FINLAY ENTERPRISES INC /DE, 424B4, 1997-10-20

FINLAY ENTERPRISES INC /DE
424B4, 1997-10-20
JEWELRY STORES

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<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-34949

3,000,000 SHARES

[LOGO] FINLAY ENTERPRISES, INC.

COMMON STOCK
(PAR VALUE $.01 PER SHARE)

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

Of the 3,000,000 shares of Common Stock offered hereby, 2,046,971 shares
are being sold by the Company and 953,029 shares are being sold by the Selling
Stockholder. See 'Principal and Selling Stockholders'. The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholder.

The last reported sale price of the Common Stock, which is quoted on the
Nasdaq National Market under the symbol 'FNLY', on October 16, 1997 was $19.50
per share. See 'Price Range of Common Stock'.

SEE 'RISK FACTORS' BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
----------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------

<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDER
------------------ ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
Per Share................... $19.00 $1.045 $17.955 $17.955
Total(3).................... $57,000,000 $3,135,000 $36,753,364 $17,111,636
</TABLE>

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(1) The Company, the Selling Stockholder and the Over-Allotment Selling
Stockholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $1,200,000 payable by the Company.
(3) The Company and the Over-Allotment Selling Stockholders have granted the
Underwriters an option for 30 days to purchase up to an additional 150,000
and 300,000 shares, respectively, at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,

underwriting discount and proceeds to the Company will be $65,550,000,
$3,605,250 and $39,446,614, respectively, and the proceeds to the
Over-Allotment Selling Stockholders will be $5,386,500. See 'Underwriting'.
----------------------

The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
October 22, 1997, against payment therefor in immediately available funds.

GOLDMAN, SACHS & CO.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

SBC WARBURG DILLON READ INC.
----------------------

The date of this Prospectus is October 16, 1997.

<PAGE>

[ARTWORK: PICTURES OF THE COMPANY'S FINE JEWELRY PRODUCTS AND MAP SHOWING
LOCATION OF THE COMPANY'S DEPARTMENTS AND STAND-ALONE STORES.]

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THIS
OFFERING. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY)
ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES
EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING'.

<PAGE>
PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified
in its entirety by reference to, the more detailed information and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. Unless otherwise specified or the context otherwise requires, in
this Prospectus (i) references to 'Finlay Jewelry' mean Finlay Fine Jewelry
Corporation, a wholly owned subsidiary of Finlay Enterprises, Inc., (ii)
references to 'Finlay' or the 'Company' mean, collectively, Finlay Enterprises,
Inc., Finlay Jewelry, their subsidiaries and all predecessor businesses, (iii)
all information presented assumes no exercise of the Underwriters'
over-allotment option, (iv) all information is presented as of August 2, 1997,
the date of the Company's most recent quarterly balance sheet, and (v) all
information presented herein gives effect to a two-for-three combination of the
Company's common stock, par value $.01 per share (the 'Common Stock'), effected
March 7, 1995. Finlay's fiscal year ends on the Saturday closest to January 31
of each year. References to 1992, 1993, 1994, 1995, 1996 and 1997 relate to the
fiscal years ending on January 30, 1993, January 29, 1994, January 28, 1995,
February 3, 1996, February 1, 1997 and January 31, 1998, respectively. Each of
the fiscal years includes 52 weeks except 1995, which includes 53 weeks. All
references herein to 'Departments' refer to fine jewelry departments operated
pursuant to license agreements or other arrangements with host department
stores.

THE COMPANY

Finlay is one of the leading retailers of fine jewelry in the United States
and France. The Company operates leased fine jewelry departments ('Departments')
in major department stores for retailers such as May Department Stores ('May'),
Federated Department Stores ('Federated'), Galeries Lafayette, Belk, Carson
Pirie Scott and Proffitt's. Finlay sells a broad selection of moderately priced
fine jewelry, including necklaces, earrings, bracelets, rings and watches, and
markets these items principally as fashion accessories with an average sales
price of approximately $150 per item. Average sales per Department were $729,000
in 1996 and the average size of a Department is approximately 1,000 square feet.
Finlay operates 946 Departments and in 1996 achieved sales of $685.3 million,
making Finlay the largest operator of Departments in the United States and
France.

Management believes that current trends in jewelry retailing, particularly
in the department store sector, provide a significant opportunity for Finlay's
growth. Consumers spent approximately $41 billion on jewelry (including both
fine and costume jewelry) in the United States in 1996, an increase of
approximately $17 billion over 1986, according to the United States Department
of Commerce. In the department store sector in which Finlay operates, consumers
spent $4 billion on fine jewelry in 1996. Management believes that demographic
factors such as the maturing of the 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. Management
also believes that jewelry consumers today increasingly perceive fine jewelry as
a fashion accessory, resulting in purchases which augment the Company's gift and
special occasion sales. Finlay's Departments are typically located in 'high
traffic' areas of leading department stores, enabling Finlay to capitalize on

these consumer buying patterns.

Host stores benefit from outsourcing the operation of their fine jewelry
departments. By engaging Finlay, 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 lessee, Finlay benefits from the host stores' reputation, customer
traffic, advertising, credit services and established customer base. Finlay also
avoids the substantial capital investment in fixed assets typical of stand-alone
retail formats, which generally has enabled Finlay's new Departments to achieve
profitability within their first twelve months of operation. Finlay further
benefits because net sales proceeds are generally remitted to Finlay by each
host store on a monthly basis with essentially all customer credit risk borne by
the host store.

3
<PAGE>
The Company employs a unique merchandising strategy, known as the 'Finlay
Triangle', which integrates store management, vendors and Finlay's central
office. This alliance enables the Company to capitalize on economies of scale,
while allowing store management to tailor merchandising programs to each host
store's unique fashion image and customer demographics. Store management,
vendors and Finlay's central office coordinate efforts and share access to
information, enabling the vendor to assist in identifying fashion trends thereby
improving inventory turnover and profitability.

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

RECENT DEVELOPMENTS

On October 6, 1997, Finlay completed the previously announced acquisition
of certain assets of the Diamond Park Fine Jewelers division of Zale Corporation
('Diamond Park'), a leading operator of Departments, for approximately $63
million. By acquiring Diamond Park, Finlay added 139 Departments that had total
sales of $93 million for the twelve months ended February 1, 1997 and also added
new host store relationships with Mercantile Stores, Marshall Field's and
Parisian. Management believes that in addition to increasing sales volume, the
acquisition of Diamond Park (the 'Diamond Park Acquisition') will improve
Finlay's results of operations through the leveraging of expenses and the
achievement of other operating synergies. Finlay does not expect the Diamond
Park Acquisition to have a material impact on earnings per share in the current
fiscal year but expects the transaction to be accretive thereafter. The Company
financed the Diamond Park Acquisition with borrowings under its revolving credit
facility (as amended, the 'Revolving Credit Facility').

On September 11, 1997, Finlay amended the Revolving Credit Facility by (i)
increasing the line of credit from $135 milllion to $175 million, (ii) including
eligible international assets in the borrowing base formula, (iii) reducing
interest rates, (iv) permitting higher balances during the annual balance
reduction period and (v) extending the maturity date from May 1998 to March
2003. Upon completion of the Diamond Park Acquisition, the line of credit was
further increased to $225 million and permitted balances during the annual
balance reduction period were further increased.

On June 18, 1997, the Company announced the extension of its lease
agreements with Federated for an additional three years. The lease extensions
apply to all of Finlay's Departments within Federated stores, including leases
for Departments in Burdines, Rich's, Lazarus, Goldsmith's and The Bon Marche
which have been extended through February 3, 2001, and the lease for Departments
in Stern's which has been extended through February 1, 2003.

