtained
from Carlyle's two largest vendors generated approximately 52% of its sales.
There can be no assurance that we can identify, on a timely basis, alternate
sources of merchandise supply in the case of an abrupt loss of any of our
significant suppliers. Additionally, we receive allowances from our vendors
through a variety of programs and arrangements, including cooperative
advertising. A significant reduction in the collection of such allowances may
negatively impact our future gross margins and/or increase future selling,
general and administrative expenses ("SG&A"), and may reduce future net income.

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

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

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

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

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

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

      WE ARE HEAVILY DEPENDENT ON OUR MANAGEMENT INFORMATION SYSTEMS AND OUR
ABILITY TO MAINTAIN AND UPGRADE THESE SYSTEMS FROM TIME TO TIME.

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

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


                                       16



      WE DEPEND ON KEY PERSONNEL.

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

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

      We currently have a significant amount of debt. As of January 28, 2006, we
had $200.0 million of debt outstanding under our Senior Notes. Additionally, at
January 28, 2006, we had $10.9 million in letters of credit under our $225.0
million revolving credit facility (the "Revolving Credit Facility") and
borrowings under the Revolving Credit Agreement were reduced to zero by the end
of January 2006. During 2005, our average revolver balance was $79.4 million and
we peaked in usage at $158.2 million, at which point the available borrowings
were an additional $55.9 million. In addition, as of January 28, 2006, the value
of gold outstanding under the Gold Consignment Agreement totaled approximately
$50.0 million. Subject to the terms of the covenants relating to our
indebtedness, we may incur additional indebtedness, including secured debt, in
the future.

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

      Our Revolving Credit Agreement, Gold Consignment Agreement and the
indenture relating to the Senior Notes contain restrictive covenants that will
limit our ability to engage in activities that may be in our long-term best
interests. These covenants include limitations on, or relating to, capital
expenditures, liens, indebtedness, investments, mergers, acquisitions,
affiliated transactions, management compensation and the payment of dividends
and other restricted payments. Although we are in compliance with our financial
covenants as of January 28, 2006, as a result of the Federated/May merger and
the impact of the merger on our future results of operations, we have amended
our financial covenants for 2006 with respect to the Revolving Credit Agreement
and the Gold Consignment Agreement.

      THE FUTURE IMPACT OF LEGAL AND REGULATORY ISSUES IS UNKNOWN.

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

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

      All of the Carlyle stores are leased. As of January 28, 2006, Carlyle had
a total of 32 leased stores. Carlyle's store leases are generally for a term of
ten years, with rent being a fixed minimum base plus, for certain of the stores,
a percentage of store sales in excess of a specified threshold. Carlyle has
generally been successful in negotiating leases for new stores and lease
renewals. However, Carlyle's business, financial condition, and operating
results could be adversely affected if Carlyle is unable to continue to
negotiate favorable new and renewal lease terms.

      WE COULD HAVE FAILURES IN OUR SYSTEM OF INTERNAL CONTROLS.

      We maintain a documented system of internal controls which is reviewed and
monitored by management, who meet regularly with the Audit Committee of the
Board of Directors of the Holding Company. We believe we have a well-designed
system to maintain adequate internal controls, however, there can be no
assurances that control deficiencies will not arise in the future. Although we
have devoted


                                       17



significant resources to document, test, monitor and improve our internal
controls, 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 controls
could have a material adverse effect on our operating results or cause us to
fail to meet reporting obligations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

      Not Applicable.

ITEM 2. PROPERTIES

      The only real estate owned by us are Finlay's central distribution
facility, totaling 106,200 square feet located in Orange, Connecticut and
Carlyle's executive and administrative office, totaling approximately 19,700
square feet located in Greensboro, North Carolina. In addition, we lease
approximately 18,400 square feet at 521 Fifth Avenue, New York, New York, and
49,100 square feet at 529 Fifth Avenue, New York, New York for our executive,
accounting, advertising, merchandising, information services and other
administrative functions. The leases for such space expire September 30, 2008.
Generally, as part of our license agreements, host stores provide office space
to our host store group management personnel free of charge.

      At January 28, 2006, Carlyle had a total of 32 leased stores, which leases
expire on various dates through 2016. Carlyle's store leases are generally for a
term of ten years, with rent being a fixed minimum base plus, for certain of the
stores, a percentage of store sales in excess of a specified threshold.

ITEM 3. LEGAL PROCEEDINGS

      From time to time, we are involved in litigation relating to claims
arising out of our operations in the normal course of business. As of April 7,
2006, 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 2005.


                                       18



                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        ISSUER PURCHASES OF EQUITY SECURITIES

      During 2005, there were no cash dividends distributed to the Holding
Company by us. During 2004, we distributed cash dividends of $39.7 million to
the Holding Company. Additionally, during 2004, we repaid an intercompany tax
liability due to the Holding Company totaling $43.4 million. The distributions
during 2004 were generally utilized to repurchase the Old Senior Debentures, to
pay interest on the Old Senior Debentures and to purchase the Holding Company's
common stock, par value $.01 per share ("Common Stock"), under its stock
repurchase program, which expired in September 2005. Certain restrictive
covenants in the indenture relating to the Senior Notes, the Revolving Credit
Agreement and the Gold Consignment Agreement impose limitations on the payment
of dividends to the Holding Company. Additionally, the Senior Notes, the
Revolving Credit Agreement and the Gold Consignment Agreement currently restrict
the amount of annual distributions to the Holding Company.

      Information regarding the Holding Company's equity compensation plans is
set forth in Item 12 of Part III of this Form 10-K, which information is
incorporated herein by reference.

      There was one record holder of our common stock at April 7, 2006.

ISSUER PURCHASES OF EQUITY SECURITIES

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


                                       19



ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

      The selected consolidated financial information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto. The statement of operations data and balance sheet data as of and for
each of the years ended January 28, 2006, January 29, 2005, January 31, 2004,
February 1, 2003 and February 2, 2002 have been derived from our audited
Consolidated Financial Statements. The results of operations for 2005 include
Carlyle's results of operations since the date of acquisition.



                                                                                 FISCAL YEAR ENDED (1)
                                                   ---------------------------------------------------------------------------------
                                                     JAN. 28,         JAN. 29,         JAN. 31,         FEB. 1,           FEB. 2,
                                                       2006             2005           2004 (2)         2003 (2)         2002 (2)
                                                   ---------------------------------------------------------------------------------
                                                                     (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Sales ..........................................   $    990,134     $    923,606     $    902,416     $    877,296     $  900,628
Cost of sales ..................................        499,099          454,391          440,517          424,846        453,246
                                                   ------------     ------------     ------------     ------------     ----------
Gross margin (3) ...............................        491,035          469,215          461,899          452,450        447,382
Selling, general and administrative expenses ...        420,613          396,185          387,501          378,095        374,085
Credit associated with the closure of Sonab (4).             --             (364)              --           (1,432)            --
Depreciation and amortization ..................         19,125           17,319           17,026           16,827         19,348
Impairment of goodwill (5) .....................         77,288               --               --               --             --
                                                   ------------     ------------     ------------     ------------     ----------
Income (loss) from operations ..................        (25,991)          56,075           57,372           58,960         53,949
Interest expense, net ..........................         24,356           20,179           16,556           17,678         19,635
Other expense (6) ..............................             79            5,962               --               --             --
                                                   ------------     ------------     ------------     ------------     ----------
Income (loss) from continuing operations before
    income taxes and cumulative effect of
    accounting change ..........................        (50,426)          29,934           40,816           41,282         34,314
Provision for income taxes (7) .................          5,339           10,447           16,035           16,064         14,369
                                                   ------------     ------------     ------------     ------------     ----------
Income (loss) from continuing operations before
    cumulative effect of accounting change .....        (55,765)          19,487           24,781           25,218         19,945
Discontinued operations, net of tax (2) ........             --               --          (11,537)           3,810          3,382
Cumulative effect of accounting change,
    net of tax (8) .............................             --               --               --          (17,209)            --
                                                   ------------     ------------     ------------     ------------     ----------
Net income (loss) ..............................   $    (55,765)    $     19,487     $     13,244     $     11,819     $   23,327
                                                   ============     ============     ============     ============     ==========

OPERATING AND FINANCIAL DATA:
 Number of locations (end of year) .............          1,009              962              972            1,011          1,006
 Percentage increase (decrease) in sales .......            7.2%             2.3%             2.9%            (2.6)%         (4.7)%
  Percentage increase (decrease) in comparable
    department sales (9) .......................            0.7%             2.7%             2.3%             0.1%          (3.0)%
 Average sales per location (10) ...............   $      1,005     $        955     $        932     $        911     $      916
 EBITDA (11) ...................................         (6,866)          73,394           74,398           75,787         73,297

 MOST DIRECTLY COMPARABLE GAAP MEASURES:
  Net income (loss) ............................   $    (55,765)    $     19,487     $     13,244     $     11,819     $   23,327
  Cash flows provided by (used in) operating
    activities .................................   $     26,248     $    (14,172)    $     48,279     $     52,291     $   43,658

  CAPITAL EXPENDITURES .........................   $     11,869     $     12,667     $     12,934     $     12,489     $   13,850



                                       20



                                                                               FISCAL YEAR ENDED (1)
                                                   ----------------------------------------------------------------------------
                                                     JAN. 28,        JAN. 29,        JAN. 31,         FEB. 1,         FEB. 2,
                                                       2006            2005            2004            2003            2002
                                                   ------------    -------------   ------------    ------------    ------------
                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

CASH FLOWS PROVIDED BY (USED IN):
 Operating activities .........................    $     26,248    $    (14,172)   $     48,279    $     52,291    $     43,658
 Investing activities .........................         (40,659)        (12,667)        (12,934)        (15,750)        (17,432)
 Financing activities .........................         (20,048)           (685)        (14,349)        (17,278)         (8,253)

BALANCE SHEET DATA-END OF PERIOD:
 Working capital ..............................    $    248,639    $    229,886    $    197,297    $    173,960    $    173,334
 Total assets .................................         520,789         558,477         592,324         578,575         583,422
 Short-term debt, including current portion of
    long-term debt ............................              --              --              --              --              --
 Long-term debt ...............................         200,000         200,000         150,000         150,000         150,000
 Total stockholder's equity ...................         112,568         164,857         185,100         187,816         193,596


__________________
(1)   Each of the fiscal years for which information is presented includes 52
      weeks.

(2)   As a result of Federated's decision not to renew our license agreement in
      the Burdines department store division in 2003, and in accordance with
      Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
      for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), the
      results of operations of the Burdines departments have been segregated
      from continuing operations and reflected as a discontinued operation for
      financial statement purposes for 2001, 2002 and 2003. Refer to Note 11 of
      Notes to Consolidated Financial Statements for additional information
      regarding discontinued operations.

(3)   We utilize the last-in, first-out ("LIFO") method of accounting for
      inventories. If we had valued inventories using the first-in, first-out
      inventory valuation method, the gross margin would have increased as
      follows: $2.6 million, $2.1 million, $4.5 million, $2.2 million and $3.6
      million for 2005, 2004, 2003, 2002 and 2001, respectively. During the
      third quarter of 2004, we changed our method of determining price indices
      used in the valuation of LIFO inventories. The impact of this change in
      accounting principle on gross margin for 2005 and 2004 is as follows:

                                                         FISCAL YEAR ENDED
                                                     -------------------------
                                                      JAN. 28,        JAN. 29,
                                                      2006 (A)          2005
                                                     ----------      ---------
                                                      (DOLLARS IN THOUSANDS)
  LIFO charge using producer price indices.....      $    6,500      $   8,000
  LIFO charge using internal index.............           2,100          2,100
                                                     ----------      ---------
  Positive impact on gross margin..............      $    4,400      $   5,900
                                                     ==========      =========

____________________________
      (a)   For comparative purposes, the LIFO charges for 2005 exclude Carlyle.

      Refer to Note 3 of Notes to Consolidated Financial Statements for
      additional information regarding this change in accounting principle.

(4)   Included in Credit associated with the closure of Sonab, our former
      European licensed jewelry department subsidiary, for 2004 and 2002 is a
      $0.4 million and $1.4 million credit, respectively, which represents a
      revision of our estimate of closure expenses to reflect our remaining
      liability associated with the closure of Sonab.

(5)   During the second quarter of 2005, Federated announced its intention to
      divest, beginning in 2006, certain stores in which we operate the fine
      jewelry departments. Based on this business indicator, we used our SFAS
      No. 142, "Goodwill and Other Intangible Assets" model to evaluate the
      carrying value of goodwill as of July 30, 2005. As a result, we determined
      that goodwill was impaired and an impairment of $77.3 million, on a
      pre-tax basis, was recorded during 2005. Refer to Note 17 of Notes to
      Consolidated Financial Statements for additional information regarding the
      impairment of goodwill.

(6)   Other expense for 2005 includes approximately $0.1 million associated with
      a loss on foreign exchange related to a refund of foreign taxes. Other
      expense for 2004 includes pre-tax charges of approximately $6.0 million,
      including $4.4 million for redemption premiums paid on the Old Senior
      Notes, $1.3 million to write-off deferred financing costs related to the
      refinancing of the Old Senior Notes and $0.3 million for other expenses.
      Refer to Note 5 of Notes to Consolidated Financial Statements for
      additional information regarding the debt refinancing.

(7)   Included in Provision for income taxes for 2004 and 2005 is a benefit of
      approximately $1.0 million and $0.4 million, respectively, associated with
      the reversal of tax accruals no longer required, primarily as a result of
      the closing of open tax years. Further, the 2004 and 2005 periods reflect
      a net recovery of foreign taxes of approximately $0.6 million and $0.2
      million, respectively. Additionally, included in Provision for income
      taxes for 2005 is approximately a $4.4 million benefit associated with the
      impairment of goodwill. Refer to Note 10 of Notes to Consolidated
      Financial Statements.

(8)   In accordance with the provisions of the Financial Accounting Standards
      Board's ("FASB") Emerging Issues Task Force ("EITF") Issue No. 02-16,
      "Accounting by a Customer (Including a Reseller) for Cash Consideration
      Received from a Vendor" ("EITF 02-16"), we recorded a cumulative effect of
      accounting change as of February 3, 2002, the date of adoption, that
      decreased net income for 2002 by $17.2 million, net of tax of $11.7
      million. The application of EITF 02-16 changed our accounting treatment
      for the recognition of vendor allowances. In 2005, 2004, 2003 and 2002
      $16.6 million,


                                       21



      $18.2 million, $19.4 million and $18.9 million, respectively, of vendor
      allowances has been reflected as a reduction to cost of sales. In 2001,
      these allowances were recorded as a reduction to gross advertising
      expenses and thus decreased SG&A. Refer to Note 2 of Notes to Consolidated
      Financial Statements for additional information regarding EITF 02-16.

(9)   Comparable department sales are calculated by comparing sales from
      departments open for the same months in the comparable periods.

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

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

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

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

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

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

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

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

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

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



                                                                FISCAL YEAR ENDED
                                   ----------------------------------------------------------------------------
                                    JAN. 28,         JAN. 29,        JAN. 31,        FEB. 1,         FEB. 2,
                                       2006            2005            2004            2003            2002
                                   ------------    ------------    ------------    ------------    ------------
                                                              (DOLLARS IN THOUSANDS)

EBITDA ........................    $     (6,866)   $     73,394    $     74,398    $     75,787    $     73,297
Depreciation and amortization .         (19,125)        (17,319)        (17,026)        (16,827)        (19,348)
Interest expense, net .........         (24,356)        (20,179)        (16,556)        (17,678)        (19,635)
Other expense .................             (79)         (5,962)             --              --              --
Provision for income taxes ....          (5,339)        (10,447)        (16,035)        (16,064)        (14,369)
Discontinued operations .......              --              --         (11,537)          3,810           3,382
Cumulative effect of accounting
 change ........................             --              --              --         (17,209)             --
                                   ------------    ------------    ------------    ------------    ------------
Net income (loss) .............    $    (55,765)   $     19,487    $     13,244    $     11,819    $     23,327
                                   ============    ============    ============    ============    ============



                                       22



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



                                                                           FISCAL YEAR ENDED
                                              ----------------------------------------------------------------------------
                                                JAN. 28,        JAN. 29,        JAN. 31,        FEB. 1,         FEB. 2,
                                                  2006            2005            2004            2003            2002
                                              ------------    ------------    ------------    ------------    ------------
                                                                         (DOLLARS IN THOUSANDS)

EBITDA ....................................   $   (6,866)     $   73,394      $   74,398      $   75,787      $   73,297
Impairment of goodwill ....................       77,288              --              --              --              --
Discontinued operations, excluding
 write-down of goodwill and depreciation
 expense ..................................           --              --           3,911           4,549           4,123
Interest expense, net .....................      (24,356)        (20,179)        (16,556)        (17,678)        (19,635)
Other expense .............................          (79)             --              --              --              --
Provision for income taxes ................       (5,339)        (10,447)        (16,035)        (16,064)        (14,369)
Amortization of deferred financing costs ..        1,185           1,058             828           1,040           1,025
Amortization of restricted stock
  compensation and restricted stock
  units ...................................        1,216           1,358             531             304             306
Credit associated with the closure of
  Sonab ...................................           --            (364)             --          (1,432)             --
Deferred income tax provision .............       (5,457)         12,235           6,759           3,982           1,633
Other .....................................         (106)          1,877              (7)            255           2,606
Changes in assets and liabilities, net
  of effects from purchase of Carlyle:
(Increase) decrease in accounts and other
  receivables .............................      (23,002)          1,714          (7,501)         (7,407)         10,310
(Increase) decrease in merchandise
  inventories .............................        1,989          (5,641)         (9,404)         24,348          22,003
(Increase) decrease in prepaid expenses and
  other ...................................         (262)           (362)            664            (886)            530
Increase (decrease) in accounts payable
  and  accrued liabilities ................       10,050         (60,382)         10,656         (14,471)        (33,982)
Increase (decrease) in due to parent ......          (13)         (8,433)             35             (36)         (4,189)
Net cash provided by (used in) operating
                                              ----------      ----------      ----------      ----------      ----------
  activities ..............................   $   26,248      $  (14,172)     $   48,279      $   52,291      $   43,658
                                              ==========      ==========      ==========      ==========      ==========



                                       23



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is provided as a supplement to the
accompanying consolidated financial statements and notes thereto contained in
Item 8 of this report. This MD&A is organized as follows:

      o     EXECUTIVE OVERVIEW - This section provides a general description of
            our business and a brief discussion of the opportunities, risks and
            uncertainties that we focus on in the operation of our business.

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

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

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

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

      o     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.

EXECUTIVE OVERVIEW

OUR BUSINESS

      We are one of the leading retailers of fine jewelry in the United States
and primarily operate licensed fine jewelry departments in major department
stores where we sell a broad selection of moderately priced jewelry, with an
average sales price of approximately $213 per item. We also operate specialty
jewelry stores which sell luxury priced jewelry, with an average sales price of
approximately $1,000 per item. As of January 28, 2006, we operated a total of
1,009 locations, including 977 Finlay departments in 15 host store groups, in 46
states and the District of Columbia, as well as 32 Carlyle specialty jewelry
stores in nine states, located principally in the southeastern United States.

      Our primary focus is to offer desirable and competitively priced products,
a breadth of merchandise assortments and to provide superior customer service.
Our ability to quickly identify emerging trends and maintain strong
relationships with vendors has enabled us to present better assortments in our
showcases. With respect to our licensed department store business, we believe
that we are an important contributor to each of our host store groups and we
continue to seek opportunities to penetrate the department store segment. By
outsourcing their fine jewelry departments to us, host store groups gain our
expertise in merchandising, selling and marketing jewelry and customer service.
Additionally, by avoiding high working capital investments typically required of
the traditional retail jewelry business, host stores improve their return on
investment and increase their profitability. As a licensee, we benefit from the
host stores' reputation, customer traffic, credit services and established
customer base. We also avoid the substantial capital investment in fixed assets
typical of a stand-alone retail format. In recent years, on average,
approximately 50% of our merchandise has been carried on consignment, which
reduces our


                                       24



inventory exposure to changing fashion trends. These factors have generally led
our new departments to achieve profitability within the first twelve months of
operation.

      In May 2005, we completed the acquisition of Carlyle and its subsidiaries.
Carlyle currently operates 32 specialty jewelry stores located primarily in the
southeastern United States under the Carlyle & Co., J.E. Caldwell & Co. and Park
Promenade trade names. The Carlyle stores are principally located in shopping
malls and lifestyle centers and focus on the designer and high-end jewelry
markets. The Carlyle stores offer a compelling shopping environment for the
high-end luxury consumer and focus on watches, gold, designer jewelry, diamonds
and precious gemstones, complemented by an assortment of giftware. Carlyle
strives to provide its customers with a premier shopping experience by utilizing
knowledgeable, professional and well-trained sales associates, marketing
programs designed to promote customer awareness of its merchandise assortments
and extending credit to its customers through its credit card programs, which
are managed by a third party. Carlyle's results of operations are included in
the accompanying Consolidated Statements of Operations since the date of
acquisition.

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

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

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

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

2005 HIGHLIGHTS

      During 2005, our Finlay departments achieved a 0.7% growth in comparable
department sales, with our strongest performances in our Bloomingdale's store
group, Belk's and Parisian, a division of Saks. Over the past decade, through
the successful execution of our marketing and merchandising strategy, we have
experienced comparable department sales increases (in nine out of ten years) and
we have consistently outperformed our host store groups with respect to these
increases. We attribute our success to an experienced and stable management
team, a well-trained and highly motivated sales force, an expert jewelry
merchandising team, unique vendor relationships and an established customer
base. Also contributing to our success are our merchandising and inventory
control systems and point-of-sale systems for our locations, which provide the
foundation for improved productivity. Total sales were $990.1 million in 2005
compared to $923.6 million in 2004, an increase of 7.2%. Total sales for 2005
included $69.5 million of sales generated by Carlyle. Gross margin increased by
$21.8 million in 2005 compared to 2004, and, as a percentage of sales, gross
margin decreased by 1.2% from 50.8% to 49.6%. Approximately 0.5% of the decrease
was associated with the addition of Carlyle as its margins are typically lower
than the gross margins related to the Finlay departments due to Carlyle's strong
emphasis on the watch category. Although SG&A increased by $24.4 million, as a
percentage of sales, SG&A decreased 0.4% from 42.9% to 42.5%, primarily as a
result of Carlyle's significantly lower rent structure as a percentage of sales
compared to that of Finlay's licensed department business.

      During 2005, we continued to effectively manage our inventories and
implement appropriate expense controls. Our operating cash flow was $26.2
million in 2005, which enabled us to open new locations and remodel and expand
existing locations. We ended 2005 with $27.5 million of cash


                                       25



compared to $62.0 million at the end of 2004. This decrease was attributable to
the acquisition price paid for Carlyle of approximately $30.0 million and
paydown of its revolving credit facility of approximately $17.0 million.
Additionally, borrowings under the Revolving Credit Agreement were reduced to
zero by the end of January 2006. The average outstanding balance under the
Revolving Credit Agreement increased to $79.4 million during 2005 as compared to
$50.6 million in the prior year, primarily as a result of additional borrowings
to finance the acquisition of Carlyle in May 2005 and to fund Carlyle's working
capital requirements. Lastly, maximum outstanding borrowings during 2005 peaked
at $158.2 million, at which point the available borrowings under the Revolving
Credit Agreement were an additional $55.9 million.

      In November 2005, we signed a new agreement with Federated, effective at
the beginning of 2006, for four Macy's divisions including Macy's South, Macy's
Midwest, Macy's North and Macy's Northwest. This new agreement is three years in
length and expires January 31, 2009. Approximately 348 stores are covered by
this agreement. The agreement has no impact on the Bloomingdale's and Lord &
Taylor divisions whose license agreements, which cover a total of 87
departments, currently run through February 3, 2007.

      During 2005, The Bon-Ton announced its intention to purchase the Northern
Department Store Group of Saks (which includes Carson Pirie Scott, Bergner's,
Boston Store, Younkers and Herberger's). The transaction closed in March 2006.
We continue to operate the fine jewelry departments in these host store groups.

OPPORTUNITIES

      We believe that current trends in jewelry retailing provide a significant
opportunity for our growth. Consumers spent approximately $59.0 billion on
jewelry (including both fine jewelry and costume jewelry) in the United States
in calendar year 2005, an increase of approximately $21.0 billion over 1995,
according to the United States Department of Commerce. In the department store
and specialty jewelry store sectors in which we operate, consumers spent an
estimated $11.4 billion on fine jewelry in calendar year 2004. Our management
believes that demographic factors such as the maturing U.S. population and an
increase in the number of working women, have resulted in greater disposable
income, thus contributing to the growth of the fine jewelry retailing industry.
Our management also believes that jewelry consumers today increasingly perceive
fine jewelry as a fashion accessory, resulting in purchases which augment our
gift and special occasion sales.

      The new agreement signed with Federated in November 2005 eliminates all
non-compete provisions from the previous May contracts that required us to
obtain May's permission before opening a new department or store within a
certain radius of a May store. We believe that the elimination of this
non-compete provision provides us with significantly greater opportunity to
expand our business and continue to diversify beyond the traditional department
store sector.

      An important initiative and focus of management is developing
opportunities for our growth. We consider it a high priority to identify new
businesses that offer growth, financial viability and manageability and will
have a positive impact on shareholder value. As discussed above, we completed
the acquisition of Carlyle in May 2005.

      In 2004, we tested moissanite merchandise (moissanite is a lab-created
stone with greater brilliance and luster than a diamond) in certain departments.
This category of merchandise generated sales of approximately $11.5 million in
2005. In 2006, more than 200 of our departments will carry moissanite which we
estimate will generate sales of approximately $15 million during 2006.

      Additional growth opportunities exist with respect to opening departments
within existing host stores that do not currently operate jewelry departments.
Such opportunities exist within Dillard's and Belk's. Over the past three years,
we have added 36 departments in Dillard's and Belk's and we plan to add 41
departments within these host store groups in 2006. Additionally, we plan to
open ten departments with Federated, including three Bloomingdale's stores, two
stores that will be transferred to us from Macy's


                                       26



East and two stores that will be transferred to us from Macy's West. Further, we
plan to open one new Carlyle store in 2006 and project opening an additional
three in 2007. Through expanding in new Bloomingdale's departments and Carlyle
stores, we will have a larger portion of our business dedicated to the high-end
luxury sector.

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

      o     Increase comparable department sales;

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

      o     Open new channels of distribution;

      o     Add new host store relationships;

      o     Add departments within existing host store groups;

      o     Add new Carlyle stores;

      o     Capitalize on developing fashion trends and emerging merchandise
            categories;

      o     Expand our most productive departments;

      o     Continue to improve operating leverage;

      o     Continue to raise customer service standards; and

      o     De-leverage the balance sheet.

      See "Business-Growth Strategy" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".

RISKS AND UNCERTAINTIES

      The risks and challenges facing our business include:

                  o     Dependence on or loss of certain host store
                        relationships; and

                  o     Host store consolidation.

      In August 2005, Federated announced that it had completed a merger with
May. In September 2005, Federated announced its integration plans for the merger
including a divisional realignment and divestiture of certain stores.
Accordingly, effective as of the beginning of 2006, we now operate a total of
401 departments in six of Federated's nine divisions, which excludes 194
departments in stores that are scheduled to be closed throughout the Spring 2006
season. As a result, the Fall 2006 season will be significantly impacted by the
loss of business at these locations. In 2005, we generated sales of
approximately $241.0 million from these 194 departments. During 2005, we
recorded charges of approximately $3.8 million related to the accelerated
depreciation of fixed assets and severance related to these departments. We
intend to record charges totaling approximately $5.3 million related to the
accelerated depreciation of fixed assets, field and central office severance and
other closing related expenses through the dates of the final store closings,
estimated to occur by July 2006. The results of


                                       27



operations of the closing departments will be classified as discontinued
operations in accordance with SFAS No. 144 upon closing.

      During 2005, approximately 72% of our sales were generated by departments
operated in store groups owned by Federated and those stores previously owned by
May. A decision by Federated or certain of our other host store groups, to
terminate our existing relationships, to assume the operation of departments
themselves, or to close a significant number of stores could have a material
adverse effect on our business and financial condition.

