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

                                  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: 0-25716

                            FINLAY ENTERPRISES, INC.
          -------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

              Delaware                                           13-3492802
----------------------------------                         ---------------------
  State or other jurisdiction of                              (I.R.S. Employer
  incorporation or organization                             Identification No.)

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

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

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $0.01 per share
                  ---------------------------------------------

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 [_]           No [X]

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 [X]             filer [_]

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

                Yes [_]                 No [X]

The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant on July 30, 2005 was $107,469,069 based on the
closing price on the Nasdaq National Market for the common stock on such date.
The registrant does not have any nonvoting common equities.

As of April 7, 2006, there were 9,062,796 shares of common stock, par value $.01
per share, of the registrant outstanding.

                      Documents incorporated by reference:

Portions of the Company's definitive Proxy Statement, in connection with its
Annual Meeting to be held in June 2006, are incorporated by reference into Part
III. The Company's Proxy Statement will be filed within 120 days after January
28, 2006.

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




                             FINLAY ENTERPRISES, INC

                                    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.............................................................17
  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............................44
  Item 8.    Financial Statements and Supplementary Data...........................................45
  Item 9.    Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure................................................45
  Item 9A.   Controls and Procedures...............................................................45
  Item 9B.   Other Information.....................................................................48

PART III
  Item 10.   Directors and Executive Officers of the Registrant....................................49
  Item 11.   Executive Compensation................................................................52
  Item 12.   Security Ownership of Certain Beneficial Owners and Management and
                Related Stockholder Matters........................................................52
  Item 13.   Certain Relationships and Related Transactions........................................56
  Item 14.   Principal Accounting Fees and Services................................................56

PART IV
  Item 15.   Exhibits, Financial Statement Schedule................................................56

SIGNATURES   ......................................................................................64



                                        2



                                     PART I

ITEM 1. BUSINESS

THE COMPANY

      Finlay Enterprises, Inc., a Delaware corporation (the "Company", the
"Registrant", "we", "us" and "our"), conducts business through its wholly-owned
subsidiary, Finlay Fine Jewelry Corporation, a Delaware corporation, and its
wholly-owned subsidiaries ("Finlay Jewelry"). References to "Finlay" mean,
collectively, the 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.

      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


                                        3



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 Finlay Jewelry completed the
redemption of our then-outstanding 9% Senior Debentures, due May 1, 2008, having
an aggregate principal amount of $75.0 million (the "Old Senior Debentures") and
the 8-3/8% Senior Notes, due May 1, 2008, having an aggregate principal amount
of $150.0 million (the "Old Senior Notes"). Additionally, in June 2004, Finlay
Jewelry 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, Finlay Jewelry
amended and restated its revolving credit agreement with General Electric
Capital Corporation ("G.E. Capital") and certain other lenders (the "Revolving
Credit Agreement") and Finlay Jewelry 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 Finlay Jewelry, entered
into supplemental indentures and guarantees (the "Supplemental Indentures") to
guarantee obligations of Finlay Jewelry 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.

      Finlay Jewelry was initially incorporated on August 2, 1985 as SL Holdings
Corporation ("SL Holdings"). The 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 Company into SL Holdings, SL Holdings changed its
name to Finlay Fine Jewelry Corporation and became a wholly-owned subsidiary of
the Company. Additionally, in connection with the acquisition of Carlyle, it
became a wholly-owned subsidiary of Finlay Jewelry. We are a holding company and
have no operations of our own. Our primary asset is the common stock of Finlay
Jewelry, which conducts all of our operations. 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.

      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


                                        4



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 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.


                                        5



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.

                               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


                                        6



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.



                                                                                    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.


                                        7



      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.

      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


                                        8



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".

      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


                                        9



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 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.


                                       10



      GOLD CONSIGNMENT AGREEMENT. Finlay Jewelry is party to the Gold
Consignment Agreement, which enables Finlay Jewelry to receive consignment
merchandise by providing gold, or otherwise making payment, to certain vendors.
While the merchandise involved remains consigned, title to the gold content of
the merchandise transfers from the vendors to the gold consignor. In July 2005,
Finlay Jewelry 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 Finlay Jewelry to consign
up to the lesser of (i) 165,000 fine troy ounces or (ii) $50.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
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, Finlay Jewelry 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, Finlay Jewelry is 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.

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.


                                       11



      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 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


                                       12



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

AVAILABLE INFORMATION

      Our internet address is www.finlayenterprises.com. We make available free
of charge on this website our annual report on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(b) of the Securities Exchange Act
of 1934 (the "Exchange Act"), as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission (the "Commission").

      Our corporate governance guidelines and the charters for our Audit
Committee, Nominating and Corporate Governance Committee and Compensation
Committee may also be found on our website at www.finlayenterprises.com. In
addition, our website contains our Codes of Business Conduct and Ethics, which
applies to our directors, officers and employees. Any waivers to our Codes of
Business Conduct and Ethics will be promptly disclosed in an SEC Filing on Form
8-K.

      In addition, we provide, at no cost, paper or electronic copies of our
reports and other filings made with the Commission. Requests should be directed
to the Corporate Secretary at:

                            Finlay Enterprises, Inc.
                            529 Fifth Avenue
                            New York, NY 10017

      The information on the website listed above, is not and should not be
considered part of this annual report on Form 10-K and is not incorporated by
reference in this document. This website is only intended to be an inactive
textual reference.


                                       13



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 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


                                       14



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 ON FINLAY JEWELRY'S
ABILITY TO CONTINUE ITS GOLD CONSIGNMENT AGREEMENT.

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

      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


                                       15



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 their 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.

      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.


                                       16



      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.

      The 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 our
Board of Directors. 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 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.


                                       17



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

      Our common stock, par value $.01 per share ("Common Stock"), is traded on
the Nasdaq National Market under the symbol "FNLY". The high and low sales
prices for the Common Stock during 2005 and 2004 were as follows:

                                            FISCAL YEAR ENDED
                          ------------------------------------------------------
                             JANUARY 28, 2006              JANUARY 29, 2005
                          ------------------------     -------------------------
                            HIGH           LOW            HIGH           LOW
                          ----------    ----------     -----------    ----------
   First Quarter .......  $  17.94       $ 10.86         $ 20.40        $ 14.11
   Second Quarter ......     13.35         10.59           21.73          15.96
   Third Quarter .......     13.95          7.50           21.99          18.41
   Fourth Quarter ......     12.30          7.37           21.98          15.50

      We have never paid cash dividends on our Common Stock and we have no
present intention to pay any cash dividends in the foreseeable future. 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 by us (including Finlay Jewelry's ability to pay
dividends to us). Additionally, the Senior Notes, the Revolving Credit Agreement
and the Gold Consignment Agreement currently restrict the amount of annual
distributions from Finlay Jewelry to us.

      During 2005, there were no cash dividends distributed by Finlay Jewelry to
the Company. During 2004, cash dividends of $39.7 million were distributed by
Finlay Jewelry to the Company. Additionally, during 2004, Finlay Jewelry repaid
an intercompany tax liability due to the Company totaling $43.4 million. The
distributions during 2004 were generally utilized to repurchase the outstanding
Old Senior Debentures, to pay interest on the Old Senior Debentures and to
purchase Common Stock under our stock repurchase program, which expired in
September 2005.

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

      As of April 7, 2006, there were 9,062,796 shares of Common Stock
outstanding and approximately 30 record holders of the Common Stock, including
holders who are nominees for an undetermined number of beneficial owners,
estimated to be in excess of 500. The last reported sale price for the Common
Stock on the Nasdaq National Market on April 7, 2006 was $10.35.