GROWTH STRATEGY

Finlay intends to pursue the following key initiatives to increase sales
and earnings:

INCREASE COMPARABLE DEPARTMENT SALES. In 1995 and 1996, Finlay
achieved comparable Department sales increases of 5.7% and 5.9%,
respectively, outpacing the majority of its host stores. These increases
were achieved primarily by emphasizing key merchandise items, increasing
focus on holiday and event-driven promotions, participating in host store
marketing programs and positioning its Departments as a 'destination
location' for fine jewelry. Finlay believes that comparable Department
sales will continue to benefit from these merchandising and marketing
strategies, as well as from increasing demand for fine jewelry.

4
<PAGE>
in 155 of Federated's 411 department stores. Since the beginning of 1992,
host store expansion has added 126 net new Departments including 52 net
new Departments since the beginning of 1995. Based on expansion plans
recently announced by May, Finlay believes it will have the opportunity to
open approximately 100 new Departments in May stores alone over the next
five years (excluding possible closings).

beginning of 1992, Finlay has added such host store groups as Burdines,
The Bon Marche, Elder Beerman and Stern's. Over the past two years, Finlay
has added 27 Departments in the Hecht's division of May as a result of
May's acquisition of John Wanamaker and Strawbridge's. By acquiring
Diamond Park, Finlay added Mercantile Stores, Marshall Field's and
Parisian to its host store relationships.

EXPAND INTERNATIONAL OPERATIONS. In October 1994, Finlay acquired
Societe Nouvelle d'Achat de Bijouterie-S.O.N.A.B. ('Sonab'), the largest
operator of Departments in France. In 1996, Finlay expanded in France by
adding 26 Departments in Monoprix and plans to open an additional 15
Monoprix Departments in 1997. Finlay operates 138 Departments in France
through five host store groups, including Galeries Lafayette, Nouvelles
Galeries and Bazar de L'Hotel de Ville. In addition, in 1996, Finlay began
operating seven Departments in Debenhams, a department store chain which
operates 90 stores throughout the United Kingdom and Ireland. In 1996, the
Company also opened a Department in a new Galeries Lafayette store in
Berlin, Germany and is exploring additional opportunities in other
European countries.

CONTINUE TO IMPROVE OPERATING LEVERAGE. Selling, general and
administrative expenses as a percentage of sales declined from 44.2% in
1993 to 42.3% in 1996. Finlay seeks to continue to leverage expenses both
by increasing sales at a faster rate than expenses and by reducing its
current level of certain operating expenses. For example, Finlay has
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, management believes the Company will
benefit from recent investments in technology and refinements of operating
procedures designed to allow Finlay's sales associates more time for
customer sales and service. Finlay's new distribution and warehouse
facility, expected to become fully operational in the Spring of 1998, will
permit the Company to improve the flow of merchandise to Departments while
reducing payroll and freight costs.

Additionally, since 1994 the Company has opened nine domestic stand-alone
discount jewelry outlet stores which provide Finlay with a channel to sell
discontinued, close-out and certain other merchandise. The Company will seek to
identify opportunities to develop additional outlet stores.
------------------------

The principal executive offices of the Company are located at 521 Fifth
Avenue, New York, New York 10175 and its telephone number at this address is
(212) 808-2060.

<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by:

The Company.......................... 2,046,971 Shares

The Selling Stockholder.............. 953,029 Shares
-------------

Total.............................. 3,000,000 Shares (1)
-------------
-------------

Common Stock to be outstanding after the
Offering................................ 9,616,449 Shares (2)(3)

Use of Proceeds........................... The net proceeds to the Company from the Offering are expected to be
used for working capital, repayment of indebtedness or other general
corporate purposes. The Company will not receive any proceeds from
the sale of the shares being sold by the Selling Stockholder. The
Indentures restrict the Company's ability to use the net proceeds
from the Offering to repay indebtedness under the Revolving Credit
Facility. See 'Risk Factors -- Substantial Leverage' and 'Use of
Proceeds'.

Nasdaq National Market symbol............. FNLY
</TABLE>

- ------------------
(1) Excludes up to 450,000 additional shares of Common Stock subject to the
over-allotment option granted by the Company and certain existing
stockholders of the Company other than the Selling Stockholder (the
'Over-Allotment Selling Stockholders') to the Underwriters. See
'Underwriting'.

(2) Excludes 150,000 additional shares of Common Stock subject to the Company's
portion of the over-allotment option granted by the Company and the
Over-Allotment Selling Stockholders to the Underwriters.

(3) Excludes 958,734 shares of Common Stock issuable upon exercise of employee
stock options outstanding at the date of this Prospectus. See 'Management --
Executive Compensation -- Long-Term Incentive Plans'.

RISK FACTORS

See 'Risk Factors' beginning on page 9 for certain considerations relevant
to an investment in the Common Stock.

<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following table presents summary consolidated financial information of
the Company for the periods indicated. This information should be read in
conjunction with 'Selected Consolidated Financial Information', 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus. The Company's balance sheet at August 2, 1997 and statement of
operations data for each of the twenty-six week periods ended August 3, 1996 and
August 2, 1997 were derived from unaudited consolidated financial statements of
the Company which include, in the opinion of management, all adjustments
necessary to present fairly, in all material respects, the financial position
and results of operations of the Company for the dates and periods presented.

Because of the seasonal nature of Finlay's business, the results for the
interim periods are not indicative of the results for the entire year.
Significant portions of Finlay's sales and income from operations are generated
in the fourth quarter of the year. See 'Risk Factors -- Seasonality',
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality' and 'Business -- Seasonality'. For information
regarding the Diamond Park Acquisition, see 'Business -- Recent Developments'.

<TABLE>
<CAPTION>
(UNAUDITED)
TWENTY-SIX WEEKS
FISCAL YEAR ENDED (1) ENDED
-------------------------------------------------------- --------------------
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, AUGUST 3, AUGUST 2,
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $473,746 $505,639 $552,090 $654,491 $685,274 $267,907 $282,652
Gross margin.................. 253,394 267,775 290,827 340,462 354,974 138,024 144,818
Management transition and
consulting expense (2)...... -- -- 5,144 -- -- -- --
Nonrecurring expenses
associated with
recapitalization (3)........ -- 1,915 -- -- -- -- --
Income (loss) from
operations.................. 37,112 33,819 36,499 48,299 53,996 6,471 7,535
Other nonrecurring (income)
expense (4)................. 2,100 17,150 -- (5,000) -- -- --
Interest expense, net......... 23,841 25,469 28,488 29,705 31,204 15,245 16,148
Income (loss) before income
taxes and cumulative effect
of accounting change........ 11,171 (8,800) 8,011 23,594 22,792 (8,774) (8,613)
Net income (loss)............. 6,028 (9,205) 2,731 14,251 11,757 (5,967) (5,604)
Net income (loss) applicable
to common shares............ 1,339 (12,799) (601) 3,534 11,757 (5,967) (5,604)
Net income (loss) per share

applicable to common
shares...................... $ 0.78 $ (6.49) $ (0.27) $ 0.53 $ 1.55 $ (0.80) $ (0.75)
Weighted average number of
shares outstanding
(000's)..................... 1,728 1,973 2,261 6,640 7,570 7,481 7,497
OPERATING AND FINANCIAL DATA:
Number of Departments (end of
period) (5)................. 746 757 903 941 939 924 958
Percentage increase in
comparable Department
sales....................... 1.9% 0.7% 4.5% 5.7% 5.9% 7.8% 5.7%
Average sales per Department
(5)......................... $ 673 $ 673 $ 674 $ 710 $ 729 $ 287 $ 298
EBITDA (6).................... 44,149 42,580 45,409 57,958 64,836 11,855 13,227
EBITDA-FIFO (as adjusted)
(7)......................... 43,579 46,424 51,398 58,901 66,755 12,246 13,227
Capital expenditures.......... 7,294 9,150 11,228 14,933 17,533 7,224 8,477
</TABLE>