RESULTS OF OPERATIONS

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



                                                            FISCAL YEAR ENDED
                                                    -----------------------------------
                                                    JAN. 28,      JAN. 29,     JAN. 31,
                                                      2006          2005         2004
                                                    --------      --------     --------

STATEMENT OF OPERATIONS DATA:
Sales .........................................        100.0%        100.0%       100.0%
Cost of sales .................................         50.4          49.2         48.8
                                                    --------      --------     --------
  Gross margin ................................         49.6          50.8         51.2
Selling, general and administrative expenses ..         42.5          42.9         42.9
Credit associated with the closure of Sonab ...           --            --           --
Depreciation and amortization .................          1.9           1.8          1.9
Impairment of goodwill (1) ....................          7.8            --           --
                                                    --------      --------     --------
Income (loss) from operations .................         (2.6)          6.1          6.4
Interest expense, net .........................          2.5           2.2          1.9
Other expense (2) .............................           --           0.7           --
                                                    --------      --------     --------
Income (loss) from continuing operations before
  income taxes ................................         (5.1)          3.2          4.5
Provision for income taxes ....................          0.5           1.1          1.8
                                                    --------      --------     --------
Income (loss) from continuing operations ......         (5.6)          2.1          2.7
Discontinued operations, net of tax (3) .......           --            --         (1.3)
                                                    --------      --------     --------
Net income (loss) .............................         (5.6)%         2.1%         1.4%
                                                    ========      ========     ========


_______________________
(1)   See Note 5 to "Selected Consolidated Financial Data".

(2)   See Note 6 to "Selected Consolidated Financial Data".

(3)   See Note 2 to "Selected Consolidated Financial Data".

2005 COMPARED WITH 2004

      SALES. Sales increased $66.5 million, or 7.2%, in 2005 compared to 2004.
Comparable department sales for the Finlay departments increased 0.7%. Sales
include $920.6 million in sales from the Finlay departments, which represented a
0.3% decrease as a result of the net effect and timing of new department
openings and closings, compared to the $923.6 million in sales reported in 2004,
and $69.5 million in sales generated by Carlyle. We attribute the increase in
comparable department sales primarily to our merchandising and marketing
strategy, which includes the following initiatives: (i) emphasizing our "Best
Value" merchandising programs, which provide a targeted assortment of items at
competitive prices; (ii) focusing on holiday and event-driven promotions as well
as host store marketing programs; (iii) using host store groups' proprietary
customer lists for targeted marketing; and (iv) positioning our departments as a
"destination location" for fine jewelry.

      Our major merchandise categories include diamonds, gold, gemstones,
watches and designer jewelry. With respect to Finlay's licensed department
business, diamond sales increased $5.9 million, or 2.4%, in 2005 compared to
2004 due primarily to the increase in consumer demand for diamond fashion
assortments, including categories such as solitaire and bridal jewelry, diamond
stud earring assortments


                                       28



and three-stone jewelry. Designer jewelry sales increased $3.7 million, or 6.9%,
in 2005 compared to 2004 due primarily to increased consumer demand for designer
jewelry in our Bloomingdale's stores.

      During 2005, we opened 62 locations, including 28 Finlay departments
within existing host store groups and 34 stores as a result of the Carlyle
acquisition in May 2005. Additionally, during 2005, we closed 15 locations,
including 13 Finlay departments and two Carlyle stores. The openings were
comprised of the following:

                                                    NUMBER OF
                      STORE GROUP                   LOCATIONS
            --------------------------------       -----------
            Carlyle stores..................           34
            Belk's..........................            8
            Dillard's.......................            4
            Federated.......................            8
            Other...........................            8
                                                   -----------
                    Total...................           62
                                                   ===========

The closings were comprised of the following:



                                                NUMBER OF
                  STORE GROUP                   LOCATIONS                               REASON
      -----------------------------------    ------------------------------------------------------------------------

      Carlyle stores..................              2            Carlyle closed these less profitable stores.
      Lord & Taylor...................              5            May closed these less profitable locations.
      Other...........................              8            Department closings within existing store groups.
                                               -----------
              Total...................             15
                                               ===========


      GROSS MARGIN. Gross margin increased by $21.8 million in 2005 compared to
2004. As a percentage of sales, gross margin decreased by 1.2% from 50.8% to
49.6%. Approximately 0.5% of the decrease is associated with the addition of
Carlyle as its margins are typically lower than the gross margin related to the
Finlay departments due to Carlyle's strong emphasis on the watch category. The
gross margin percentage was negatively impacted in the fourth quarter of 2005 as
a result of deep markdowns in the Federated stores that will close in 2006 in an
effort to reduce inventory levels as well as the increased price of gold.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The components of SG&A
include payroll expense, license fees, rent expense, net advertising
expenditures and other field and administrative expenses. SG&A increased $24.4
million, or 6.2%. As a percentage of sales, SG&A decreased by 0.4% from 42.9% to
42.5%. The components of this net decrease in SG&A are as follows:



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

       Net advertising expenditures.....        0.6%        Decrease is primarily due to lower gross advertising
                                                            expenditures and increased vendor support.

       License and lease fees...........        0.6         Decrease is primarily due to Carlyle's significantly
                                                            lower rent structure as a percentage of sales
                                                            compared to Finlay's licensed department business.

       Payroll expense..................       (0.2)        Increase in payroll expense is due to the accrual of
                                                            severance costs totaling $1.2 million for closing stores
                                                            as well as lower than expected same store sales negatively
                                                            impacting the leveraging of payroll expense.

       Other expenses...................       (0.6)        Increase is due to Carlyle's higher field and
                                                            administrative expenses as a percentage of sales as
                                                            well as Finlay's lower than expected same store sales
                                                            negatively impacting the leveraging of these expenses.
                                             ---------
                    Total ..............        0.4%
                                             =========



                                       29



      DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.8 million primarily due to accelerated depreciation costs totaling
approximately $2.6 million associated with store closings as a result of the
Federated/May merger, as well as additional depreciation and amortization as a
result of capital expenditures for the most recent twelve months, offset by the
effect of certain assets becoming fully depreciated.

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

      INTEREST EXPENSE, NET. Interest expense increased by $4.2 million
primarily due to an increase in average borrowings ($279.4 million for the
period in 2005 compared to $231.9 million in 2004) as a result of additional
borrowings to finance the acquisition of Carlyle in May 2005 and to fund
Carlyle's working capital requirements offset by the refinancing of the Old
Senior Debentures and the Old Senior Notes during 2004. The weighted average
interest rate was approximately 7.7% for 2005 compared to 7.4% for 2004.

      OTHER EXPENSE. Other expense for 2005 includes approximately $79,000
associated with a loss on foreign exchange related to a refund of foreign taxes.
Other expense for 2004 includes $4.4 million for redemption premiums paid on the
Old Senior Notes, $1.3 million to write-off deferred financing costs related to
the refinancing of the Old Senior Notes and $0.3 million for other expenses.

      PROVISION FOR INCOME TAXES. The income tax provision for the 2005 and 2004
periods reflects effective tax rates of 36.2% (before reflecting the impairment
of goodwill) and 34.9%, respectively. During 2004 and 2005, respectively, a
benefit of approximately $1.0 million and $0.4 million were recorded associated
with the reversal of tax accruals no longer required, primarily a result of the
closing of open tax years. Further, the 2004 and 2005 periods reflect a net
recovery of foreign taxes of approximately $0.6 million and $0.2 million,
respectively. Additionally, during 2005, a benefit of approximately $4.4 million
was recorded associated with the impairment of goodwill.

      NET INCOME (LOSS). Net loss of $55.8 million for the 2005 period compares
to net income of $19.5 million in the prior period as a result of the factors
discussed above.

2004 COMPARED WITH 2003

      SALES. Sales increased $21.2 million, or 2.3%, in 2004 compared to 2003.
The increase in sales is due primarily to the 2.7% increase in comparable
department sales. Additionally, total sales increased as a result of the net
effect and timing of new department openings and closings. We attribute the
increase in sales primarily to the "Key Item" and "Best Value" merchandising
programs and to the marketing initiatives discussed above.

      Our major merchandise categories include diamonds, gold, gemstones,
watches and designer jewelry. Diamond sales increased $11.4 million, or 4.9%, in
2004 compared to 2003 due primarily to the increase in consumer demand for
diamond fashion assortments, including categories such as solitare and bridal
jewelry, diamond stud earring assortments and three-stone jewelry. Designer
jewelry sales increased $10.6 million, or 24.9%, in 2004 compared to 2003. Sales
in all other categories remained relatively flat in 2004 compared to 2003.


                                       30



     During 2004, we opened 28 departments, within existing store groups, and
closed 38 departments. The openings were comprised of the following:

                                                NUMBER OF
                 STORE GROUP                   DEPARTMENTS
      ----------------------------------     ----------------
             May........................            9
             Dillard's..................           11
             Federated..................            3
             Saks.......................            1
             Other......................            4
                                             ----------------
                      Total.............           28
                                             ================

      The closings were comprised of the following:



                                                NUMBER OF
                 STORE GROUP                   DEPARTMENTS                             REASON
      ----------------------------------     ----------------    --------------------------------------------------

             Lord & Taylor..............            17           May closed these less profitable locations.
             Other......................            21           Department closings within existing store groups.
                                                   ----
                       Total............            38
                                                   ====


      GROSS MARGIN. Gross margin increased by $7.3 million in 2004 compared to
2003, and as percentage of sales, gross margin decreased by 0.4%. The components
of this 0.4% net decrease in gross margin are as follows:



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

      Merchandise cost of sales......       (0.7)%       Increase in merchandise cost of sales is due to our
                                                         continued efforts to increase market penetration and
                                                         market share through our pricing strategy, the mix of
                                                         sales with increased sales in the diamond, designer and
                                                         clearance categories, which have lower margins than
                                                         other categories as well as the increased price of
                                                         gold.

      LIFO ..........................        0.3%        Net decrease in the LIFO provision from $4.5 million in
                                                         the 2003 period to $2.1 million in the 2004 period. As
                                                         discussed below, we changed our method of valuing
                                                         inventory for LIFO purposes.
                                          ----------
                   Total ............       (0.4)%
                                          ==========


      During the third quarter of 2004, we changed our method of determining
price indices used in the valuation of LIFO inventories. Prior to the third
quarter of 2004, we determined our LIFO inventory value by utilizing selected
producer price indices published for jewelry and watches by the Bureau of Labor
Statistics ("BLS"). During the third quarter of 2004, we began applying
internally developed indices that we believe more accurately measure inflation
or deflation in the components of our merchandise and our merchandise mix than
the BLS producer price indices. Additionally, we believe that this accounting
change is an alternative accounting method that is preferable under the
circumstances described above. As a result of this change in accounting method,
we recorded a LIFO charge of approximately $2.1 million for the year ended
January 29, 2005. Using the BLS producer price indices, the LIFO charge for the
year ended January 29, 2005 would have been $8.0 million. Had we not changed our
method of determining price indices, the net income under the former LIFO method
for the year ended January 29, 2005 would have been approximately $15.9 million.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The components of SG&A
include payroll expense, license fees, net advertising expenditures and other
field and administrative expenses. SG&A increased $8.7 million, or 2.2%. As a
percentage of sales, SG&A remained flat at 42.9%.

      CREDIT ASSOCIATED WITH THE CLOSURE OF SONAB. In 2004, we revised our
estimate of closure expenses to reflect our remaining liability associated with
the closure of Sonab and, as a result, recorded a credit of $0.4 million.


                                       31



      DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$0.3 million reflecting additional depreciation and amortization as a result of
capital expenditures for the most recent twelve months, offset by the effect of
certain assets becoming fully depreciated. In addition, accelerated depreciation
costs totaling approximately $0.5 million and $0.4 million associated with the
Lord & Taylor store closings, were recorded in 2004 and 2003, respectively.

      INTEREST EXPENSE, NET. Interest expense increased by $3.6 million
primarily due to an increase in average borrowings ($231.9 million for 2004
compared to $192.7 million for 2003) as a result of the refinancing of the Old
Senior Notes. The weighted average interest rate was approximately 7.4% for 2004
compared to 7.3% for 2003.

      OTHER EXPENSE. Other expense includes $4.4 million for redemption premiums
paid on the Old Senior Notes, $1.3 million to write-off deferred financing costs
related to the refinancing of the Old Senior Notes and $0.3 million for other
expenses.

      PROVISION FOR INCOME TAXES. The income tax provision for 2004 and 2003
reflects effective tax rates of 34.9% and 39.6%, respectively. The income tax
provision for 2004 includes a benefit of approximately $1.0 million associated
with the reversal of certain income tax accruals which were no longer required.
Additionally, the tax provision for 2004 includes a benefit of approximately
$0.6 million associated with tax refunds related to Sonab.

      NET INCOME. Net income of $19.5 million for 2004 represents an increase of
$6.2 million as compared to net income of $13.2 million in 2003 as a result of
the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

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

                                         JANUARY 28,     JANUARY 29,
                                            2006            2005
                                         -----------     -----------
                                            (DOLLARS IN THOUSANDS)
      Cash and cash equivalents......    $    27,498     $    61,957
      Working capital................        248,639         229,886
      Long-term debt.................        200,000         200,000
      Stockholder's equity (a).......        112,568         164,857

_______________________

(a)   The stockholder's equity balance at January 28, 2006 reflects a charge of
      approximately $72.9 million, net of tax, related to the impairment of
      goodwill.

      Our primary capital requirements are for funding working capital for new
locations and growth of existing locations, as well as debt service obligations
and license fees to host store groups, rent payments for the Carlyle stores,
funding potential acquisitions, and, to a lesser extent, capital expenditures
for opening new locations, renovating existing locations and information
technology investments. For 2005 and 2004, capital expenditures totaled $11.9
million and $12.7 million, respectively. Total capital expenditures for 2006 are
estimated to be approximately $12 to $14 million, including Carlyle. Although
capital expenditures are limited by the terms of the Revolving Credit Agreement,
to date, this limitation has not precluded us from satisfying our capital
expenditure requirements.

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

      Cash flows provided by (used in) operating, investing and financing
activities for the fiscal years ended January 28, 2006, January 29, 2005 and
January 31, 2004 were as follows:


                                       32



                                                                      FISCAL YEARS ENDED
                                                        -----------------------------------------------
                                                        JANUARY 28,       JANUARY 29,      JANUARY 31,
                                                           2006              2005             2004
                                                        ------------     -------------    -------------
                                                                    (DOLLARS IN THOUSANDS)

      Operating Activities.........................     $     26,248     $     (14,172)   $      48,279
      Investing Activities.........................          (40,659)          (12,667)         (12,934)
      Financing Activities.........................          (20,048)             (685)         (14,349)
      Net increase (decrease) in cash and cash
                                                        ------------     -------------    -------------
        equivalents................................     $    (34,459)    $     (27,524)   $      20,996
                                                        ============     =============    =============


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

      o     Investment in inventory and for working capital;

      o     Strategic acquisitions;

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

      o     Investments in technology.

OPERATING ACTIVITIES

      The primary source of our liquidity is cash flows from operating
activities. The key component of operating cash flow is merchandise sales.
Operating cash outflows include payments to vendors for inventory, services and
supplies, payments for employee payroll, license fees, rent and payments of
interest and taxes. Net cash flows from operations were $26.2 million in 2005
and were impacted by the extension of a deferred billing program with the former
May groups, where we receive settlement for certain sales over a twelve month
period, resulting in an increase in accounts and other receivables of
approximately $13.0 million over last year. Additionally, accounts payable and
accrued liabilities increased over last year as a result of the acquisition of
Carlyle. Further, current deferred taxes increased by approximately $5.8
million, of which approximately $4.3 million was attributed to the purchase of
Carlyle and the remaining $1.5 million was primarily the result of tax LIFO and
expenses not currently deductible. Long-term deferred tax liabilities decreased
by approximately $10.9 million, of which approximately $3.0 million was
attributed to the acquisition of Carlyle. The remaining difference was primarily
the result of a change in book vs. tax depreciation and the impairment of tax
deductible goodwill.

      Our principal 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. However, we cannot ensure
the collection of sales proceeds from our host stores. Additionally, on average,
approximately 50% of our merchandise has been carried on consignment. Our
working capital balance was $248.6 million at January 28, 2006, an increase of
$18.8 million from January 29, 2005.

      The seasonality of our business causes working capital requirements, and
therefore borrowings under the Revolving Credit Agreement, to reach their
highest level in the months of October, November and December in anticipation of
the year-end holiday season. Accordingly, we experience seasonal cash needs as
inventory levels peak. Additionally, substantially all of our license agreements
provide for accelerated payments during the months of November and December,
which require the host store groups to remit to us 75% of the estimated months'
sales prior to or shortly following the end of that month. These proceeds result
in a significant increase in our cash, which is used to reduce our borrowings
under the Revolving Credit Agreement. Inventory levels increased by $53.2
million, or 19.1%, as compared to January 29, 2005, primarily as a result of the
acquisition of Carlyle, whose inventory levels were $53.9 million as of January
28, 2006.


                                       33



INVESTING ACTIVITIES

      Net cash used in investing activities, consisting of the acquisition of
Carlyle in May 2005, which accounted for $28.8 million of cash invested in 2005
as well as payments for capital expenditures, were $40.7 million, $12.7 million
and $12.9 million in 2005, 2004 and 2003, respectively. Capital expenditures in
2005, 2004 and 2003 related primarily to expenditures for opening new locations
and renovating existing locations.

FINANCING ACTIVITIES

      Payments on debt have been our primary financing activities. Net cash used
in financing activities was $20.0 million in 2005 consisting principally of the
paydown of Carlyle's revolving credit facility in conjunction with the
acquisition. Net cash used in financing activities was $0.7 million in 2004
consisting principally of proceeds from the issuance of the Senior Notes, offset
by the purchase and redemption of the then outstanding Old Senior Notes and
capitalized financing costs of $5.1 million related to the refinancing of the
Old Senior Notes. Net cash used in financing activities was $14.3 million in
2003 consisting of payment of dividends to the Holding Company.

      Our Revolving Credit Agreement, which matures in January 2008, provides us
with a line of credit of up to $225.0 million to finance working capital needs.
Amounts outstanding under the Revolving Credit Agreement bear interest at a rate
equal to, at our option, (i) the prime rate plus a margin ranging from zero to
1.0% or (ii) the adjusted Eurodollar rate plus a margin ranging from 1.0% to
2.0%, in each case depending on our financial performance. The weighted average
interest rate was 5.9% and 4.0% for 2005 and 2004, respectively.

      In each year, we are required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the "Balance Reduction Requirement"). Borrowings under
the Revolving Credit Agreement at January 28, 2006 and January 29, 2005 were
zero. The average amounts outstanding under the Revolving Credit Agreement
during 2005 and 2004 were $79.4 million and $50.6 million, respectively. The
maximum amount outstanding during 2005 was $158.2 million, at which point the
available borrowings were an additional $55.9 million. At January 28, 2006 and
January 29, 2005, we had letters of credit outstanding totaling $10.9 million
and $11.7 million, respectively, which guarantee various trade activities.

      In August 2005, Federated announced that it had completed a merger with
May. In September 2005, Federated announced its integration plans including a
divisional realignment and divestiture of certain stores. Accordingly, effective
as of the beginning of 2006, we now operate a total of 401 departments in six of
Federated's nine divisions, which excludes 194 departments in stores that are
scheduled to be closed throughout the Spring 2006 season. As a result, the Fall
2006 season will be significantly impacted by the loss of business at these
locations. In 2005, we generated sales of approximately $241.0 million from
these 194 departments. In 2005, we recorded charges associated with accelerated
depreciation of fixed assets and severance totaling approximately $3.8 million
related to these departments. We intend to record additional charges totaling
approximately $5.3 million related to the accelerated depreciation of fixed
assets, field and executive and administrative office severance and other
closing related expenses through the dates of the final store closings,
estimated to occur by July 2006.

      In May 2005, we completed the acquisition of Carlyle. The purchase price
was approximately $29.0 million, plus estimated transaction fees of
approximately $1.7 million, and was financed with additional borrowings under
the Revolving Credit Agreement. In connection with the acquisition, Carlyle's
revolving credit facility was terminated and paid in full at the closing. Since
the date of the purchase, Carlyle's cash requirements have been, and we expect
will continue to be, funded under our Revolving Credit Agreement. In connection
with the acquisition, we replaced the existing Revolving Credit Agreement and
entered into an amended and restated credit agreement with G.E. Capital and
certain other lenders and we entered into the Gold Consignment Amendment to,
among other things, permit the


                                       34



acquisition transaction. In addition, Carlyle and its subsidiaries, together
with us, entered into the Supplemental Indentures to guarantee our obligations
under the Senior Notes.

      During 2004, we and the Holding Company each commenced an offer to
purchase for cash our Old Senior Notes and the Holding Company's Old Senior
Debentures, respectively. Holders of approximately 98% and 79% of the
outstanding Old Senior Notes and the outstanding Old Senior Debentures,
respectively, tendered their securities and consented to amendments to the
related indentures. Additionally, during 2004, we completed the sale of the
Senior Notes and called for the redemption of all of the untendered Old Senior
Notes and Old Senior Debentures, respectively, and these securities were
repurchased in July 2004 . 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, including $5.0 million
associated with the sale of the Senior Notes, which were deferred and are being
amortized over the term of the Senior Notes. In June 2004, we recorded pre-tax
charges of approximately $6.0 million, including $4.4 million for redemption
premiums paid on the Old Senior Notes, $1.3 million to write-off deferred
financing costs related to the refinancing of the Old Senior Notes and $0.3
million for other expenses. These costs are included in Other expense in the
accompanying Consolidated Statements of Operations for the year ended January
29, 2005.

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

      A significant amount of our operating cash flow will be used to pay
interest with respect to the Senior Notes and amounts due under the Revolving
Credit Agreement, including the payments required pursuant to the Balance
Reduction Requirement. As of January 28, 2006, our outstanding borrowings were
$200.0 million under the Senior Notes.

      Our agreements covering the Revolving Credit Agreement and the Senior
Notes each require that we comply with certain restrictive and financial
covenants. In addition, we are a party to the Gold Consignment Agreement, which
also contains certain covenants. Although we are in compliance with our
financial covenants as of January 28, 2006, as a result of the Federated/May
merger and the impact of the merger on our future results of operations, we have
amended our financial covenants for 2006 with respect to the Revolving Credit
Agreement and the Gold Consignment Agreement. Because compliance is based, in
part, on our management's estimates and actual results can differ from those
estimates, there can be no assurance that we will be in compliance with the
covenants in the future or that the lenders will waive or amend any of the
covenants should we be in violation thereof. We believe the assumptions used are
appropriate.

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

      The indenture related to the Senior Notes contains restrictions relating
to, among other things, the payment of dividends, redemptions or repurchases of
capital stock, the incurrence of additional indebtedness, the making of certain
investments, the creation of certain liens, the sale of certain assets, entering
into transactions with affiliates, engaging in mergers and consolidations and
the transfer of all or substantially all assets.


                                       35



      We believe that, based upon current operations, anticipated growth and
continued availability under the Revolving Credit Agreement, we will, for the
foreseeable future, be able to meet our debt service and anticipated working
capital obligations and to make distributions to the Holding Company sufficient
to permit the Holding Company to pay certain expenses as they come due. No
assurances, however, can be given that our current level of operating results
will continue or improve or that our income from operations will continue to be
sufficient to permit us to meet our debt service and other obligations.
Currently, our principal financing arrangements restrict the amount of annual
distributions to the Holding Company. The amounts required to satisfy the
aggregate of our interest expense totaled $23.3 million and $19.6 million in
2005 and 2004, respectively.

      Our long-term needs for external financing will depend on our rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with our vendors. At January 28, 2006 and January 29,
2005 $328.4 million and $349.7 million, respectively, of consignment merchandise
from approximately 300 vendors was on hand. For 2005, we had an average balance
of consignment merchandise of $352.5 million as compared to an average balance
of $365.2 million in 2004.

      The following table summarizes our contractual and commercial obligations
which may have an impact on future liquidity and the availability of capital
resources, as of January 28, 2006 (dollars in thousands):



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

Long-Term Debt Obligations:
  Senior Notes (due 2012) (1) ............   $  200,000   $       --   $        --   $         --   $  200,000
Interest payments on Senior Notes ........      108,875       16,750        33,500         33,500       25,125
Operating lease obligations (2) ..........       28,778        5,753        10,036          6,259        6,730
Revolving Credit Agreement (due 2008) (3).           --           --            --             --           --
Gold Consignment Agreement (expires 2007).       50,000           --        50,000             --           --
Gold forward contracts ...................        5,123        5,123            --             --           --
Employment agreements ....................        7,293        2,804         4,489             --           --
Contractual bonuses (4) ..................          691           --           691             --           --
Letters of credit ........................       10,894       10,644            --            250           --
                                             ----------   ----------   -----------   ------------   ----------
  Total ..................................   $  411,654   $   41,074   $    98,716   $     40,009   $  231,855
                                             ==========   ==========   ===========   ============   ==========


____________________
(1)   In June 2004, we issued $200.0 million of Senior Notes due 2012. Refer to
      Note 5 of Notes to the Consolidated Financial Statements.

(2)   Represents future minimum payments under noncancellable operating leases
      as of January 28, 2006.

(3)   There were no borrowings under the Revolving Credit Agreement at January
      28, 2006. The average amount outstanding during 2005 was $79.4 million and
      the outstanding balance as of April 7, 2006 was $60.2 million.

(4)   Represents a special bonus for three senior executives equal to 50% of the
      executives' salary if employed by Finlay on June 30, 2008.

      The operating leases included in the above table do not include contingent
rent based upon sales volume, which amounted to approximately $155.8 million for
2005, or variable costs such as maintenance, insurance and taxes. Our open
purchase orders are cancelable without penalty and are therefore not included in
the above table. There were no commercial commitments outstanding as of January
28, 2006, other than as disclosed in the table above, nor have we provided any
third-party financial guarantees as of and for the year ended January 28, 2006.

OFF-BALANCE SHEET ARRANGEMENTS

      Our Gold Consignment Agreement enables us to receive consignment
merchandise by providing gold, or otherwise making payment, to certain vendors.
While the merchandise involved remains consigned, title to the gold content of
the merchandise transfers from the vendors to the gold consignor. In July 2005,
we further amended the Gold Consignment Agreement to, among other things, extend
the maturity date to October 31, 2007 (October 31, 2008 should our Revolving
Credit Agreement be extended on terms acceptable to the gold consignor) and to
establish new financial covenants (including minimum


                                       36



earnings and fixed charge ratio requirements and certain maximum debt
limitations). The Gold Consignment Agreement permits us to consign up to the
lesser of (i) 165,000 fine troy ounces or (ii) $50.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At January
28, 2006, amounts outstanding under the Gold Consignment Agreement totaled
89,103 fine troy ounces, valued at approximately $50.0 million. The average
amount outstanding under the Gold Consignment Agreement was $49.6 million in
2005. In the event this agreement is terminated, we would be required to return
the gold or purchase the outstanding gold at the prevailing gold rate in effect
on that date. For financial statement purposes, the consigned gold is not
included in merchandise inventories on the Consolidated Balance Sheets and,
therefore, no related liability has been recorded.

      The Gold Consignment Agreement requires us to comply with certain
covenants, including restrictions on the incurrence of certain indebtedness, the
creation of liens, engaging in transactions with affiliates and limitations on
the payment of dividends. In addition, the Gold Consignment Agreement also
contains various financial covenants, including minimum earnings and fixed
charge coverage ratio requirements and certain maximum debt limitations.
Although we are in compliance with our financial covenants as of January 28,
2006, as a result of the Federated/May merger and the impact of the merger on
our future results of operations, we have amended our financial covenants for
2006 with respect to the Revolving Credit Agreement and the Gold Consignment
Agreement.

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

OTHER ACTIVITIES AFFECTING LIQUIDITY

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

      In June 2005, we entered into employment agreements with three senior
executives of Finlay Jewelry and in March 2006, we entered into an employment
agreement with a fourth senior executive of Finlay Jewelry. Each of the
agreements has a term of three years, unless earlier terminated in accordance
with the provisions of the employment agreements. The agreements provide for
annual salary levels totaling approximately $1.6 million, incentive compensation
based on meeting specific financial goals and a special bonus equal to 50% of
each executives' salary if, in the case of the June 2005 agreements, he or she
is employed by Finlay Jewelry on June 30, 2008, and in the case of the March
2006 agreement, if the executive is employed by Finlay Jewelry on February 28,
2009.

      In March 2006, we also entered into an agreement with another senior
executive of Finlay Jewelry who was relocated as a result of the Federated/May
merger.

      From time to time, we enter into forward contracts based upon the
anticipated sales of gold product in order to hedge against the risk arising
from our payment arrangements. At January 28, 2006, we had two open positions in
gold forward contracts totaling 10,000 fine troy ounces, to purchase gold for
$5.1 million. There can be no assurance that these hedging techniques will be
successful or that hedging transactions will not adversely affect our results of
operations or financial position. A significant change in prices of key
commodities, including gold, could adversely affect Finlay's business by
reducing operating margins and impacting consumer demand if retail prices are
increased significantly.

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 2005 and 2004
accounted for an average of approximately 42% of our sales and approximately


                                       37



97% of our income from operations, exclusive of the goodwill impairment charge
of $77.3 million for 2005. 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 13 of Notes to Consolidated Financial Statements.