ISSUER PURCHASES OF EQUITY SECURITIES

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

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


                                       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        388,349        378,855       374,866
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         56,524         58,200        53,168
Interest expense, net ....................................        24,309         22,637         23,506         24,627        26,583
Other expense (6) ........................................            79          9,090             --             --            --
                                                             ------------   ------------   ------------   ------------  ------------
Income (loss) from continuing operations before
     income taxes and cumulative effect of
     accounting change ...................................       (50,379)        24,348         33,018         33,573        26,585
Provision for income taxes (7) ...........................         5,357          8,323         13,071         13,135        11,432
                                                             ------------   ------------   ------------   ------------  ------------
Income (loss) from continuing operations before
     cumulative effect of accounting change ..............       (55,736)        16,025         19,947         20,438        15,153
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) ........................................   $   (55,736)   $    16,025    $     8,410    $     7,039   $    18,535
                                                             ============   ============   ============   ============  ============

Net income (loss) per share applicable to
       common shares:
   Basic net income (loss) per share:
     Income (loss) from continuing operations before
       cumulative effect of accounting change ............   $     (6.21)   $      1.83    $      2.21    $      2.17   $      1.49
     Discontinued operations .............................            --             --          (1.28)          0.41          0.33
     Cumulative effect of accounting change ..............            --             --             --          (1.83)           --
                                                             ------------   ------------   ------------   ------------  ------------
     Net income (loss) ...................................   $     (6.21)   $      1.83    $      0.93    $      0.75   $      1.82
                                                             ============   ============   ============   ============  ============

   Diluted net income (loss) per share:
     Income (loss) from continuing operations before
       cumulative effect of accounting change ............   $     (6.21)   $      1.74    $      2.15    $      2.11   $      1.47
     Discontinued operations .............................            --             --          (1.24)          0.40          0.33
     Cumulative effect of accounting change ..............            --             --             --          (1.78)           --
                                                             ------------   ------------   ------------   ------------  ------------
     Net income (loss) ...................................   $     (6.21)   $      1.74    $      0.91    $      0.73   $      1.80
                                                             ============   ============   ============   ============  ============

   Weighted average number of shares and share
       equivalents outstanding (000's):
     Basic ...............................................         8,981          8,737          9,012          9,416        10,180
     Diluted .............................................         8,981          9,218          9,292          9,683        10,301



                                       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)

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 (5) (11) .....................................         (6,866)        73,394         73,550         75,027         72,516

MOST DIRECTLY COMPARABLE GAAP MEASURES:

   Net income (loss) ..................................     $  (55,736)    $   16,025     $    8,410     $    7,039     $   18,535
   Cash flows provided by operating
       activities .....................................     $   27,309     $   27,041     $   41,183     $   45,060     $   40,231

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

CASH FLOWS PROVIDED BY (USED IN):

  Operating activities ................................     $   27,309     $   27,041     $   41,183     $   45,060     $   40,231
  Investing activities ................................        (40,659)       (12,667)       (12,934)       (15,750)       (17,432)
  Financing activities ................................        (22,902)       (41,233)        (6,278)        (9,348)        (5,092)

BALANCE SHEET DATA-END OF PERIOD:

  Working capital .....................................     $  252,356     $  234,210     $  239,134     $  208,990     $  202,536
  Total assets ........................................        521,482        560,908        595,022        580,485        584,853
  Short-term debt, including current portion of
       long-term debt .................................             --             --             --             --             --
  Long-term debt ......................................        200,000        200,000        225,000        225,000        225,000
  Total stockholders' equity ..........................        116,285        169,181        152,896        149,036        149,207


_________________________

      (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


                                       21



            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 $9.1 million, including $6.7 million for redemption
            premiums paid on the Old Senior Debentures and the Old Senior Notes,
            $2.1 million to write-off deferred financing costs related to the
            refinancing of the Old Senior Debentures and 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, $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.


                                       22



            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     $   73,550     $   75,027     $   72,516
Depreciation and amortization .........................        (19,125)       (17,319)       (17,026)       (16,827)       (19,348)
Interest expense, net .................................        (24,309)       (22,637)       (23,506)       (24,627)       (26,583)
Other expense .........................................            (79)        (9,090)            --             --             --
Provision for income taxes ............................         (5,357)        (8,323)       (13,071)       (13,135)       (11,432)
Discontinued operations ...............................             --             --        (11,537)         3,810          3,382
Cumulative effect of accounting change ................             --             --             --        (17,209)            --
                                                            -----------    -----------    -----------    -----------    -----------
Net income (loss) .....................................     $  (55,736)    $   16,025     $    8,410     $    7,039     $   18,535
                                                            ===========    ===========    ===========    ===========    ===========


            Because we also consider EBITDA useful as a liquidity measure, we
            present the following reconciliation of EBITDA to our net cash
            provided by 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     $   73,550     $   75,027     $   72,516
Impairment of goodwill ................................         77,288             --             --             --             --
Discontinued operations, excluding write-down
   of goodwill and depreciation expense ...............             --             --          3,911          4,549          4,123
Interest expense, net .................................        (24,309)       (22,637)       (23,506)       (24,627)       (26,583)
Other expense .........................................            (79)            --             --             --             --
Provision for income taxes ............................         (5,357)        (8,323)       (13,071)       (13,135)       (11,432)
Amortization of deferred financing costs ..............          1,185          1,125          1,033          1,246          1,231
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)        12,337          6,784          3,994          1,664
Other .................................................            288          2,082             77            258          2,606
Changes in assets and liabilities, net of effects
   from purchase of Carlyle:
 (Increase) decrease in accounts and other
    receivables .......................................        (23,057)         1,769         (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)          (342)           642           (871)           515
   Increase (decrease) in accounts payable and
    accrued liabilities ...............................         10,730        (27,717)         8,137        (17,194)       (37,028)
                                                            -----------    -----------    -----------    -----------    -----------
Net cash provided by operating activities .............     $   27,309     $   27,041     $   41,183     $   45,060     $   40,231
                                                            ===========    ===========    ===========    ===========    ===========



                                       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     Diluted earnings per share ("EPS") (net income divided by weighted
            average shares outstanding and share equivalents included to the
            extent they are dilutive) which is an indicator of the returns
            generated for our shareholders;

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

      o     Total 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.


                                       25



      During 2005, we continued to effectively manage our inventories and
implement appropriate expense controls. Our operating cash flow was $27.3
million in 2005, which enabled us to open new locations and remodel and expand
existing locations. We ended 2005 with $28.2 million of cash compared to $64.4
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.


                                       26



      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 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


                                       27



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 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              43.0
   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               6.3
   Interest expense, net....................................           2.5               2.5               2.6
   Other expense (2)........................................            --               1.0                --
                                                                 ------------      -------------     ------------
   Income (loss) from continuing operations before
       income taxes.........................................          (5.1)              2.6               3.7
   Provision for income taxes...............................           0.5               0.9               1.5
                                                                 ------------      -------------     ------------
   Income (loss) from continuing operations................           (5.6)              1.7               2.2
   Discontinued operations, net of tax (3)..................            --                --              (1.3)
                                                                 ------------      -------------     ------------
   Net income (loss)........................................          (5.6)%             1.7%              0.9%
                                                                 ============      =============     ============


______________________
      (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.


                                       28



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

   Payroll expense...............                Increase  in  payroll  expense is due to the  accrual of  severance
                                       (0.2)     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................                Increase  is due  to  Carlyle's  higher  field  and  administrative
                                       (0.6)     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%
                                      ======


      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


                                       29



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 $1.7 million
primarily due to an increase in average borrowings ($279.4 million for the
period in 2005 compared to $258.3 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 7.6% 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 $6.7 million for redemption premiums paid on the
Old Senior Debentures and the Old Senior Notes, $2.1 million to write-off
deferred financing costs related to the refinancing of the Old Senior Debentures
and 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 34.2%, 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 $55.7 million for the 2005 period compares
to net income of $16.0 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.

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


                                       30



                                                   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 and net income per diluted
share under the former LIFO method for the year ended January 29, 2005 would
have been approximately $12.4 million or $1.34 per share, on a diluted basis.

      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 $7.8 million, or 2.0%. As a
percentage of sales, SG&A decreased to 42.9% from 43.0%. The components of this
0.1% net decrease in SG&A are as follows:


                                       31





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

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

      License fees......................       (0.1%)       Increase in license fees is due to a change in
                                                            the mix of host store group sales.

      Payroll expense ..................       (0.2%)       Although sales increased over the prior year, the
                                                            increase in payroll expense is due to lower than
                                                            expected same store sales negatively impacting
                                                            the leveraging of payroll expense.
                                             -----------
                     Total .............        0.1%
                                             ===========


      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.

      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 decreased by $0.9 million
primarily due to a decrease in average borrowings from $267.7 million in 2003 to
$258.3 million in 2004 as well as a slight decrease in the weighted average
interest rate (7.6% for 2004 compared to 7.7% for 2003) as a result of the
refinancing of the Old Senior Debentures and the Old Senior Notes.

      OTHER EXPENSE. Other expense includes $6.7 million for redemption premiums
paid on the Old Senior Debentures and the Old Senior Notes, $2.1 million to
write-off deferred financing costs related to the refinancing of the Old Senior
Debentures and 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 34.2% 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 $16.0 million for 2004 represents an increase of
$7.6 million as compared to net income of $8.4 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......     $      28,191        $     64,443
      Working capital................           252,356             234,210
      Long-term debt.................           200,000             200,000
      Stockholders' equity (a).......           116,285             169,181

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


                                       32



      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:



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

     Operating Activities.........................     $   27,309       $    27,041      $     41,183
     Investing Activities.........................        (40,659)          (12,667)          (12,934)
     Financing Activities.........................        (22,902)          (41,233)           (6,278)
     Net increase (decrease) in cash and cash
                                                       ------------     -------------    -------------
       equivalents................................     $  (36,252)      $   (26,859)     $     21,971
                                                       ============     =============    =============


      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 $27.3 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.


                                       33



      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 $252.4 million at January 28, 2006, an increase of
$18.1 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.