<TABLE>
<CAPTION>
(UNAUDITED)
AUGUST 2, 1997
--------------
<S> <C>
BALANCE SHEET DATA -- END OF PERIOD (DOLLARS IN THOUSANDS):
Working capital.................................................................................. $ 67,590
Total assets..................................................................................... 425,395
Short-term debt, including current portion of long-term debt (8)................................. 111,526
Long-term debt, excluding current portion........................................................ 216,084
Stockholders' equity (deficit)................................................................... 12,354
</TABLE>

(Continued on following page)

7
<PAGE>
- ----------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.

(2) Included in 1994 are compensation and benefits for a former senior executive
totaling $3.1 million as a result of the termination of his employment
agreement and other management transition and consulting expense totaling
$2.0 million.

(3) Included in 1993 in connection with the Recapitalization Transactions (as
defined in 'Risk Factors -- Concentration of Ownership') is the redemption
of outstanding equity participation units in accordance with the terms and
conditions of the Company's former equity participation plan totaling $0.9
million and bonuses totaling $1.0 million.

(4) Included in 1992 are $2.1 million of nonrecurring expenses associated with a
withdrawn initial public offering. Included in 1993 are nonrecurring

expenses of $17.2 million relating to the write-off of certain deferred
financing costs and other expenses incurred in connection with the
Recapitalization Transactions. See Note 1 of Notes to Consolidated Financial
Statements. Included in 1995 are proceeds of $5.0 million from a life
insurance policy Finlay maintained on a senior executive.

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

(6) EBITDA represents income from operations before depreciation and
amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
expenses totaling $1.9 million described in Note 3 above and for 1994,
EBITDA includes the effect of management transition and consulting expense
totaling $5.1 million described in Note 2 above. The Company believes EBITDA
provides additional information for determining its ability to meet future
debt service requirements. 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) for the purpose of analyzing Finlay's operating
performance, financial position and cash flows. However, Finlay has
presented EBITDA because 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.

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

(8) At February 1, 1997, short-term debt was $2,000; at August 2, 1997,
short-term debt consisted principally of indebtedness under the Revolving
Credit Facility and was used for seasonal working capital needs.

8
<PAGE>
RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully before purchasing the
Common Stock offered hereby. This Prospectus contains forward-looking statements
within the meaning of the Securities Act of 1933, as amended (the 'Securities
Act'), and the Securities Exchange Act of 1934, as amended (the 'Exchange Act').
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the risk
factors set forth below. See 'Special Note Regarding Forward-Looking
Statements'.

SUBSTANTIAL LEVERAGE

Following the Offering, the Company will remain substantially leveraged. At
August 2, 1997, total debt outstanding was $327.6 million, representing 96.4% of

total book capitalization. After giving effect to the Offering and increased
borrowings under the Revolving Credit Facility to finance the Diamond Park
Acquisition, Finlay's total indebtedness would have been $393.7 million,
representing 89.2% of total book capitalization. See 'Capitalization'.

The degree to which Finlay is leveraged could have important consequences
to holders of the Common Stock, including the following: (i) Finlay's ability to
obtain additional financing in the future may be impaired; (ii) a substantial
portion of Finlay's cash flow from operations must be dedicated to service its
indebtedness, including an annual balance reduction requirement under Finlay's
Revolving Credit Facility; (iii) the credit agreement (as amended, the
'Revolving Credit Agreement') relating to Finlay's Revolving Credit Facility,
the indenture (the 'Note Indenture') relating to Finlay Jewelry's 10 5/8% Senior
Notes due 2003 (the 'Notes'), the indenture (the 'Debenture Indenture', and,
together with the Note Indenture, the 'Indentures') relating to Finlay's 12%
Senior Discount Debentures due 2005 (the 'Debentures') and the Company's gold
consignment agreement (the 'Gold Consignment Agreement') all contain provisions
which restrict the ability of the Company to pay dividends; (iv) the Revolving
Credit Agreement and the Indentures impose other operating and financial
restrictions on Finlay Jewelry which may limit its operations and development,
including its ability to finance acquisitions or to repay indebtedness; (v)
future financing arrangements will likely impose similar restrictions on Finlay;
(vi) changes in interest rates or rates charged under the Revolving Credit
Facility and the Gold Consignment Agreement could adversely affect the Company's
results of operations or financial condition; (vii) Finlay may be more leveraged
than other providers of similar products and services, which may place Finlay at
a competitive disadvantage; and (viii) Finlay's significant degree of leverage
could make it more vulnerable to changes in general economic conditions. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations'.

SEASONALITY

Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 42% of Finlay's sales and 86% of operating income (excluding
nonrecurring expenses) for 1994, 1995 and 1996. Finlay has typically experienced
losses in the first three quarters of its fiscal year. During these periods,
working capital requirements have been funded by the Revolving Credit Facility.
This pattern is expected to continue. 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. A substantial decrease in sales
during the fourth quarter would have a material adverse effect on Finlay's
profitability. The Company's quarterly results of operations also may fluctuate
significantly as a result of a variety of factors, including the timing of new
Department openings, net sales contributed by new Departments, increases or
decreases in comparable Department sales, timing of certain holidays, changes in
the Company's selection of merchandise, general economic, industry and weather
conditions that affect consumer spending and actions of competitors. In
addition, since jewelry purchases are discretionary and a majority of jewelry

9
<PAGE>

purchases by store customers are made using credit, declines in general economic
conditions or consumer credit availability, or increases in prevailing interest
rates, could adversely affect the business and financial condition of Finlay,
particularly if such changes were to occur in the fourth quarter of Finlay's
fiscal year. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Seasonality' and 'Business -- Seasonality'.

DEPENDENCE ON HOST STORE RELATIONSHIPS

During 1996, approximately 48% of Finlay's sales were generated by
Departments operated in store groups owned by May, and approximately 22% of
Finlay's sales were generated by Departments operated in store groups owned by
Federated. Management believes that its relationships with the May and Federated
store groups are excellent. Nevertheless, a decision by either company to
transfer the operation of some or all of their Departments to a competitor, or
to assume the operation of those Departments themselves, could have a material
adverse effect on the business and financial condition of Finlay. Such adverse
effects could also be caused by consolidation transactions effected by May,
Federated or other host store groups. In recent years the department store
industry has been consolidating. Although Finlay has, in the past, benefitted
from host store consolidations, no assurance can be given that significant host
store relationships of Finlay will not be terminated as a result of such
consolidation. For example, when Federated acquired Emporium/Weinstocks, 30
stores in which Finlay operated Departments were integrated into Federated's
Macy's division, which currently operates its own fine jewelry business. See
'Business -- Store Relationships'.