      The following table summarizes the quarterly financial data for 2005 and
2004:



                                                           FISCAL QUARTER
                                  ---------------------------------------------------------------
                                     FIRST           SECOND (A)       THIRD (A)       FOURTH (A)
                                  ------------    ----------------   ------------    ------------
                                                       (DOLLARS IN THOUSANDS)
                                                            (UNAUDITED)

2005:
  Sales .......................   $    185,729    $    199,735       $    183,261    $    421,409
  Gross margin ................         93,430         100,179             90,493         206,933
  Income (loss) from operations            401         (74,623)(b)         (4,778)         53,009
  Net income (loss) ...........         (2,824)        (74,811)(b)         (6,874)         28,744
2004:
  Sales .......................   $    187,572    $    188,638       $    166,841    $    380,555
  Gross margin ................         95,729          96,164             84,612         192,710
  Income (loss) from operations          3,159           4,504             (2,315)         50,727
  Net income (loss) ...........           (530)         (3,330)(c)         (4,828)         28,175


_________________________
(a)   The thirteen week period ended July 30, 2005 includes the results of
      operations of Carlyle since the date of acquisition.

(b)   The loss from operations includes a charge of $77.3 million, on a pre-tax
      basis, related to the impairment of goodwill in the second quarter of
      2005. The net loss includes a charge of $72.9 million, net of tax, related
      to the impairment of goodwill. Refer to Note 17 of Notes to Consolidated
      Financial Statements.

(c)   The net loss includes debt extinguishment costs of $6.0 million, on a
      pre-tax basis, related to the refinancing of the Old Senior Notes in the
      second quarter of 2004. Refer to Note 5 of Notes to Consolidated Financial
      Statements.

RESTATEMENT OF THE INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

      Subsequent to the issuance of the our interim consolidated financial
statements for the twenty-six and thirty-nine week periods ended July 30, 2005
and October 29, 2005, respectively, we determined that the payment of certain
debt assumed in the Carlyle acquisition was recorded as an operating activity
rather than a financing activity in the consolidated statements of cash flows.
As a result, the consolidated statements of cash flows for the thirteen weeks
and twenty six weeks ended July 30, 2005 and thirty-nine weeks ended October 29,
2005 will be restated to reflect the repayment of the debt in accordance with
SFAS No. 95, "Statement of Cash Flows" as cash used in financing activities
rather than operating activities. We anticipate correcting this in our Form 10-Q
filings for the second and third quarters of 2006. A summary of the effects of
the restatement on cash flows provided by (used in) operating and financing
activities in these statements of cash flows are as follows (in thousands):



                                                  AS PREVIOUSLY
                                                    REPORTED       ADJUSTMENT     AS RESTATED

Thirteen weeks ended July 30, 2005:
Net cash used in operating activities .........   $    (45,052)   $     17,137    $    (27,915)
Net cash provided by financing activities .....         77,159         (17,137)         60,022

Twenty-six weeks ended July 30, 2005:
Net cash used in operating activities .........       (131,166)         17,137        (114,029)
Net cash provided by financing activities .....        104,567         (17,137)         87,430

Thirty-nine weeks ended October 29, 2005:
Net cash used in operating activities .........       (162,257)         17,137        (145,120)
Net cash provided by financing activities .....        140,744         (17,137)        123,607



                                       38



INFLATION

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

      MERCHANDISE INVENTORIES

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

      During the third quarter of 2004, we changed our method of determining
price indices used in the valuation of LIFO inventories. Prior to the third
quarter of 2004, we determined our LIFO inventory value by utilizing selected
producer price indices published for jewelry and watches by the BLS. During the
third quarter of 2004, we began applying internally developed indices that we
believe more accurately measure inflation or deflation in the components of our
merchandise and our specific merchandise mix than the BLS producer price
indices. Additionally, we believe that this change in accounting principle is an
alternative accounting method that is preferable since the internal indices are
representative of our actual merchandise mix of inventory, as opposed to the
producer price indices, which are broader, more general inflation indices.
Adjustments to earnings resulting from changes in historical loss trends have
been insignificant for 2005 and 2004. Further, we do not anticipate any
significant change in LIFO that would cause a significant change in our
earnings.

      We estimate inventory shrinkage for the period from the last inventory
date to the end of the reporting period on a store-by-store basis. Our inventory
shortage estimate can be affected by changes in merchandise mix and changes in
actual shortage trends. The shrinkage rate from the most recent physical
inventory, in combination with historical experience, is the basis for
estimating shrinkage. As of January 28, 2006, our shrink reserve totaled $1.2
million, compared to $2.1 million as of January 29, 2005. Additionally, during
both 2005 and 2004, inventory shrinkage amounted to approximately 0.4% 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


                                       39



merchandise or SG&A when the purpose for which the vendor funds were intended to
be used has been fulfilled. Accordingly, a reduction in vendor allowances
received would increase our cost of sales and/or SG&A.

      Vendor allowances have been accounted for in accordance with EITF 02-16.
Vendor allowances provided as a reimbursement of specific, incremental and
identifiable costs incurred to promote a vendor's products are recorded as an
SG&A reduction when the cost is incurred. All other vendor allowances are
initially deferred with the deferred amounts recognized as a reduction in cost
of sales when the related product is sold. In 2005, 2004 and 2003, $16.6
million, $18.2 million and $19.4 million, respectively, of vendor allowances has
been reflected as a reduction to cost of sales.

      As of January 28, 2006 and January 29, 2005, deferred vendor allowances
totaled (i) $11.1 million and $14.8 million, respectively, for owned
merchandise, which allowances are included as an offset to merchandise
inventories on the Consolidated Balance Sheets, and (ii) $7.5 million and $8.4
million, respectively, for merchandise received on consignment, which allowances
are included as deferred income on the Consolidated Balance Sheets.

      LONG-LIVED ASSETS

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

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

          o     Significant negative industry or economic trends; or

          o     Store closings.

      When we determine that the carrying value of long-lived assets may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, we recognize an impairment loss at the time the undiscounted
estimated future net cash flows expected to be generated by an asset (or group
of assets) is less than its carrying value. We measure impairment losses as the
amount by which the asset's carrying value exceeds its fair value. To the extent
future cash flows are less than anticipated, additional impairment charges may
result. There have been no adjustments to earnings resulting from the impairment
of long-lived assets for 2005. We also review the estimated useful lives of the
assets and reduce such lives if necessary. During 2005, we recorded charges of
approximately $2.6 million related to the accelerated depreciation of fixed
assets as a result of the store closings resulting from the Federated/May
merger.

      REVENUE RECOGNITION

      We recognize revenue upon the sale of merchandise, either owned or
consigned, to our customers, net of anticipated returns. The provision for sales
returns is based on historical evidence of our return rate. As of January 28,
2006 and January 29, 2005, our allowance for sales returns totaled $1.5 million.
Adjustments to earnings resulting from revisions to estimates on our sales
return provision has been insignificant for 2005 and 2004.

      SELF-INSURANCE RESERVES

      Other than with respect to our Carlyle operations, we are self-insured for
medical and workers' compensation claims up to certain maximum liability
amounts. Although the amounts accrued are determined based on an analysis of
historical trends of losses, settlements, litigation costs and other factors,
the amounts that we will ultimately disburse could differ materially from the
accrued amounts. Self-insurance reserves aggregated $7.1 million and $5.6
million at January 28, 2006 and January 29, 2005, respectively.


                                       40



      INCOME TAXES

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

      ACCOUNTING FOR ACQUISITIONS

      In May 2005, we completed the acquisition of Carlyle. Carlyle currently
operates 32 specialty jewelry stores, located primarily in the southeastern
United States. The acquisition of Carlyle has been accounted for under the
purchase method of accounting in accordance with SFAS No. 141, "Business
Combinations". As such, we have undertaken an analysis of the fair value of
identified tangible and intangible assets and liabilities, and determined the
excess of fair value of net assets acquired over cost. We utilized estimates to
determine the fair value of inventory and certain acquisition costs.

RECENT ACCOUNTING PRONOUNCEMENT

      In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation". This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123(R) requires that the fair value of such equity
instruments be recognized as expense in the historical financial statements as
services are performed. We will adopt SFAS No. 123(R) for the first quarter of
2006 and we expect to recognize approximately $0.1 million of compensation
expense in 2006.

      On January 23, 2006, the Holding Company's Compensation Committee of the
Board of Directors approved accelerating the vesting of all out-of-the-money,
unvested stock options held by employees and independent directors. An option
was considered out-of-the-money if the stated option exercise price was greater
than the closing price of the Holding Company's Common Stock on the day before
the Holding Company's Compensation Committee approved the acceleration. Unvested
options to purchase approximately 35,400 shares became exercisable as a result
of the vesting acceleration. The vesting acceleration did not result in the
recognition of compensation expense for 2005. As a result of the acceleration,
expected compensation expense in 2006 was reduced by approximately $0.2 million,
on a pre-tax basis.

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:


                                       41



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

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

      o     The seasonality of the retail jewelry business;

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

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

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

      o     Our continuation of the Gold Consignment Agreement;

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

      o     The impact of fluctuations in gold and diamond prices;

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

      o     Our ability to collect net sales proceeds from our host stores;

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

      o     Our ability to identify and rapidly respond to fashion trends;

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

      o     Our dependence on key officers;

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

      o     Our compliance with applicable contractual covenants;

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

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

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

      o     The impact of any host store bankruptcy; and

      o     Trends in the general economy in the United States.

      Readers are cautioned not to unduly rely on these forward-looking
statements, which reflect our 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


                                       42



contained herein, readers should carefully review any disclosure of risks and
uncertainties contained in other documents we file or have filed from time to
time with the Commission.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We are exposed to market risk through the interest rate on our borrowings
under the Revolving Credit Agreement, which has a variable interest rate. Based
on the average amounts outstanding under the Revolving Credit Agreement for
2005, a 100 basis point change in interest rates would have resulted in an
increase in interest expense of approximately $0.8 million in 2005. In seeking
to minimize the risks from interest rate fluctuations, we manage exposures
through our regular operating and financing activities. In addition, the
majority of our borrowings are under fixed rate arrangements, as described in
Note 5 of Notes to Consolidated Financial Statements.

      COMMODITY RISK

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

      In 2005, we entered into forward contracts for the purchase of a portion
of our gold in order to hedge the risk of gold price fluctuations. The table
below provides information about our derivative financial instruments that are
sensitive to gold prices as of January 28, 2006:

                CONTRACT        FINE TROY       PREVAILING
               SETTLEMENT       OUNCES OF       GOLD PRICE       CONTRACT FAIR
 COMMODITY        DATE             GOLD          PER OUNCE        MARKET VALUE
----------    -------------    -------------    ------------    ---------------
   Gold          5/31/06          5,000          $  570.74       $ 2,854,000
   Gold          6/30/06          5,000          $  572.99       $ 2,865,000

      Based on the amount of sales of gold product, a $10 change in the price of
gold may have impacted gross margin by approximately $1.0 million for 2005.


                                       43



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                                                             PAGE
                                                                                                             ----

Reports of Independent Registered Public Accounting Firms................................................... F-2

Consolidated Statements of Operations for the years ended January 28, 2006, January 29, 2005
  and January 31, 2004...................................................................................... F-4

Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005..................................... F-5

Consolidated Statements of Changes in Stockholder's Equity and Comprehensive Income (Loss)
  for the years ended January 28, 2006, January 29, 2005 and January 31, 2004............................... F-6

Consolidated Statements of Cash Flows for the years ended January 28, 2006, January 29, 2005
  and January 31, 2004...................................................................................... F-7

Notes to Consolidated Financial Statements for the years ended January 28, 2006, January 29, 2005
  and January 31, 2004...................................................................................... 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 firms regarding accounting or financial disclosure matters.

ITEM 9A. CONTROLS AND PROCEDURES

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

     We excluded from our assessment the internal control over financial
reporting within our Carlyle subsidiary, which was acquired on May 19, 2005, and
whose financial statements reflect total assets and net sales constituting 13.0%
and 7.0%, respectively, of the related consolidated financial statement amounts
as of and for the year ended January 28, 2006.

      A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management's assessment identified the following material weakness
in internal control over financial reporting.

                                       44



      During the year ended January 28, 2006, an error was made in the
classification of the payment of Carlyle debt assumed upon acquisition as a
component of cash flows from operating activities rather than as a component of
cash flows from financing activities on the consolidated statements of cash
flows. This misclassification had no impact on the increase (decrease) in cash
and cash equivalents for the period. This misclassification was corrected and is
reflected properly in the consolidated statements of cash flows for the year
ended January 28, 2006. The correction of this misstatement will result in the
restatement of the consolidated statements of cash flows for the thirteen weeks
and twenty-six weeks ended July 30, 2005 and thirty-nine weeks ended October 29,
2005 to reflect the repayment of the debt in accordance with SFAS No. 95,
"Statement of Cash Flows" as cash used in financing activities rather than
operating activities. We anticipate correcting this in our Form 10-Q filings for
the second and third quarters of 2006. As a result, the Company's controls
related to the review, monitoring and analysis of the consolidated statements of
cash flows to determine that transactions were appropriately classified in
accordance with SFAS No. 95, "Statement of Cash Flows" did not operate
effectively.

      Management concluded that as of January 28, 2006, as a result of the
material weakness described above, we did not maintain effective internal
control over financial reporting. Management and the Audit Committee agree that
this control deficiency constitutes a material weakness.

      Our management's assessment of the effectiveness of our internal control
over financial reporting as of January 28, 2006 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their
report which is included herein.

REMEDIATION PLANS FOR MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL
REPORTING

      As discussed above, management's assessment identified a material weakness
related to the preparation and presentation of the consolidated statements of
cash flows. Management did not identify any other material weaknesses in
connection with their assessment. The results of management's assessment were
communicated to the Audit Committee. We have implemented enhancements to our
internal control over financial reporting to provide reasonable assurance that
errors and control deficiencies in our consolidated statements of cash flows
will not recur. These enhancements include improving our review and oversight
process relating to the internal controls over our consolidated statements of
cash flows. These enhancements began during the preparation of the Form 10-K for
the year ended January 28, 2006 and will continue on an ongoing basis in 2006.

DISCLOSURE CONTROLS AND PROCEDURES

        The Company's management, with the participation of its CEO and CFO,
carried out an evaluation of the effectiveness of disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) pursuant
to Exchange Act Rule 13a-15 as of the end of the period covered by this report.
Based upon that evaluation, the CEO and CFO concluded that the design and
operation of these disclosure controls and procedures were not effective as of
the end of the period covered by this report solely because of the material
weakness related to the review, monitoring and analysis of the consolidated
statements of cash flows described above. Management did not identify any other
material weakness in connection with their assessment. In light of the material
weakness described above, we performed additional analyses and other procedures
to ensure our consolidated financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP"). Accordingly, management
believes that the financial statements included in this report fairly present,
in all material respects, our financial condition, results of operations and
cash flows for the periods presented.


                                       45



CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

     The Company's management, with the participation of the Company's CEO and
CFO, also conducted an evaluation of the Company's 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 28, 2006 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Based on that evaluation,
there was no such change during the quarter ended January 28, 2006.

     We excluded from our assessment any changes in internal control over
financial reporting within our Carlyle subsidiary, which was acquired on May 19,
2005, and whose financial statements reflect total assets and net sales
constituting 13.0% and 7.0%, respectively, of the related consolidated financial
statement amounts as of and for the year ended January 28, 2006.

     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
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. The Company conducts periodic evaluations of its controls to enhance,
where necessary, its 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.





















                                       46



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of
Finlay Fine Jewelry Corporation:

     We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Finlay
Fine Jewelry Corporation and subsidiaries (the "Company") did not maintain
effective internal control over financial reporting as of January 28, 2006,
because of the effect of the material weakness identified in management's
assessment based on criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. As described in the accompanying Management's Report on Internal
Control Over Financial Reporting, management excluded from their assessment the
internal control over financial reporting of its Carlyle subsidiary, which was
acquired on May 19, 2005, and whose financial statements reflect total assets
and net sales constituting 13.0% and 7.0%, respectively, of the related
consolidated financial statement amounts as of and for the year ended January
28, 2006. Accordingly, our audit did not include the internal control over
financial reporting at Carlyle. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

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

     A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

    Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are


                                       47


subject to the risk that the controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.

    A material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weakness has been identified and
included in management's assessment: the Company's controls over the review,
monitoring and analysis of the Company's consolidated statements of cash flows
to determine that transactions were appropriately classified in accordance with
SFAS No. 95, "Statement of Cash Flows" did not operate effectively. As a result,
the Company incorrectly reflected the payment of certain debt assumed in the
Carlyle acquisition as an operating activity rather than a financing activity.
This error resulted in a material reclassification in order to present the 2006
consolidated statements of cash flows in accordance with generally accepted
accounting principles. The material weakness was considered in determining the
nature, timing, and extent of audit tests applied in our audit of the
consolidated financial statements as of and for the year ended January 28, 2006,
of the Company and this report does not affect our report on such consolidated
financial statements.

      In our opinion, management's assessment that the Company did not maintain
effective internal control over financial reporting as of January 28, 2006, is
fairly stated, in all material respects, based on the criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, because of the
effect of a material weakness described above on the achievement of the
objectives of the control criteria, the Company has not maintained effective
internal control over financial reporting as of January 28, 2006, based on the
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.

      We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended January 28, 2006, of the Company and our
report dated April 26, 2006 expressed an unqualified opinion on those
consolidated financial statements based on our audit and the report of other
auditors and included an explanatory paragraph regarding the Company's change in
method of determining price indices used in the valuation of LIFO inventories in
2004.




/s/ DELOITTE & TOUCHE LLP

New York, New York
April 26, 2006


ITEM 9B. OTHER INFORMATION

      The Holding Company and Finlay Jewelry have entered into an amendment
dated as of April 24, 2006 (the "Revolving Credit Agreement Amendment") to
clarify the definition of EBITDA in the Revolving Credit Agreement as set forth
in the Revolving Credit Agreement Amendment.

     The foregoing description of the Revolving Credit Agreement Amendment is
qualified in its entirety by reference to the Revolving Credit Agreement
Amendment, which is filed as Exhibit 10.10 (d) hereto and is incorporated herein
by reference.


                                       48




PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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



                  NAME                     AGE                                POSITION
--------------------------------------     ---      ------------------------------------------------------------

Arthur E. Reiner....................        65       Chairman of the Board, President and Chief Executive
                                                     Officer of the Holding Company, Chairman and Chief
                                                     Executive Officer of Finlay Jewelry and Director

Joseph M. Melvin....................        55       Executive Vice President and Chief Operating Officer of
                                                     the Holding Company and President and Chief Operating
                                                     Officer of Finlay Jewelry

Leslie A. Philip....................        59       Executive Vice President and Chief Merchandising Officer
                                                     of the Holding Company and Finlay Jewelry

Edward J. Stein.....................        61       Senior Vice President and Director of Stores of Finlay
                                                     Jewelry

Joyce Manning Magrini...............        50       Executive Vice President - Administration of Finlay Jewelry

Bruce E. Zurlnick...................        54       Senior Vice President, Treasurer and Chief Financial
                                                     Officer of the Holding Company and Finlay Jewelry

David B. Cornstein..................        67       Director

Rohit M. Desai......................        67       Director

Michael Goldstein...................        64       Director

John D. Kerin.......................        67       Director

Richard E. Kroon....................        62       Director

Ellen R. Levine.....................        62       Director

Norman S. Matthews..................        73       Director

Thomas M. Murnane...................        59       Director


      See information under the caption "Certain Relationships and Related
Transactions-Stockholders' Agreement"

      Under the Holding Company's Restated Certificate of Incorporation, the
Holding Company's Board of Directors is classified into three classes. The
members of each class will serve staggered three-year terms. Messrs. Desai,
Goldstein and Murnane are Class I directors; Messrs. Cornstein, Kerin and Reiner
are Class II directors; and Messrs. Matthews and Kroon and Ms. Levine are Class
III directors. The terms of the Class II, Class III and Class I directors expire
at the annual meeting of stockholders to be held in 2006, 2007 and 2008,
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 directors and executive officers of
the Holding Company and Finlay Jewelry, are set forth below.


                                       49



      ARTHUR E. REINER became Chairman of the Holding Company effective February
1, 1999 and, from January 1995 to such date, served as Vice Chairman of the
Holding Company. Mr. Reiner has also served as President and Chief Executive
Officer of the Holding Company since January 30, 1996 and as Chairman of the
Board and Chief Executive Officer of Finlay Jewelry since January 3, 1995. Prior
to joining Finlay, Mr. Reiner had spent over 30 years with the Macy's
organization. From February 1992 to October 1994, Mr. Reiner was Chairman and
Chief Executive Officer of Macy's East, a subsidiary of Macy's. From 1988 to
1992, Mr. Reiner was Chairman and Chief Executive Officer of Macy's Northeast,
which was combined with Macy's Atlanta division to form Macy's East in 1992. Mr.
Reiner is also a director of New York & Company, Inc.

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

      LESLIE A. PHILIP has been Executive Vice President and Chief Merchandising
Officer of the Holding Company and Finlay Jewelry since May 1997. From May 1995
to May 1997, Ms. Philip was Executive Vice President-Merchandising and Sales
Promotion of Finlay Jewelry. From 1993 to May 1995, Ms. Philip was Senior Vice
President--Advertising and Sales Promotion of Macy's, and from 1988 to 1993, Ms.
Philip was Senior Vice President--Merchandise--Fine Jewelry at Macy's. Ms.
Philip held various other positions at Macy's from 1970 to 1988.

      EDWARD J. STEIN has been Senior Vice President and Director of Stores of
Finlay Jewelry since July 1995. From December 1988 to June 1995, Mr. Stein was
Vice President - Regional Supervisor of Finlay Jewelry, and occupied similar
positions with Finlay's predecessors from 1983 to December 1988. Mr. Stein held
various other positions at Finlay from 1965 to 1983.

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

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

      DAVID B. CORNSTEIN has been Chairman Emeritus of the Holding Company since
his retirement from day-to-day involvement with the Holding Company effective
January 31, 1999. He served as Chairman of the Holding Company from May 1993
until his retirement, and has been a director of the Holding Company and Finlay
Jewelry since their inception in December 1988. Mr. Cornstein is a Principal of
Pinnacle Advisors Limited. From December 1988 to January 1996, Mr. Cornstein was
President and Chief Executive Officer of the Holding Company. From December 1985
to December 1988, Mr. Cornstein was President, Chief Executive Officer and a
director of a predecessor of the Holding Company. He is also a director of
Circa, Inc.

      ROHIT M. DESAI has been a director of the Holding Company and Finlay
Jewelry since May 1993. Mr. Desai is the founder of and, since its formation in
1984, has been Chairman and President of Desai Capital Management Incorporated,
a specialized equity investment management firm in New York which manages the
assets of various institutional clients through Equity-Linked Investors-II,
Private Equity Investors III, L.P. and Private Equity Investors IV, L.P. Mr.
Desai is also the managing general partner of the general partner of
Equity-Linked Investors-II and the managing member of the general partners of
Private Equity


                                       50



Investors III, L.P. and Private Equity Investors IV, L.P. Mr. Desai serves as a
director of SITEL Corporation, Suncom Wireless, Inc. and Independence Community
Bank Corp.

      MICHAEL GOLDSTEIN has been a director of the Holding Company and Finlay
Jewelry since May 1999. Mr. Goldstein has been Chairman of the Toys "R" Us
Children's Fund, Inc. since June 2001. Mr. Goldstein was Chairman of the Board
of Toys "R" Us, Inc. from February 1998 to June 2001. From February 1994 to
February 1998, Mr. Goldstein was Vice Chairman of the Board and Chief Executive
Officer of Toys "R" Us, Inc., and served as acting Chief Executive Officer from
August 1999 to January 14, 2000. Mr. Goldstein is also a director of United
Retail Group Inc., 4Kids Entertainment, Inc., Medco Health Solutions, Inc.,
Pacific Sunwear of California, Inc. and Martha Stewart Living Omnimedia, Inc.

      JOHN D. KERIN has been a director of the Company and Finlay Jewelry since
December 1999. Since January 2000, Mr. Kerin has been a consultant to The McGraw
Hill Companies, Inc. From July 1979 to January 2000, Mr. Kerin served in various
positions with The McGraw-Hill Companies, Inc., including, from January 1988 to
September 1990, as President and Chief Executive Officer of Numerex, Inc., a
McGraw Hill subsidiary and from May 1994 to January 2000, as Senior Vice
President, Information Management and Chief Information Officer of the McGraw
Hill Companies, Inc.

      RICHARD E. KROON was elected as a director of the Company and Finlay
Jewelry in 2003. Mr. Kroon retired in July 2001 as chairman of the Sprout Group
Venture Capital Fund (a venture capital affiliate of Credit Suisse First
Boston), where he had served as Chairman since April 2000 and where he served as
Managing Partner from March 1981 to April 2000. Mr. Kroon is also a director of
Cohen & Steers Mutual Funds, and is a past chairman of the National Venture
Capital Association. He also serves on the investment subcommittee of Monmouth
University.

      ELLEN R. LEVINE was appointed as a director of the Company and Finlay
Jewelry in January 2004. Ms. Levine has been Editor-in-Chief of Good
Housekeeping since 1994. Ms. Levine also served as Editor-in-Chief of two other
major women's magazines from 1982 to 1994. She is also a director of Gaylord
Entertainment Company.

      NORMAN S. MATTHEWS has been a director of the Company and Finlay Jewelry
since July 1993. Mr. Matthews has been a retail consultant based in New York for
more than the past five years. Mr. Matthews served as Vice Chairman and then
President of Federated Department Stores from 1983 to 1988. He is also a
director of The Progressive Corporation and Henry Schein, Inc.

      THOMAS M. MURNANE has served as a director of the Holding Company and
Finlay Jewelry since December 2002. Mr. Murnane is a retired partner of
PricewaterhouseCoopers, LLP, who served in various capacities during his tenure
with that firm since 1980, including Director of the firm's Retail Strategy
Consulting Practice, Director of Overall Strategy Consulting for the East Region
of the United States, and Global Director of Marketing and Brand Management for
PwC Consulting. Mr. Murnane has been self-employed as a business advisor since
2002. Mr. Murnane is also a director of The Pantry, Inc., Captaris, Inc. and
Pacific Sunwear of California, Inc.

CODES OF ETHICS

      Finlay has adopted Codes of Ethics that apply to all of our directors and
employees including, without limitation, our CEO, our CFO and all of our
employees performing financial or accounting functions. The Codes of Ethics are
posted on the Holding Company's web-site, www.finlayenterprises.com under the
heading "Governance" and are incorporated by reference as an exhibit to this
Form 10-K. The Holding Company intends to satisfy the disclosure requirement
under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a
provision of its Codes of Ethics by posting such information on its website at
the location specified above. 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.


                                       51



AUDIT COMMITTEE FINANCIAL EXPERT

      The Audit Committee of the Board of Directors consists of the following
members of the Board of Directors of each of the Holding Company and Finlay
Jewelry: Rohit M. Desai, Michael Goldstein, John D. Kerin and Thomas M. Murnane,
each of whom is an "independent director" under the NASDAQ listing standards
applicable to audit committee members. Each of the Holding Company and Finlay
Jewelry has determined that Mr. Goldstein, Chairman of the Audit Committee,
qualifies as an "audit committee financial expert" as defined in Item 401(h) of
Regulation S-K, and that Mr. Goldstein is independent as the term is used in
Item 7 (d) (3) (iv) of Schedule 14A under the Exchange Act.


                                       52



ITEM 11. EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

      The following table sets forth information with respect to the
compensation in 2005, 2004 and 2003 of Finlay's Chief Executive Officer and each
of the five other most highly compensated executive officers of the Holding
Company or Finlay Jewelry (collectively, the "Named Executive Officers").