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 $22.9 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 $41.2 million in 2004,
consisting principally of proceeds from the issuance of the Senior Notes by
Finlay Jewelry and funds received from stock option exercises, offset by the
purchase and redemption of the then outstanding Old Senior Debentures and the
Old Senior Notes, the repurchase of 392,745 shares of Common Stock for
approximately $6.9 million under our stock repurchase program (which expired in
September 2005) and capitalized financing costs of $5.1 million related to the
refinancing of the Old Senior Debentures and the Old Senior Notes. Net cash used
in financing activities was $6.3 million in 2003 principally related to the
repurchase of 482,217 shares for approximately $6.7 million under our stock
repurchase program, partially offset by funds received from stock option
exercises.

      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


                                       34



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 Finlay's Revolving Credit Agreement. In
connection with the acquisition, we replaced the existing Revolving Credit
Agreement and entered into an amended and restated credit agreement with G.E.
Capital and certain other lenders and Finlay Jewelry entered into the Gold
Consignment Amendment to, among other things, permit the acquisition
transaction. In addition, Carlyle and its subsidiaries, together with Finlay
Jewelry, entered into the Supplemental Indentures to guarantee obligations of
Finlay Jewelry under the Senior Notes.

      During 2004, we and Finlay Jewelry each commenced an offer to purchase for
cash our Old Senior Debentures and Finlay Jewelry's Old Senior Notes,
respectively. Holders of approximately 79% and 98% of the outstanding Old Senior
Debentures and the outstanding Old Senior Notes, respectively, tendered their
securities and consented to amendments to the related indentures. Additionally,
during 2004, Finlay Jewelry completed the sale of the Senior Notes and called
for the redemption of all of the untendered Old Senior Debentures and Old Senior
Notes, 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.

      Finlay Jewelry 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 $9.1 million, including $6.7 million
for redemption premiums paid on the Old Senior Debentures and the Old Senior
Notes, $2.1 million to write-off deferred financing costs related to the
refinancing of the Old Senior Debentures and 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 Debentures and Old Senior Notes were all undertaken to
decrease our overall interest rate, extend our debt maturities and decrease
total long-term debt as well as simplify our capital structure by eliminating
debt at the parent company level. As a result of the completion of the
redemption of the Old Senior Debentures, Finlay Jewelry is no longer required to
provide the funds 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.


                                       35



      Our agreements covering the Revolving Credit Agreement and the Senior
Notes each require that we comply with certain restrictive and financial
covenants. In addition, Finlay Jewelry is a party to the Gold Consignment
Agreement, which also contains certain covenants. Although Finlay Jewelry is in
compliance with its 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, Finlay Jewelry has amended its 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 Finlay
Jewelry will be in compliance with the covenants in the future or that the
lenders will waive or amend any of the covenants should Finlay Jewelry 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.

      We believe that, based upon current operations, anticipated growth and
continued availability under the Revolving Credit Agreement, Finlay Jewelry
will, for the foreseeable future, be able to meet its debt service and
anticipated working capital obligations and to make distributions sufficient to
permit us to pay certain expenses as they come due. No assurances, however, can
be given that Finlay Jewelry's current level of operating results will continue
or improve or that Finlay Jewelry's income from operations will continue to be
sufficient to permit Finlay Jewelry to meet its debt service and other
obligations. Currently, Finlay Jewelry's principal financing arrangements
restrict the amount of annual distributions from Finlay Jewelry to us. The
amounts required to satisfy the aggregate of Finlay Jewelry's 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):


                                       36





                                                                   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, Finlay Jewelry 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 the Company 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

      Finlay Jewelry's Gold Consignment Agreement enables Finlay Jewelry to
receive consignment merchandise by providing gold, or otherwise making payment,
to certain vendors. While the merchandise involved remains consigned, title to
the gold content of the merchandise transfers from the vendors to the gold
consignor. In July 2005, Finlay Jewelry 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 ratio requirements and certain
maximum debt limitations). The Gold Consignment Agreement permits Finlay Jewelry
to consign up to the lesser of (i) 165,000 fine troy ounces or (ii) $50.0
million worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At 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,
Finlay Jewelry would be required to return the gold or purchase the outstanding
gold at the prevailing gold rate in effect on that date. For financial statement
purposes, the consigned gold is not included in merchandise inventories on the
Consolidated Balance Sheets and, therefore, no related liability has been
recorded.

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


                                       37



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 the Company'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 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.


                                       38



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



                                                                                   FISCAL QUARTER
                                                  ----------------------------------------------------------------------------------
                                                        FIRST               SECOND (A)             THIRD (A)           FOURTH (A)
                                                  ------------------     ------------------     ----------------     ---------------
                                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                     (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) ........................             (2,814)             (74,793)(b)             (6,874)               28,745
   Net income (loss) per share - basic(d)....      $       (0.31)         $     (8.33)(b)        $     (0.77)         $       3.20
   Net income (loss) per share - diluted (d).      $       (0.31)         $     (8.33)(b)        $     (0.77)         $       3.11
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) ........................             (1,557)              (5,712)(c)             (4,826)               28,120
   Net income (loss) per share - basic (d)...      $       (0.18)         $     (0.66)           $     (0.55)         $       3.20
   Net income (loss) per share - diluted (d).      $       (0.18)         $     (0.66)           $     (0.55)         $       3.02


___________________
      (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 and net loss per share 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 and net loss per share includes debt extinguishment
            costs of $9.1 million, on a pre-tax basis, related to the
            refinancing of the Old Senior Debentures and the Old Senior Notes in
            the second quarter of 2004. Refer to Note 5 of Notes to Consolidated
            Financial Statements.

      (d)   Net income (loss) per share for each quarter is computed as if each
            quarter were a discrete period. As such, the total of the four
            quarters net income (loss) per share does not necessarily equal the
            net income (loss) per share for the year.

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...................   $   (45,031)         $     17,137         $   (27,894)
    Net cash provided by financing activities...............        74,159               (17,137)             57,022

    Twenty-six weeks ended July 30, 2005:
    Net cash used in operating activities...................      (130,115)               17,137            (112,978)
    Net cash provided by financing activities...............       101,713               (17,137)             84,576

    Thirty-nine weeks ended October 29, 2005:
    Net cash used in operating activities...................      (161,197)               17,137            (144,060)
    Net cash provided by financing activities...............       137,890               (17,137)            120,753



                                       39



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.


                                       40



      VENDOR ALLOWANCES

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

      Vendor allowances have been accounted for in accordance with EITF 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

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

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

      o     Significant negative industry or economic trends; or

      o     Store closings.

      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


                                       41



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.

      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 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 our Common Stock on the day before the 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-


                                       42



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:

      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     Finlay Jewelry's continuation of its 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


                                       43



      o     Trends in the general economy in the United States.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We are exposed to market risk through the interest rate on our borrowings
under the Revolving Credit Agreement, which has a variable interest rate. Based
on the average amounts outstanding under the Revolving Credit Agreement for
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:



                                           FINE TROY        PREVAILING
                        CONTRACT           OUNCES OF        GOLD PRICE        CONTRACT FAIR
     COMMODITY      SETTLEMENT 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.


                                       44



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 Stockholders' 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

Financial Statement Schedule:
    Schedule I - Condensed Financial Information of Registrant .............................................F-30


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.

     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

                                       45



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.

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 Enterprises, Inc.:

     We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Finlay
Enterprises, Inc. 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 and consolidated financial statement schedule.

      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 and financial statement schedule 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 and financial
statement schedule 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 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

      Certain information incorporated herein by reference to our Proxy
Statement described below is also contained in the Finlay Jewelry Form 10-K for
the fiscal year ended January 28, 2006.

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 Company and Finlay Jewelry. Each of the
persons listed as a director is a member of the Board of Directors of both the
Company and Finlay Jewelry.



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

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

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

Leslie A. Philip....................     59     Executive Vice President and Chief Merchandising Officer of
                                                the 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 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


      Information under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Compliance" to be included in our definitive Proxy
Statement to be filed pursuant to Regulation 14A ("Proxy Statement") is
incorporated herein by reference.

      Under our Restated Certificate of Incorporation, our 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 Company and Finlay Jewelry, together
with their periods of service as directors and executive officers of the Company
and Finlay Jewelry, are set forth below.


                                       49



      ARTHUR E. REINER became Chairman of the Company effective February 1, 1999
and, from January 1995 to such date, served as Vice Chairman of the Company. Mr.
Reiner has also served as President and Chief Executive Officer of the 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 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 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 Company and Finlay Jewelry since January 2000. From
June 1990 to December 1999, he was Treasurer of the 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 Company since his
retirement from day-to-day involvement with the Company effective January 31,
1999. He served as Chairman of the Company from May 1993 until his retirement,
and has been a director of the 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 Company. From December 1985 to December 1988, Mr.
Cornstein was President, Chief Executive Officer and a director of a predecessor
of the Company. He is also a director of Circa, Inc.

      ROHIT M. DESAI has been a director of the 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 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.