Finlay's lease agreements typically have an initial term of one to five
years, and contain renewal options or provisions for automatic renewal absent
prior notice of termination by either party. Each year, a substantial number of
leases are subject to renewal. For example, all of Finlay's leases with May host
stores are subject to renewal in January 1998 or January 1999. Although Finlay's
leases have historically been renewed in the ordinary course, there can be no
assurance that such leases will continue to be renewed, or, if renewed, on
comparable terms. Finlay's lease agreements also give host stores termination
rights based on certain performance and other factors. See 'Business -- Store
Relationships'.

AVAILABILITY OF CONSIGNED MERCHANDISE

In recent years, on average, approximately 50% of Finlay's domestic
merchandise has been carried on consignment (pursuant to written agreements or
other arrangements) or otherwise financed by vendors, thereby reducing Finlay's
direct capital investment in inventory to levels which it believes are low for
the retail jewelry industry. Although Finlay does not believe that its
consignment agreements or arrangements with its vendors will be subject to
substantial adverse changes in the future, there can be no assurance that Finlay
will be able to continue to obtain substantial amounts of merchandise on these
terms. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and 'Business -- Purchasing and Inventory'.

COMPETITION

Finlay faces competition for retail jewelry sales from national and

regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, specialty stores, mass merchandisers, catalog
showrooms, discounters, direct mail suppliers and televised home shopping.
Several of Finlay's competitors are substantially larger and have greater
financial resources than Finlay. With respect to the operation of Departments in
host store groups, Finlay competes with a limited number of established
Department lessees and department store chains. See 'Business -- Competition'.

EXPANSION

A significant portion of Finlay's growth in sales and income from
operations in recent years has resulted from Finlay's obtaining leases to
operate Departments in new host store groups and the addition of new Departments
in existing host store groups. Finlay cannot predict the number of

10
<PAGE>
Departments it will operate in the future or whether its expansion, if any, will
be at levels comparable to that experienced to date. In many cases, Finlay is
subject to limitations under its lease agreements which prohibit Finlay from
operating Departments for other host store groups within a certain geographical
radius of the host stores (typically five to ten miles). Such limitations
restrict Finlay from further expansion within areas where it currently operates
Departments, including expansion by possible acquisitions. However, Finlay has
from time to time obtained the consent of an existing host store group to
operate Departments for another host store group within the prohibited area. May
and Federated have granted consents of this type to Finlay with respect to one
another's host stores. There can be no assurance that additional consents will
be obtained in the future. The existence of these geographic limitations may
impede Finlay's ability to enter into leases with other potential host store
groups. In addition, in certain cases, Finlay has found that, notwithstanding
the absence of any geographical limitation in a lease agreement, it may be
limited as a practical matter from opening Departments for competing host store
groups in close proximity to each other because of the adverse effect such
openings might have on its overall host store group relationships. See 'Business
- -- Store Relationships'.

The Company may also from time to time examine opportunities to acquire or
invest in companies or businesses that complement the Company's existing
business. For example, on October 6, 1997, the Company acquired Diamond Park.
There can be no assurance that the Diamond Park Acquisition or future
acquisitions by the Company will be successful or improve the Company's
operating results. In addition, the Company's ability to complete acquisitions
will depend on the availability of both suitable target businesses and
acceptable financing. Any future acquisitions may result in a potentially
dilutive issuance of additional equity securities, the incurrence of additional
debt or increased working capital requirements. Any such acquisition may also
result in earnings dilution, the amortization of goodwill and other intangible
assets or other charges to operations, any of which could have a material
adverse effect on the Company's business, financial condition or results of
operations. Such acquisitions could involve numerous additional risks,
including, without limitation, difficulties in the assimilation of the
operations, products, services and personnel of any acquired company and the
diversion of management's attention from other business concerns. See 'Business

- -- Recent Developments'.

DEPENDENCE ON KEY OFFICERS

Finlay's recent success has depended to a significant degree on the efforts
of Arthur E. Reiner, President, Chief Executive Officer and Vice Chairman of the
Company and Chairman and Chief Executive Officer of Finlay Jewelry, as well as
David B. Cornstein, Chairman of the Company. Finlay's operations may be
adversely affected if its current officers cease to be active in management.
Messrs. Reiner and Cornstein have employment agreements with Finlay for a period
ending January 31, 2001 and 1999, respectively. Upon the expiration of the term
of his employment agreement on January 31, 1999, Mr. Cornstein is expected to
become Chairman Emeritus of the Company. See 'Management -- Executive
Compensation -- Employment Agreements and Change of Control Arrangements'.

LIMITED PUBLIC MARKET FOR COMMON STOCK; VOLATILITY OF MARKET PRICE

Upon completion of the Offering, the Company will have 9,616,449 shares of
Common Stock outstanding of which 5,798,376 shares are expected to be held by
non-affiliates of the Company. The Common Stock has been included in the Nasdaq
National Market since completion of an initial public offering in April 1995
(the 'Initial Public Offering'). During the twelve months ended September 30,
1997, the average daily volume of Common Stock traded in the Nasdaq National
Market was approximately 8,300 shares. During that period, there were 43 trading
days on which no shares of the Common Stock were traded. There can be no
assurance that the market for the Common Stock will become more active following
the Offering. Although several securities firms act as market-makers for the
Common Stock, a less active market for the Common Stock may cause the price of
the Common Stock to be more volatile than it otherwise would be. In addition,
there can be no assurance that market prices after the Offering will equal or
exceed the initial public offering price per share set forth on the cover page
of this Prospectus. The market price of the Common Stock could be subject to
significant fluctuations in response to Finlay's operating results and
developments relating to the Company, its

11
<PAGE>
competitors, general retailing and economic conditions and other external
factors. In addition, in recent years the stock market in general has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of companies. These market
fluctuations, as well as general economic conditions, may adversely affect the
market price of the Common Stock.

AVAILABILITY AND COST OF PRECIOUS METALS AND PRECIOUS AND SEMI-PRECIOUS STONES

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 the Company's results of
operations or financial condition. Although the Company attempts to protect
against such fluctuations in the price of gold by entering into futures

contracts, there can be no assurance that these hedging techniques will be
successful or that hedging transactions will not adversely affect the Company's
results of operations or financial condition.

CONCENTRATION OF OWNERSHIP

In May 1993, affiliates of Thomas H. Lee Company (together with its
affiliated transferees, the 'Lee Investors') and partnerships managed by Desai
Capital Management Incorporated (the 'Desai Investors') acquired a controlling
interest in the Company in connection with a series of transactions that
recapitalized the Company (the 'Recapitalization Transactions'). Before giving
effect to the Offering, the Lee Investors, the Desai Investors and Messrs.
Cornstein and Reiner (collectively, the 'Management Stockholders') beneficially
own, in the aggregate, 61.9% of the Common Stock. Equity-Linked Investors, L.P.,
one of the Desai Investors, in connection with the scheduled winding-up of this
partnership, is selling all of the Common Stock owned by it in the Offering.
After giving effect to the Offering, the Lee Investors, the Desai Investors and
the Management Stockholders will beneficially own, in the aggregate, 38.8% of
the Common Stock, of which 24.4% will be held by the Lee Investors, 7.3% will be
held by the Desai Investors and 7.1% will be held by the Management
Stockholders. See 'Principal and Selling Stockholders'.