                                              ANNUAL COMPENSATION                       LONG TERM COMPENSATION
                             ------------------------------------------------------   ---------------------------
                                                                                                      NUMBER OF
                                                                                       RESTRICTED     SECURITIES
    NAME AND PRINCIPAL                                              OTHER ANNUAL         STOCK        UNDERLYING       ALL OTHER
         POSITION             YEAR       SALARY       BONUSES     COMPENSATION (1)       AWARDS      OPTIONS/SARS   COMPENSATION (2)
---------------------------  ------   ------------   ----------   -----------------   ------------   ------------   ---------------

ARTHUR E. REINER              2005    $1,005,000     $  526,263   $   32,338          $ 500,000(3)        54,437    $   58,707(3)
  Chairman, President         2004     1,005,000        478,782       24,124                 --               --        44,882(3)
  and Chief Executive         2003       970,000        597,520       16,775            773,500(3)        50,000        37,596(3)
  Officer of the Holding
  Company and Chairman
  and Chief Executive
  Officer of Finlay Jewelry

JOSEPH M. MELVIN              2005    $  452,055     $  142,036   $       --          $  85,536(4)         7,200    $    9,647
  Executive Vice President    2004       437,056        215,556           --             96,750(5)         5,000         9,340
  and Chief Operating         2003       422,056        259,986           --             75,700(6)         5,000         9,340
  Officer of the Holding
  Company and President
  and Chief Operating
  Officer of Finlay Jewelry

LESLIE A. PHILIP              2005    $  471,690     $  148,205   $       --          $  85,536(7)         7,200    $    9,647
  Executive Vice President    2004       456,690        225,240           --             96,750(8)         5,000         9,340
  and Chief Merchandising     2003       441,690        272,081           --             75,700(9)         5,000         9,340
  Officer of the Holding
  Company and Finlay
  Jewelry

EDWARD J. STEIN               2005    $  390,056     $  122,556   $       --          $ 42,768(10)         3,600    $    9,647
  Senior Vice President       2004       380,056        187,444           --            48,375(11)         2,500         9,340
  and Director of Stores      2003       370,056        227,954           --            37,850(12)         2,500         9,340
  of Finlay Jewelry

JOYCE MANNING MAGRINI         2005    $  319,250     $  102,115   $       --          $ 59,400(13)         5,000    $    9,647
  Executive Vice President -  2004       290,000        143,028           --            67,725(14)         3,500         9,340
  Administration of Finlay    2003       280,000        172,480           --            37,850(15)         2,500         9,340
  Jewelry

BRUCE E. ZURLNICK             2005    $  310,000     $   97,402   $       --          $ 42,768(16)         3,600    $    9,647
  Senior Vice President,      2004       295,000        145,494           --            48,375(17)         2,500         9,340
  Treasurer and               2003       285,000        180,834           --            37,850(18)         2,500         9,340
  Chief Financial Officer
  of the Holding Company
  and  Finlay Jewelry


_______________________
      (1)   Represents tax equalization payments made in connection with life
            insurance premiums paid by Finlay on behalf of the Named Executive
            Officers.

      (2)   Includes for each Named Executive Officer the sum of the following
            amounts earned in 2005, 2004 and 2003 for such Named Executive.


                                       53



                                                                   LIFE          RETIREMENT       MEDICAL
                                                               INSURANCE (A)    BENEFITS (B)   BENEFITS (C)
                                                              ---------------   ------------   -------------

Arthur E. Reiner ...................................   2005   $    38,038       $      6,663   $        --
                                                       2004        28,376              6,500            --
                                                       2003        20,176              6,500            --

Joseph M. Melvin ...................................   2005   $        --       $      6,663   $     2,984
                                                       2004            --              6,500         2,840
                                                       2003            --              6,500         2,840

Leslie A. Philip ...................................   2005   $        --       $      6,663   $     2,984
                                                       2004            --              6,500         2,840
                                                       2003            --              6,500         2,840

Edward J. Stein ....................................   2005   $        --       $      6,663   $     2,984
                                                       2004            --              6,500         2,840
                                                       2003            --              6,500         2,840


Joyce Manning Magrini ..............................   2005   $        --       $      6,663   $     2,984
                                                       2004            --              6,500         2,840
                                                       2003            --              6,500         2,840

Bruce E. Zurlnick ..................................   2005   $        --       $      6,663   $     2,984
                                                       2004            --              6,500         2,840
                                                       2003            --              6,500         2,840


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

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

            (c) The insurance premiums paid in respect of the Named Executive
                Officer under our Executive Medical Benefits Plan.

      (3)   Included in the other compensation set forth in Note 2 above, are
            taxable auto allowances and employer provided travel of $14,006,
            $10,006 and $10,920 for 2005, 2004 and 2003, respectively. The value
            of the 50,000 shares of restricted stock of the Holding Company
            issued to Mr. Reiner in August 2003, is based on the closing prices
            on the dates of issuance. At January 28, 2006, Mr. Reiner owned
            100,000 shares of restricted stock, having an aggregate market value
            at such date of $933,000 and 50,000 shares of restricted stock, a
            portion of which is subject to vesting, having an aggregate market
            value at such date of $466,500. Included in 2005 are 54,437 shares
            of restricted stock, which were issued in February 2006 and are
            subject to vesting. Additionally, Mr. Reiner will receive incentive
            stock compensation of $209,458, on or about April 26, 2006, for
            which the number of shares has not yet been determined. To the
            extent dividends are paid on the Holding Company's Common Stock
            generally, dividends would be paid on the restricted stock. See
            "--Employment and Other Agreements and Change of Control
            Arrangements".

      (4)   The value of the 7,200 shares awarded to Mr. Melvin in April 2005,
            which shares are to be received by him upon completion of vesting in
            April 2008 (or an earlier vesting period under certain
            circumstances) if he is then employed by the Holding Company, is
            based on the closing price on the date of the award. At January 28,
            2006, such shares would have had an aggregate market value of
            $67,176. To the extent any dividend or other distribution is made in
            the form of shares of Common Stock, the number of shares to be
            received shall be adjusted by the Holding Company in such manner as
            it deems equitable.

      (5)   The value of the 5,000 shares of restricted stock awarded to Mr.
            Melvin in April 2004, which shares are to be received by him upon
            completion of vesting in April 2006 (or an earlier vesting date
            under certain circumstances), if he is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $46,650. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.

      (6)   The value of the 5,000 shares of restricted stock awarded to Mr.
            Melvin in October 2003, which shares are to be received by him upon
            completion of vesting in September 2007 (or an earlier vesting date
            under certain circumstances), if he is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $46,650. To the extent any dividend or


                                       54



            other distribution is made in the form of shares of Common Stock,
            the number of shares to be received shall be adjusted by the Holding
            Company in such manner as it deems equitable.

      (7)   The value of the 7,200 shares awarded to Ms. Philip in April 2005,
            which shares are to be received by her upon completion of vesting in
            April 2008 (or an earlier vesting date under certain circumstances),
            if she is then employed by the Holding Company, is based on the
            closing price on the date of the award. At January 28, 2006, such
            shares would have had an aggregate market value of $67,176. To the
            extent any dividend or other distribution is made in the form of
            shares of Common Stock, the number of shares to be received shall be
            adjusted by the Holding Company in such manner as it deems
            equitable.

      (8)   The value of the 5,000 shares of restricted stock awarded to Ms.
            Philip in April 2004, which shares are to be received by her upon
            completion of vesting in April 2006 (or an earlier vesting date
            under certain circumstances), if she is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $46,650. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.

      (9)   The value of the 5,000 shares of restricted stock awarded to Ms.
            Philip in October 2003, which shares are to be received by her upon
            completion of vesting in September 2007 (or an earlier vesting date
            under certain circumstances), if she is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2005, such shares would have had an aggregate market
            value of $46,650. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.

      (10)  The value of the 3,600 shares awarded to Mr. Stein in April 2005,
            which shares are to be received by him upon completion of vesting in
            April 2008 (or an earlier vesting date under certain circumstances),
            if he is then employed by the Holding Company, is based on the
            closing price on the date of the award. At January 28, 2006, such
            shares would have had an aggregate market value of $33,588. To the
            extent any dividend or other distribution is made in the form of
            shares of Common Stock, the number of shares to be received shall be
            adjusted by the Holding Company in such manner as it deems
            equitable.

      (11)  The value of 2,500 shares of restricted stock awarded to Mr. Stein
            in April 2004, which shares are to be received by him upon
            completion of vesting in April 2006 (or an earlier vesting date
            under certain circumstances) if he is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $23,325. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.

      (12)  The value of the 2,500 shares of restricted stock awarded to Mr.
            Stein in October 2003, which shares are to be received by him upon
            completion of vesting in September 2007 (or an earlier vesting date
            under certain circumstances), if he is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $23,325. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.

      (13)  The value of 5,000 shares of restricted stock awarded to Ms. Magrini
            in April 2005, which shares are to be received by her upon
            completion of vesting in April 2008 (or an earlier vesting date
            under certain circumstances), if she is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $46,650. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.

      (14)  The value of 3,500 shares of restricted stock awarded to Ms. Magrini
            in April 2004, which shares are to be received by her upon
            completion of vesting in April 2006 (or an earlier vesting date
            under certain circumstances), if she is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $32,655. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.

      (15)  The value of 2,500 shares of restricted stock awarded to Ms. Magrini
            in October 2003, which shares are to be received by her upon
            completion of vesting in September 2007 (or an earlier vesting date
            under certain circumstances), if she is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $23,325. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.


                                       55



      (16)  The value of 3,600 shares of restricted stock awarded to Mr.
            Zurlnick in April 2005, which shares are to be received by him upon
            completion of vesting in April 2008 (or an earlier vesting date
            under certain circumstances) if he is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $33,588. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.

      (17)  The value of 2,500 shares of restricted stock awarded to Mr.
            Zurlnick in April 2004, which shares are to be received by him upon
            completion of vesting in April 2006 (or an earlier vesting date
            under certain circumstances) if he is then employed by the Holding
            Company, is based on the closing price on the date of the award. At
            January 28, 2006, such shares would have had an aggregate market
            value of $23,325. To the extent any dividend or other distribution
            is made in the form of shares of Common Stock, the number of shares
            to be received shall be adjusted by the Holding Company in such
            manner as it deems equitable.

      (18)  The value of the 2,500 shares of restricted stock awarded to Mr.
            Zurlnick in October 2003, which shares are to be received by him
            upon completion of vesting in September 2007 (or an earlier vesting
            date under certain circumstances), if he is then employed by the
            Holding Company, is based on the closing price on the date of the
            award. At January 28, 2006, such shares would have had an aggregate
            market value of $23,325. To the extent any dividend or other
            distribution is made in the form of shares of Common Stock, the
            number of shares to be received shall be adjusted by the Holding
            Company in such manner as it deems equitable.

      Mr. Reiner was named Chairman of the Holding Company effective February 1,
1999 and, from January 1995 to such date, served as Vice Chairman of the Holding
Company. For a discussion of the employment and other arrangements with Mr.
Reiner, see "--Employment and Other Agreements and Change of Control
Arrangements".


                                       56



LONG-TERM INCENTIVE PLANS

      The Holding Company has long-term incentive plans for which it has
reserved a total of 2,582,596 shares of Common Stock for issuance in connection
with awards of stock and options under such plans. Of this total, 732,596 shares
of Common Stock have been reserved for issuance under the Holding Company's Long
Term Incentive Plan (the "1993 Plan"), of which 511,111 shares have been issued
to date in connection with exercises of options granted under the 1993 Plan and
159,219 shares are reserved for issuance upon exercise of currently outstanding
options. The remaining 62,266 shares of Common Stock are available for future
grants under the 1993 Plan. In 1997, the Holding Company's Board of Directors
and stockholders approved the Holding Company's 1997 Long Term Incentive Plan
(as amended, the "1997 Plan" and, together with the 1993 Plan, the "Incentive
Plans"), which was intended to supplement the 1993 Plan. The 1997 Plan is
similar to the 1993 Plan and provides for the grant of the same types of awards
as are available under the 1993 Plan. The maximum number of shares of Common
Stock available for issuance under the 1997 Plan is 1,850,000. Of this total,
294,494 shares have been issued to date in connection with exercises of options
granted under the 1997 Plan, 210,437 shares have been issued to date in
connection with restricted stock arrangements, 649 shares have been issued to
date in connection with awards under the Executive Plan (as defined below) and
904,215 shares are reserved for issuance upon exercise of currently outstanding
options and 335,382 shares are reserved for issuance in connection with
purchases and awards under the Executive Plan and the Director Plan (as defined
below) and awards of restricted stock. The remaining 104,823 shares of Common
Stock are available for future grants under the 1997 Plan.

      In April 2003, the Board of Directors adopted the Executive Deferred
Compensation and Stock Purchase Plan (the "Executive Plan") and the Director
Deferred Compensation and Stock Purchase Plan (the "Director Plan" and
collectively with the Executive Plan, the "RSU Plans"), which were approved by
the Holding Company's stockholders in June 2003. In addition to giving the
Holding Company the ability to make stock-based awards to current or future key
executives and directors under the RSU Plans, the Holding Company believes that
the RSU Plans create a means to provide deferred compensation to such selected
individuals and to raise the level of stock ownership in the Holding Company by
such executives and directors thereby strengthening the mutuality of interests
between them and the Holding Company's stockholders. Under the RSU Plans, which
are administered by the Compensation Committees of the Holding Company and
Finlay Jewelry, designated key executives of Finlay and the non-employee
directors are eligible to receive restricted stock units ("RSUs"). An RSU is a
unit of measurement equivalent to one share of common stock, but with none of
the attendant rights of a stockholder of a share of common stock. Two types of
RSUs are awarded under the RSU Plans: (i) participant RSUs, where a plan
participant may elect to defer, in the case of an executive employee, a portion
of his or her actual or target bonus, and in the case of a non-employee
director, his or her retainer fees and committee chairmanship fees, and receive
RSUs in lieu thereof and (ii) matching RSUs, where 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, as more fully described below. At the time of distribution under the
RSU Plans, RSUs are converted into actual shares of Common Stock of the Holding
Company. As of January 28, 2006, 216,730 RSUs were awarded and purchased under
the RSU Plans and thereafter an additional 7,408 RSUs have been awarded and
purchased. The shares of Common Stock to be issued under the RSU Plans will be
funded solely by the shares of Common Stock already available for issuance under
the Incentive Plans.

      The Incentive Plans, which are administered by the Compensation Committees
of the Holding Company and Finlay Jewelry, permit the Holding Company to grant
to key employees, consultants and directors of the Holding Company and its and
their subsidiaries, 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,
including purchases and awards under the RSU Plans, subject to such terms and
conditions as the Holding Company's Compensation Committee shall determine; (v)
performance units which are based upon attainment of performance goals during a
period of not less than two nor more than five years and which may be settled in
cash or in Common


                                       57



Stock in the discretion of the Holding Company's Compensation Committee; or (vi)
any combination of the foregoing. The 1997 Plan provides, however, that no
participant may be granted, during any fiscal year, options or other awards
relating to more than 200,000 shares of Common Stock.

      Under the Incentive Plans, the Holding Company may grant stock options
which are either "incentive stock options" ("Incentive Options") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, (the
"Code"), or non-incentive stock options ("Non-incentive Options"). Incentive
Options are designed to result in beneficial tax treatment to the optionee, but
will not entitle the Holding Company to a tax deduction. Nonincentive Options
will not give the optionee the tax benefits of Incentive Options, but generally
will entitle the Holding Company to a tax deduction when and to the extent
income is recognized by the optionee.

      The Incentive Plans provide that the per share exercise price of an option
granted thereunder shall be determined by the Holding Company's Compensation
Committee. The exercise price of an Incentive Option may not, however, be less
than 100% of the fair market value of the Common Stock on the date the option is
granted and the duration of an Incentive Option may not exceed ten years from
the date of grant. In addition, an Incentive Option that is granted to an
employee who, at the time the option is granted, owns stock possessing more than
10% of the total combined voting power of all classes of capital stock of the
"employer corporation" (as used in the Code) or any parent or subsidiary thereof
shall have a per share exercise price which is at least 110% of the fair market
value of the Common Stock on the date the option is granted and the duration of
any such option may not exceed five years from the date of grant. Options
granted under the Incentive Plans become exercisable at such time or times as
the Compensation Committee may determine at the time the option is granted.
Options are generally nontransferable and exercisable only by the participant.

      Various vesting schedules have been utilized and the Holding Company's
grants typically contain transfer and certain other restrictions. In addition,
(i) if an optionee's employment is terminated for cause, such optionee's options
will terminate immediately, (ii) if an optionee's employment is terminated due
to death, "disability" or "retirement" (each as defined in the Incentive Plans),
such optionee's options become fully vested and exercisable for a specific
period following termination and (iii) if an optionee's employment is terminated
for any other reason, such optionee's options remain exercisable to the extent
vested for a specific period following termination.

      The Incentive Plans may be amended or terminated by the Board of Directors
at any time, but no such termination or amendment may, without the consent of a
participant, adversely affect the participant's rights with respect to
previously granted awards.

      Designated key executives of Finlay are eligible to purchase RSUs under
the Executive Plan. Eligibility under the Executive Plan is determined by the
Compensation Committees of the Holding Company and Finlay Jewelry, in their sole
discretion. Any director of the Holding Company who is not an active employee of
the Holding Company or any of its and their subsidiaries who is selected to
receive retainer fees by the Compensation Committees of the Holding Company and
Finlay Jewelry is eligible to purchase RSUs under the Director Plan.

      At the times set forth in the Executive Plan, a participant may elect to
defer 25% of his or her annual actual or target bonus that would otherwise be
paid in cash to such participant under the Holding Company's management bonus
opportunity plan, and receive RSUs in lieu thereof. Generally, participant RSUs
are credited under the Executive Plan to a participant's account on or about
April 25th of each plan year in an amount equal to: (i) 25% of the participant's
actual or target bonus received divided by (ii) the fair market value (as
defined in the Executive Plan) of a share of Common Stock on the award date.

      At the times set forth in the Director Plan, a participant may elect 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) that would otherwise be paid to the
participant in cash for a fiscal year, and receive RSUs in lieu thereof.
Participant RSUs will be credited to


                                       58



a participant's account on the first business day of each quarter in an amount
equal to: (i) 100% of the participant's eligible director fees divided by (ii)
the fair market value (as defined in the Director Plan) of a share of Common
Stock on the award date.

      On each award date, with respect to each participant RSU that a
participant elects to purchase under the RSU Plans, the Holding Company will
credit a participant's account with one matching RSU. At the time of
distribution, RSUs are converted into actual shares of Common Stock.

      Participant RSUs are fully vested at all times. Matching RSUs under the
Executive Plan vest three years after the applicable award date, provided the
participant is continuously employed by Finlay Jewelry or a subsidiary from the
award date through the applicable vesting date. In the event a participant's
employment is terminated for any reason (other than by Finlay Jewelry without
"cause" or as a result of death, "disability," "retirement" or a "change in
control" (as each such term is defined in the Executive Plan)) prior to the
applicable vesting date, all unvested matching RSUs will be forfeited.
Notwithstanding the foregoing, upon a participant's death, "disability" or
"change in control," in each case while employed by Finlay Jewelry or a
subsidiary, all unvested matching RSUs will become 100% vested. Upon a
termination of a participant's employment by Finlay Jewelry or a subsidiary
without "cause" or upon "retirement" (as each such term is defined in the
Executive 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.
Matching RSUs under the Director Plan will vest on the one year anniversary of
the award date, provided the participant continuously serves as a director of
the Holding Company from the award date through the applicable vesting date. In
the event a participant's directorship is terminated for any reason (other than
death, "disability," or "change in control" (as each such term is defined in the
Director Plan)) all unvested matching RSUs will be forfeited. Upon a
participant's death, "disability" or "change in control," all unvested matching
RSUs will become 100% vested.

      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: (i) a participant's termination of employment or directorship or
(ii) 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
early in accordance with the applicable RSU Plans).

      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: (i) a participant's termination of employment or
directorship or (ii) 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 in
control" or a termination of the RSU Plan, each vested matching RSU in a
participant's account will be distributed twelve months after such termination.

      If a participant engages in "detrimental activity" (as defined in the RSU
Plans) while employed or serving as a director, or during a period commencing on
the participant's termination date and ending one year following the date that a
participant terminates employment or a directorship: (i) the participant will
forfeit vested and unvested matching RSUs to the extent not yet paid 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 applicable
RSU Plan attributable to such matching RSUs, valued at the greater of the "fair
market value" on the date the participant received payment under such RSU Plan
or the date that the participant engaged in "detrimental activity."

      The Holding Company has the right to amend or terminate the RSU Plans at
any time, by action of its Board of Directors or its Compensation Committee,
provided that no such action will adversely affect a participant's rights under
such RSU Plan with respect to RSUs purchased or awarded and vested before the
date of such action. No amendment will be effective unless approved by the
stockholders of the Holding Company if stockholder approval of such amendment is
required to comply with any applicable law, regulation or stock exchange rule.


                                       59



      In July 2004, the Board of Directors of the Holding Company, upon the
recommendation of the Compensation Committee, adopted, subject to stockholder
approval, an amendment to the 1997 Plan as described below to allow for awards
based on performance to be deductible under Section 162(m) of the Code. The
amendment was approved by stockholders in September 2004. Compliance with the
requirements of Section 162 (m) enables the Holding Company to deduct
compensation associated with awards under the plan which qualifies as
"performance-based" for purposes of Section 162(m) of the Code.

      If the Compensation Committee determines, at the time an award is granted
to a participant who is then an officer, that such participant is, or is likely
to be as of the end of the taxable year in which the Holding Company would
ordinarily claim a tax deduction in connection with such award, a covered
employee (as defined below), then the Compensation Committee may provide that
the distribution of cash, shares or other property pursuant to the 1997 Plan
shall be subject to the achievement of one or more objective performance goals
established by the Compensation Committee, which shall be based on the
attainment of specified levels of one or any variation or combination of the
following: revenues, net revenues, cost reductions and savings, operating
income, income before taxes, net income, adjusted net income, EBITDA, earnings
per share, adjusted earnings per share, operating margins, stock price, working
capital measures, return on assets, return on revenues or productivity, return
on equity, return on invested capital, cash flow measures, market share,
stockholder return or economic value added. In addition, the Compensation
Committee may establish as an additional performance measure, the attainment by
a participant in the 1997 Plan of one or more personal objectives and/or goals
that the Compensation Committee deems appropriate, including but not limited to,
implementation of Holding Company policies, negotiations of significant
corporate transactions, development of long-term business goals or strategic
plans, or exercise of specific areas of managerial responsibility. The
Compensation Committee will not have discretion to increase awards over the
level determined by application of the performance goal formula(s) and will be
required to certify, prior to payment, that the performance goals underlying the
awards have been satisfied. The performance goals set by the Compensation
Committee may be expressed on an absolute and/or relative basis, may include
comparisons with past performance of the Holding Company (including one or more
divisions, if any) and/or the current or past performance of other companies.
The performance goals shall be set by the Compensation Committee within the time
period prescribed by, and shall otherwise comply with, the requirements of
Section 162(m) of the Code, or any successor provision thereto, and the
regulations thereunder.

      The measures used in performance goals set under the 1997 Plan shall be
determined in a manner consistent with generally accepted accounting principles
("GAAP") and in a manner consistent with the methods of reporting used in the
Holding Company's Annual Reports on Form 10-K and Quarterly Reports on Form
10-Q, without regard, however, to special, unusual or non-recurring items or
events, items related to the disposal or acquisition of a business, or to
changes in accounting principles or law, except as may otherwise be determined
by the Compensation Committee. To the extent that any objective performance
goals are expressed using any earnings or revenue-based measures that require
deviations from GAAP, such deviations will be at the discretion of the
Compensation Committee.

CASH BONUS PLAN

      Under Section 162(m) of the Code, the Holding Company's Federal income tax
deductions for certain compensation paid to designated executives is limited to
$1 million per taxable year. Section 162(m) denies to a publicly held
corporation, a deduction in determining its taxable income, for "covered
compensation" in excess of $1 million paid in any taxable year to those
individuals who, at the end of the taxable year, are "covered employees"
(defined to mean the Holding Company's Chief Executive Officer and employees
whose total compensation for the taxable year is required to be reported to
stockholders under the Exchange Act), by reason of such employees being among
the four highest compensated officers for the taxable year, other than the Chief
Executive Officer). "Covered compensation" does not include amounts payable upon
the attainment of performance goals established by a committee of outside
directors if the material terms of the performance goals are approved by the
stockholders.


                                       60



      In July 2004, the Board of Directors of the Holding Company, upon the
recommendation of the Compensation Committee, adopted, subject to stockholder
approval, the Finlay Enterprises, Inc. 2004 Cash Bonus Plan (the "Cash Bonus
Plan") so as to qualify bonuses paid under the Cash Bonus Plan as
"performance-based" for purposes of Section 162(m) of the Code. The Cash Bonus
Plan is intended to provide annual incentives to certain senior executive
officers in a manner designed to reinforce the Holding Company's performance
goals, to link a significant portion of participants' 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 the benefit of
the Holding Company, to the extent practicable, the associated Federal income
tax deduction for payments of qualified "performance-based" compensation. The
Cash Bonus Plan was approved by stockholders in September 2004. Under the Cash
Bonus Plan, the Compensation Committee may pay cash bonuses which qualify as
performance-based compensation under the Code.

      The participants in the Cash Bonus Plan will be those key executives who
are designated by the Compensation Committee to participate in the Cash Bonus
Plan from time to time. The Compensation Committee reserves the right to
establish alternative incentive compensation arrangements for otherwise eligible
executives if it determines that it would be in the best interests of the
Holding Company and its stockholders to do so, even if the result is a loss of
deductibility for certain compensation payments.

      Specific performance goals for participating executives will be selected
from among the business criteria described below. These goals are established
for each participant by the Compensation Committee prior to the 91st day of each
performance period, but no later than the expiration of the first 25% of a
performance period having a duration of less than one year for determining the
participant's business criteria target.

      Under the Cash Bonus Plan, the Compensation Committee sets one or more
objective performance goals for each participant, which shall be based on the
attainment of specified levels of one or any variation or combination of the
following: revenues, net revenues, cost reductions and savings, operating
income, income before taxes, net income, EBITDA, adjusted net income, earnings
per share, adjusted earnings per share, operating margins, stock price, working
capital measures, return on assets, return on revenues or productivity, return
on equity, return on invested capital, cash flow measures, market share,
stockholder return or economic value added. In addition, the Compensation
Committee may establish as an additional performance measure, the attainment by
a participant in the Cash Bonus Plan of one or more personal objectives and/or
goals that the Compensation Committee deems appropriate, including but not
limited to implementation of Holding Company policies, negotiation of
significant corporate transactions, development of long-term business goals or
strategic plans for the Holding Company, or the exercise of specific areas of
managerial responsibility. The Compensation Committee will not have discretion
to increase bonus amounts over the level determined by application of the
performance goal formula(s) and will be required to certify, prior to payment,
that the performance goals underlying the bonus payments have been satisfied.
The performance goals set by the Compensation Committee may be expressed on an
absolute and/or relative basis, and may include comparisons with the past
performance of the Holding Company (including one or more divisions thereof, if
any) and/or the current or past performance of other companies.

      The measures used in performance goals set under the Cash Bonus Plan shall
be determined in a manner consistent with GAAP and in a manner consistent with
those methods of reporting used in the Holding Company's Annual Reports on Form
10-K and Quarterly Reports on Form 10-Q, without regard, however, to special,
unusual or non-recurring items or events, items related to the disposal or
acquisition of a business or to changes in accounting principles or law, except
as may otherwise be determined by the Compensation Committee. To the extent that
any objective performance goals are expressed using any earnings or
revenue-based measures that require deviations from GAAP, such deviations will
be at the discretion of the Compensation Committee.

      In general, the benefits under the Cash Bonus Plan will consist of a cash
bonus payable to participants, provided the performance goals established by the
Compensation Committee are met (and, if met, the extent to which such goals are
met.) The bonus opportunity for each participant under the Cash


                                       61



Bonus Plan for each performance period, will be related by a specific formula to
the participant's base salary at the start of such performance period, provided
that the maximum bonus paid under the plan to any individual in respect of any
fiscal year shall not exceed $2 million.

      The Cash Bonus Plan will be administered by the Compensation Committee,
which at all times shall be composed solely of at least two directors who are
"outside directors" within the meaning of Section 162(m). All determinations of
the Compensation Committee with respect to the Cash Bonus Plan will be in its
discretion and be binding. The expenses of administering the Cash Bonus Plan
will be borne by the Holding Company.

      The Board of Directors may at any time terminate or suspend the Cash Bonus
Plan or revise it in any respect, provided that (i) no amendment shall be made
which would cause bonuses payable under the plan to fail to qualify for the
exemption from the limitations of Section 162(m) of the Code and (ii) no such
action shall adversely affect a participant's rights under the Cash Bonus Plan
with respect to bonus arrangements agreed to by the Holding Company and the
participant, pursuant to a written agreement or otherwise, before the date of
such action, without the consent of the participant.

KEY EMPLOYEE SEVERANCE PAY PLAN

      In June 2005, the Board of Directors of the Holding Company, upon the
recommendation of the Compensation Committee, approved the Finlay Key Employee
Special Severance Pay Plan (the "Severance Plan"), which provides for the
payment of severance pay to designated key employees who are permanently and
involuntarily terminated solely as a result of a merger of May with and into
Federated. The severance pay for each such key employee is equal to (i) one
year's base salary at his or her then-current rate for key employees in "Class
I", and (ii) one year's base salary at his or her then-current rate plus one
year's bonus (calculated by averaging the annual bonus thereof over the prior
three fiscal years) for key employees in "Class II". Edward J. Stein and Bruce
E. Zurlnick are among those designated as key employees in Class II. Individuals
with employment contracts which provide for severance will not be eligible to
receive benefits under the Severance Plan.

OPTION/SAR GRANTS IN 2005/LONG-TERM INCENTIVE PLAN AWARDS IN 2005

      Except for RSUs, there were no options granted or stock appreciation
rights issued, or any long-term incentive plan awards, by the Holding Company in
2005 to the Named Executive Officers.

CERTAIN INFORMATION CONCERNING STOCK OPTIONS/SARS

      The following table sets forth certain information with respect to stock
options exercised in 2005 as well as the value of stock options at the fiscal
year end. No stock appreciation rights were exercised during 2005.