                                       50



      MICHAEL GOLDSTEIN has been a director of the 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 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

      We have 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. Our Codes of Ethics are
posted on our web-site, www.finlayenterprises.com under the heading "Governance"
and are incorporated by reference as an exhibit to this Form 10-K. We intend to
satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an
amendment to, or waiver from, a provision of our Codes of Ethics by posting such
information on our website at the location specified above. We will provide to
any person without charge, upon request addressed to the Corporate Secretary at
Finlay Enterprises, Inc., 529 Fifth Avenue, New York, N.Y. 10017, a copy of the
Codes of Ethics.

AUDIT COMMITTEE FINANCIAL EXPERT

      The Audit Committee of the Board of Directors consists of the following
members of our Board of Directors: Rohit M. Desai, Michael Goldstein, John D.
Kerin and Thomas M. Murnane, each of whom is


                                       51



an "independent director" under the NASDAQ listing standards applicable to audit
committee members. We have 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.

ITEM 11. EXECUTIVE COMPENSATION

      The information to be included in the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.

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



                                                                      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 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 Company and certain securityholders of the Company. The address for
      the


                                       52



      beneficial owners named in the table, unless specified otherwise in a
      subsequent footnote, is c/o the 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 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 Partners,
      L.L.C., Kevin A. Richardson, II, Henry J. Lawlor, Jr., Murray A. Indick,
      Charles E. McCarthy, and Christian Puscasiu is 200 High Street, Ste. 700,
      Boston, Massachusetts 02110.

(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.
      Barclays Global Investors, NA. has


                                       53



      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 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 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 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 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 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 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 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 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 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 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 Company.


                                       54



(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 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
      Company.

EQUITY COMPENSATION PLAN TABLE

      Options to purchase Common Stock, restricted stock and RSUs have been
granted 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)
                                                      (a)                  (b)         NUMBER OF SECURITIES
                                                   NUMBER OF        WEIGHTED-AVERAGE   REMAINING AVAILABLE
                                                  SECURITIES         EXERCISE PRICE         FOR FUTURE
                                               TO BE ISSUED UPON           OF             ISSUANCE UNDER
                                                  EXERCISE OF          OUTSTANDING     EQUITY COMPENSATION
                                                  OUTSTANDING           OPTIONS,         PLANS (EXCLUDING
                                                   OPTIONS,             WARRANTS       SECURITIES REFLECTED
              PLAN CATEGORY                   WARRANTS AND RIGHTS      AND RIGHTS         IN 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 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 nonrestricted stock awards,
            including purchases and awards under the RSU Plans, subject to such
            terms and conditions as the Compensation Committee shall determine;
            (v) performance units which are based upon attainment of performance
            goals during a period of not less than two nor more than five years
            and which may be settled in cash or in Common Stock in the
            discretion of our Compensation Committee; or (vi) any combination of
            the foregoing.

      (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 of our executive officers
            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
            us).


                                       55



      In April 2003, the Board of Directors adopted the Executive Deferred
Compensation and Stock Purchase Plan and the Director Deferred Compensation and
Stock Purchase Plan, which was approved by our stockholders on June 19, 2003
(the "RSU Plans"). Under the RSU Plans, key executives and our non-employee
directors as directed by our Compensation Committee, are eligible to acquire
restricted stock units ("RSUs"). An RSU is a unit of measurement equivalent to
one share of common stock, but with none of the attendant rights of a
stockholder of a share of common stock. Two types of RSUs are awarded under the
RSU Plans: (i) participant RSUs, where a plan participant may elect to defer, in
the case of an executive employee, a portion of his or her actual or target
bonus, and in the case of a non-employee director, his or her retainer fees and
Committee chairmanship fees, and receive RSUs in lieu thereof and (ii) matching
RSUs, where we 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. As of January 28, 2006, 216,730 RSUs have been awarded under the
RSU Plans.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information to be included in the section captioned "Certain
Transactions" in the Proxy Statement is incorporated herein by reference.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

      The information to be included in the section captioned "Principal
Accounting Fees and Services" in the Proxy Statement is incorporated herein by
reference.

                                     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.

      Schedule I - Condensed Financial Information of Registrant

      Note: Schedules other than those referred to above have been omitted as
      inapplicable or not required under the instructions contained in
      Regulation S-X or the information is included elsewhere in the financial
      statements or the notes thereto.

      (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 the
            Company, Credit Suisse First Boston LLC, J.P. Morgan
            Securities Inc. and SG Americas Securities, LLC (incorporated
            by reference to Exhibit 1.1 filed as part of the Quarterly
            Report on Form 10-Q for the period ended May 1, 2004 filed by
            the Company on June 10, 2004).


                                       56



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 the Company on May 25, 2005).

3.1         Certificate of Incorporation of the Company (incorporated by
            reference to Exhibit 3.1 filed as part of the Annual Report on Form
            10-K for the period ended January 28, 1995 filed by the Company on
            April 12, 1995).

3.2(a)      Amended and Restated By-laws of the Company (incorporated by
            reference to Exhibit 3.2 filed as part of the Annual Report on Form
            10-K for the period ended February 1, 2003 filed by the Company on
            May 1, 2003).

3.2(b)      Second Amendment, dated as of September 10, 2003, to the Amended and
            Restated By-Laws of the Company (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 the Company on December
            10, 2003).

4.1         Article Fourth of the 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. 33-88938).

4.2         Specimen Common Stock certificate (incorporated by reference to
            Exhibit 4.2 of Form S-1 Registration Statement, Registration No.
            33-88938).

4.3(a)      Amended and Restated Stockholders' Agreement dated as of March 6,
            1995 among the 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 the Company on April 12, 1995).

4.3(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 the Company on December 16, 1997).

4.4         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 4.7 filed as part of the
            Current Report on Form 8-K filed by the Company on June 10, 1993).

4.5(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 the Company on June 10, 2004).

4.5(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 the Company
            on May 25, 2005).

4.5(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 the Company
            on May 25, 2005).


                                       57



4.5(d)      Supplemental Indenture dated as of May 19, 2005 among Carlyle & Co.
            of Montgomery, Finlay Jewelry and HSBC Bank USA, as Trustee,
            together with Subsidiary Guarantee (incorporated by reference to
            Exhibit 10.7 filed as part of the Current Report on Form 8-K filed
            by the Company on May 25, 2005).

4.5(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 the Company on May 25, 2005).

4.6         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 the Company on June 10, 2004).

4.7         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 the Company on June 10, 2004).

4.8         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 the Company on
            June 10, 2004).

10.1        Form of Agreement and Certificate of Option Pursuant to the Long
            Term Incentive Plan of the 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 the Company on September 14,
            1993).

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

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

10.3        Executive Medical Benefits Plan of Finlay Jewelry and the Company
            (incorporated by reference to Exhibit 10.7 of Form S-1 Registration
            Statement, Registration No. 33-59434).

10.4(a)     Employment Agreement, dated as of January 30, 2005, among the
            Company, Finlay Jewelry and Arthur E. Reiner (including the forms of
            restricted stock agreements annexed thereto) (incorporated by
            reference to Exhibit 10.5 filed as part of the Quarterly Report on
            Form 10-Q for the period ended October 30, 2004 filed by the Company
            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 the Company
            on June 22, 2005).

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


                                       58



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 the
            Company on June 22, 2005).

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 the Company 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 the Company on March 8, 2006).

10.5        Tax Allocation Agreement dated as of November 1, 1992 between the
            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 Company (incorporated by reference
            to Exhibit 19.6 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(b)     Amendment No. 1 to the 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 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 the Company
            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 the Company on April 29,
            2002).

10.7(b)     Amendment to the 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 the Company on September 10,
            2004).

10.8(a)     The Company's Executive Deferred Compensation and Stock Purchase
            Plan (incorporated by reference to Exhibit 10.1 filed as part of
            Amendment No. 1 to the Quarterly Report on Form 10-Q/A for the
            period ended August 2, 2003 filed by the Company on September 19,
            2003).

10.8(b)     Amendment No. 1, dated June 19, 2003, to the Company's Executive
            Deferred Compensation and Stock Purchase Plan (incorporated by
            reference to Exhibit 10.2 filed as part of Amendment No. 1 to the
            Quarterly Report on Form 10-Q/A for the period ended August 2, 2003
            filed by the Company on September 19, 2003).

10.9(a)     The Company's Director Deferred Compensation and Stock Purchase Plan
            (incorporated by reference to Exhibit 10.3 filed as part of
            Amendment No. 1 to the Quarterly Report on Form 10-Q/A for the
            period ended August 2, 2003 filed by the Company on September 19,
            2003).

10.9(b)     Form of Deferral Agreement under the Company's Director Deferred
            Compensation and Stock Purchase Plan (incorporated by reference to
            Exhibit 10.4 filed as part of the


                                       59



            Quarterly Report on Form 10-Q for the period ended November 1, 2003
            filed by the Company on December 10, 2003).