The Company, the Lee Investors, the Desai Investors, the Management
Stockholders and certain third parties are parties to a Stockholders' Agreement
(as amended, the 'Stockholders' Agreement'). The Stockholders' Agreement
provides, among other things, that all of the parties thereto will, subject to
certain conditions, vote their shares to fix the number of members of the Board
of Directors at eight and that each of the Lee Investors, the Desai Investors
and the Management Stockholders have the right to nominate certain members of
the Company's Board of Directors, totaling six nominees. Each of the parties to
the Stockholders' Agreement have agreed to vote in favor of such nominees. The
nomination and election of the remaining two directors is not governed by the
Stockholders' Agreement, although the Stockholders' Agreement does require that
such directors not be parties to the Stockholders' Agreement. See 'Management',
'Principal and Selling Stockholders' and 'Certain Transactions -- Stockholders'
Agreement'.

Although none of the Lee Investors, the Desai Investors nor the Management
Stockholders individually currently own, and following the Offering none of them
individually will own, a majority of the voting securities of the Company, their
respective significant beneficial ownership of the Common Stock and rights to
nominate directors under the Stockholders' Agreement enable each of them to
exercise substantial influence over the management of Finlay. The concentration
of beneficial ownership of the Company may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of the Common Stock. See 'Principal and
Selling Stockholders', 'Certain Transactions' and 'Description of Capital
Stock'.

12
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market after the
Offering under Rule 144 of the Securities Act ('Rule 144') or otherwise or the
perception that such sales could occur may adversely affect prevailing market
prices of the Common Stock. The Company has agreed not to register for sale, and
the Company, the Lee Investors, the Desai Investors, the Selling Stockholder,
the Over-Allotment Selling Stockholders and the current directors and executive
officers of Finlay who hold Common Stock or options to purchase Common Stock
have agreed, during the period beginning from the date of the underwriting
agreement relating to the Offering (the 'Underwriting Agreement') and continuing
to and including the date 180 days after the date of this Prospectus, not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities which are substantially similar to the shares of Common Stock
or which are convertible into or exchangeable for, or represent the right to
receive, shares of Common Stock or securities which are substantially similar to
the shares of Common Stock without the prior written consent of the
representatives of the Underwriters, except, in the case of the Company, the
Selling Stockholder and the Over-Allotment Selling Stockholders, for the shares
of Common Stock offered in connection with the Offering and, in the case of the
Company, securities issued pursuant to employee stock option plans existing on
the date of this Prospectus. The Lee Investors, the Desai Investors, the
Management Stockholders and certain other individuals have the right to demand
registration under the Securities Act of their shares of Common Stock and have
the right to have their shares of Common Stock included in future registered
public offerings of securities by the Company. These stockholders have agreed
not to exercise such rights for a period of 180 days after the date of this
Prospectus without the prior written consent of the representatives of the
Underwriters. The exercise of such registration rights or the perception of an
ability to do so could adversely affect the market price of the Common Stock and
could impair Finlay's future ability to raise capital through an offering of the
Company's equity securities. See 'Certain Transactions' and 'Shares Eligible for
Future Sale'.

DILUTION

Purchasers of Common Stock in the Offering will experience immediate
dilution of $26.14 per share ($25.76 per share if the Underwriters'
over-allotment option is exercised in full) in net tangible book value per
share, which exceeds the initial public offering price of the Common Stock
offered hereby. The net tangible book value (deficiency) per share, after giving
pro forma effect to the Offering, will be $(7.14) per share ($(6.76) per share
if the Underwriters' over-allotment option is exercised in full). Existing
stockholders will receive an increase in the net tangible book value of their
shares of Common Stock.

RESTRICTION ON PAYMENT OF DIVIDENDS

The Company has no present intention to pay dividends on the Common Stock.
In addition, various restrictions under Finlay's financing arrangements limit
the ability of the Company to pay dividends or to make other similar
distributions. See '-- Substantial Leverage' and 'Dividend Policy'.

CHANGE OF CONTROL AND ANTI-TAKEOVER PROVISIONS

The Debenture Indenture provides that, upon the occurrence of a Change of

Control (as defined in the Debenture Indenture), the Company will be required to
make an offer (a 'Change of Control Offer') to purchase all of the Debentures
issued and then outstanding under the Debenture Indenture at a purchase price
equal to 101% of the accreted value thereof on the date of purchase (if prior to
May 1, 1998) or 101% of the principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase (if on or after May 1, 1998). Under the
Debenture Indenture, a 'Change of Control' occurs when (a) a person or group
other than certain of the Company's existing stockholders becomes the beneficial
owner of 50% or more of the aggregate voting power of the Company; (b) during
any period of two consecutive calendar years, certain changes in the composition
of the Company's Board of Directors occur; or (c) the Company ceases to own 100%
of Finlay Jewelry. A Change of Control under the Debenture Indenture would
constitute a default under the Revolving Credit Agreement and would

13
<PAGE>
also constitute a Change of Control under the Note Indenture, accelerating all
obligations under those agreements.

In addition, employment agreements with certain members of senior
management contain provisions requiring Finlay to make certain payments to such
executives in the event such executives are terminated in connection with a
Change of Control (as defined in such employment agreements). See 'Management --
Executive Compensation -- Employment Agreements and Change of Control
Arrangements'.

The foregoing provisions may have the effect of delaying, deferring or
preventing a change of control of the Company, may discourage bids for the
Common Stock and may adversely affect the market price of the Common Stock.

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the 'Certificate of Incorporation') and Amended and Restated
By-laws (the 'By-laws'), as well as provisions of the Delaware General
Corporation Law (the 'DGCL'), may also have the effect of delaying, deferring or
preventing a change of control of the Company, may discourage bids for the
Common Stock and may adversely affect the market price of the Common Stock. For
example, under the Certificate of Incorporation, the Board of Directors is
authorized to issue one or more series of preferred stock having such
designations, rights and preferences as may be determined by the Board, and the
Certificate of Incorporation and the By-laws provide for a classified Board of
Directors. See 'Description of Capital Stock'.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus includes 'forward-looking statements' within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. 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. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under 'Risk Factors' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations', as

well as trends in the general economy, competition in the retail jewelry
business, the seasonality of the retail jewelry business, the Company's ability
to increase comparable Department sales and to open new Departments, the
Company's dependence on certain host store relationships due to the
concentration of sales generated by such host stores, the availability to the
Company of alternate sources of merchandise supply in the case of an abrupt loss
of any significant supplier, the Company's ability to continue to obtain
substantial amounts of merchandise on consignment, the Company's dependence on
key officers, the Company's ability to integrate the Diamond Park assets (and
any future acquisitions) into its existing business, the Company's high degree
of leverage and the availability to the Company of financing and credit on
favorable terms and changes in regulatory requirements which are applicable to
the Company's business.

Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. In addition to the disclosure contained herein,
readers should carefully review any disclosure of risks and uncertainties
contained in other documents the Company files or has filed from time to time
with the Securities and Exchange Commission (the 'Commission') pursuant to the
Exchange Act.

<PAGE>
USE OF PROCEEDS

The proceeds to the Company from the Offering, net of underwriting discount
and other expenses of the Offering are estimated to be $35.6 million ($38.2
million if the Underwriters' over-allotment option is exercised in full). The
Company will not receive any of the proceeds from the sale of the shares being
sold by the Selling Stockholder or the shares to be sold, if any, by the
Over-Allotment Selling Stockholders. The net proceeds to the Company from the
Offering are expected to be used for working capital, repayment of indebtedness
or other general corporate purposes. The Indentures restrict the Company's
ability to use the net proceeds from the Offering to repay indebtedness under
the Revolving Credit Facility. See 'Risk Factors -- Substantial Leverage'.

PRICE RANGE OF COMMON STOCK

The Common Stock is included in the Nasdaq National Market under the symbol
'FNLY'.