                                       62



AGGREGATED OPTION/SAR EXERCISES IN 2005 AND FISCAL YEAR-END OPTION SAR VALUE



                                                                 NUMBER OF SECURITIES           VALUE OF UNEXERCISED
                                   SHARES                       UNDERLYING UNEXERCISED       IN-THE-MONEY OPTIONS/SARS
                                  ACQUIRED                          OPTIONS/SARS AT               AT YEAR-END ($)
                                     ON            VALUE         YEAR-END EXERCISABLE/       EXERCISABLE/ UNEXERCISABLE
            NAME                  EXERCISE        REALIZED           UNEXERCISABLE                     (1)(2)
-----------------------------    -----------    ------------    -----------------------      --------------------------

Arthur E. Reiner............           --       $      --           440,000/20,000                $   91,200/45,600
Joseph M. Melvin............           --       $      --           118,600/ 9,000                $   62,640/20,520
Leslie A. Philip............       10,000       $  94,700           126,667/10,000                $   78,000/22,800
Edward J. Stein.............           --       $      --            64,667/ 3,000                $   51,840/ 6,840
Joyce Manning Magrini.......           --       $      --            12,000/ 3,000                $   15,960/ 6,840
Bruce E. Zurlnick...........           --       $      --            35,000/ 3,000                $   36,000/ 6,840


________________________
(1)   The value of Unexercised In-the-Money Options/SARs represents the
      aggregate amount of the excess of $9.33, the closing price for a share of
      Common Stock at year-end, over the relevant exercise price of all
      "in-the-money" options.

(2)   The options granted under the 1997 Plan generally vest over periods of up
      to five years. Other vesting schedules have also been utilized by Finlay.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      The Board of Directors of each of the Holding Company and Finlay Jewelry
have established a Compensation Committee. The Compensation Committee of each of
the Board of Directors of the Holding Company and Finlay Jewelry is presently
comprised of Norman S. Matthews, Michael Goldstein, John D. Kerin and Ellen R.
Levine. All decisions with respect to executive compensation and benefit plans
involving employees of Finlay Jewelry are currently made by the Compensation
Committee. None of the present members of either Compensation Committee were, at
any time, an officer or employee of the Holding Company or any of its
subsidiaries and no "compensation committee interlocks" existed during 2005.

EMPLOYMENT AND OTHER AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

      In 2004, the Holding Company entered into an employment agreement with Mr.
Reiner. Pursuant to the employment agreement, Mr. Reiner will continue to serve
as Chairman, President and Chief Executive Officer of the Holding Company and
Chairman and Chief Executive Officer of Finlay Jewelry for a period commencing
on January 30, 2005 and ending on January 31, 2009, unless earlier terminated in
accordance with the provisions of the employment agreement. The employment
agreement provides for the payment of an annual base salary of $1,005,000. In
addition to his annual base salary, Mr. Reiner is entitled to receive cash
incentive compensation ("Cash Incentive Compensation") and stock incentive
compensation ("Stock Incentive Compensation" and collectively with the Cash
Incentive Compensation, the "Incentive Compensation") based on the attainment of
financial objectives developed by senior management and approved by the Holding
Company's Board of Directors.

      Commencing with the 2005 fiscal year, the target amount of Cash Incentive
Compensation shall be based on the base salary for such year and, if EBITA (as
defined in the employment agreement) in any fiscal year is 80% of the Target
Level (as defined in the employment agreement) for such fiscal year, the Cash
Incentive Compensation shall be 33.333% of the Target Cash Incentive Amount (as
defined in the employment agreement). If EBITA exceeds 80% of the Target Level,
the percentage of the Target Cash Incentive Amount payable in respect of such
fiscal year shall increase 3.333% for each percentage point by which EBITA in
such fiscal year exceeds 80% of the Target Level. If EBITA levels exceed 100% of
the target, the Cash Incentive Compensation can exceed the base salary.

      Additionally, commencing with the 2005 fiscal year, the maximum amount of
Stock Incentive Compensation payable in respect of any fiscal year during the
employment term shall be that number of restricted shares of Common Stock of the
Holding Company ("Restricted Stock") having an aggregate fair market value (as
defined) nearest to $400,000 ("Target Stock Incentive Amount"), with the actual


                                       63



amount to be based on whether the specified EBITA levels are met for such year,
except that for 2006, the aggregate maximum value is $200,000. If EBITA in any
fiscal year is 80% of the Target Level for such fiscal year, the Stock Incentive
Compensation payable in respect of such fiscal year shall be 33.333% of the
Target Stock Incentive Amount. If EBITA exceeds 80% of the Target Level, the
percentage of the Target Stock Incentive Amount payable in respect of such
fiscal year shall increase 3.333% for each percentage point by which EBITA in
such fiscal year exceeds 80% of the Target Level. Commencing with the 2005
fiscal year, Mr. Reiner shall also be entitled to receive, for each fiscal year
during the employment term, in addition to the Stock Incentive Compensation,
shares of Restricted Stock having an aggregate market value (as defined) nearest
to $500,000 ("Restricted Stock Time-Based Bonus"). Under the employment
agreement, Mr. Reiner is also entitled to certain insurance and other ancillary
benefits.

      If, at the scheduled, or under specified circumstances, earlier expiration
of the employment term, Mr. Reiner and the Holding Company cannot agree upon the
terms to continue Mr. Reiner's employment, or if his employment is terminated
without "cause" or by Mr. Reiner for "good reason" (as such terms are defined in
the employment agreement), he would be entitled to receive, in addition to other
payments and benefits under the employment agreement, a severance payment in an
amount equal to one year's base salary plus the amount of Cash Incentive
Compensation for the most recently completed fiscal year, which shall not be
less than one year's base salary ("Severance Amount").

      Mr. Reiner's employment agreement provides that if his employment is
terminated prior to a "change of control" (as defined in the employment
agreement) either by the Holding Company without "cause" or by Mr. Reiner for
"good reason," Mr. Reiner will continue to receive his base salary for the
balance of the term and Incentive Compensation (calculated as though 110% of the
Target Level were achieved) as if such termination had not occurred. Mr. Reiner
will also be entitled to receive, on the date of termination, all of the
Restricted Stock Time-Based Bonus, plus the Severance Amount and insurance and
other benefits.

      In the event Mr. Reiner's employment is terminated by the Holding Company
without "cause" or by Mr. Reiner for "good reason" and coincident with or
following a "change of control," Mr. Reiner shall be entitled to a lump sum
payment equal to 299% of his "base amount" (as defined in Section 280G(b)(3) of
the Internal Revenue Code of 1986), subject to certain restrictions, and all of
the Restricted Stock issuable under the terms of the employment agreement. In
the event that Mr. Reiner voluntarily terminates his employment within one year
following a "change of control" in connection with which the acquirer did not
expressly assume Mr. Reiner's agreement and extend its term so the unexpired
portion is not less than three years, or otherwise offers Mr. Reiner a contract
on terms no less favorable than those provided under the agreement providing for
a term of at least three years, he will be entitled to a payment equal to 299%
of the "base amount."

      In June 2005, the Board of Directors of the Holding Company upon the
recommendation of the Compensation Committee approved employment agreements
between (i) Finlay Jewelry and Joseph M. Melvin, Executive Vice President and
Chief Operating Officer of the Holding Company and President and Chief Operating
Officer of Finlay Jewelry, (ii) Finlay Merchandising & Buying, Inc., a
wholly-owned subsidiary of Finlay Jewelry ("FM&B") and Leslie A. Philip,
Executive Vice President and Chief Merchandising Officer of the Holding Company
and Finlay Jewelry and (iii) Finlay Jewelry and Joyce Manning Magrini, Executive
Vice President - Administration of Finlay Jewelry.

      Each of the employment agreements has a term of three years unless earlier
terminated in accordance with the provisions of the employment agreements. Mr.
Melvin will receive an annual base salary of $452,056, Ms. Philip will receive
annual base salary of $471,690 and Ms. Magrini will receive annual base salary
of $325,000. In addition to annual base salary, each of the executives will be
entitled to receive an annual bonus based on the attainment of financial goals.
Each employment agreement also provides that the executive shall receive, in the
event he or she is employed by Finlay Jewelry or FM&B, on June 30, 2008, a
special bonus equal to 50% of the executive's then-current base salary.


                                       64



      If an executive is terminated without good cause (as defined in the
employment agreements), the executive shall be entitled to receive, subject to
satisfaction of specified conditions, a lump sum severance payment in an amount
equal to 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).

      In March 2006, Finlay Jewelry entered into employment agreements with each
of (i) Bruce E. Zurlnick, Senior Vice President, Chief Financial Officer and
Treasurer of the Holding Company and Finlay Jewelry and (ii) Edward J. Stein,
Senior Vice President and Director of Stores of Finlay Jewelry.

      The agreement with Mr. Zurlnick provides for his continued employment as
Senior Vice President, Chief Financial Officer and Treasurer, for a term ending
February 28, 2009 unless earlier terminated in accordance with the provisions of
the employment agreement. Mr. Zurlnick will receive annual base salary at the
rate of $310,000. In addition, Mr. Zurlnick will be entitled to receive an
annual bonus based on the attainment of financial goals. The agreement with Mr.
Zurlnick also provides that he shall receive, in the event he is employed by
Finlay Jewelry on February 28, 2009, a special bonus equal to 50% of his
then-current base salary. If Mr. Zurlnick is terminated without good cause (as
defined in his agreement), he shall be 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 the annual bonus to him over the prior
three fiscal years).

      The agreement with Mr. Stein provides for him to continue as an employee
at-will of Finlay Jewelry. Mr. Stein will receive annual base salary at the rate
of $390,056. In addition, Mr. Stein will be entitled to receive an annual bonus
based on the attainment of financial goals. The agreement with Mr. Stein also
provides that in the event he is employed by Finlay Jewelry on January 31, 2009
and Finlay Jewelry terminates his employment solely by virtue of the failure to
renew Finlay Jewelry's license agreement dated as of July 26, 2001 with Macy's
Central, Inc., as amended, for a period of more than one fiscal year from its
current expiration date of January 31, 2009, he shall, subject to satisfaction
of specified conditions (and offsets for income from other activities), be
entitled to receive, as severance pay, the sum of $595,420 payable as follows:
(i) $297,710 (plus interest) due six months after termination and (ii) beginning
with the seventh calendar month thereafter, six monthly installments of
$49,618.33 each. The agreement with Mr. Stein requires Finlay Jewelry to pay all
expenses associated with the relocation of his primary residence to southern
California in the event his employment is terminated on or before January 31,
2009 for specified reasons, in accordance with Finlay Jewelry's current
relocation policy for executives.

      For information relating to the awards of restricted stock in October
2003, April 2004 and April 2005, under the 1997 Plan to Mr. Melvin, Ms. Philip,
Mr. Stein, Ms. Magrini and Mr. Zurlnick, which stock will be issued in September
2007, April 2006 and April 2008, respectively, (or an earlier vesting date under
certain circumstances, including a change of control (as defined in such plan)
provided the respective officers are then employed by Finlay Jewelry, see -
Summary Compensation Table" and "Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters" including,
"--Equity Compensation Plan Table".


                                       65



DIRECTORS' COMPENSATION

      Directors of Finlay Jewelry 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
2005, 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 aggregate
annual fee at the rate of $6,000 and the Chairman for the Compensation and
Nominating and Corporate Governance Committees receiving an aggregate annual fee
at the rate of $3,000 each.

      Commencing in August 2003, each non-employee director was allowed to
elect, under the Holding Company's Director Deferred Compensation and Stock
Purchase Plan, to defer 100% of his or her eligible director fees that would
otherwise be paid in cash and receive restricted stock units (i.e., RSUs). The
participant RSUs are awarded and credited to a director participant's account
quarterly in an amount based on a formula which divides the cash amount deferred
by the fair market value of a share of Common Stock on the award date. On each
award date, the Company credits a participant's account with one matching RSU
for each participant RSU purchased by the director. The following non-employee
directors own RSUs in the amounts set forth below:

                               Participant RSUs        Matching RSUs(1)
                               ----------------        ----------------
Rohit M. Desai                      4,990                   4,990
Norman S. Matthews                  5,588                   5,588
Michael Goldstein                   6,187                   6,187
John D. Kerin                       4,314                   4,314
Richard E. Kroon                    4,990                   4,990
Ellen R. Levine                     3,498                   3,498
Thomas M. Murnane                   5,490                   5,490

___________________
(1)   The matching RSUs include vested and unvested RSUs.

      The number of RSUs owned by each such director includes the following
amounts of RSUs acquired during 2005: Mr. Desai: 2,157 participant RSUs and
2,157 matching RSUs; Mr. Matthews: 2,415 participant RSUs and 2,415 matching
RSUs; Mr. Goldstein: 2,674 participant RSUs and 2,674 matching RSUs; Mr. Kerin:
2,157 participant RSUs and 2,157 matching RSUs; Mr. Kroon: 2,157 participant
RSUs and 2,157 matching RSUs; Mr. Murnane: 2,415 participant RSUs and 2,415
matching RSUs; and Ms. Levine: 2,157 participant RSUs and 2,157 matching RSUs.
See "--Long-Term Incentive Plans".

      Mr. Reiner has an employment contract with Finlay. See information under
the caption "Employment and Other Agreements and Change of Control
Arrangements".


                                       66



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 7,
2006 by (i) each person who, to the knowledge of the Holding Company, was the
beneficial owner of more than 5% of the outstanding Common Stock of the Holding
Company, (ii) each of the Holding Company's directors, the Holding Company's
Chief Executive Officer and each of the five other most highly compensated
executive officers of the Holding Company or Finlay Jewelry, and (iii) all
current directors and executive officers as a group. The Holding Company owns
all of our issued and outstanding capital stock.



                                                                          SHARES OF COMMON STOCK
                                                                          BENEFICIALLY OWNED (1)
                                                                        ---------------------------
                                                                         NUMBER OF      PERCENTAGE
                                   NAME                                   SHARES         OF CLASS
      ---------------------------------------------------------------   ------------   ------------

      Wells Fargo & Company(2) ......................................    1,359,880           15.0%
      FMR Corp.(3)...................................................      988,722           10.9%
      Prides Capital Partners, L.L.C.(4).............................      950,940           10.5%
      Dimensional Fund Advisors LLC(5)...............................      737,188            8.1%
      Arthur E. Reiner(1)(6).........................................      668,219            7.0%
      Barclays Global Investors, N.A.(7) ............................      464,656            5.1%
      David B. Cornstein(1)..........................................      403,200            4.4%
      Leslie A. Philip(1)(8).........................................      139,738            1.5%
      Joseph M. Melvin(1)(9).........................................      131,719            1.4%
      Edward J. Stein(1)(10).........................................       75,903            *
      Norman S. Matthews(1)(11)......................................       60,650            *
      Bruce E. Zurlnick(1)(12).......................................       48,082            *
      Michael Goldstein (1)(13)......................................       39,998            *
      Joyce Manning Magrini(1)(14)...................................       21,121            *
      Rohit M. Desai (1)(15).........................................       15,063            *
      Thomas M. Murnane(1)(16).......................................       13,834            *
      Richard E. Kroon(1)(17) .......................................        8,063            *
      John D. Kerin(1)(18)...........................................        7,387            *
      Ellen R. Levine (1)(19) .......................................        5,755            *
      All directors and executive officers
      as a group (14 persons)(20)....................................    1,638,732           16.3%


_________________
      * Less than one percent.

      (1)   Based on 9,062,796 shares outstanding on April 7, 2006. A person is
            deemed to be the beneficial owner of securities that can be acquired
            by such person within 60 days from April 7, 2006 upon the exercise
            of options, vesting of restricted stock awards and vesting of
            matching RSUs. Each beneficial owner's percentage ownership is
            determined by assuming that options, restricted stock and matching
            RSUs that are held by such person and which are exercisable or
            become vested within 60 days of April 7, 2006 have been exercised or
            have become vested. Except as noted below, each beneficial owner has
            sole voting power and sole investment power, subject (in the case of
            the Holding Company's directors and executive officers) to the terms
            of the Amended and Restated Stockholders' Agreement dated as of
            March 6, 1995, as amended (the "Stockholders' Agreement"), by and
            among the Holding Company and certain securityholders of the Holding
            Company. The address for the beneficial owners named in the table,
            unless specified otherwise in a subsequent footnote, is c/o the
            Holding Company, 529 Fifth Avenue, New York, New York 10017.

      (2)   According to Amendment No. 3, dated February 1, 2006, to a Schedule
            13G dated January 23, 2004, as amended, filed with the Commission by
            Wells Fargo & Company and Wells Capital Management Incorporated,
            Wells Fargo & Company has sole power to vote 1,238,025 shares and


                                       67



            sole power to dispose of 1,333,880 shares and Wells Capital
            Management Incorporated has sole power to vote 1,212,025 shares and
            sole power to dispose of 1,298,880 shares. The address of Wells
            Fargo & Company is 420 Montgomery Street, San Francisco, California
            94104 and the address for Wells Capital Management Incorporated is
            525 Market Street, 10th Floor, San Francisco, California 94104.

      (3)   These shares represent shares reported as beneficially owned by FMR
            Corp. in a joint filing on Amendment No. 6, dated February 14, 2006,
            to a Schedule 13G dated February 1, 1999, as amended, filed with the
            Commission by FMR Corp., Edward C. Johnson 3d, Fidelity Management &
            Research Company ("Fidelity") and Fidelity Low Priced Stock Fund
            (the "Fund"). According to said Schedule 13G Amendment, members of
            the Edward C. Johnson 3d family are the predominant owners of Class
            B shares of common stock of FMR Corp., representing approximately
            49% of the voting power of FMR Corp. Mr. Johnson 3d is Chairman of
            FMR Corp. The Johnson family group and all other Class B
            shareholders have entered into a shareholders' voting agreement
            under which all Class B shares will be voted in accordance with the
            majority vote of Class B shares. Accordingly, through their
            ownership of voting common stock and the execution of the
            shareholders' voting agreement, members of the Johnson family may be
            deemed, under the Investment Company Act of 1940, to form a
            controlling group with respect to FMR Corp. The Schedule 13G
            Amendment further states that Fidelity, a wholly-owned subsidiary of
            FMR Corp. and a registered investment adviser, is the beneficial
            owner of the 988,722 shares which are the subject of the Schedule
            13G Amendment as a result of its acting as investment adviser to the
            Fund, an investment company which owns all of such 988,722 shares.
            Mr. Johnson 3d, FMR Corp., through its control of Fidelity, and the
            Fund each has sole power to dispose of the 988,722 shares owned by
            the Fund. Neither FMR Corp. nor Mr. Johnson 3d has the sole power to
            vote or direct the voting of the shares owned directly by the Fund,
            which power resides with the Fund's Board of Trustees. Fidelity
            carries out the voting of the shares under written guidelines
            established by the Fund's Board of Trustees. The address for FMR
            Corp., Fidelity and the Fund is 82 Devonshire Street, Boston,
            Massachusetts 02109.

      (4)   According to a Form 3 filed with the Commission on March 30, 2006
            and a Form 4 filed with the Commission on April 3, 2006, these
            shares represent shares reported as beneficially owned by Prides
            Capital Partners, L.L.C, which has sole voting and investment power
            over these shares. Prides Capital Partners, L.L.C. is the general
            partner of Prides Capital Fund L.P., which directly owns the shares
            of common stock set forth in the table. Additionally, as the
            controlling shareholders of Prides Capital Partners, L.L.C., Kevin
            A. Richardson, II, Henry J. Lawlor, Jr., Murray A. Indick, Charles
            E. McCarthy and Christian Puscasiu, may also be deemed to
            beneficially own these shares. The address for Prides Capital
            Parners, L.L.C., Kevin A. Richardson, II, Henry J. Lawlor, Jr.,
            Murray A. Indick, Charles E. McCarthy, and Christian Puscasiu is 200
            High Street, Ste. 700, Boston, Massachusetts 02110.

      (5)   According to Amendment No. 1, dated February 6, 2006, to a Schedule
            13G dated February 9, 2005, as amended, filed with the Commission by
            Dimensional Fund Advisors Inc. ("Dimensional"), Dimensional may be
            deemed to beneficially own, have sole power to vote or to direct the
            vote and sole power to dispose or to direct the disposition of the
            737,188 shares. Dimensional is an investment advisor registered
            under Section 203 of the Investment Advisors Act of 1940.
            Dimensional furnishes investment advice to four investment companies
            registered under the Investment Company Act of 1940 and serves as
            investment manager to certain other commingled group trusts and
            separate accounts (collectively, the investment companies, trusts
            and accounts are the "Funds"). In its role as investment advisor or
            manager, Dimensional may be deemed to be a beneficial owner of the
            737,188 shares and to possess sole investment and/or sole voting
            power over the 737,188 shares owned directly by the Funds. The
            address of Dimensional is 1299 Ocean Avenue, 11th Floor, Santa
            Monica, California 90401.

      (6)   Includes options to acquire an aggregate of 440,000 shares of Common
            Stock having exercise prices ranging from $7.05 to $14.00 per share.
            Also includes 25,000 shares of restricted stock and 17,413
            participant restricted stock units, or RSUs (as herein defined), and
            excludes 17,413 matching RSUs, which are not yet vested. Also
            includes 54,437 shares of restricted stock, which were issued in
            February 2006 and are subject to vesting. Additionally, Mr. Reiner
            will receive incentive stock compensation of $209,458, on or about
            April 26, 2006, for which the number of shares has not yet been
            determined.

      (7)   Information regarding share ownership was obtained from the Schedule
            13G jointly filed on January 26, 2006 by Barclays Global Investors,
            NA., Barclays Global Fund Advisors, Barclays Global Investors, Ltd.
            and Barclays Global Investors Japan Trust and Banking Company
            Limited.


                                       68



            Barclays Global Investors, NA. has sole voting power with respect to
            449,726 of the shares shown above and sole disposition power with
            respect to 464,656 of the shares shown. The address for Barclays
            Global Investors, NA. is 45 Fremont Street, San Francisco, CA 94105.

      (8)   Includes options to acquire an aggregate of 126,667 shares of Common
            Stock having exercise prices ranging from $7.05 to $23.1875 per
            share. Also includes 8,071 participant RSUs and excludes 8,071
            matching RSUs, which are not yet vested. Also includes 5,000 shares
            of restricted stock awarded in April 2004, which shares are to be
            received by Ms. Philip in April 2006. Excludes 5,000 shares of
            restricted stock awarded in October 2003, which shares are to be
            received by Ms. Philip upon completion of vesting in September 2007
            (or an earlier vesting date under certain circumstances) if then
            employed by the Holding Company. Also excludes 7,200 shares of
            restricted stock awarded in April 2005, which shares are to be
            received by Ms. Philip upon completion of vesting in April 2008 (or
            an earlier vesting date under certain circumstances) if then
            employed by the Holding Company.

      (9)   Includes options to acquire an aggregate of 118,000 shares of Common
            Stock having exercise prices ranging from $7.05 to $24.3125 per
            share. Also includes 7,719 participant RSUs and excludes 7,719
            matching RSUs, which are not yet vested. Also includes 5,000 shares
            of restricted stock awarded in April 2004, which shares are to be
            received by Mr. Melvin in April 2006. Excludes 5,000 shares of
            restricted stock awarded in October 2003, which shares are to be
            received by Mr. Melvin upon completion of vesting in September 2007
            (or an earlier vesting date under certain circumstances) if then
            employed by the Holding Company. Also excludes 7,200 shares of
            restricted stock awarded in April 2005, which shares are to be
            received by Mr. Melvin upon completion of vesting in April 2008 (or
            an earlier vesting date under certain circumstances) if then
            employed by the Holding Company.

      (10)  Includes options to acquire an aggregate of 64,667 shares of Common
            Stock having exercise prices ranging from $7.05 to $13.4219 per
            share. Also includes 7,536 participant RSUs and excludes 7,536
            matching RSUs, which are not yet vested. Also includes 2,500 shares
            of restricted stock awarded in April 2004, which shares are to be
            received by Mr. Stein in April 2006. Excludes 2,500 shares of
            restricted stock awarded in October 2003, which shares are to be
            received by Mr. Stein upon completion of vesting in September 2007
            (or an earlier vesting date under certain circumstances) if then
            employed by the Holding Company. Also excludes 3,600 shares of
            restricted stock awarded in April 2005, which shares are to be
            received by Mr. Stein upon completion of vesting in April 2008 (or
            an earlier vesting date under certain circumstances) if then
            employed by the Holding Company.

      (11)  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 9,030 participant and vested matching RSUs and
            excludes 2,146 matching RSUs, which are not yet vested.

      (12)  Includes options to acquire an aggregate of 35,000 shares of Common
            Stock having exercise prices ranging from $7.05 to $13.5625 per
            share. Also includes 5,282 participant RSUs and excludes 5,282
            matching RSUs, which are not yet vested. Also includes 2,500 shares
            of restricted stock awarded in April 2004, which shares are to be
            received by Mr. Zurlnick in April 2006. Excludes 2,500 shares of
            restricted stock awarded in October 2003, which shares are to be
            received by Mr. Zurlnick upon completion of vesting in September
            2007 (or an earlier vesting date under certain circumstances) if
            then employed by the Holding Company. Also excludes 3,600 shares of
            restricted stock awarded in April 2005, which shares are to be
            received by Mr. Zurlnick upon completion of vesting in April 2008
            (or an earlier vesting date under certain circumstances) if then
            employed by the Holding Company.

      (13)  Includes options to acquire an aggregate of 20,000 shares of Common
            Stock having exercise prices ranging from $9.85 to $13.4375 per
            share. Also includes 9,998 participant and vested matching RSUs and
            excludes 2,376 matching RSUs, which are not yet vested.

      (14)  Includes options to acquire an aggregate of 12,000 shares of Common
            Stock having exercise prices ranging from $7.05 to $12.75 per share.
            Also includes 5,121 participant RSUs and excludes 5,121 matching
            RSUs, which are not yet vested. Also includes 3,500 shares of
            restricted stock awarded in April 2004, which shares are to be
            received by Ms. Magrini in April 2006. Excludes


                                       69



            2,500 shares of restricted stock awarded in October 2003, which
            shares are to be received by Ms. Magrini upon completion of vesting
            in September 2007 (or an earlier vesting date under certain
            circumstances) if then employed by the Holding Company. Also
            excludes 5,000 shares of restricted stock awarded in April 2005,
            which shares are to be received by Ms. Magrini upon completion of
            vesting in April 2008 (or an earlier vesting date under certain
            circumstances) if then employed by the Holding Company.

      (15)  Includes options to acquire an aggregate of 5,000 shares of Common
            Stock having an exercise price of $15.877 per share. Also includes
            8,063 participant and vested matching RSUs and excludes 1,917
            matching RSUs, which are not yet vested.

      (16)  Includes options to acquire an aggregate of 5,000 shares of Common
            Stock having an exercise price of $12.939 per share. Also includes
            8,834 participant and vested matching RSUs and excludes 2,146
            matching RSUs, which are not yet vested.

      (17)  Includes 8,063 participant and vested matching RSUs and excludes
            1,917 matching RSUs, which are not yet vested.

      (18)  Includes 7,387 participant and vested matching RSUs and excludes
            1,241 matching RSUs, which are not yet vested.

      (19)  Includes 5,755 participant and vested matching RSUs and excludes
            1,241 matching RSUs, which are not yet vested.

      (20)  Includes options to acquire an aggregate of 846,334 shares of Common
            Stock having exercise prices ranging from $7.05 to $24.3125 per
            share. Also includes 108,272 participant and vested matching RSUs.
            Also includes 18,500 shares of restricted stock awarded in April
            2004, which shares are to be received by the respective executive
            officers in April 2006. Excludes 64,126 matching RSUs, which are not
            yet vested and 17,500 shares of restricted stock awarded in October
            2003, which shares are to be received upon completion of vesting in
            September 2007 (or an earlier vesting date under certain
            circumstances), if the respective officers are then employed by the
            Holding Company. Also excludes 26,600 shares of restricted stock
            awarded in April 2005, which shares are to be received upon
            completion of vesting in April 2008 (or an earlier vesting date
            under certain circumstances) if the respective officers are then
            employed by the Holding Company.

EQUITY COMPENSATION PLAN TABLE

      Options to purchase Common Stock, restricted stock and RSUs have been
granted by the Holding Company to employees and non-employee directors under
various stock-based compensation plans. See Note 6 of Notes to Consolidated
Financial Statements. The following table summarizes the number of stock options
issued, shares of restricted stock and RSUs awarded, the weighted-average
exercise price and the number of securities remaining to be issued under all
outstanding equity compensation plans as of January 28, 2006.