10.9(c)     Form of Deferral Agreement under the Company's Executive Deferred
            Compensation and Stock Purchase Plan (incorporated by reference to
            Exhibit 10.5 filed as part of the Quarterly Report on Form 10-Q for
            the period ended November 1, 2003 filed by the Company 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 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 the Company 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 the Company 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 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 the Company 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 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"), Finlay Merchandising & Buying, Inc.
            ("Finlay Merchandising & Buying") and eFinlay, Inc. ("eFinlay")
            (incorporated by reference to Exhibit 10.11 filed as part of the
            Annual Report on Form 10-K for the period ended February 1, 2003
            filed by the Company on May 1, 2003).

10.12(a)    Amended and Restated Security Agreement dated as of January 22,
            2003, by and among Finlay Jewelry, FJI, Finlay Merchandising &
            Buying, eFinlay and G.E. Capital, individually and as agent
            (incorporated by reference to Exhibit 10.12 filed as part of the
            Annual Report on Form 10-K for the period ended February 1, 2003
            filed by the Company 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.,
            Finlay Merchandising & Buying, 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 the Company on May 25, 2005).

10.13       Amended and Restated Pledge Agreement dated as of January 22, 2003,
            by and among Finlay Jewelry, FJI, Finlay Merchandising & Buying,
            eFinlay and G.E. Capital, as agent (incorporated by reference to
            Exhibit 10.13 filed as part of the Annual Report on Form 10-K for
            the period ended February 1, 2003 filed by the Company on May 1,
            2003).

10.14       Amended and Restated Trademark Security Agreement dated as of
            January 22, 2003 by Finlay Jewelry, FJI, Finlay Merchandising &
            Buying, eFinlay and G.E. Capital, as agent


                                       60



            (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 the Company on May 1, 2003).

10.15       Amended and Restated Patent Security Agreement dated as of January
            22, 2003 by Finlay Jewelry, FJI, Finlay Merchandising & Buying and
            eFinlay in favor of G.E. Capital, as agent (incorporated by
            reference to Exhibit 10.15 filed as part of the Annual Report on
            Form 10-K for the period ended February 1, 2003 filed by the Company
            on May 1, 2003).

10.16       Amended and Restated Copyright Security Agreement dated as of
            January 22, 2003 by Finlay Jewelry, FJI, Finlay Merchandising &
            Buying and eFinlay in favor of G.E. Capital, as agent (incorporated
            by reference to Exhibit 10.16 filed as part of the Annual Report on
            Form 10-K for the period ended February 1, 2003 filed by the Company
            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 the Company 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 the Company 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 the Company 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 the Company 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 the Company 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 the Company 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 the Company 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


                                       61



            Quarterly Report on Form 10-Q for the period ended May 1, 2004 filed
            by the Company 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 the Company on September 9,
            2004).

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 the Company 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 the Company 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 the Company 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 the Company 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 the Company 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 the Company on
            June 18, 2001).

10.22       Restricted Stock Agreement, dated as of August 14, 2003, between the
            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 the Company on December 10,
            2003).

10.23       Form of Restricted Stock Agreement entered into by the 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 the Company on December 10, 2003).

10.24       Form of Restricted Stock Agreement entered into by the Company in
            connection with restricted stock awards under the 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 the Company on June 10, 2004).


                                       62



10.25       The Company's 2004 Cash Bonus Plan (incorporated by reference to
            Exhibit 10.1 filed as part of the Current Report on Form 8-K filed
            by the Company on September 10, 2004).

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 the Company on June 22, 2005).

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

14.1        Codes of Ethics.

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 the Company on December
            9, 2004).

21.1        Subsidiaries of the Company.

23.1        Consent of Deloitte & Touche LLP, Independent Registered Public
            Accounting Firm.

23.2        Consent of Cherry, Bekaert & Holland L.L.P., Independent Registered
            Public Accounting Firm.

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.


                                       63



                                   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 Enterprises, Inc.

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, President,      April 26, 2006
--------------------------------------
           Arthur E. Reiner              Chief Executive Officer and Director
                                         (Principal Executive Officer)

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



                                       64

                            FINLAY ENTERPRISES, INC.
                   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 Stockholders' 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

Financial Statement Schedule:
   Schedule I - Condensed Financial Information of Registrant...............F-30


                                       F-1



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
of Finlay Enterprises, Inc.:

We have audited the accompanying consolidated balance sheets of Finlay
Enterprises, Inc. and subsidiaries (the "Company") as of January 28, 2006 and
January 29, 2005, and the related consolidated statements of operations, changes
in stockholders' equity and comprehensive income (loss) and cash flows for each
of the three fiscal years in the period ended January 28, 2006. Our audits also
included the financial statement schedule listed in the Index at Item 15. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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 Enterprises, Inc. 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. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

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



                                                                                    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         388,349
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          56,524
Interest expense, net ..........................................         24,309          22,637          23,506
Other expense ..................................................             79           9,090              --
                                                                   ------------    ------------    ------------
    Income (loss) from continuing operations before
        income taxes ...........................................        (50,379)         24,348          33,018
Provision for income taxes .....................................          5,357           8,323          13,071
                                                                   ------------    ------------    ------------
    Income (loss) from continuing operations ...................        (55,736)         16,025          19,947
Discontinued operations, net of tax ............................             --              --         (11,537)
                                                                   ------------    ------------    ------------
    Net income (loss) ..........................................   $    (55,736)   $     16,025    $      8,410
                                                                   ============    ============    ============

Net income (loss) per share applicable to common shares:
    Basic net income (loss) per share:
        Income (loss) from continuing operations ...............   $      (6.21)   $       1.83    $       2.21
        Discontinued operations, net of tax ....................             --              --           (1.28)
                                                                   ------------    ------------    ------------
        Basic net income (loss) per share ......................   $      (6.21)   $       1.83    $       0.93
                                                                   ============    ============    ============

    Diluted net income (loss) per share:
        Income (loss) from continuing operations ...............   $      (6.21)   $       1.74    $       2.15
        Discontinued operations, net of tax ....................             --              --           (1.24)
                                                                   ------------    ------------    ------------
        Diluted income (loss) per share ........................   $      (6.21)   $       1.74    $       0.91
                                                                   ============    ============    ============

Weighted average shares and share equivalents outstanding:
        Basic ..................................................      8,980,621       8,737,272       9,012,257
                                                                   ============    ============    ============
        Diluted ................................................      8,980,621       9,218,294       9,291,759
                                                                   ============    ============    ============


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


                                       F-4



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



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

                                     ASSETS
Current assets:
   Cash and cash equivalents .....................................   $    28,191    $    64,443
   Accounts receivable ...........................................        39,034         22,598
   Other receivables .............................................        43,203         35,692
   Merchandise inventories .......................................       331,757        278,589
   Prepaid expenses and other ....................................         4,232          2,958
                                                                     -----------    -----------
      Total current assets .......................................       446,417        404,280
                                                                     -----------    -----------
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 ...............................................   $   521,482    $   560,908
                                                                     ===========    ===========

               LIABILITIES AND STOCKHOLDERS' 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 ..........................................        20,770         16,479
                                                                     -----------    -----------
      Total current liabilities ..................................       194,061        170,070
Long-term debt ...................................................       200,000        200,000
Deferred income taxes ............................................        10,171         21,070
Other non-current liabilities ....................................           965            587
                                                                     -----------    -----------
      Total liabilities ..........................................       405,197        391,727
                                                                     -----------    -----------
Commitments and contingencies (Note 12)
Stockholders' equity:
   Common Stock, par value $.01 per share; authorized 25,000,000
      shares; issued 11,214,614 and 11,197,281 shares, at
      January 28, 2006 and January 29, 2005, respectively ........           112            112
   Additional paid-in capital ....................................        92,505         90,048
   Retained earnings .............................................        52,296        108,032
   Unamortized restricted stock compensation .....................        (1,593)        (1,500)
   Accumulated other comprehensive income (loss) .................           364           (112)
   Less treasury stock, of 2,207,904 shares, at both January
      28, 2006 and January 29, 2005, at cost .....................       (27,399)       (27,399)
                                                                     -----------    -----------
      Total stockholders' equity .................................       116,285        169,181
                                                                     -----------    -----------
      Total liabilities and stockholders' equity .................   $   521,482    $   560,908
                                                                     ===========    ===========