The following table sets forth the range of high and low reported sale
prices for the Common Stock for the fiscal periods indicated, as reported by the
Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended February 3, 1996:
First Quarter (1).......................................................................... $14 1/4 $14
Second Quarter............................................................................. 15 7/8 11
Third Quarter.............................................................................. 18 1/4 14
Fourth Quarter............................................................................. 17 1/8 10 3/8
Fiscal Year Ended February 1, 1997:
First Quarter.............................................................................. $15 $10 1/4
Second Quarter............................................................................. 17 1/8 13 1/8
Third Quarter.............................................................................. 15 3/8 12
Fourth Quarter............................................................................. 17 3/4 13 1/2
Fiscal Year Ended January 31, 1998:
First Quarter.............................................................................. $16 1/2 $13 3/4
Second Quarter............................................................................. 18 15
Third Quarter (through October 16, 1997)................................................... 19 7/8 16 3/4
</TABLE>

- ------------------
(1) The first quarter of 1995 includes the period April 6, 1995 (the date of the
Initial Public Offering) through April 29, 1995.

As of October 16, 1997 there were approximately 75 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, and 7,569,478 shares of
Common Stock outstanding. The last reported sale price for the Common Stock on
the Nasdaq National Market on October 16, 1997 was $19.50.

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock and has no
present intention to pay any such dividends in the foreseeable future. Certain
restrictive covenants in the Indentures, the Revolving Credit Agreement and the
Gold Consignment Agreement impose limitations on the payment of dividends by the
Company. See 'Risk Factors -- Substantial Leverage', 'Description of Capital
Stock' and Notes 3 and 4 of Notes to Consolidated Financial Statements.

<PAGE>
CAPITALIZATION

The following table sets forth as of August 2, 1997: (i) the cash and cash
equivalents and the capitalization of the Company; (ii) the adjustments to
reflect the net proceeds to the Company of the Offering and indebtedness
incurred in connection with the Diamond Park Acquisition; and (iii) the adjusted
capitalization of the Company to reflect these events. This table should be read
in conjunction with 'Selected Consolidated Financial Information' and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
(UNAUDITED)
AUGUST 2, 1997
-------------------------------------------
AS
ACTUAL ADJUSTMENTS ADJUSTED
-------- --------------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents........................................ $ 3,453 $ 35,553(1) $ 39,006
-------- --------
-------- --------
Short-term debt (including current portion of long-term debt).... $111,526 $ 63,992(2)
2,062(3) $177,580
--------
--------
Long-term debt:
Notes.......................................................... $135,000 $135,000
Debentures..................................................... 81,084 81,084
-------- --------
Total long-term debt........................................ 216,084 216,084
-------- --------
Stockholders' equity:
Common stock................................................... 76 20(1) 96
Additional paid-in capital..................................... 47,850 35,533(1) 83,383
Distributions in excess of carryover basis..................... (24,390) (24,390)
Note receivable from stock sale................................ (1,001) (1,001)
Retained earnings (deficit).................................... (2,459) (2,459)
Foreign currency translation adjustment........................ (7,722) (7,722)
-------- --------
Total stockholders' equity (deficit)........................ 12,354 47,907
-------- --------
Total capitalization...................................... $228,438 $263,991
-------- --------
-------- --------
</TABLE>

- ------------------
(1) Reflects the net proceeds to the Company of the Offering.

(2) Reflects indebtedness incurred in connection with the Diamond Park

Acquisition.

(3) Reflects the payment of fees associated with the amendment to the Revolving
Credit Facility.

<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION

The selected consolidated financial information set forth 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 included elsewhere in this Prospectus. The balance sheet and
statement of operations data of the Company at January 30, 1993, January 29,
1994, January 28, 1995, February 3, 1996 and February 1, 1997 and for each of
the fiscal years then ended were derived from consolidated financial statements
of the Company, which statements have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included elsewhere
herein. The Company's balance sheet at August 2, 1997 and statement of
operations data for each of the twenty-six week periods ended August 3, 1996 and
August 2, 1997 were derived from unaudited consolidated financial statements of
the Company which include, in the opinion of management, all adjustments
necessary to present fairly, in all material respects, the financial position
and results of operations of the Company for the dates and periods presented.

<TABLE>
<CAPTION>
(UNAUDITED)
TWENTY-SIX
FISCAL YEAR ENDED (1) WEEKS ENDED
---------------------------------------------------- ---------------------
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, AUGUST 3, AUGUST 2,
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales....................................... $473,746 $505,639 $552,090 $654,491 $685,274 $267,907 $282,652
Cost of sales............................... 220,352 237,864 261,263 314,029 330,300 129,883 137,834
-------- -------- -------- -------- -------- --------- ---------
Gross margin (2)............................ 253,394 267,775 290,827 340,462 354,974 138,024 144,818
Selling, general and administrative
expenses.................................. 209,245 223,280 240,274 282,504 290,138 126,169 131,591
Depreciation and amortization............... 7,037 8,761 8,910 9,659 10,840 5,384 5,692
Management transition and consulting
expense (3)............................... -- -- 5,144 -- -- -- --
Nonrecurring expenses associated with
recapitalization (4)...................... -- 1,915 -- -- -- -- --
-------- -------- -------- -------- -------- --------- ---------
Income (loss) from operations............... 37,112 33,819 36,499 48,299 53,996 6,471 7,535
Other nonrecurring (income) expense (5)..... 2,100 17,150 -- (5,000) -- -- --
Interest expense, net....................... 23,841 25,469 28,488 29,705 31,204 15,245 16,148

-------- -------- -------- -------- -------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change.... 11,171 (8,800) 8,011 23,594 22,792 (8,774 ) (8,613 )
Provision (credit) for income taxes......... 5,608 405 5,280 9,343 11,035 (2,807 ) (3,009 )
-------- -------- -------- -------- -------- --------- ---------
Income (loss) before cumulative effect of
accounting change......................... 5,563 (9,205) 2,731 14,251 11,757 (5,967 ) (5,604 )
Cumulative effect of accounting change
(6)....................................... 465 -- -- -- -- -- --
-------- -------- -------- -------- -------- --------- ---------
Net income (loss)........................... $ 6,028 $ (9,205) $ 2,731 $ 14,251 $ 11,757 $ (5,967 ) $ (5,604 )
-------- -------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- -------- --------- ---------
Net income (loss) applicable to common
shares.................................... $ 1,339 $(12,799) $ (601) $ 3,534 $ 11,757 $ (5,967 ) $ (5,604 )
Net income (loss) per share applicable to
common shares............................. $ 0.78 $ (6.49) $ (0.27) $ 0.53 $ 1.55 $ (0.80 ) $ (0.75 )
Weighted average number of shares
outstanding (000's)....................... 1,728 1,973 2,261 6,640 7,570 7,481 7,497
</TABLE>

(Continued on following page)

<PAGE>

<TABLE>
<CAPTION>
(UNAUDITED)
TWENTY-SIX
FISCAL YEAR ENDED (1) WEEKS ENDED
---------------------------------------------------- ---------------------
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, AUGUST 3, AUGUST 2,
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL DATA:
Number of Departments (end of period) (7)... 746 757 903 941 939 924 958
Percentage increase in comparable Department
sales (7)(8).............................. 1.9% 0.7% 4.5% 5.7% 5.9% 7.8 % 5.7 %
Average sales per Department (7)(9)......... $ 673 $ 673 $ 674 $ 710 $ 729 $ 287 $ 298
EBITDA (10)................................. 44,149 42,580 45,409 57,958 64,836 11,855 13,227
EBITDA-FIFO (as adjusted) (11).............. 43,579 46,424 51,398 58,901 66,755 12,246 13,227
Capital expenditures........................ 7,294 9,150 11,228 14,933 17,533 7,224 8,477
BALANCE SHEET DATA -- END OF PERIOD:
Working capital............................. $ 6,139 $ 21,728 $ 27,362 $ 66,395 $ 77,616 $ 63,408 $ 67,590
Total assets................................ 272,769 292,112 340,764 395,145 421,273 403,483 425,395
Short-term debt, including current portion
of long-term debt......................... 13,228 1,271 576 206 2 77,947 111,526
Long-term debt, excluding current portion... 132,221 194,234 201,217 202,905 211,427 207,038 216,084
Series A Preferred Stock.................... 16,561 -- -- -- -- -- --
Series C Preferred Stock.................... -- 22,096 25,428 -- -- -- --
Stockholders' equity (deficit).............. (20,355) (56,799) (57,084) 12,784 22,505 7,564 12,354
</TABLE>

- ------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.