                                                                                                      (C)
                                                                                             NUMBER OF SECURITIES
                                                          (A)                  (B)          REMAINING AVAILABLE FOR
                                                 NUMBER OF SECURITIES    WEIGHTED-AVERAGE    FUTURE ISSUANCE UNDER
                                                   TO BE ISSUED UPON    EXERCISE PRICE OF     EQUITY COMPENSATION
                                                      EXERCISE OF          OUTSTANDING         PLANS (EXCLUDING
                                                 OUTSTANDING OPTIONS,   OPTIONS, WARRANTS   SECURITIES REFLECTED IN
                    PLAN CATEGORY                 WARRANTS AND RIGHTS       AND RIGHTS            COLUMN (A))
      ----------------------------------------   --------------------   -----------------   -----------------------

      Equity compensation plans approved  by
         security holders.....................        1,397,414            $    12.79                224,577
      Equity compensation plans not approved
         by security holders..................               --                    --                     --
                                                 --------------------   -----------------   -----------------------
      Total...................................        1,397,414            $    12.79                224,577
                                                 ====================   =================   =======================


____________________
(1)   Awards are permitted under the Incentive Plans in the form of (i) stock
      options; (ii) stock appreciation rights in tandem with stock options;
      (iii) limited stock appreciation rights in tandem with stock options; (iv)
      restricted or


                                       70



      nonrestricted stock awards, including purchases and awards under the RSU
      Plans, subject to such terms and conditions as the Holding Company's
      Compensation Committee shall determine; (v) performance units which are
      based upon attainment of performance goals during a period of not less
      than two nor more than five years and which may be settled in cash or in
      Common Stock in the discretion of the Holding Company's Compensation
      Committee; or (vi) any combination of the foregoing. See "Item 11. --
      Long-Term Incentive Plans".

(2)   As of January 28, 2006, an aggregate of 156,000 shares of restricted stock
      have been issued under the 1997 Plan. Pursuant to awards made in October
      2003, April 2004 and April 2005 under the 1997 Plan, an additional 31,250,
      32,500 and 48,300 shares, respectively, of restricted stock will be issued
      to certain executive officers of the Holding Company on September 30,
      2007, April 30, 2006 and April 30, 2008, respectively (or an earlier
      vesting date under certain circumstances, provided the respective officers
      are then employed by the Holding Company).

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

STOCKHOLDERS' AGREEMENT

      Certain members of management (the "Management Stockholders"), directors
and employees holding options to purchase Common Stock or RSUs, certain private
investors and the Holding Company are parties to a stockholders' agreement
("Stockholders' Agreement"), which sets forth certain rights and obligations of
the parties with respect to the Common Stock (including certain "come along" and
"take along" rights relating to sales of Common Stock) and corporate governance
of the Holding Company. The Stockholders' Agreement provides that the parties
thereto must vote their shares in favor of certain directors who are nominated
by Mr. Cornstein and Mr. Reiner. Mr. Cornstein is his own director designee and
Mr. Reiner is his own director designee.

REGISTRATION RIGHTS AGREEMENT

      A registration rights agreement, dated as of May 26, 1993, as amended,
(the "Registration Rights Agreement") with the Holding Company, grants certain
registration rights to certain Management Stockholders and other investors.
Management Stockholders may demand registration under certain circumstances. In
addition, under the Registration Rights Agreement, if the Holding Company
proposes to register shares of Common Stock under the Securities Act of 1933, as
amended (the "Securities Act"), then each party to the Registration Rights
Agreement will have the right, subject to certain restrictions, priorities and
exceptions to request that the Holding Company register its shares of Common
Stock in connection with such registration. Under the Registration Rights
Agreement, the parties agreed to indemnify each other for certain liabilities in
connection with any registration of shares subject to the Registration Rights
Agreement.

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
therein), 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.


                                       71



      For information relating to certain transactions involving members of
management or others, see "-- Employment and Other Agreements and Change of
Control Arrangements" under the caption "Executive Compensation".

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


                                       72



ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

      AUDIT FEES. The aggregate fees billed by Deloitte & Touche LLP for
professional services rendered for the audit of our annual financial statements
and management's assessment of the effectiveness of internal control over
financial reporting for the fiscal years ended January 28, 2006 and January 29,
2005 and the reviews of the financial statements included in our Forms 10-Q for
fiscal years 2005 and 2004 totaled $710,000 and $843,200, respectively.
Additionally, the year ended January 28, 2006 includes fees billed by Cherry,
Bekaert and Holland LLP totaling $70,000 for professional services rendered for
the audit of Carlyle's financial statements as of and for the 37 - week period
ended January 28, 2006 and the reviews of the financial statements included in
our Forms 10-Q as well as the audit of Carlyle's opening balance sheet.

      AUDIT-RELATED FEES. The aggregate fees billed by Deloitte & Touche LLP for
assurance and related services that are reasonably related to the performance of
the audit or review of Finlay's financial statements for the fiscal years ended
January 28, 2006 and January 29, 2005 and that are not disclosed in the
paragraph captioned "Audit Fees" above, were $124,000 and $105,000,
respectively. In 2005, audit related services were performed by Deloitte &
Touche LLP in connection with their audit of Finlay's 401(k) plan, due diligence
review related to the acquisition of Carlyle and consulting regarding comment
letter responses to the Division of Corporation Finance of the Commission. In
2004, audit related services were performed by Deloitte & Touche LLP in
connection with their audit of Finlay's 401(k) plan and work related to the
refinancing of the Old Senior Notes and Old Senior Debentures and issuance of
the Senior Notes.

      TAX FEES. The aggregate fees billed by Deloitte & Touche LLP for
professional services rendered for tax compliance, tax advice and tax planning
for the fiscal years ended January 28, 2006 and January 29, 2005 were $0 and
$25,681, respectively.

      The Audit Committee has established pre-approval policies and procedures,
pursuant to which the Audit Committee approved the foregoing audit and
permissible non-audit services provided by Deloitte & Touche LLP in 2005.

                                     PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)   Documents filed as part of this report:
         (1) Financial Statements.

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

         (2) Financial Statement Schedules. None.

         (3) Exhibits.

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

ITEM
NUMBER      DESCRIPTION
------      -----------

1.1         Purchase Agreement, dated as of May 27, 2004, among Finlay Jewelry,
            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).


                                       73



2.1         Agreement and Plan of Merger, dated May 19, 2005, by and among
            Finlay Fine Jewelry Corporation, 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).

3.1         Certificate of Incorporation, as amended, of Finlay Jewelry
            (incorporated by reference to Exhibit 3.1 of Form S-1 Registration
            Statement, Registration No. 33-59580).

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

3.2(b)      Second Amendment, dated as of September 10, 2003, to the Amended and
            Restated By-Laws of Finlay Jewelry (incorporated by reference to
            Exhibit 3.2 filed as part of the Quarterly Report on Form 10-Q for
            the period ended November 1, 2003 filed by Finlay Jewelry on
            December 10, 2003).

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

4.2(a)      Amended and Restated Stockholders' Agreement dated as of March 6,
            1995 among the Holding Company, David B. Cornstein, Arthur E. Reiner
            and certain other security holders (incorporated by reference to
            Exhibit 4.9 filed as part of the Annual Report on Form 10-K for the
            period ended January 28, 1995 filed by Finlay Jewelry on April 12,
            1995).

4.2(b)      Omnibus Amendment to Registration Rights and Stockholders'
            Agreements (incorporated by reference to Exhibit 10.10 filed as part
            of the Quarterly Report on Form 10-Q for the period ended November
            1, 1997 filed by Finlay Jewelry on December 16, 1997).

4.3         Registration Rights Agreement dated as of May 26, 1993 among the
            Company, David B. Cornstein, and certain other security holders
            (incorporated by reference to Exhibit 4.6 filed as part of the
            Current Report on Form 8-K filed by Finlay Jewelry on June 10,
            1993).

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


                                       74



            (incorporated by reference to Exhibit 10.7 filed as part of the
            Current Report on Form 8-K filed by Finlay Jewelry on May 25, 2005).

4.4(e)      Supplemental Indenture dated as of May 19, 2005 among Park
            Promenade, Inc., Finlay Jewelry and HSBC Bank USA, as Trustee,
            together with Subsidiary Guarantee (incorporated by reference to
            Exhibit 10.8 filed as part of the Current Report on Form 8-K filed
            by Finlay Jewelry on May 25, 2005).

4.5         Form of Finlay Jewelry's 8-3/8% Senior Notes due 2012 issued under
            Rule 144A of the Securities Act (incorporated by reference to
            Exhibit 4.2 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).

4.6         Form of Finlay Jewelry's 8-3/8% Senior Notes due 2012 issued under
            Regulation S of the Securities Act (incorporated by reference to
            Exhibit 4.3 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         Registration Rights Agreement, dated as of June 3, 2004, between
            Finlay Jewelry and Credit Suisse First Boston LLC, J.P. Morgan
            Securities Inc. and SG Americas Securities, LLC (incorporated by
            reference to Exhibit 4.4 filed as part of the Quarterly Report on
            Form 10-Q for the period ended May 1, 2004 filed by Finlay Jewelry
            on June 10, 2004).

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

10.2(a)     The Holding Company's Retirement Income Plan, as amended and
            restated June 2003.

10.2(b)     Amendment No. 1, dated December 23, 2005, to the Holding Company's
            Retirement Income Plan, as amended and restated June 2003.

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

10.4(a)     Employment Agreement, dated as of January 30, 2005, among the
            Holding Company, Finlay Jewelry and Arthur E. Reiner (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).

10.4(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).

10.4(c)     Employment Agreement dated as of June 16, 2005 between Leslie A.
            Philip and FM&B, 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).

10.4(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).


                                       75



10.4(e)     Employment Agreement between Bruce E. Zurlnick and Finlay Jewelry
            (incorporated by reference to Exhibit 10.1 filed as part of the
            Current Report on Form 8-K filed by Finlay Jewelry on March 8,
            2006).

10.4(f)     Letter Agreement between Edward J. Stein and Finlay Jewelry
            (incorporated by reference to Exhibit 10.2 filed as part of the
            Current Report on Form 8-K filed by Finlay Jewelry on March 8,
            2006).

10.5        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 the Company on June 30, 1993).

10.6(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).

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

10.6(c)     Amendment to the Holding Company's Long Term Incentive Plan
            (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).

10.7(a)     1997 Long Term Incentive Plan, 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).

10.7(b)     Amendment to the Holding Company's 1997 Long Term Incentive Plan
            (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).

10.8(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).

10.8(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).

10.9(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).

10.9(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).

10.9(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


                                       76



            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).

10.10(a)    Third Amended and Restated Credit Agreement, dated as of May 19,
            2005 among Finlay Jewelry and Carlyle & Co. Jewelers, the Holding
            Company, General Electric Capital Corporation ("G.E. Capital"),
            individually and in its capacity as administrative agent, Bank of
            America, N.A., individually and as documentation agent, and certain
            other banks and institutions (incorporated by reference to Exhibit
            10.1 filed as part of the Current Report on Form 8-K filed by Finlay
            Jewelry on May 25, 2005).

10.10(b)    Joinder Agreement dated as of May 19, 2005 for the benefit of G.E.
            Capital, as administrative agent, in connection with (i) that
            certain Amended and Restated Guaranty dated as of January 22, 2003
            among the guarantors party thereto and the agent, (ii) that certain
            Amended and Restated Security Agreement dated as of January 22, 2003
            among the grantors party thereto and the agent and (iii) that
            certain Amended and Restated Pledge Agreement dated as of January
            22, 2003 among the pledgors party thereto and the agent
            (incorporated by reference to Exhibit 10.4 filed as part of the
            Current Report on Form 8-K filed by Finlay Jewelry on May 25, 2005).

10.10(c)    Amendment No. 1, dated April 7, 2006, to the Third Amended and
            Restated Credit Agreement dated as of May 19, 2005, among Finlay
            Jewelry, Carlyle & Co. Jewelers, the Holding Company and G.E.
            Capital, individually and in its capacity as administrative agent,
            Bank of America, N.A., and certain other banks and institutions
            (incorporated by reference to Exhibit 10.1 filed as part of the
            Current Report on Form 8-K filed by Finlay Jewelry on April 13,
            2006).

10.10(d)    Amendment No. 2 dated April 24, 2006, to the Third Amended and
            Restated Credit Agreement dated as of May 19, 2005, among Finlay
            Jewelry, Carlyle & Co. Jewelers, the Holding Company and G.E.
            Capital, individually and in its capacity as administrative agent,
            Bank of America, N.A., and certain other banks and institutions.

10.11       Amended and Restated Guaranty, dated as of January 22, 2003, by
            Finlay Jewelry, Inc. ("FJI"), FM&B and eFinlay, Inc. ("eFinlay")
            (incorporated by reference to Exhibit 10.11 filed as part of the
            Annual Report on Form 10-K for the period ended February 1, 2003
            filed by Finlay Jewelry on May 1, 2003).

10.12(a)    Amended and Restated Security Agreement dated as of January 22,
            2003, by and among Finlay Jewelry, FJI, FM&B, 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).

10.12(b)    Amendment to Amended and Restated Security Agreement, dated as of
            May 19, 2005, by and among Finlay Jewelry, Finlay Jewelry, Inc.,
            FM&B, Inc., eFinlay, Inc., 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).

10.13       Amended and Restated Pledge Agreement dated as of January 22, 2003,
            by and among Finlay Jewelry, FJI, FM&B, 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).

10.14       Amended and Restated Trademark Security Agreement dated as of
            January 22, 2003 by Finlay Jewelry, FJI, FM&B, eFinlay and 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).

10.15       Amended and Restated Patent Security Agreement dated as of January
            22, 2003 by Finlay Jewelry, FJI, FM&B 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).


                                       77



10.16       Amended and Restated Copyright Security Agreement dated as of
            January 22, 2003 by Finlay Jewelry, FJI, FM&B 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).

10.17       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).

10.18       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).

10.19(a)    Amended and Restated Gold Consignment Agreement dated as of March
            30, 2001 (the "Amended and Restated Gold Consignment Agreement")
            between Finlay Jewelry, eFinlay, Inc. ("eFinlay") and Sovereign Bank
            (as successor to Fleet National Bank, f/k/a BankBoston, N.A., f/k/a
            The First National Bank of Boston, as successor to Rhode Island
            Hospital Trust National Bank) ("Sovereign Bank"), and the other
            parties which are or may become parties thereto (incorporated by
            reference to Exhibit 10.1 filed as part of the Quarterly Report on
            Form 10-Q for the period ended May 5, 2001 filed by Finlay Jewelry
            on June 18, 2001).

10.19(b)    First Amendment to the Amended and Restated Gold Consignment
            Agreement (incorporated by reference to Exhibit 10.17(b) 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).

10.19(c)    Second Amendment, dated September 30, 2002, to the Amended and
            Restated Gold Consignment Agreement (incorporated by reference to
            Exhibit 10 filed as part of the Quarterly Report on Form 10-Q for
            the period ended November 2, 2002 filed by Finlay Jewelry on
            December 13, 2002).

10.19(d)    Third Amendment, dated April 4, 2003, to the Amended and Restated
            Gold Consignment Agreement (incorporated by reference to Exhibit
            10.19(d) 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).

10.19(e)    Fourth Amendment, dated as of July 6, 2003, to the Amended and
            Restated Gold Consignment Agreement (incorporated by reference to
            Exhibit 10.1 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).

10.19(f)    Fifth Amendment, dated as of May 27, 2004, to the Amended and
            Restated Gold Consignment Agreement (incorporated by reference to
            Exhibit 10.3 filed as part of the Quarterly Report on Form 10-Q for
            the period ended May 1, 2004 filed by Finlay Jewelry on June 10,
            2004).

10.19(g)    Sixth Amendment, dated as of August 20, 2004, to the Amended and
            Restated Gold Consignment Agreement (incorporated by reference to
            Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q for
            the period ended July 31, 2004 filed by Finlay Jewelry on September
            9, 2004).


                                       78



10.19(h)    Seventh Amendment, dated as of November 22, 2004, to the Amended and
            Restated Gold Consignment Agreement (incorporated by reference to
            Exhibit 10.2 filed as part of the Current Report on Form 8-K filed
            by Finlay Jewelry on November 24, 2004).

10.19(i)    Consent and Amendment, dated as of May 19, 2005, among Sovereign
            Bank, Sovereign Precious Metals, LLC (Sovereign Bank and Sovereign
            Precious Metals, LLC individually and as agents), Commerzbank
            International S.A., Finlay Fine Jewelry Corporation and eFinlay,
            Inc. to the Amended and Restated Gold Consignment Agreement, dated
            as of March 30, 2001, as amended (incorporated by reference to
            Exhibit 10.3 filed as part of the Current Report on Form 8-K filed
            by Finlay Jewelry on May 25, 2005).

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

10.19(k)    Ninth Amendment dated as of April 7, 2006, to the Amended and
            Restated Gold Consignment Agreement among Sovereign Bank, Sovereign
            Precious Metals, LLC (Sovereign Bank and Sovereign Precious Metals,
            LLC individually and as agents), Commerzbank International S.A.,
            Finlay Jewelry and eFinlay, Inc. (incorporated by reference to
            Exhibit 10.2 filed as part of the Current Report on Form 8-K filed
            by Finlay Jewelry on April 13, 2006).

10.20       Amended and Restated Security Agreement dated as of March 30, 2001
            between Finlay Jewelry, eFinlay and Sovereign Bank, as agent,
            (incorporated by reference to Exhibit 10.2 filed as part of the
            Quarterly Report on Form 10-Q for the period ended May 5, 2001 filed
            by Finlay Jewelry on June 18, 2001).

10.21       Amended and Restated Intercreditor Agreement dated as of March 30,
            2001 between Sovereign Bank, as agent, and G.E. Capital, as agent,
            and acknowledged by Finlay Jewelry and eFinlay (incorporated by
            reference to Exhibit 10.3 filed as part of the Quarterly Report on
            Form 10-Q for the period ended May 5, 2001 filed by Finlay Jewelry
            on June 18, 2001).

10.22       Restricted Stock Agreement, dated as of August 14, 2003, between the
            Holding Company and Arthur E. Reiner (incorporated by reference to
            Exhibit 10.2 filed as part of the Quarterly Report on Form 10-Q for
            the period ended November 1, 2003 filed by Finlay Jewelry on
            December 10, 2003).

10.23       Form of Restricted Stock Agreement entered into by the Holding
            Company, in connection with October 2003 awards of restricted stock
            (incorporated by reference to Exhibit 10.3 filed as part of the
            Quarterly Report on Form 10-Q for the period ended November 1, 2003
            filed by Finlay Jewelry on December 10, 2003).

10.24       Form of Restricted Stock Agreement entered into by the Holding
            Company in connection with restricted stock awards under the Holding
            Company's 1997 Long Term Incentive Plan (incorporated by reference
            to Exhibit 10.1 filed as part of the Quarterly Report on Form 10-Q
            for the period ended May 1, 2004 filed by Finlay Jewelry on June 10,
            2004).

10.25       The Holding Company's 2004 Cash Bonus Plan (incorporated by
            reference to Exhibit 10.1 filed as part of the Quarterly Report on
            Form 10-Q for the period ended July 31, 2004 filed by Finlay Jewelry
            on September 9, 2004).


                                       79



10.26       Description of Director and Named Executive Officer Compensation.

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

18          Preferability letter from Deloitte & Touche LLP regarding change in
            inventory valuation methodology (incorporated by reference to
            Exhibit 18 filed as part of the Quarterly Report on Form 10-Q for
            the period ended October 30, 2004 filed by Finlay Jewelry on
            December 9, 2004).

21.1        Subsidiaries of Finlay Jewelry.

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

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

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.


                                       80



                                   SIGNATURES

      PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

                                                 Finlay Fine Jewelry Corporation

Date: April 26, 2006                             By:   /s/ ARTHUR E.REINER
                                                       -------------------------
                                                           Arthur 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,                     April 26, 2006
----------------------------------      Chief Executive Officer and Director
          Arthur E. Reiner              (Principal Executive Officer)


       /s/ BRUCE E. ZURLNICK            Senior Vice President, Treasurer and       April 26, 2006
----------------------------------      Chief Financial Officer (Principal
         Bruce E. Zurlnick              Financial and Accounting Officer)


       /s/ DAVID B. CORNSTEIN           Director                                   April 26, 2006
----------------------------------
         David B. Cornstein


         /s/ ROHIT M. DESAI             Director                                   April 26, 2006
----------------------------------
           Rohit M. Desai


       /s/ MICHAEL GOLDSTEIN            Director                                   April 26, 2006
----------------------------------
         Michael Goldstein


         /s/ JOHN D. KERIN              Director                                   April 26, 2006
----------------------------------
           John D. Kerin


        /s/ RICHARD E. KROON            Director                                   April 26, 2006
----------------------------------
          Richard E. Kroon

        /s/ ELLEN R. LEVINE             Director                                   April 26, 2006
----------------------------------
             Ellen R. Levine


       /s/ NORMAN S. MATTHEWS           Director                                   April 26, 2006
----------------------------------
         Norman S. Matthews


       /s/ THOMAS M. MURNANE            Director                                   April 26, 2006
----------------------------------
         Thomas M. Murnane



                                       81`

`FINLAY FINE JEWELRY CORPORATION
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           PAGE
                                                                           ----

Reports of Independent Registered Public Accounting Firms...................F-2

Consolidated Statements of Operations for the years ended
 January 28, 2006, January 29, 2005 and January 31, 2004....................F-4

Consolidated Balance Sheets as of January 28, 2006 and
 January 29, 2005...........................................................F-5

Consolidated Statements of Changes in Stockholder's Equity and
 Comprehensive Income (Loss) for the years ended January 28, 2006,
 January 29, 2005 and January 31, 2004......................................F-6

Consolidated Statements of Cash Flows for the years ended
 January 28, 2006, January 29, 2005 and January 31, 2004....................F-7

Notes to Consolidated Financial Statements for the years ended
 January 28, 2006, January 29, 2005 and January 31, 2004....................F-8


                                      F-1



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
of Finlay Fine Jewelry Corporation:

We have audited the accompanying consolidated balance sheets of Finlay Fine
Jewelry Corporation and subsidiaries (the "Company") as of January 28, 2006 and
January 29, 2005, and the related consolidated statements of operations, changes
in stockholder's equity and comprehensive income (loss) and cash flows for each
of the three fiscal years in the period ended January 28, 2006. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Carlyle & Co. Jewelers and its subsidiaries, ("Carlyle"), a
wholly-owned subsidiary of the Company, which statements reflect total assets
constituting 13.0% of consolidated total assets as of January 28, 2006 and total
net sales constituting 7.0% of consolidated total net sales for the year ended
January 28, 2006. Such financial statements were audited by other auditors,
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Carlyle, is based solely on the report of such other
auditors.

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

In our opinion, based on our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Finlay Fine Jewelry Corporation and subsidiaries as of
January 28, 2006 and January 29, 2005, and the results of their operations and
their cash flows for each of the three fiscal years in the period ended January
28, 2006, in conformity with accounting principles generally accepted in the
United States of America.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of January 28, 2006, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated April 26, 2006 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an adverse opinion on the effectiveness of the Company's internal control
over financial reporting.

As discussed in Notes 2 and 3 to the consolidated financial statements, in 2004,
the Company changed their method of determining price indices used in the
valuation of LIFO inventories.

/s/ DELOITTE & TOUCHE LLP

New York, New York
April 26, 2006


                                       F-2



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Carlyle & Co. Jewelers and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Carlyle & Co.
Jewelers and Subsidiaries, a wholly-owned subsidiary of Finlay Fine Jewelry
Corporation, (the "Company"), as of January 28, 2006, and the related
consolidated statements of operations and retained earnings, and cash flows for
the period beginning May 19, 2005 and ending January 28, 2006. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Carlyle & Co. Jewelers and
Subsidiaries, a wholly-owned subsidiary of Finlay Fine Jewelry Corporation, as
of January 28, 2006, and the results of their operations and their cash flows
for the 37 week period then ended in conformity with accounting principles
generally accepted in the United States of America.

CHERRY, BEKAERT & HOLLAND L.L.P.

Greensboro, North Carolina
April 26, 2006


                                       F-3



                         FINLAY FINE JEWELRY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)



                                                                                  YEAR ENDED
                                                                    ---------------------------------------
                                                                    JANUARY 28,   JANUARY 29,   JANUARY 31,
                                                                        2006         2005           2004
                                                                    -----------   -----------   -----------

Sales ..........................................................    $   990,134   $   923,606   $   902,416
Cost of sales ..................................................        499,099       454,391       440,517
                                                                    -----------   -----------   -----------
  Gross margin .................................................        491,035       469,215       461,899
Selling, general and administrative expenses ...................        420,613       396,185       387,501
Credit associated with the closure of Sonab ....................             --          (364)           --
Depreciation and amortization ..................................         19,125        17,319        17,026
Impairment of goodwill .........................................         77,288            --            --
                                                                    -----------   -----------   -----------
  Income (loss) from operations ................................        (25,991)       56,075        57,372
Interest expense, net ..........................................         24,356        20,179        16,556
Other expense ..................................................             79         5,962            --
                                                                    -----------   -----------   -----------
  Income (loss) from continuing operations before income taxes..        (50,426)       29,934        40,816
Provision for income taxes .....................................          5,339        10,447        16,035
                                                                    -----------   -----------   -----------
  Income (loss) from continuing operations .....................        (55,765)       19,487        24,781
Discontinued operations, net of tax ............................             --            --       (11,537)
                                                                    -----------   -----------   -----------
  Net income (loss) ............................................    $   (55,765)  $    19,487  $     13,244
                                                                    ===========   ===========   ===========


              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 28,    JANUARY 29,
                                                                     2006          2005
                                                                 ------------   -----------
                          ASSETS

Current assets:
  Cash and cash equivalents ..............................       $     27,498   $    61,957
  Accounts receivable ....................................             39,034        22,598
  Other receivables ......................................             43,203        35,747
  Merchandise inventories ................................            331,757       278,589
  Prepaid expenses and other .............................              4,232         2,958
                                                                 ------------   -----------
    Total current assets .................................            445,724       401,849
                                                                 ------------   -----------
Fixed assets:
  Building, equipment, fixtures and leasehold improvements            116,267       113,039
  Less - accumulated depreciation and amortization .......             55,903        50,558
                                                                 ------------   -----------
    Fixed assets, net ....................................             60,364        62,481
                                                                 ------------   -----------
Deferred charges and other assets, net ...................             14,701        16,859
Goodwill .................................................                 --        77,288
                                                                 ------------   -----------
    Total assets .........................................       $    520,789   $   558,477
                                                                 ============   ===========

                      LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
  Accounts payable - trade ...............................       $    111,452   $   102,994
  Accrued liabilities:
    Accrued salaries and benefits ........................             17,139        14,654
    Accrued miscellaneous taxes ..........................              7,869         7,242
    Accrued interest .....................................              3,031         3,120
    Deferred income ......................................              7,543         8,449
    Deferred income taxes ................................             12,426         6,593
    Other ................................................             13,831        10,539
  Income taxes payable ...................................             20,698        16,479
  Due to parent ..........................................              3,096         1,893
                                                                 ------------   -----------
    Total current liabilities ............................            197,085       171,963
Long-term debt ...........................................            200,000       200,000
Deferred income taxes ....................................             10,171        21,070
Other non-current liabilities ............................                965           587
                                                                 ------------   -----------
    Total liabilities ....................................            408,221       393,620
                                                                 ------------   -----------
Commitments and contingencies (Note 12)
Stockholder's equity:
  Common Stock, par value $.01 per share; authorized
    5,000 shares; issued and outstanding 1,000 shares ....                 --            --
  Additional paid-in capital .............................             85,975        82,975
  Retained earnings ......................................             26,229        81,994
  Accumulated other comprehensive income (loss) ..........                364          (112)
                                                                 ------------   -----------
    Total stockholder's equity ...........................            112,568       164,857
                                                                 ------------   -----------
    Total liabilities and stockholder's equity ...........       $    520,789   $   558,477
                                                                 ============   ===========


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


                                       F-5



                         FINLAY FINE JEWELRY CORPORATION
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
                         AND COMPREHENSIVE INCOME (LOSS)
                        (IN THOUSANDS, EXCEPT SHARE DATA)



                                       COMMON STOCK                                ACCUMULATED
                                    -------------------  ADDITIONAL                   OTHER            TOTAL
                                     NUMBER               PAID-IN     RETAINED    COMPREHENSIVE    STOCKHOLDER'S    COMPREHENSIVE
                                    OF SHARES   AMOUNT    CAPITAL     EARNINGS    INCOME (LOSS)       EQUITY        INCOME (LOSS)
                                    ---------  -------   ----------  ---------    -------------    -------------    -------------