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


                                       F-5



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



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

Balance, February 1, 2003 .....  9,300,638  $   106  $   79,680  $    83,597  $        (554) $(13,793)  $    149,036
  Net income ..................         --       --          --        8,410             --        --          8,410  $       8,410
  Change in fair value of
    gold forward contracts,
    net of tax ................         --       --          --           --           (140)       --           (140)          (140)
                                                                                                                      -------------
  Comprehensive income ........         --                                                                            $       8,270
                                                                                                                      =============
  Exercise of stock options
    and related tax benefit ...    149,500        1       1,722           --             --        --          1,723
  Issuance of restricted
    stock and restricted
    stock units ...............     50,000        1       1,406           --         (1,327)       --             80
  Amortization of restricted
    stock compensation and
    restricted stock units ....         --       --          --           --            531        --            531
  Purchase of treasury stock ..   (482,217)      --          --           --             --    (6,744)        (6,744)
                               -----------  -------- ----------- ----------- --------------  --------  -------------
Balance, January 31, 2004 .....  9,017,921      108      82,808       92,007         (1,490)  (20,537)       152,896
  Net income ..................         --       --          --       16,025             --        --         16,025  $      16,025
  Change in fair value of
    gold forward contracts,
    net of tax ................         --       --          --           --            (27)       --            (27)           (27)
                                                                                                                      -------------
  Comprehensive income ........                                                                                       $      15,998
                                                                                                                      =============
  Exercise of stock options
    and related tax benefit ...    364,201        4       4,964           --             --        --          4,968
  Issuance of restricted
    stock and restricted
    stock units ...............         --       --       2,276           --         (1,453)       --            823
  Amortization of restricted
    stock compensation and
    restricted stock units ....         --       --          --           --          1,358        --          1,358
  Purchase of treasury stock ..   (392,745)      --          --           --             --    (6,862)        (6,862)
                               -----------  -------- ----------- ----------- --------------  --------  -------------
Balance, January 29, 2005 .....  8,989,377      112      90,048      108,032         (1,612)  (27,399)       169,181
  Net loss ....................         --       --          --      (55,736)            --        --        (55,736) $     (55,736)
  Change in fair value of
    gold forward contracts,
    net of tax ................         --       --          --           --            476        --            476            476
                                                                                                                      -------------
  Comprehensive loss ..........                                                                                       $     (55,260)
                                                                                                                      =============
  Exercise of stock options
    and related tax benefit ...     17,333       --         209           --             --        --            209
  Issuance of restricted
    stock and restricted
    stock units ...............         --       --       2,248           --         (1,309)       --            939
  Amortization of restricted
    stock compensation and
    restricted stock units ....         --       --          --           --          1,216        --          1,216
                               -----------  -------- ----------- ----------- --------------  --------  -------------
Balance, January 28, 2006 .....  9,006,710  $   112  $   92,505  $    52,296  $      (1,229) $(27,399)  $    116,285
                               ===========  ======== =========== =========== ==============  ========  =============


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


                                       F-6



                            FINLAY ENTERPRISES, INC.
                      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) .......................................................   $   (55,736) $    16,025  $     8,410
   Adjustments to reconcile net income (loss) to net cash provided
      by 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        1,125        1,033
   Amortization of restricted stock compensation and restricted stock units          1,216        1,358          531
   Loss on extinguishment of debt ..........................................            --        9,090           --
   Credit associated with the closure of Sonab .............................            --         (364)          --
   Deferred income tax provision ...........................................        (5,457)      12,337        6,784
   Other, net ..............................................................           288        2,082           77
   Changes in operating assets and liabilities, net of effects from
        purchase of Carlyle (Note 15):
      (Increase) decrease in accounts and other receivables ................       (23,057)       1,769       (7,501)
      (Increase) decrease in merchandise inventories .......................         1,989       (5,641)      (9,404)
      (Increase) decrease in prepaid expenses and other ....................          (262)        (342)         642
      Increase (decrease) in accounts payable and accrued liabilities ......        10,730      (27,717)       8,137
                                                                               -----------  -----------  -----------
           NET CASH PROVIDED BY OPERATING ACTIVITIES .......................        27,309       27,041       41,183
                                                                               -----------  -----------  -----------

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 Debentures and Old Senior Notes ...            --     (231,971)          --
   Capitalized financing costs .............................................          (311)      (5,088)        (431)
   Bank overdraft ..........................................................        (5,600)      (1,248)        (424)
   Purchase of treasury stock ..............................................            --       (6,862)      (6,744)
   Stock options exercised .................................................           146        3,936        1,321
                                                                               -----------  -----------  -----------
           NET CASH USED IN FINANCING ACTIVITIES ...........................       (22,902)     (41,233)      (6,278)
                                                                               -----------  -----------  -----------
           INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................       (36,252)     (26,859)      21,971
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...............................        64,443       91,302       69,331
                                                                               -----------  -----------  -----------
CASH AND CASH EQUIVALENTS, END OF YEAR .....................................   $    28,191  $    64,443  $    91,302
                                                                               ===========  ===========  ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
      Interest paid ........................................................   $    23,213  $    23,695  $    22,783
                                                                               ===========  ===========  ===========
      Income taxes paid (refunded) .........................................   $     6,940  $    (5,982) $    10,914
                                                                               ===========  ===========  ===========
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 ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ORGANIZATION OF THE COMPANY

      Finlay Enterprises, Inc. (the "Company", the "Registrant", "we", "us" and
"our"), a Delaware corporation, conducts business through its wholly-owned
subsidiary, Finlay Fine Jewelry Corporation and its wholly-owned subsidiaries
("Finlay Jewelry"). References to "Finlay" mean collectively, the 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 the Company and our wholly-owned subsidiary, Finlay Jewelry.
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 ENTERPRISES, INC.
                   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 stockholders' equity, and is reclassified into cost of sales when
the offsetting effects of the hedged transaction impact earnings. Changes in the
fair value of the derivative attributable to hedge ineffectiveness are recorded
in earnings immediately. At 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 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.


                                       F-9



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      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.

      NET INCOME (LOSS) PER SHARE: Net income (loss) per share has been computed
in accordance with SFAS No. 128, "Earnings per Share". Basic and diluted net
income (loss) per share were calculated using the weighted average number of
shares outstanding during each period, with options to purchase common stock,
par value $0.01 per share ("Common Stock"), restricted stock and restricted
stock units, included in diluted net income (loss) per share, using the treasury
stock method, to the extent that such options, restricted stock and restricted
stock units were dilutive. As we had a net loss for 2005, the stock options,
restricted stock and restricted stock units are not considered in the
calculation of diluted net loss per share due to their antidilutive effect. As a
result, the weighted average number of shares outstanding used for both the
basic and diluted net loss per share calculations was the same. Total stock
options, restricted stock and restricted stock units outstanding were 1,411,094
at January 28, 2006 at prices ranging from $7.05 to $24.31 per share. Due to the
antidilutive impact on net income per share, 49,739 and 207,644 options were not
included in the weighted average shares outstanding for 2004 and 2003,
respectively. The following is an analysis of the differences between basic and
diluted net income per share:



                                                                  FISCAL YEAR ENDED
                                           ---------------------------------------------------------------
                                               JANUARY 28,            JANUARY 29,          JANUARY 31,
                                                   2006                  2005                  2004
                                           --------------------   -------------------   ------------------
                                           NUMBER OF     PER      NUMBER OF    PER      NUMBER OF    PER
                                            SHARES      SHARE      SHARES     SHARE      SHARES     SHARE
                                           ---------  ---------   ---------  --------   ---------  -------

Weighted average shares outstanding.....   8,980,621  $   (6.21)  8,737,272  $   1.83   9,012,257  $  0.93
Dilutive stock options..................          --         --     289,023      (.06)    209,874    (0.02)
Restricted stock........................          --         --     141,582      (.03)     66,993       --
Restricted stock units..................          --         --      50,417        --       2,635       --
Weighted average shares                    ---------  ---------   ---------  --------   ---------  -------
 and share equivalents..................   8,980,621  $   (6.21)  9,218,294  $   1.74   9,291,759  $  0.91
                                           =========  =========   =========  ========   =========  =======


      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 $1.0 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.


                                      F-10



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      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.

      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 our stock option plans, which requires
recognition of compensation cost ratably over the vesting period of the stock
options, Net income (loss) and Net income (loss) per share would be as follows:


                                      F-11



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



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

NET INCOME (LOSS):
Reported net income (loss) ..............................  $    (55,736)   $     16,025   $     8,410
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) .............................  $    (55,876)   $     15,704   $     7,942
                                                           ============    ============   ===========

BASIC NET INCOME (LOSS) PER SHARE:
Reported net income (loss) per share ....................  $      (6.21)   $       1.83   $      0.93
                                                           ============    ============   ===========
Pro forma net income (loss) per share ...................  $      (6.22)   $       1.80   $      0.88
                                                           ============    ============   ===========

DILUTED NET INCOME (LOSS) PER SHARE:
Reported net income (loss) per share ....................  $      (6.21)   $       1.74   $      0.91
                                                           ============    ============   ===========
Pro forma net income (loss) per share ...................  $      (6.22)   $       1.70   $      0.85
                                                           ============    ============   ===========


      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.

      On January 23, 2006, the 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 our Common Stock on the day before the Compensation
Committee approved the acceleration. Unvested out-of-the-money options to
purchase approximately 35,400 shares became exercisable as a result of the
vesting acceleration. The vesting acceleration did not result in the recognition
of compensation expense for 2005. 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.