(2) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as follows: $(0.6) million, $1.9 million, $0.8
million, $0.9 million, $1.9 million, $0.4 million and zero for 1992, 1993,
1994, 1995, 1996 and for the twenty-six weeks ended August 3, 1996 and
August 2, 1997, respectively.

(3) Included in 1994 are compensation and benefits for a former senior
executive totaling $3.1 million as a result of the termination of his
employment agreement and other management transition and consulting expense
totaling $2.0 million.

(4) Included in 1993 in connection with the Recapitalization Transactions is
the redemption of outstanding equity participation units in accordance with
the terms and conditions of the Company's former equity participation plan
totaling $0.9 million and bonuses totaling $1.0 million.

(5) Included in 1992 are $2.1 million of nonrecurring expenses associated with
a withdrawn initial public offering. Included in 1993 are nonrecurring
expenses of $17.2 million relating to the write-off of certain deferred
financing costs and other expenses incurred in connection with the
Recapitalization Transactions. See Note 1 of Notes to Consolidated
Financial Statements. Included in 1995 are proceeds of $5.0 million from a
life insurance policy Finlay maintained on a senior executive.

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

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

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

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

(10) EBITDA represents income from operations before depreciation and
amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
expenses totaling $1.9 million described in Note 4 above and for 1994,
EBITDA includes the effect of management transition and consulting expense
totaling $5.1 million described in Note 3 above. The Company believes
EBITDA provides additional information for determining its ability to meet
future debt service requirements. 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) for the purpose of analyzing Finlay's
operating performance, financial position and cash flows. However, Finlay
has presented EBITDA because 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.

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

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following should be read in conjunction with 'Selected Consolidated
Financial Information' and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.

Certain statements under this caption 'Management's Discussion and Analysis
of Financial Condition and Results of Operations' constitute 'forward-looking
statements' under the Securities Act and the Exchange Act. See 'Risk Factors'
and 'Special Note Regarding Forward-Looking Statements'.

GENERAL

Over the past three years, sales have increased by $133.2 million to $685.3
million, a compound annual growth rate of 11.4%, while comparable Department
sales have increased by 4.5%, 5.7% and 5.9% in 1994, 1995 and 1996,
respectively. Comparable Department sales include Departments open for the same
months during comparable periods. The increase in total sales during this period
is the result of (i) adding 182 net new Departments and stand-alone stores,
including 95 Departments and three stand-alone stores from the acquisition of
Sonab, a French jewelry retailer, and (ii) increasing comparable Department
sales. Management attributes its comparable Department sales increases during
this period to the following Company initiatives: (i) introducing its 'Key Item'
and 'Best Value' merchandising programs, which provide a targeted assortment of
items at competitive prices; (ii) increasing focus on holiday and event-driven
promotions as well as host store marketing programs; (iii) positioning the
Company's Departments as a 'destination location' for fine jewelry; and (iv)
implementing project PRISM (Promptly Reduce Inefficiencies and Sales Multiply),
a management initiative designed to allow Finlay's sales associates more time
for customer sales and service.

Gross margin as a percentage of sales has decreased from 52.7% in 1994 to
51.8% in 1996. This is principally the result of the Company's 'Key Item' and
'Best Value' programs, which produce higher sales volume and a slightly lower
gross margin, on average, than other merchandise. In 1996, the Company's gross
margin as a percentage of sales was essentially unchanged as compared to 1995.

Selling, general and administrative expenses ('SG&A') as a percentage of
sales have decreased from 43.5% in 1994 to 42.3% in 1996. Management attributes
this improvement to (i) leveraging operating expenses through higher sales and
(ii) reducing the level of certain operating expenses through the ongoing
implementation of project PRISM. The components of SG&A include payroll expense,
lease fees, net advertising expenditures and other field and administrative
expenses.

As a result of the Recapitalization Transactions in 1993 and the 1988
Leveraged Recapitalization (as defined in Note 1 of Notes to Consolidated
Financial Statements included elsewhere in this Prospectus), the Company is
highly leveraged and, as such, interest expense has significantly impacted the
Company's results of operations. In addition, the Company records approximately
$3.0 million of goodwill amortization, on an annual basis, resulting from the
1988 Leveraged Recapitalization.

Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab, which as of August 2, 1997 operated 146 Departments and
three stand-alone stores, principally in France. Finlay's results of operations
for 1995 reflect the first full year of Sonab's operations. In 1996, Finlay
expanded its international operations into the United Kingdom with the opening
of seven Departments in the Debenhams department store chain and into Germany
with the opening of a Galeries Lafayette store in Berlin.

DIAMOND PARK ACQUISITION

On October 6, 1997, Finlay completed the previously announced acquisition
of certain assets of Diamond Park, a leading operator of Departments, for
approximately $63 million. By acquiring Diamond Park, Finlay added 139
Departments that had total sales of $93 million for the twelve months ended
February 1, 1997 and also added new host store relationships with Mercantile
Stores, Marshall Field's and Parisian. Management believes that in addition to
increasing sales volume, the Diamond Park Acquisition will improve Finlay's
results of operations through the leveraging of expenses and the achievement of
other operating synergies. Finlay does not expect the Diamond Park Acquisition
to have a material impact on earnings per share in the current fiscal year but
expects the transaction to be accretive thereafter. The Company financed the
Diamond Park Acquisition with borrowings under the Revolving Credit Facility.

19
<PAGE>
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
FISCAL YEAR ENDED ENDED
------------------------------ ----------------------
JAN. 28, FEB. 3, FEB. 1, AUGUST 3, AUGUST 2,
1995 1996 1997 1996 1997
-------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................ 47.3 48.0 48.2 48.5 48.8
-------- ------- ------- --------- ---------
Gross margin............................................... 52.7 52.0 51.8 51.5 51.2
Selling, general and administrative expenses................. 43.5 43.2 42.3 47.1 46.5
Depreciation and amortization................................ 1.6 1.4 1.6 2.0 2.0
Management transition and consulting expense (1)............. 1.0 -- -- -- --
-------- ------- ------- --------- ---------
Income (loss) from operations.............................. 6.6 7.4 7.9 2.4 2.7
Other nonrecurring income (2)................................ -- (0.7) -- -- --
Interest expense, net........................................ 5.1 4.5 4.6 5.7 5.7
-------- ------- ------- --------- ---------
Income (loss) before income taxes.......................... 1.5 3.6 3.3 (3.3) (3.0)

Provision (credit) for income taxes.......................... 1.0 1.4 1.6 (1.1) (1.0)
-------- ------- ------- --------- ---------
Net income (loss).......................................... 0.5% 2.2% 1.7% (2.2)% (2.0)%
-------- ------- ------- --------- ---------
-------- ------- ------- --------- ---------
OTHER SUPPLEMENTAL DATA:
EBITDA (3)................................................... 8.2% 8.9% 9.5% 4.4% 4.7%
EBITDA-FIFO (as adjusted) (4)................................ 9.3% 9.0% 9.7% 4.6% 4.7%
</TABLE>

- ------------------
(1) Included in 1994 are compensation and benefits for a former senior executive
totaling $3.1 million as a result of the termination of his employment
agreement and other management transition and consulting expense totaling
$2.0 million.