Balance, February 1, 2003 .......     1,000    $  --     $  82,975   $ 104,786      $     55       $   187,816
  Net income ....................        --       --            --      13,244            --            13,244        $   13,244
  Change in fair value of gold
    forward contracts, net of tax        --       --            --          --          (140)             (140)             (140)
                                                                                                                    -------------
  Comprehensive income ..........                                                                                     $   13,104
                                                                                                                    =============
  Dividends on common stock .....        --       --            --     (15,820)           --           (15,820)
                                    ---------  -------   ----------  ---------    -------------    -------------
Balance, January 31, 2004 .......     1,000       --        82,975     102,210           (85)          185,100
  Net income ....................        --       --            --      19,487            --            19,487        $   19,487
  Change in fair value of gold
    forward contracts, net of tax        --       --            --          --           (27)              (27)              (27)
                                                                                                                    -------------
  Comprehensive income ..........                                                                                     $   19,460
                                                                                                                    =============
  Dividends on common stock .....        --       --            --     (39,703)           --           (39,703)
                                    ---------  -------   ----------  ---------    -------------    -------------
Balance, January 29, 2005 .......     1,000       --        82,975      81,994          (112)          164,857
  Net loss ......................        --       --            --     (55,765)           --           (55,765)       $  (55,765)
  Change in fair value of gold
    forward contracts, net of tax        --       --            --          --           476               476               476
                                                                                                                    -------------
  Comprehensive loss ............                                                                                     $  (55,289)
                                                                                                                    =============
  Capital contribution ..........        --       --         3,000          --            --             3,000
                                    ---------  -------   ----------  ---------    -------------    -------------
Balance, January 28, 2006 .......     1,000    $  --     $  85,975   $  26,229      $    364       $   112,568
                                    =========  =======   ==========  =========    =============    =============


              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 ENDED
                                                                                -----------------------------------------
                                                                                JANUARY 28,    JANUARY 29,    JANUARY 31,
                                                                                    2006          2005           2004
                                                                                -----------    -----------    -----------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss) .......................................................     $  (55,765)    $   19,487     $   13,244
  Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities:
  Write-down of goodwill included in discontinued operations ..............             --             --         13,758
  Impairment of goodwill ..................................................         77,288             --             --
  Depreciation and amortization ...........................................         19,125         17,319         18,716
  Amortization of deferred financing costs ................................          1,185          1,058            828
  Amortization of restricted stock compensation and restricted stock units           1,216          1,358            531
  Loss on extinguishment of debt ..........................................             --          5,962             --
  Credit associated with the closure of Sonab .............................             --           (364)            --
  Deferred income tax provision ...........................................         (5,457)        12,235          6,759
  Other, net ..............................................................           (106)         1,877             (7)
  Changes in operating assets and liabilities, net of effects from purchase
    of Carlyle (Note 15):
    (Increase) decrease in accounts and other receivables .................        (23,002)         1,714         (7,501)
    (Increase) decrease in merchandise inventories ........................          1,989         (5,641)        (9,404)
    (Increase) decrease in prepaid expenses and other .....................           (262)          (362)           664
    Increase (decrease) in accounts payable and accrued liabilities .......         10,050        (60,382)        10,656
    Increase (decrease) in due to parent ..................................            (13)        (8,433)            35
                                                                                -----------    -----------    -----------
       NET CASH PROVIDED BY (USED IN) OPERATING
         ACTIVITIES .......................................................         26,248        (14,172)        48,279
                                                                                -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of equipment, fixtures and leasehold improvements .............        (11,869)       (12,667)       (12,934)
  Acquisition of Carlyle, net of cash acquired ............................        (28,790)            --             --
                                                                                -----------    -----------    -----------
       NET CASH USED IN INVESTING ACTIVITIES ..............................        (40,659)       (12,667)      (12,934)
                                                                                -----------    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from revolving credit facility .................................        733,314        590,311        683,750
  Principal payments on revolving credit facility .........................       (733,314)      (590,311)      (683,750)
  Payment of Carlyle debt assumed upon acquisition ........................        (17,137)            --             --
  Proceeds from issuance of Senior Notes ..................................             --        200,000             --
  Purchase and redemption of Old Senior Notes .............................             --       (154,647)            --
  Capitalized financing costs .............................................           (311)        (5,088)          (431)
  Bank overdraft ..........................................................         (5,600)        (1,247)          (424)
  Capital contribution ....................................................          3,000             --             --
  Payment of dividends ....................................................             --        (39,703)       (13,494)
                                                                                -----------    -----------    -----------
       NET CASH USED IN FINANCING ACTIVITIES ..............................        (20,048)          (685)       (14,349)
                                                                                -----------    -----------    -----------
       INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................        (34,459)       (27,524)        20,996
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ..............................         61,957         89,481         68,485
                                                                                -----------    -----------    -----------
CASH AND CASH EQUIVALENTS, END OF YEAR ....................................     $   27,498     $   61,957     $   89,481
                                                                                ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Interest paid ...........................................................     $   23,260     $   19,616     $   16,042
                                                                                ===========    ===========    ===========
  Income taxes paid (refunded) ............................................     $    6,911     $   (6,073)    $   10,861
                                                                                ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
  Tax benefit from exercise of stock options ..............................     $       63     $    1,028     $      401
                                                                                ===========    ===========    ===========
  Restricted stock units issuance costs accrued not yet paid ..............     $      546     $      636     $       --
                                                                                ===========    ===========    ===========
  Accrual for purchases of fixed assets ...................................     $    2,548     $    1,990     $       --
                                                                                ===========    ===========    ===========


              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--ORGANIZATION OF THE COMPANY

      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 primarily operate
licensed fine jewelry departments in department 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.

      In May 2005, we completed the acquisition of Carlyle & Co. Jewelers and
its subsidiaries ("Carlyle"). Carlyle currently operates 32 specialty jewelry
stores in nine states located primarily in the southeastern United States under
the Carlyle & Co., J.E. Caldwell & Co. and Park Promenade trade names. Carlyle's
results of operations are included in the accompanying Consolidated Statements
of Operations since the date of acquisition.

     Refer to Note 3 and Note 5 for information regarding amendments to our
financial covenants. Additionally, refer to Note 14 for information regarding
the consolidation of host store groups and the impact on our licensed department
business.

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 include
merchandise inventories, vendor allowances, useful lives of finite-lived assets,
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 2006, 2005, 2004 and 2003 relate to the fiscal years ended on
February 3, 2007, January 28, 2006, January 29, 2005 and January 31, 2004. Each
of the fiscal years includes 52 weeks, except 2006 which includes 53 weeks.

      CASH AND CASH EQUIVALENTS: We consider cash on hand, deposits in banks and
deposits in money market funds as cash and cash equivalents.

      MERCHANDISE INVENTORIES: Consolidated inventories are stated at the lower
of cost or market determined by the last-in, first-out ("LIFO") method. See Note
3 for information regarding our change in method of determining price indices
used in the valuation of LIFO inventories from external indices published by the
Bureau of Labor Statistics ("BLS") to an internally developed index in 2004.
Inventory is reduced for estimated obsolescence or unmarketable inventory equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions.

      The cost to us of gold merchandise sold on consignment, which typically
varies with the price of gold, is not fixed until the merchandise is sold. We,
at times, enter into forward contracts based upon the anticipated sales of gold
product in order to hedge against the risk of gold price fluctuations. Such


                                       F-8



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

contracts typically have durations ranging from one to nine months. For the
years ended January 28, 2006, January 29, 2005 and January 31, 2004, the
gain/loss on open forward contracts was not material. At January 28, 2006, we
had two open positions in gold forward contracts totaling 10,000 fine troy
ounces, to purchase gold for $5.1 million. At January 29, 2005, we had several
open positions in gold forward contracts totaling 37,000 fine troy ounces, to
purchase gold for $16.1 million. The fair value of gold under such contracts was
$5.7 million and $15.8 million at January 28, 2006 and January 29, 2005,
respectively.

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

      We have designated our existing derivative instruments, consisting of gold
forward contracts, as cash flow hedges. For derivative instruments designated as
cash flow hedges, the effective portion of the change in the fair value of the
derivative is recorded in accumulated other comprehensive income, a separate
component of stockholder's equity, and is reclassified into cost of sales when
the offsetting effects of the hedged transaction impact earnings. Changes in the
fair value of the derivative attributable to hedge ineffectiveness are recorded
in earnings immediately. At January 28, 2006, the fair value of the gold forward
contracts resulted in the recognition of an asset of $0.6 million. At January
29, 2005, the fair value of the gold forward contracts resulted in the
recognition of a liability of $0.2 million. The amount recorded in accumulated
other comprehensive income at January 28, 2006 of $0.4 million, net of tax, is
expected to be reclassified into earnings during 2006. The amount recorded in
accumulated other comprehensive loss at January 29, 2005 of $0.1 million, net of
tax, was reclassified into earnings in the first quarter of 2005.

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

      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


                                       F-9



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

and software are expensed as incurred. Amortization is computed by the
straight-line method over the estimated useful lives of the software ranging
from three to seven years. Included in Deferred charges and other assets, net in
the accompanying Consolidated Balance Sheets at both January 28, 2006 and
January 29, 2005, are capitalized software costs of $23.0 million and
accumulated amortization of $15.8 million and $12.6 million, respectively.

      DEFERRED FINANCING COSTS: Deferred financing costs are amortized over the
term of the related debt agreements using the straight line method, which
approximates the effective interest method. Net deferred financing costs totaled
$5.1 million at January 28, 2006 and $6.1 million at January 29, 2005, net of
accumulated amortization of $2.6 million and $1.5 million, respectively. The
deferred financing costs are reflected as a component of Deferred charges and
other assets, net in the accompanying Consolidated Balance Sheets. Amortization
of deferred financing costs for 2005, 2004 and 2003 totaled $1.2 million, $1.1
million and $0.8 million, respectively, and have been recorded as a component of
Interest expense, net in the accompanying Consolidated Statements of Operations.
Refer to Note 5 for additional information regarding deferred financing costs.

      REVENUE RECOGNITION: We recognize revenue upon the sale of merchandise,
either owned or consigned, to our customers, net of anticipated returns. The
provision for sales returns is based on our historical return rate. Carlyle
offers its customers a layaway plan that allows them to set merchandise aside
and pay for it over a period of up to ten months with no finance charges.
Receipts of layaway deposits are recorded as a liability on the balance sheet
and are included in other current liabilities, which totaled approximately $0.6
million at January 28, 2006. Layaway deposits are not recognized as sales until
fully paid for by the customer and the customer claims the merchandise.

      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 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 2005, 2004 and 2003, gross
advertising expenses were $45.3 million, $45.4 million and $47.1 million,
respectively, and are included in SG&A in the accompanying Consolidated
Statements of Operations.

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

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


                                      F-10



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      As of January 28, 2006 and January 29, 2005, deferred vendor allowances
totaled (i) $11.1 million and $14.8 million, respectively, for owned
merchandise, which allowances are included as an offset to Merchandise
inventories on our Consolidated Balance Sheets, and (ii) $7.5 million and $8.4
million, respectively, for merchandise received on consignment, which allowances
are included as Deferred income on our Consolidated Balance Sheets.

      STORE OPENING COSTS: The cost of opening new locations are expensed as
incurred.

      FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
Consolidated Financial Statements at fair value due to the short-term maturity
of these instruments. The fair value of our debt and off-balance sheet financial
instruments are disclosed in Note 5 and in Merchandise inventories above.

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



                                                                 FISCAL YEAR ENDED
                                                       --------------------------------------
                                                       JANUARY 28,  JANUARY 29,   JANUARY 31,
                                                          2006          2005         2004
                                                       -----------  -----------   -----------
                                                                   (IN THOUSANDS)

NET INCOME (LOSS):
Reported net income (loss) ..........................  $  (55,765)  $   19,487    $   13,244
Add/Deduct: Stock-based employee compensation
    expense included in reported net income (loss),
    net of tax ......................................         566          841           466
Add/Deduct: Stock-based employee compensation
    expense determined under the fair  value
    method, net of tax ..............................        (706)      (1,162)         (934)
                                                       -----------  -----------   -----------
Pro forma net income (loss) .........................  $  (55,905)  $   19,166    $   12,776
                                                       ===========  ===========   ===========


      The fair value of options granted in 2005, 2004 and 2003 was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at the grant date of $13.12 in 2005, $18.60 in 2004 and $15.63 in
2003 and the following weighted average assumptions: risk free interest rate of
4.20%, 3.78% and 3.59% for 2005, 2004 and 2003, respectively, expected life of
seven years for each of 2005, 2004 and 2003 and volatility of 59.45% for 2005,
58.62% for 2004 and 58.46% for 2003. The weighted average fair value of options
granted in 2005, 2004 and 2003 was $4.64, $6.30 and $5.20, respectively. Options
generally vest in five years and expire in ten years from their dates of grant.

      In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation". This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123(R) requires that the fair value of such equity
instruments be recognized as expense in the historical financial statements as
services are performed. We will adopt SFAS No. 123(R) for the first quarter of
2006 and we expect to recognize approximately $0.1 million of compensation
expense in 2006.


                                      F-11



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      On January 23, 2006, the Holding Company's Compensation Committee of the
Board of Directors approved accelerating the vesting of all out-of-the-money,
unvested stock options held by employees and independent directors. An option
was considered out-of-the-money if the stated option exercise price was greater
than the closing price of the Holding Company's common stock, par value $.01 per
share ("Common Stock") on the day before the Holding Company's Compensation
Committee approved the acceleration. Unvested out-of-the-money options to
purchase approximately 35,400 shares became exercisable as a result of the
vesting acceleration. The vesting acceleration did not result in the recognition
of compensation expense for 2005. As a result of the acceleration, expected
compensation expense in 2006 was reduced by approximately $0.2 million, on a
pre-tax basis.

      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 11 for additional
information regarding discontinued operations.

      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.

      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 13 for
unaudited quarterly financial data.

NOTE 3--MERCHANDISE INVENTORIES

Merchandise inventories consisted of the following:



                                                            JANUARY 28,    JANUARY 29,
                                                             2006 (A)         2005
                                                            -----------    -----------
                                                                  (IN THOUSANDS)

Jewelry goods - rings, watches and other fine jewelry
  (first-in, first-out ("FIFO") basis)....................   $  353,009     $ 297,266
Less: Excess of FIFO cost over LIFO inventory value.......       21,252        18,677
                                                            -----------    -----------
                                                             $  331,757     $ 278,589
                                                            ===========    ===========


___________________
(a)   Merchandise inventories as of January 28, 2006 include approximately $53.9
      million of inventory related to Carlyle on a LIFO basis.

      In accordance with EITF 02-16, the FIFO basis of merchandise inventories
have been reduced by $11.1 million and $14.8 million at January 28, 2006 and
January 29, 2005, respectively, to reflect the vendor allowances as a reduction
in the cost of merchandise.

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


                                      F-12



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3--MERCHANDISE INVENTORIES (CONTINUED)

      This change has been accounted for as a change in accounting principle. A
change in accounting principle results from the adoption of a generally accepted
accounting principle different than the one used previously for reporting
purposes. The cumulative effect of this change on retained earnings at the
beginning of 2004 and the pro forma impact of applying the new method in the
periods prior to 2004 are not determinable and, therefore, the prior years
presented have not been restated to reflect this change in accounting method. As
such, for comparative purposes, the following table presents the impact on Net
income for 2004 had we not changed our LIFO method (in thousands):

                                                            FISCAL YEAR ENDED
                                                               JANUARY 29,
                                                                  2005
                                                            -----------------
NET INCOME:
Net income, as reported................................       $     19,487
Impact of change in LIFO inventory valuation method,
  net of tax...........................................              3,687
                                                            -----------------
Net income, excluding change in accounting principle...       $     15,800
                                                            =================

      Approximately $328.4 million and $349.7 million at January 28, 2006 and
January 29, 2005, respectively, of merchandise received on consignment is not
included in Merchandise inventories and Accounts payable-trade in the
accompanying Consolidated Balance Sheets.

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

      In July 2005, we further amended the Gold Consignment Agreement to, among
other things, extend the maturity date to October 31, 2007 (October 31, 2008
should our Revolving Credit Agreement be extended on terms acceptable to the
gold consignor) and to establish new financial covenants (including minimum
earnings and fixed charge coverage ratio requirements and certain maximum debt
limitations). The Gold Consignment Agreement permits us to consign up to the
lesser of (i) 165,000 fine troy ounces or (ii) $50.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At January
28, 2006 and January 29, 2005, amounts outstanding under the Gold Consignment
Agreement totaled 89,103 and 116,687 fine troy ounces, respectively, valued at
approximately $50.0 million and $49.8 million, respectively. In the event this
agreement is terminated, we will be required to return the gold or purchase the
outstanding gold at the prevailing gold rate in effect on that date. For
financial statement purposes, the Gold Consignment Agreement is an off-balance
sheet arrangement. As such, the consigned gold is not included in Merchandise
inventories on our Consolidated Balance Sheets and, therefore, no related
liability has been recorded. Additionally, Finlay Jewelry makes cash advances to
certain vendors for the cost of the non-gold portion of the gold consignment
merchandise. As of January 28, 2006 and January 29, 2005, these advances totaled
$30.6 million and $31.0 million, respectively, and are recorded in Other
receivables on our Consolidated Balance Sheets.

      Under the Gold Consignment Agreement, we are required to pay a daily
consignment fee on the dollar equivalent of the fine gold value of the ounces of
gold consigned thereunder. The daily consignment fee as of January 28, 2006 and
January 29, 2005 was approximately 3.0% and 2.8% per annum, respectively. In
addition, we are required to pay a fee of 0.5% if the amount of gold consigned
has a value equal to or less than $12.0 million. Consignment fees for the years
ended January 28, 2006, January 29, 2005 and January 31, 2004 were $1.1 million,
$1.2 million and $1.1 million, respectively.

      In conjunction with the Gold Consignment Agreement, we granted the gold
consignor a first priority perfected lien on, and a security interest in,
specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and a lien on proceeds and products of such jewelry
subject to the terms of an intercreditor agreement between the gold consignor
and General Electric Capital Corporation ("G.E. Capital").


                                      F-13



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3--MERCHANDISE INVENTORIES (CONTINUED)

      The Gold Consignment Agreement requires us to comply with certain
covenants, including restrictions on the incurrence of certain indebtedness, the
creation of liens, engaging in transactions with affiliates and limitations on
the payment of dividends. In addition, the Gold Consignment Agreement also
contains various financial covenants, including minimum earnings and fixed
charge coverage ratio requirements and certain maximum debt limitations.
Although we are in compliance with our financial covenants as of January 28,
2006, as a result of the Federated/May merger and the impact of the merger on
our future results of operations, we have amended our financial covenants for
2006 with respect to the Gold Consignment Agreement. Because compliance is
based, in part, on our management's estimates and actual results can differ from
those estimates, there can be no assurance that we will be in compliance with
the covenants in the future or that the lenders will waive or amend any of the
covenants should we be in violation thereof. We believe the assumptions used are
appropriate.

NOTE 4--FIXED ASSETS

      Fixed assets consists of the following:
                                               JANUARY 28,      JANUARY 29,
                                                  2006              2005
                                               -----------      -----------
                                                      (IN THOUSANDS)
Land and building ..........................    $  10,024        $   9,736
Fixtures....................................       77,705           75,938
Displays....................................        8,273            8,639
Computers and equipment.....................       18,102           18,518
Leasehold improvements......................        2,163               --
Construction in progress....................           --              208
                                               -----------      -----------
                                                  116,267          113,039
Less: accumulated depreciation
 and amortization........                         (55,903)         (50,558)
                                               -----------      -----------
Net fixed assets...........................     $  60,364        $  62,481
                                               ===========      ===========

NOTE 5--SHORT AND LONG-TERM DEBT

      On January 22, 2003, our revolving credit agreement with G.E. Capital and
certain other lenders was amended and restated (the "Revolving Credit
Agreement"). The Revolving Credit Agreement, which matures in January 2008,
provides us with a senior secured revolving line of credit up to $225.0 million
(the "Revolving Credit Facility"). The Revolving Credit Facility allows
borrowings based on an advance rate of (i) up to 85% of eligible accounts
receivable and (ii) up to 60% of eligible owned inventory after taking into
account such reserves or offsets as G.E. Capital may deem appropriate (the
"Borrowing Base"). Eligibility criteria are established by G.E. Capital, which
retains the right to adjust the Borrowing Base in its reasonable judgement by
revising standards of eligibility, establishing reserves and/or increasing or
decreasing from time to time the advance rates (except that any increase in the
borrowing base rate percentage shall require the consent of other lenders). We
are permitted to use up to $30 million of the Revolving Credit Facility for the
issuance of letters of credit issued for our account. The outstanding revolving
credit balance and letter of credit balance under the Revolving Credit Agreement
are required to be reduced each year to $50 million or less and $20 million or
less, respectively, for a 30 consecutive day period (the "Balance Reduction
Requirement"). Funds available under the Revolving Credit Agreement are utilized
to finance working capital needs.

      Amounts outstanding under the Revolving Credit Agreement bear interest at
a rate equal to, at our option, (i) the Index Rate (as defined) plus a margin
ranging from zero to 1.0% or (ii) adjusted Eurodollar rate plus a margin ranging
from 1.0% to 2.0%, in each case depending on our financial performance. "Index
Rate" is defined as the higher of (i) the prime rate and (ii) the Federal Funds
Rate plus 50 basis points per annum. A letter of credit fee which could range
from 1.0% to 2.0%, per annum, depending on our financial performance, of the
face amount of letters of credit guaranteed under the Revolving Credit


                                      F-14



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5--SHORT AND LONG-TERM DEBT (CONTINUED)

Agreement is payable monthly in arrears. An unused facility fee on the average
unused daily balance of the Revolving Credit Facility is payable monthly in
arrears equal to 0.375% per annum. Upon the occurrence (and during the
continuance) of an event of default under the Revolving Credit Agreement,
interest would accrue at a rate which is 2% in excess of the rate otherwise
applicable, and would be payable upon demand.

     The Revolving Credit Agreement is secured by a first priority perfected
security interest in all of our (and any of our subsidiary's) present and future
tangible and intangible assets. The Revolving Credit Agreement contains
customary covenants, including limitations on or relating to capital
expenditures, liens, indebtedness, investments, mergers, acquisitions, affiliate
transactions, management compensation and the payment of dividends and other
restricted payments. The Revolving Credit Agreement also contains various
financial covenants, including minimum earnings and fixed charge coverage ratio
requirements and certain maximum debt limitations. Although we are in compliance
with our amended financial covenants as of January 28, 2006, as a result of the
Federated/May merger and the impact of the merger on our future results of
operations, we have further amended our financial covenants for 2006 with
respect to the Revolving Credit Agreement. Because compliance is based, in part,
on our management's estimates and actual results can differ from those
estimates, there can be no assurance that we will be in compliance with the
covenants in the future or that the lenders will waive or amend any of the
covenants should we be in violation thereof. We believe the assumptions used are
appropriate.

      There were no amounts outstanding at both January 28, 2006 and January 29,
2005 under the Revolving Credit Agreement. The maximum amounts outstanding under
the Revolving Credit Agreement during 2005, 2004 and 2003 were $158.2 million,
$99.8 million and $93.5 million, respectively. The average amounts outstanding
for the same periods were $79.4 million, $50.6 million and $42.7 million,
respectively. The weighted average interest rates were 5.9%, 4.0% and 3.4% for
2005, 2004 and 2003, respectively.

      At January 28, 2006 and January 29, 2005, we had letters of credit
outstanding totaling $10.9 million and $11.7 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 28,     JANUARY 29,
                                        2006            2005
                                     -----------     -----------
                                           (IN THOUSANDS)
Senior Notes (a).................     $ 200,000       $ 200,000
                                     ===========     ===========
_____________________________
(a)   The fair value of the Senior Notes, determined based on market quotes, was
      approximately $177.5 million at January 28, 2006.

      During 2004, we and the Holding Company each commenced an offer to
purchase for cash our 8-3/8% Senior Notes, due May 1, 2008, having an aggregate
principal amount of $150.0 million (the "Old Senior Notes") and the Holding
Company's 9% Senior Debentures, due May 1, 2008, having an aggregate principal
amount of $75.0 million (the "Old Senior Debentures"), respectively. Holders of
approximately 98% and 79% of the outstanding Old Senior Notes and the
outstanding Old Senior Debentures, respectively, tendered their securities and
consented to amendments to the related indentures. Additionally, 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") and called for the
redemption of all of the untendered Old Senior Notes and Old Senior Debentures,
respectively, and those securities were repurchased in July 2004. Interest on
the Senior Notes is payable semi-annually on June 1 and December 1 of each year.


                                      F-15



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5--SHORT AND LONG-TERM DEBT (CONTINUED)

      We incurred approximately $5.2 million in costs associated with the sale
of the Senior Notes, of which $5.0 million were deferred and are being amortized
over the term of the Senior Notes. In June 2004, we recorded pre-tax charges of
approximately $6.0 million, including $4.4 million for redemption premiums paid
on the Old Senior Notes, $1.3 million to write-off deferred financing costs
related to the refinancing of the Old Senior Notes and $0.3 million for other
expenses. These costs are included in Other expense in the accompanying
Consolidated Statements of Operations for the year ended January 29, 2005.

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

      The indenture governing the Senior Notes contains restrictions relating
to, among other things, the payment of dividends, redemptions or repurchases of
capital stock, the incurrence of additional indebtedness, the making of certain
investments, the creation of certain liens, the sale of certain assets, entering
into transactions with affiliates, engaging in mergers and consolidations and
the transfer of all or substantially all assets. We were in compliance with all
of our covenants as of and for the year ended January 28, 2006.

      The aggregate amounts of long-term debt payable in each of the five years
in the period ending January 28, 2010 are as follows:

                                               (IN THOUSANDS)
                                               --------------
           2006 ...........................     $        --
           2007 ...........................              --
           2008 ...........................              --
           2009 ...........................              --
           2010 ...........................              --
           Thereafter .....................         200,000
                                               --------------
                                                $   200,000
                                               ==============

      Interest expense for 2005, 2004 and 2003 was $24.6 million, $20.2 million
and $16.6 million, respectively. Interest income for the same periods was $0.2
million, $0.2 million and $0.1 million, respectively.

NOTE 6--LONG -TERM INCENTIVE PLANS AND OTHER

      The Holding Company's Long Term Incentive Plan (the "1993 Plan") permits
the Holding Company to grant to key employees of the Holding Company and its
subsidiaries, consultants and certain other persons, and directors of the
Holding Company (other than members of the Compensation Committee of the Holding
Company's Board of Directors), the following: (i) stock options; (ii) stock
appreciation rights in tandem with stock options; (iii) limited stock
appreciation rights in tandem with stock options; (iv) restricted or
nonrestricted stock awards subject to such terms and conditions as the
Compensation


                                      F-16



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6--LONG -TERM INCENTIVE PLANS AND OTHER (CONTINUED)

Committee shall determine; (v) performance units which are based upon attainment
of performance goals during a period of not less than two nor more than five
years and which may be settled in cash or in the Holding Company's Common Stock,
at the discretion of the Compensation Committee; or (vi) any combination of the
foregoing. Under the 1993 Plan, the Holding Company may grant stock options
which are either incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or non-incentive
stock options. As of January 28, 2006, an aggregate of 732,596 shares of the
Holding Company's Common Stock have been reserved for issuance pursuant to the
1993 Plan, of which a total of 161,219 shares are subject to options granted to
certain senior management, key employees and a director. The exercise prices of
such options range from $7.23 per share to $16.50 per share.

      In March 1997, the Board of Directors of the Holding Company adopted the
1997 Long-Term Incentive Plan (the "1997 Plan"), which was approved by the
Holding Company's stockholders in June 1997. The 1997 Plan, which is similar to
the 1993 Plan, is intended as a successor to the 1993 Plan and provides for the
grant of the same types of awards as are currently available under the 1993
Plan. Of the 1,850,000 shares of the Holding Company's Common Stock that have
been reserved for issuance pursuant to the 1997 Plan, a total of 907,415 shares,
as of January 28, 2006, are subject to options granted to certain senior
management, key employees and directors and 484,780 shares are subject to
purchases and awards of restricted stock and restricted stock units. The
exercise prices of such options range from $7.05 per share to $24.31 per share.