                                      F-12



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: We
record liabilities for costs associated with exit or disposal activities when
the liabilities are incurred.

      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.

      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 (in thousands) and Net income per share for 2004 had we not changed our
LIFO method:


                                      F-13



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3--MERCHANDISE INVENTORIES (CONTINUED)

                                                            FISCAL YEAR
                                                               ENDED
                                                            JANUARY 29,
                                                                2005
                                                            ------------
NET INCOME:
Net income, as reported.................................    $     16,025
Impact of change in LIFO inventory valuation method,
     net of tax.........................................           3,687
                                                            ------------
Net income, excluding change in accounting principle....    $     12,338
                                                            ============

BASIC NET INCOME PER SHARE:
Basic net income per share, as reported.................    $       1.83
Impact of change in LIFO inventory valuation method,
     net of tax.........................................           (0.42)
Basic net income per share, excluding change in
                                                            ------------
     accounting principle...............................    $       1.41
                                                            ============

DILUTED NET INCOME PER SHARE:
Diluted net income per share, as reported...............    $       1.74
Impact of change in LIFO inventory valuation method,
     net of tax.........................................           (0.40)
Diluted net income per share, excluding change in
                                                            ------------
     accounting principle...............................    $       1.34
                                                            ============

      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.

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

      In July 2005, Finlay Jewelry 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 Finlay
Jewelry to consign up to the lesser of (i) 165,000 fine troy ounces or (ii)
$50.0 million worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At 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, Finlay Jewelry
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, Finlay Jewelry is 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, Finlay Jewelry is 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.


                                      F-14



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      In conjunction with the Gold Consignment Agreement, Finlay Jewelry 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").

      The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the creation of liens, engaging in transactions with affiliates
and limitations on the payment of dividends. In addition, the Gold Consignment
Agreement also contains various financial covenants, including minimum earnings
and fixed charge coverage ratio requirements and certain maximum debt
limitations. Although Finlay Jewelry is in compliance with its 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, Finlay Jewelry has
amended its 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, Finlay Jewelry's 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 Finlay Jewelry 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).
Finlay Jewelry is permitted to use up to $30 million of the Revolving Credit
Facility for the issuance of letters of credit issued for the account of Finlay
Jewelry. 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.


                                      F-15



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

      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 the financial performance of Finlay
Jewelry, of the face amount of letters of credit guaranteed under the Revolving
Credit 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 Finlay Jewelry's (and any 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 Finlay Jewelry is in
compliance with its 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, Finlay Jewelry has further amended its 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 Finlay Jewelry each commenced an offer to purchase for
cash our 9% Senior Debentures, due May 1, 2008, having an aggregate principal
amount of $75.0 million (the "Old Senior Debentures") and Finlay Jewelry's
8-3/8% Senior Notes, due May 1, 2008, having an aggregate principal amount of
$150.0 million (the "Old Senior Notes"), respectively. Holders of approximately
79% and 98% of the outstanding Old Senior Debentures and the outstanding Old
Senior Notes, respectively, tendered


                                      F-16



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

their securities and consented to amendments to the related indentures.
Additionally, during 2004, Finlay Jewelry completed the sale of 8-3/8% Senior
Notes, due June 1, 2012, having an aggregate principal amount of $200.0 million
(the "Senior Notes") and called for the redemption of all of the untendered Old
Senior Debentures and Old Senior Notes, 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.

      Finlay Jewelry 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 $9.1 million, including $6.7 million for
redemption premiums paid on the Old Senior Debentures and the Old Senior Notes,
$2.1 million to write-off deferred financing costs related to the refinancing of
the Old Senior Debentures and 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 the existing and future unsubordinated indebtedness
of Finlay Jewelry and senior to any future indebtedness of Finlay Jewelry that
is expressly subordinated to the Senior Notes. The Senior Notes are effectively
subordinated to Finlay Jewelry's secured indebtedness, including obligations
under its Revolving Credit Agreement and its 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 its subsidiaries. Finlay Jewelry 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, Finlay Jewelry 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 Finlay Jewelry 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. Finlay Jewelry was in
compliance with all of its 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, $22.8 million
and $23.6 million, respectively. Interest income for the same periods was $0.3
million, $0.2 million and $0.1 million, respectively.


                                      F-17



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6--STOCKHOLDERS' EQUITY

      Our Long Term Incentive Plan (the "1993 Plan") permits us to grant to our
key employees, consultants and certain other persons, and our directors (other
than members of the Compensation Committee of our Board of Directors), the
following: (i) stock options; (ii) stock appreciation rights in tandem with
stock options; (iii) limited stock appreciation rights in tandem with stock
options; (iv) restricted or nonrestricted stock awards subject to such terms and
conditions as the Compensation Committee shall determine; (v) performance units
which are based upon attainment of performance goals during a period of not less
than two nor more than five years and which may be settled in cash or in Common
Stock, at the discretion of the Compensation Committee; or (vi) any combination
of the foregoing. Under the 1993 Plan, we 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 our 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, our Board of Directors adopted the 1997 Long-Term Incentive
Plan (the "1997 Plan"), which was approved by our 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 our 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 our 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 our stock repurchase
program, which expired in September 2005, we repurchased a total of 2,207,904
shares for $27.4 million.


                                      F-18



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)

      In February 2001, an executive officer of the Company was issued Common
Stock, 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
stockholders' equity. Compensation expense of approximately $1.2 million has
been amortized over four years and totaled approximately $0.3 million in each of
2004 and 2003.

      In August 2003, an executive officer of the Company was issued an
additional 50,000 shares of Restricted Stock, pursuant to a restricted stock
agreement. Fifty percent of the Restricted Stock became fully vested on January
31, 2005 and was accounted for as a component of stockholders' equity.
Compensation expense of approximately $0.4 million has been amortized over the
vesting period and totaled approximately $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 the Company were awarded a total of
31,250 shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after four years of continuous employment
with the Company and is accounted for as a component of stockholders' equity
with respect to unamortized restricted stock compensation. However, such shares
are not considered outstanding. Compensation expense of approximately $0.5
million is being amortized over four years and totaled approximately $0.1
million in each of 2005, 2004 and 2003.

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

      Commencing in February 2005, an executive officer of the Company became
entitled to receive stock incentive compensation based on the attainment of
financial objectives established by senior management and approved by the Board
of Directors. The maximum amount of stock incentive compensation payable in any
fiscal year is equal to the number of restricted shares of Common Stock having
an aggregate value nearest to $400,000 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 the Company were awarded a total of
48,300 shares of Restricted Stock, pursuant to restricted stock agreements. The
Restricted Stock becomes fully vested after three years of continuous employment
with the Company and is accounted for as a component of stockholders' equity
with respect to unamortized restricted stock compensation. However, such shares
are not considered outstanding. Compensation expense of approximately $0.6
million is being amortized over three years. Amortization for 2005 totaled
approximately $0.1 million.


                                      F-19



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

      In April 2003, the Board of Directors adopted the Executive Deferred
Compensation and Stock Purchase Plan and the Director Deferred Compensation and
Stock Purchase Plan, which was approved by our stockholders on June 19, 2003
(the "RSU Plans"). Under the RSU Plans, key executives and non-employee
directors, as directed by our Compensation Committee, are eligible to acquire
restricted stock units ("RSUs"). An RSU is a unit of measurement equivalent to
one share of common stock, but with none of the attendant rights of a
stockholder of a share of Common Stock. Two types of RSUs are awarded under the
RSU Plans: (i) participant RSUs, where a plan participant may elect to defer, in
the case of an executive employee, a portion of his or her actual or target
bonus, and in the case of a non-employee director, his or her retainer fees and
Committee chairmanship fees, and receive RSUs in lieu thereof and (ii) matching
RSUs, where we 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. 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:


                                      F-20



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8--LICENSE AGREEMENTS WITH DEPARTMENT STORES AND LEASE
        AGREEMENTS (CONTINUED)

                                                        (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
                                                        ==============

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 subsidiary,
Finlay Jewelry and its wholly owned subsidiaries.

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


                                      F-21



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10--INCOME TAXES (CONTINUED)

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


      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...................    $   9,462     $  (1,889)     $  6,005
Current taxes - State and local...........        1,506        (1,525)          282
Current taxes - Foreign...................         (154)         (600)           --
Deferred taxes - Federal..................       (4,073)        9,746         5,359
Deferred taxes - State and local..........       (1,384)        2,591         1,425
                                              -----------   -----------   -----------
Provision for income taxes................    $   5,357     $   8,323      $ 13,071
                                              ===========   ===========   ===========


      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.....................    $ (17,633)    $   8,522     $  11,556
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...          187           953         1,109
Reversal of tax accruals no longer required.....         (425)       (1,025)           --
Other...........................................          124           473           406
                                                    -----------   -----------   -----------
Provision for income taxes......................    $   5,357     $   8,323     $  13,071
                                                    ===========   ===========   ===========


      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


                                      F-22



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10--INCOME TAXES (CONTINUED)

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
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 and the Old Senior Debentures.

(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.


                                      F-23



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)

      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 from Finlay
Jewelry to us.

      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, except per share data):



                                                             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) (c)..........................         (2,814)      (74,793)       (6,874)       28,745

Net income (loss) per share applicable to
   Common shares (c) (e):
Basic net income (loss) per share..............     $    (0.31)   $    (8.33)   $    (0.77)   $     3.20
                                                    ===========   ===========   ===========   ===========
Diluted net income (loss) per share............     $    (0.31)   $    (8.33)   $    (0.77)   $     3.11
                                                    ===========   ===========   ===========   ===========



                                      F-24



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



                                                             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       192,710
Selling, general and administrative expenses...         88,181        87,286        82,629       137,725
Income (loss) from operations..................          3,159         4,504        (2,315)       50,727
Net income (loss) (d)..........................         (1,557)       (5,712)       (4,826)       28,120

Net income (loss) per share applicable to
   common shares (d) (e):
Basic net income (loss) per share..............     $    (0.18)   $    (0.66)   $    (0.55)   $     3.20
                                                    ===========   ===========   ===========   ===========
Diluted net income (loss) per share............     $    (0.18)   $    (0.66)   $    (0.55)   $     3.02
                                                    ===========   ===========   ===========   ===========


______________________________
(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.

(c)   Net income (loss) and net income (loss) per share includes a charge of
      approximately $72.9 million, net of tax, related to the impairment of
      goodwill during the second quarter of 2005.

(d)   Net income (loss) and net income (loss) per share includes debt
      extinguishment costs of $9.1 million, on a pre-tax basis, related to the
      refinancing of the Old Senior Debentures and the Old Senior Notes in the
      second quarter of 2004.

(e)   Net income (loss) per share for each quarter is computed as if each
      quarter were a discrete period. As such, the total of the four quarters
      net income (loss) per share does not necessarily equal the net income
      (loss) per share for the year.

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

Thirteen weeks ended July 30, 2005:
Net cash used in operating activities..........   $ (45,031)   $  17,137    $ (27,894)
Net cash provided by financing activities......      74,159      (17,137)      57,022

Twenty-six weeks ended July 30, 2005:
Net cash used in operating activities..........    (130,115)      17,137     (112,978)
Net cash provided by financing activities......     101,713      (17,137)      84,576

Thirty-nine weeks ended October 29, 2005:
Net cash used in operating activities..........    (161,197)      17,137     (144,060)
Net cash provided by financing activities......     137,890      (17,137)     120,753



                                      F-25



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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.


                                      F-26



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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 Finlay's Revolving Credit
Agreement. In connection with the acquisition, we replaced the existing
Revolving Credit Agreement and entered into an amended and restated credit
agreement with G.E. Capital and certain other lenders and Finlay Jewelry 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 Finlay Jewelry, entered into supplemental indentures
and guarantees (the "Supplemental Indentures") to guarantee obligations of
Finlay Jewelry 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
                                                   ============


                                      F-27



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15--CARLYLE & CO. JEWELERS ACQUISITION (CONTINUED)

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

                                                      FISCAL YEAR ENDED
                                                 ---------------------------
                                                  JANUARY 28,    JANUARY 29,
                                                     2006           2005
                                                 ------------   ------------
                                                       (IN THOUSANDS)
Sales.........................................   $ 1,013,584    $ 1,008,643
Operating income (loss) (a)...................   $   (26,062)   $    61,027
Net income (loss) (a).........................   $   (56,457)   $    17,414
Basic net income (loss) per share (a).........   $     (6.29)   $      1.99
Diluted net income (loss) per share (a).......   $     (6.29)   $      1.89

_____________________
(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 and net loss per share 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.

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........................      459,159       62,323       521,482
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.


                                      F-28



                            FINLAY ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 - SEGMENT INFORMATION (CONTINUED)

      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.

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-29



                                   SCHEDULE I

                         CONDENSED FINANCIAL INFORMATION
                                  OF REGISTRANT

                    FINLAY ENTERPRISES, INC. - PARENT COMPANY
                             STATEMENT OF OPERATIONS
                                 (IN THOUSANDS)



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

REVENUE........................................   $        --   $        --   $        --
                                                  -----------   -----------   -----------
EXPENSES:
Selling, general and administrative expenses...            --            --           848
Interest expense, net..........................           (47)        2,458         6,950
Other expense..................................            --         3,128            --
                                                  -----------   -----------   -----------
   Total expenses..............................           (47)        5,586         7,798
Equity in income (loss) of subsidiaries........       (55,765)       19,487        13,244
                                                  -----------   -----------   -----------
    Income (loss) before income taxes..........       (55,718)       13,901         5,446
Provision (benefit) for income taxes...........            18        (2,124)       (2,964)
                                                  -----------   -----------   -----------
    Net income (loss)..........................   $   (55,736)  $    16,025   $     8,410
                                                  ===========   ===========   ===========



                                      F-30



                             SCHEDULE I (CONTINUED)

                         CONDENSED FINANCIAL INFORMATION
                                  OF REGISTRANT

                    FINLAY ENTERPRISES, INC. - PARENT COMPANY
                                 BALANCE SHEETS
                                 (IN THOUSANDS)



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

Current assets:
   Cash and cash equivalents....................................   $       693   $     2,486
   Due from affiliate...........................................         3,096         1,893
                                                                   -----------   -----------
      Total current assets......................................         3,789         4,379

Investment in subsidiary........................................       112,204       164,969
Deferred charges................................................            --            --
Income tax receivable, due from affiliate ......................            --            --
                                                                   -----------   -----------
      Total assets..............................................   $   115,993   $   169,348
                                                                   ===========   ===========

              LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accrued liabilities..........................................   $        --   $        --
Income tax payable, due to affiliate............................            72            55
Long-term debt..................................................            --            --
                                                                   -----------   -----------
      Total liabilities.........................................            72            55
                                                                   -----------   -----------
Stockholders' equity:
   Common stock.................................................           112           112
   Additional paid-in-capital...................................        92,505        90,048
   Retained earnings............................................        52,296       108,032
   Unamortized restricted stock compensation....................        (1,593)       (1,500)
   Less treasury stock..........................................       (27,399)      (27,399)
                                                                   -----------   -----------
      Total stockholders' equity................................       115,921       169,293
                                                                   -----------   -----------
      Total liabilities and stockholders' equity................   $   115,993   $   169,348
                                                                   ===========   ===========



                                      F-31



                             SCHEDULE I (CONTINUED)

                         CONDENSED FINANCIAL INFORMATION
                                  OF REGISTRANT

                    FINLAY ENTERPRISES, INC. - PARENT COMPANY
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)



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

CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss) ...........................................   $    (55,736)   $     16,025    $      8,410
   Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
   Amortization of deferred financing costs ....................             --              67             207
   Loss on extinguishment of debt ..............................             --           3,128              --
   Equity in (income) loss of subsidiaries .....................         55,765         (19,487)        (13,244)
   Receipt/(payment) of dividends from affiliate ...............         (3,000)         39,703          13,494
   Changes in operating assets and liabilities:
      (Increase) decrease in current assets ....................             --              20             (20)
      Increase (decrease) in accrued liabilities ...............          1,032          (1,005)            491
      Increase (decrease) in due to parent .....................             --          42,464          (2,940)
                                                                   ------------    ------------    ------------
         NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES ....         (1,939)         80,915           6,398
                                                                   ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Purchase and redemption of Old Senior Debentures ............             --         (77,324)             --
   Purchase of treasury stock ..................................             --          (6,862)         (6,744)
   Stock options exercised .....................................            146           3,936           1,321
                                                                   ------------    ------------    ------------
         NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ...            146         (80,250)         (5,423)
                                                                   ------------    ------------    ------------
         INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......         (1,793)            665             975
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................          2,486           1,821             846
                                                                   ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF YEAR .........................   $        693    $      2,486    $      1,821
                                                                   ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
      Interest paid (received) .................................   $        (47)   $      4,079    $      6,741
                                                                   ============    ============    ============
      Income taxes paid ........................................   $         30    $         91    $         53
                                                                   ============    ============    ============



                                      F-32



                             SCHEDULE I (CONTINUED)

                          NOTES TO CONDENSED FINANCIAL
                            INFORMATION OF REGISTRANT

                    FINLAY ENTERPRISES, INC. - PARENT COMPANY

ACCOUNTING POLICIES:

      Certain information and footnote disclosures normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted. Accordingly, these financial
statements should be read in conjunction with the consolidated financial
statements of Finlay Enterprises, Inc. (the "Company") in its 2005 Annual Report
on Form 10-K.

      The investments in our subsidiaries are carried on the equity basis, which
represents amounts invested less dividends received plus or minus our equity in
the subsidiaries' income or loss to date. Significant intercompany balances and
activities have not been eliminated in this unconsolidated financial
information.


                                      F-33