      The following table summarizes the transactions pursuant to the Holding
Company's 1993 Plan and 1997 Plan for 2005, 2004 and 2003:



                                                2005                     2004                      2003
                                       ----------------------  ------------------------   -----------------------
                                       NUMBER OF   WTD. AVG.    NUMBER OF    WTD. AVG.    NUMBER OF    WTD. AVG.
                                        OPTIONS    EX. PRICE     OPTIONS     EX. PRICE     OPTIONS     EX. PRICE
                                       ----------  ----------  -----------   ----------   ----------   ----------

Outstanding at beginning of year....   1,074,967   $   12.03    1,431,368     $  11.70    1,590,335    $   11.46
Granted.............................      13,000       12.80       14,000        18.60       10,000        15.63
Exercised...........................     (17,333)       7.56     (364,201)       10.87     (149,500)        8.85
Forfeited...........................      (2,000)      15.83       (6,200)       19.66      (19,467)       15.73
                                       ----------  ----------  -----------   ----------   ----------   ----------
Outstanding at end of year..........   1,068,634   $   12.11    1,074,967     $  12.03    1,431,368    $   11.70
                                       ==========  ==========  ===========   ==========   ==========   ==========
Exercisable at end of year..........   1,029,634   $   12.28      900,267     $  12.30    1,101,208    $   12.27


      The following table summarizes information concerning options outstanding
and exercisable at January 28, 2006:



                    OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
-------------------------------------------------------------  ----------------------------
                                   WTD. AVG.
  EXERCISE          NUMBER         REMAINING       WTD. AVG.     NUMBER         AVERAGE
 PRICE RANGE      OUTSTANDING   CONTRACTUAL LIFE   EX. PRICE   EXERCISABLE   EXERCISE PRICE
-------------     -----------   ----------------   ---------   -----------   --------------

$ 7.05-$14.00        956,634          3.07          $ 11.44       917,634        $ 11.63
$14.59-$19.50         82,000          3.69            15.71        82,000          15.71
$21.00-$24.31         30,000          2.14            23.56        30,000          23.56
                  -----------   ----------------   ---------   -----------   --------------
$ 7.05-$24.31      1,068,634          3.20          $ 12.11     1,029,634        $ 12.28
                  ===========   ================   =========   ===========   ==============


      As of January 28, 2006, and from inception of the Holding Company's stock
repurchase program, which expired in September 2005, the Holding Company
repurchased a total of 2,207,904 shares for $27.4 million.

      In February 2001, an executive officer of Finlay was issued Common Stock
of the Holding Company, subject to restrictions ("Restricted Stock") in the
amount of 100,000 shares, pursuant to a restricted stock agreement. The
Restricted Stock became fully vested on January 29, 2005 and was accounted for
as a component of the Holding Company's stockholders' equity. Compensation
expense of approximately $1.2 million has been amortized over four years and
totaled approximately $0.3 million in


                                      F-17



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6--LONG -TERM INCENTIVE PLANS AND OTHER (CONTINUED)

each of 2004 and 2003.

      In August 2003, an executive officer of Finlay was issued an additional
50,000 shares of Restricted Stock, pursuant to a restricted stock agreement.
Fifty percent of the Restricted Stock became fully vested on January 31, 2005
and was accounted for as a component of the Holding Company's stockholders'
equity. Compensation expense of approximately $0.4 million has been amortized
over the vesting period and totaled approximately $0.3 million and $0.1 million
in 2004 and 2003, respectively. The remaining 50% of the Restricted Stock
becomes fully vested on June 30, 2007 and has been accounted for as a component
of stockholders' equity. Compensation expense of approximately $0.4 million is
being amortized over the vesting period and totaled approximately $0.1 million
in each of 2005, 2004 and 2003.

      In October 2003, certain executives of Finlay were awarded a total of
31,250 shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after four years of continuous employment
with Finlay and is accounted for as a component of the Holding Company's
stockholders' equity with respect to unamortized restricted stock compensation.
However, such shares are not considered outstanding. Compensation expense of
approximately $0.5 million is being amortized over four years and totaled
approximately $0.1 million in each of 2005, 2004 and 2003.

      In April 2004, certain executives of Finlay were awarded a total of 32,500
shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after two years of continuous employment
with Finlay and is accounted for as a component of the Holding Company's
stockholders' equity with respect to unamortized restricted stock compensation.
However, such shares are not considered outstanding. Compensation expense of
approximately $0.6 million is being amortized over two years and totaled
approximately $0.3 million and $0.2 million in 2005 and 2004, respectively.

      Commencing in February 2005, an executive officer of Finlay became
entitled to receive stock incentive compensation based on the attainment of
financial objectives established by senior management and approved by the
Holding Company's Board of Directors. The maximum amount of stock incentive
compensation payable in any fiscal year is equal to the number of restricted
shares of Common Stock having an aggregate value nearest to $400,000 with the
actual amount to be based on whether the specified financial results are met for
each respective year, except that for 2006, the maximum aggregate value is
$200,000. Compensation expense of $0.2 million was recorded during 2005. These
shares are not considered outstanding at January 28, 2006. Additionally, for
each fiscal year during the employment term, the executive officer is eligible
to receive Restricted Stock having an aggregate value nearest to $500,000,
subject to the terms of the employment agreement. Compensation expense will be
recognized ratably over the vesting periods.

      In April 2005, certain executives of Finlay were awarded a total of 48,300
shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after three years of continuous employment
with Finlay and is accounted for as a component of the Holding Company's
stockholders' equity with respect to unamortized restricted stock compensation.
However, such shares are not considered outstanding. Compensation expense of
approximately $0.6 million is being amortized over three years. Amortization for
2005 totaled approximately $0.1 million.

NOTE 7--EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION AND STOCK PURCHASE PLANS

      In April 2003, the Board of Directors of the Holding Company adopted the
Executive Deferred Compensation and Stock Purchase Plan and the Director
Deferred Compensation and Stock Purchase Plan, which was approved by the Holding
Company's stockholders on June 19, 2003 (the "RSU Plans").


                                      F-18



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7--EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION AND STOCK PURCHASE PLANS
        (CONTINUED)

Under the RSU Plans, key executives and non-employee directors, as directed by
the Holding Company's Compensation Committee, are eligible to acquire restricted
stock units ("RSUs"). An RSU is a unit of measurement equivalent to one share of
common stock, but with none of the attendant rights of a stockholder of a share
of Common Stock. Two types of RSUs are awarded under the RSU Plans: (i)
participant RSUs, where a plan participant may elect to defer, in the case of an
executive employee, a portion of his or her actual or target bonus, and in the
case of a non-employee director, his or her retainer fees and Committee
chairmanship fees, and receive RSUs in lieu thereof and (ii) matching RSUs,
where the Holding Company will credit a participant's plan account with one
matching RSU for each participant RSU that a participant elects to purchase.
While participant RSUs are fully vested at all times, matching RSUs are subject
to vesting and forfeiture as set forth in the RSU Plans. At the time of
distribution under the RSU Plans, RSUs are converted into actual shares of
Common Stock of the Holding Company. As of January 28, 2006 and January 29,
2005, 216,730 and 98,422 RSUs, respectively, have been awarded under the RSU
Plans. Amortization totaled approximately $0.5 million and $0.4 million for 2005
and 2004, respectively.

NOTE 8--LICENSE AGREEMENTS WITH DEPARTMENT STORES AND LEASE AGREEMENTS

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

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

                                                 FISCAL YEAR ENDED
                                    -------------------------------------------
                                    JANUARY 28,    JANUARY 29,      JANUARY 31,
                                       2006            2005            2004
                                    -----------    -----------      -----------
Minimum fees ................        $   5,758      $   2,028        $   1,974
Contingent fees .............          155,796        154,268          149,346
                                    -----------    -----------      -----------
    Total ...................        $ 161,554      $ 156,296        $ 151,320
                                    ===========    ===========      ===========

      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 28, 2006:

                                                       (IN THOUSANDS)
                                                      ----------------
2006............................................         $    5,753
2007 ...........................................              5,561
2008 ...........................................              4,475
2009 ...........................................              3,238
2010 ...........................................              3,021
Thereafter......................................              6,730
                                                      ----------------
    Total minimum payments required.............         $   28,778
                                                      ================


                                      F-19



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9--PROFIT SHARING PLAN

      We maintain a defined contribution profit-sharing plan to provide
retirement benefits for all personnel. This plan provides 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 begin to vest upon the
completion of two years of employment and accrues at the rate of 20% per year.
Additionally, we have the option to contribute 2% of the employees' earnings
annually, as limited by the Code, which begin to vest upon the completion of
three years of employment and accrues at the rate of 20% per year. Company
contributions totaled $2.2 million, $2.3 million and $2.1 million for 2005, 2004
and 2003, respectively.

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

NOTE 10--INCOME TAXES

      For income tax reporting purposes, we have an October 31 year end. We file
a consolidated Federal income tax return with our wholly-owned subsidiaries and
our parent, the Holding Company. Our provision for income taxes and deferred tax
assets and liabilities was calculated as if we filed our tax return on a
stand-alone basis.

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

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



                                                          JANUARY 28,    JANUARY 29,
                                                             2006           2005
                                                          -----------    -----------
                                                                (IN THOUSANDS)

Deferred Tax Assets
  Uniform inventory capitalization......................   $  3,879       $   3,416
  Expenses not currently deductible.....................      3,226           1,693
  Net operating losses - current........................        503              --
                                                          -----------    -----------
                                                              7,608           5,109
  Valuation allowance...................................         --             100
                                                          -----------    -----------
    Total current.......................................      7,608           5,009
                                                          -----------    -----------
  Net operating losses - non-current....................      2,284              --
  Tax deductible goodwill...............................      2,601              --
                                                          -----------    -----------
    Total non-current...................................      4,885              --
                                                          -----------    -----------
       Total deferred tax assets........................     12,493           5,009
                                                          -----------    -----------
Deferred Tax Liabilities
  LIFO inventory valuation..............................     20,034          11,602
                                                          -----------    -----------
    Total current.......................................     20,034          11,602
                                                          -----------    -----------
Depreciation and amortization...........................     15,056          21,070
                                                          -----------    -----------
    Total non-current...................................     15,056          21,070
                                                          -----------    -----------
       Total deferred tax liabilities...................     35,090          32,672
                                                          -----------    -----------
         Net deferred income tax liabilities............   $ 22,597       $  27,663
                                                          ===========    ===========
    Net current deferred income tax liabilities.........   $ 12,426       $   6,593
    Net non-current deferred income tax liabilities.....     10,171          21,070
                                                          -----------    -----------
         Net deferred income tax liabilities............   $ 22,597       $  27,663
                                                          ===========    ===========



                                      F-20



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10--INCOME TAXES (CONTINUED)

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

                                                 FISCAL YEAR ENDED
                                    -------------------------------------------
                                    JANUARY 28,    JANUARY 29,      JANUARY 31,
                                       2006           2005             2004
                                    -----------    -----------      -----------
Current taxes - Federal ..........   $  9,447        $     57        $  8,629
Current taxes - State and local ..      1,503          (1,245)            647
Current taxes - Foreign ..........       (154)           (600)             --
Deferred taxes - Federal .........     (4,073)          9,666           5,339
Deferred taxes - State and local .     (1,384)          2,569           1,420
                                    -----------    -----------     ------------
Provision for income taxes .......   $  5,339        $ 10,447        $ 16,035
                                    ===========    ===========     ============

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



                                                               FISCAL YEAR ENDED
                                                    ---------------------------------------
                                                    JANUARY 28,   JANUARY 29,   JANUARY 31,
                                                       2006           2005          2004
                                                    -----------   -----------   -----------

Federal statutory provision ......................   $(17,649)     $ 10,478      $ 14,286
Impairment of goodwill ...........................     23,258            --            --
Foreign tax refund ...............................         --        (1,800)           --
Redetermination of foreign tax credits ...........       (154)        1,200            --
State and local taxes, net of federal benefit.....        185         1,121         1,343
Reversal of tax accruals no longer required ......       (425)       (1,025)           --
Other ............................................        124           473           406
                                                    -----------   -----------   -----------
Provision for income taxes .......................   $  5,339      $ 10,447      $ 16,035
                                                    ===========   ===========   ===========


      During 2004 and 2005, a benefit of approximately $1.0 million and $0.4
million, respectively, was recorded associated with the reversal of tax accruals
no longer required, primarily as the result of the closing of open tax years.
Further, in 2004 we recorded refunds claimed for foreign taxes originally paid
in 1995 and 1996, together with an adjustment for foreign tax credits previously
used to reduce U.S. income tax liability. This resulted in a net recovery of
foreign tax of approximately $0.6 million and $0.2 million in 2004 and 2005,
respectively. Additionally, the 2005 period reflects a benefit of approximately
$4.4 million associated with the impairment of goodwill.

      As a result of the acquisition of Carlyle, we acquired net operating loss
carryforwards that are subject to an annual limitation of $1.3 million. At
October 31, 2005, we had available net operating loss carryforwards for federal
income tax reporting purposes of approximately $7.0 million that expire from
2019 through 2024.

      A number of years may elapse before a particular matter, for which we have
established an accrual, is audited and finally resolved. While it is often
difficult to predict the final outcome or the timing of resolution of any
particular tax matter, we believe that our accruals reflect the probable outcome
of tax contingencies. The favorable or unfavorable settlement of any particular
issue will be recognized as a decrease or an increase to our income tax expense
in the year of resolution. Our tax accruals are presented in the balance sheet
with income and other taxes.

NOTE 11--DISCONTINUED OPERATIONS

      During 2003, Federated Department Stores, Inc. ("Federated") announced
that it would not renew our license agreement in its Burdines department store
division due to the consolidation of the Burdines and Macy's fine jewelry
departments in 2004. The termination of the license agreement in January 2004


                                      F-21



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11--DISCONTINUED OPERATIONS (CONTINUED)

resulted in the closure of 46 Finlay departments in the Burdines department
store division. In 2003, we generated approximately $55.0 million in sales from
the Burdines departments. The results of operations of the Burdines department
store division have been segregated from those of continuing operations, net of
tax, and classified as discontinued operations for the year ended January 31,
2004.

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

                                                          FISCAL YEAR ENDED
                                                             JANUARY 31,
                                                                2004
                                                          -----------------
    Sales...........................................        $     55,006
    Income before income taxes (1) (2)..............               3,676
    Discontinued operations, net of tax (3).........             (11,537)

_____________________
(1)   Includes an allocation of $0.2 million of interest expense related to the
      Revolving Credit Agreement.

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

(3)   The loss from discontinued operations includes a write-down of goodwill of
      $13.8 million during the year ended January 31, 2004, as a result of the
      department closings.

NOTE 12--COMMITMENTS AND CONTINGENCIES

      From time to time, we are involved in litigation arising out of our
operations in the normal course of business. As of April 7, 2006, we are not a
party to any legal proceedings that, individually or in the aggregate, are
reasonably expected to have a material adverse effect on our business, results
of operations, financial condition or cash flows. However, the results of these
matters cannot be predicted with certainty, and an unfavorable resolution of one
or more of these matters could have a material adverse effect on our
consolidated financial statements.

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

      In June 2005, we entered into employment agreements with three senior
executives of Finlay Jewelry and in March 2006, we entered into an employment
agreement with a fourth senior executive of Finlay Jewelry. Each of the
agreements has a term of three years, unless earlier terminated in accordance
with the provisions of the employment agreements. The agreements provide for
annual salary levels totaling approximately $1.6 million, incentive compensation
based on meeting specific financial goals and a special bonus equal to 50% of
each executives' salary if, in the case of the June 2005 agreements, he or she
is employed by Finlay Jewelry on June 30, 2008, and in the case of the March
2006 agreement, if the executive is employed by Finlay Jewelry on February 28,
2009.

      In March 2006, we also entered into an agreement with another senior
executive of Finlay Jewelry who was relocated as a result of the Federated/May
merger.

      The Senior Notes, the Revolving Credit Agreement and the Gold Consignment
Agreement currently restrict the amount of annual distributions to the Holding
Company. During 2004, we declared $39.7


                                      F-22



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)

million of dividends and $39.7 million was distributed to the Holding Company.
During 2003, we declared $15.8 million of dividends and $13.5 million was
distributed to the Holding Company.

      Our concentration of credit risk consists principally of accounts
receivable. Over the past three years, store groups owned by Federated and those
stores previously owned by The May Department Stores Company ("May") accounted
for approximately 73% of our sales. We believe that the risk associated with
these receivables, other than those from department store groups indicated
above, would not have a material adverse effect on our financial position or
results of operations.

      In 2005, approximately 31% of sales related to the Finlay departments were
generated by merchandise obtained from their five largest vendors and
approximately 10% of sales related to the Finlay departments were generated by
merchandise obtained from its largest vendor. Additionally, merchandise obtained
from Carlyle's two largest vendors generated approximately 52% of its sales.

      We have not provided any third-party financial guarantees as of January
28, 2006 and January 29, 2005 and for each of the three fiscal years in the
period ended January 28, 2006.

NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED)

      The following table summarizes the quarterly financial data for 2005 and
2004 (dollars in thousands):



                                                           FISCAL YEAR ENDED JANUARY 28, 2006
                                                 ------------------------------------------------------
                                                   FIRST        SECOND          THIRD         FOURTH
                                                  QUARTER     QUARTER (A)    QUARTER (A)    QUARTER (A)
                                                 ---------    -----------    -----------    -----------

Sales ........................................   $185,729     $  199,735     $  183,261     $  421,409
Gross margin .................................     93,430        100,179         90,493        206,933
Selling, general and administrative
   expenses ..................................     88,909         93,305         89,949        148,450
Income (loss) from operations (b) ............        401        (74,623)        (4,778)        53,009
Net income (loss) (b) ........................     (2,824)       (74,811)        (6,874)        28,744




                                                           FISCAL YEAR ENDED JANUARY 29, 2005
                                                 -----------------------------------------------------
                                                   FIRST       SECOND           THIRD        FOURTH
                                                  QUARTER      QUARTER         QUARTER       QUARTER
                                                 ---------    -----------    -----------    -----------

Sales ........................................   $187,572     $  188,638     $  166,841     $  380,555
Gross margin .................................     95,729         96,164         84,612        197,210
Selling, general and administrative
   expenses ..................................     88,181         87,286         82,629        138,089
Income (loss) from operations ................      3,159          4,504         (2,315)        50,727
Net income (loss) (c) ........................       (530)        (3,330)        (4,828)        28,175

_____________________
(a)   The thirteen week period ended July 30, 2005 includes the results of
      operations of Carlyle since the date of acquisition.

(b)   The income (loss) from operations includes a charge of approximately $77.3
      million, on a pre-tax basis, related to the impairment of goodwill in the
      second quarter of 2005. Net income (loss) includes a charge of
      approximately $72.9 million, net of tax, related to the impairment of
      goodwill during the second quarter of 2005.

(c)   Net income (loss) includes debt extinguishment costs of $6.0 million, on a
      pre-tax basis, related to the refinancing of the Old Senior Notes in the
      second quarter of 2004.


                                      F-23



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

RESTATEMENT OF THE INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

      Subsequent to the issuance of the our interim consolidated financial
statements for the twenty-six and thirty-nine week periods ended July 30, 2005
and October 29, 2005, respectively, we determined that the payment of certain
debt assumed in the Carlyle acquisition was recorded as an operating activity
rather than a financing activity in the consolidated statements of cash flows.
As a result, the consolidated statements of cash flows for the thirteen weeks
and twenty six weeks ended July 30, 2005 and thirty-nine weeks ended October 29,
2005 will be restated to reflect the repayment of the debt in accordance with
SFAS No. 95, "Statement of Cash Flows" as cash used in financing activities
rather than operating activities. We anticipate correcting this in our Form 10-Q
filings for the second and third quarters of 2006. A summary of the effects of
the restatement on cash flows provided by (used in) operating and financing
activities in these statements of cash flows are as follows (in thousands):



                                                 AS PREVIOUSLY
                                                   REPORTED      ADJUSTMENT   AS RESTATED
                                                 -------------   ----------   -----------

Thirteen weeks ended July 30, 2005:
Net cash used in operating activities ........   $    (45,052)   $  17,137    $  (27,915)
Net cash provided by financing activities ....         77,159      (17,137)       60,022

Twenty-six weeks ended July 30, 2005:
Net cash used in operating activities ........       (131,166)      17,137      (114,029)
Net cash provided by financing activities ....        104,567      (17,137)       87,430

Thirty-nine weeks ended October 29, 2005:
Net cash used in operating activities ........       (162,257)      17,137      (145,120)
Net cash provided by financing activities ....        140,744      (17,137)      123,607


NOTE 14-- CONSOLIDATION OF HOST STORE GROUPS AND OTHER

      In February 2005, Federated and May announced that they had entered into a
merger agreement whereby Federated would acquire May. In August 2005, Federated
announced that it had completed the merger with May. In September 2005,
Federated announced its integration plans including a divisional realignment and
divestiture of certain stores. Accordingly, effective as of the beginning of
2006, we now operate a total of 401 departments in six of Federated's nine
divisions, as follows:

          Macy's South (1)                                 136
          Macy's Midwest (2)                                87
          Macy's North (3)                                  53
          Macy's Northwest (4)                              38
          Bloomingdale's                                    30
          Lord & Taylor                                     57
                                                         -------
          Total                                            401
                                                         =======

_____________________
(1)   Primarily comprised of the former
      Rich's-Macy's/Lazarus-Macy's/Goldsmith's-Macy's division of Federated and
      certain of May's former Foley's and Hecht's stores.

(2)   Primarily comprised of the former Famous-Barr/L.S. Ayres/Jones and
      Kaufmann's divisions of May.

(3)   Primarily comprised of the former Marshall Field's division of May.

(4)   Primarily comprised of the former Bon-Macy's division of Federated and
      certain of May's former Meier & Frank stores.

      As a result of Federated's integration plans, we will no longer operate
in the following 194 departments:

      o   150 stores under various regional nameplates that will be phased into
          the Macy's East and Macy's West divisions, which are Federated
          divisions in which we have not historically operated


                                      F-24



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14-- CONSOLIDATION OF HOST STORE GROUPS AND OTHER (CONTINUED)

          the fine jewelry departments. The transition of these departments is
          expected to begin after Mother's Day and be completed by the end of
          July 2006;

      o   40 stores that will be divested by Federated primarily in the first
          quarter of 2006; and

      o   4 stores that will be closed in preparation for reopening as
          Bloomingdale's stores.

In 2005, we generated sales of approximately $241.0 million from these 194
departments. In 2005, we recorded charges associated with accelerated
depreciation of fixed assets and severance totaling approximately $3.8 million
related to these departments. We intend to record additional charges totaling
approximately $5.3 million related to the accelerated depreciation of fixed
assets, field and central office severance and other closing related expenses
through the dates of the final store closings, estimated to occur by July 2006.

      In November 2005, we signed a new agreement with Federated effective at
the beginning of 2006, which governs our operations in four Macy's divisions
including Macy's South, Macy's Midwest, Macy's North and Macy's Northwest. This
new agreement is three years in length and expires January 31, 2009.
Approximately 348 stores are covered by this agreement. The new agreement has no
impact on the Bloomingdale's and Lord & Taylor divisions whose license
agreements, which cover a total of 87 departments, currently run through
February 3, 2007. In addition to extending our agreement for three years, the
new agreement eliminates all non-compete provisions from the previous May
contracts that required us to obtain May's permission before opening a new
department or store within a certain radius of a May store.

      In January 2006, Federated announced that it intends to divest its Lord
& Taylor division prior to the end of 2006. Further, in March 2006, Federated
announced its intention to divest an additional five underperforming Lord &
Taylor stores and convert one store to Macy's. We cannot anticipate the impact
of the proposed transaction on our future results of operations and there is no
assurance that we will not be adversely impacted.

      In July 2003, May announced its intention to divest 32 Lord & Taylor
stores, as well as two other stores in its Famous-Barr division. Through January
28, 2006, a total of 32 stores have closed. During 2005 and 2004, we recorded
charges of $30,000 and $1.0 million, respectively relating to the accelerated
depreciation of fixed assets and the loss on disposal of fixed assets.

   Following is a summary of the activity in the reserve established for store
closing charges (in thousands):

                                              SEVERANCE AND
                                               TERMINATION
                                                BENEFITS
                                              -------------
          Balance at February 1, 2003.......   $    --
          Charges ..........................       426
          Payments .........................       (84)
                                              -------------
          Balance at January 31, 2004.......       342
          Charges ..........................       313
          Payments .........................      (487)
                                              -------------
          Balance at January 29, 2005.......       168
          Charges ..........................     1,233
          Payments .........................      (143)
                                              -------------
          Balance at January 28, 2006.......   $ 1,258
                                              =============


                                      F-25



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15--CARLYLE & CO. JEWELERS ACQUISITION

      In May 2005, we completed the acquisition of Carlyle. The purchase price
was approximately $29.0 million, plus estimated transaction fees of
approximately $1.7 million, and was financed with additional borrowings under
the Revolving Credit Agreement. The acquisition was undertaken to complement and
diversify our existing business and provides the opportunity to increase our
presence in the luxury jewelry market. In connection with the purchase,
Carlyle's revolving credit facility was terminated and paid in full at the
closing. Since the date of the acquisition, Carlyle's cash requirements have
been, and we expect will continue to be, funded under our Revolving Credit
Agreement. In connection with the acquisition, we replaced the existing
Revolving Credit Agreement and entered into an amended and restated credit
agreement with G.E. Capital and certain other lenders and we entered into a
consent and amendment to the Gold Consignment Agreement to, among other things,
permit the acquisition transaction. In addition, Carlyle and its subsidiaries,
together with us, entered into supplemental indentures and guarantees (the
"Supplemental Indentures") to guarantee our obligations under the Senior Notes.

     The Carlyle acquisition has been accounted for as a purchase, and,
accordingly, the operating results of Carlyle have been included in our
consolidated financial statements since the date of acquisition. Our January 28,
2006 Consolidated Balance Sheet reflects the Carlyle acquisition using a
purchase price allocation. The following table summarizes the fair values of the
assets and liabilities at the date of acquisition (dollars in thousands):

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

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

                                                   FISCAL YEAR ENDED
                                               --------------------------
                                               JANUARY 28,    JANUARY 29,
                                                  2006           2005
                                               -----------    -----------
                                                     (IN THOUSANDS)
      Sales ................................   $ 1,013,584    $ 1,008,643
      Operating income (loss) (a)              $   (26,062)   $    65,709
      Net income (loss) (a) ................   $   (56,487)   $    27,736

______________________
(a)   The operating loss for 2005 includes a charge of approximately $77.3
      million, on a pre-tax basis, related to the impairment of goodwill. The
      net loss for 2005 includes a charge of approximately $72.9 million, net of
      tax, related to the impairment of goodwill. See Note 17.

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


                                      F-26



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 - SEGMENT INFORMATION

      Prior to the acquisition of Carlyle in May 2005, we operated in a single
reportable segment, the operation of department store based fine jewelry
departments, in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Since the acquisition of Carlyle, we now
have two operating segments - department store based fine jewelry departments
and stand-alone jewelry stores. The accounting policies of the segments are
generally the same as those described in Note 2. There are no intercompany sales
between the segments.

      The following table provides segment level financial information for the
year ended January 28, 2006 (dollars in thousands):

                                                      FISCAL YEAR ENDED
                                                      JANUARY 28, 2006
                                             ----------------------------------
                                              FINLAY       CARLYLE      TOTAL
                                             ---------    ---------   ---------
Sales ....................................   $ 920,644    $  69,490   $ 990,134
Depreciation and amortization ............      18,778          347      19,125
Income (loss) from operations (a) ........     (31,770)       5,779     (25,991)
Total assets .............................     458,466       62,323     520,789
Capital expenditures .....................      10,100        1,769      11,869

_________________
(a)   The loss from operations for 2005 for Finlay includes a pre-tax charge of
      approximately $77.3 million related to the impairment of goodwill. See
      Note 17. The income from operations for Carlyle does not include an
      allocation of overhead.

      Additionally, our sales mix by merchandise category was as follows for,
2005, 2004 and 2003 (dollars in thousands):



                                                 FISCAL YEAR ENDED
                    ---------------------------------------------------------------------------
                            JAN. 28, 2006 (1)               JAN. 29, 2005       JAN. 31, 2004
                    -----------------------------------    ----------------    ----------------
                         FINLAY            CARLYLE             FINLAY               FINLAY
                    ----------------   ----------------    ----------------    ----------------
                               % OF               % OF                % OF                % OF
                     SALES     SALES    SALES     SALES     SALES     SALES     SALES     SALES
                    --------   -----   --------   -----    --------   -----    --------   -----

Diamonds ........   $249,921    27.1%  $ 19,462    28.1%   $243,995    26.4%   $232,597    25.8%
Gold ............    182,830    19.9      1,130     1.6     197,292    21.4     196,900    21.8
Gemstones .......    189,916    20.6      5,159     7.5     196,751    21.3     198,038    22.0
Watches .........    128,662    14.0     26,290    37.8     131,989    14.3     133,999    14.8
Designer ........     56,898     6.2     13,278    19.1      53,232     5.8      42,632     4.7
Other (2) .......    112,417    12.2      4,171     5.9     100,347    10.8      98,250    10.9
                    --------   -----   --------   -----    --------   -----    --------   -----
Total Sales .....   $920,644   100.0%  $ 69,490   100.0%   $923,606   100.0%   $902,416   100.0%
                    ========   =====   ========   =====    ========   =====    ========   =====


_________________
(1)   Sales for 2005 includes Carlyle since the date of acquisition.

(2)   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-27



                         FINLAY FINE JEWELRY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - GOODWILL IMPAIRMENT

      SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142")
requires an impairment-only approach to accounting for goodwill. During the
quarter ended July 30, 2005, Federated announced their intention to divest,
beginning in 2006, certain stores in which we operate the fine jewelry
departments. Based upon this business indicator, we utilized our SFAS No. 142
model to evaluate the carrying value of the goodwill recorded on our department
store based fine jewelry departments segment as of July 30, 2005.

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


                                      F-28`