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

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

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

TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 COMPARED WITH TWENTY-SIX WEEKS
ENDED AUGUST 3, 1996

SALES. Sales for the twenty-six weeks ended August 2, 1997 increased $14.7
million, or 5.5%, over the comparable period in 1996. Comparable Department
sales increased 5.7%. Management attributes this increase in comparable
Department sales primarily to the 'Key Item' and 'Best Value' merchandising
programs and to the marketing initiatives discussed above. The increase in
comparable Department sales was offset by a $0.5 million decrease in sales
resulting from the net effect and timing of Department openings and closings.
During the twenty-six weeks ended August 2, 1997, Finlay opened 25 Departments
and closed six Departments. The openings and closings were all within existing
store groups. The closings resulted from host store decisions to close the
stores, with one of the stores reopening at a new location with a Finlay
operated Department.

GROSS MARGIN. Gross margin for the period increased by $6.8 million but,
as a percentage of sales, gross margin decreased by 0.3% as a result of
management's efforts to increase market penetration and market share through its
competitive pricing strategy.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $5.4 million,
or 4.3%, due primarily to payroll expense and lease fees associated with the
increase in the Company's sales as well as an increase in net advertising
expenditures as compared with the 1996 period. As a percentage of sales, SG&A

decreased by 0.6% as a result of the leveraging of these expenses.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$0.3 million, reflecting an increase in capital expenditures for the most recent
twelve months, offset by the effect of certain assets becoming fully
depreciated. This increase in fixed assets was due to the addition of new
Departments and the renovation of existing Departments.

20
<PAGE>
INTEREST EXPENSE, NET. Interest expense increased by $0.9 million,
reflecting an increase in average borrowings ($310.9 million for the period in
1997 compared to $276.3 million for the comparable period in 1996) primarily as
a result of the timing of inventory receipts during the 1997 period and an
increase in the outstanding balance of the Debentures due to the accretion of
interest. The increase in average borrowings was partially offset by a lower
weighted average interest rate (10.2% for the 1997 period compared to 10.3% for
the comparable period in 1996).

PROVISION (CREDIT) FOR INCOME TAXES. The income tax provision for the 1997
and 1996 periods reflects an effective tax rate of 41.5%.

NET INCOME (LOSS). Net loss of $5.6 million for the 1997 period was $0.4
million lower than the net loss of $6.0 million for the comparable period in
1996 as a result of the factors discussed above.

1996 COMPARED WITH 1995

SALES. Sales increased $30.8 million, or 4.7%, in 1996 compared to 1995.
Comparable Department sales increased 5.9%. Management attributes this increase
in comparable Department sales primarily to the 'Key Item' and 'Best Value'
merchandising programs and to the marketing initiatives discussed above. Sales
decreased $7.8 million as a result of the net effect of new store openings
offset by store closings as well as the timing of such Department openings and
closings. During 1996, Finlay opened 84 Departments and closed 86 Departments.
The openings were comprised of the following:

<TABLE>
<CAPTION>
NUMBER OF
DEPARTMENTS/
STORE GROUP STORES REASON
- ------------------------ ------------ ----------------------------------------------------------
<S> <C> <C>
Hecht's 13 May's acquisition of Strawbridge's.
Monoprix 26 Expansion in France.
Debenhams 7 Initial Departments in the United Kingdom.
New York Jewelry Outlet 2 Additional outlet stores.
Other 36 Department openings within existing store groups.
--
84
--
--
</TABLE>

The closings were comprised of the following:

<TABLE>
<CAPTION>
NUMBER OF
DEPARTMENTS/
STORE GROUP STORES REASON
- ----------------------- ------------ ----------------------------------------------------------
<S> <C> <C>
Emporium/Weinstocks 29 Acquired by Federated and integrated into Macy's.
The Jones Store Co. 8 Lessor consolidated with one lessee.
Maison Blanche/Gayfers 17 Lessor consolidated with one lessee.
Other 32 Department closings within existing store groups.
--
86
--
--
</TABLE>

The majority of the 32 closings within existing host store groups resulted from
host store decisions to close the stores, with nine of the stores reopening at
new locations with Finlay operated Departments (including two which reopened in
1997). Ten closings resulted from Finlay's decision to close unprofitable
Departments in Steinbach stores.

GROSS MARGIN. Gross margin increased by $14.5 million in 1996 compared to
1995 but, as a percentage of sales, gross margin decreased by 0.2% primarily due
to an increase in the LIFO provision and to a lesser extent as a result of
management's efforts to increase market penetration and market share through its
pricing strategy.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $7.6 million,
or 2.7%, in 1996 compared to 1995 due primarily to payroll expense and lease
fees associated with the increase in the Company's sales. As a percentage of
sales, SG&A decreased by 0.9% in 1996 compared to 1995 as a result of the
leveraging of these expenses.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.2 million in 1996 compared to 1995, reflecting $17.5 million in capital
expenditures for the most recent twelve months, offset by the effect of certain
assets becoming fully depreciated. The increase in fixed assets was due to the
addition of new Departments and the renovation of existing Departments.

21
<PAGE>
OTHER NONRECURRING INCOME. The Company received, during the second quarter
of 1995, proceeds of $5.0 million from a life insurance policy maintained on a
senior executive.

INTEREST EXPENSE, NET. Interest expense increased by $1.5 million in 1996
compared to 1995 reflecting an increase in average borrowings ($283.3 million
for 1996 compared to $269.5 million for 1995) partially offset by a lower
weighted average interest rate (10.3% for 1996 compared to 10.5% for 1995).

PROVISION (CREDIT) FOR INCOME TAXES. The income tax provision for 1996 and
1995 reflects an effective tax rate of 41.5%.

NET INCOME (LOSS). Net income of $11.8 million for 1996 represents a
decrease of $2.5 million as compared to the net income of $14.3 million in 1995
as a result of the factors discussed above. Excluding the effect of the receipt
of life insurance proceeds in 1995, net income of $11.8 million in 1996
represents an increase of $2.5 million from $9.3 million in 1995.

1995 COMPARED WITH 1994

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

GROSS MARGIN. Gross margin increased by $49.6 million in 1995 compared to
1994 but, as a percentage of sales, gross margin decreased by 0.7% as a result
of management's efforts to increase market penetration and market share through
a pricing strategy that had become more competitive. Sonab accounted for $17.3
million of the total increase in gross margin primarily due to the inclusion of
a full year of Sonab operations in 1995.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $42.2
million, or 17.6%, in 1995 compared to 1994 due primarily to payroll expense and
lease fees associated with the increase in the Company's sales. In addition,
Sonab accounted for $13.7 million of the total increase in SG&A. As a percentage
of sales, SG&A decreased by 0.3% in 1995 compared to 1994 as a result of the
leveraging of these expenses.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$0.7 million in 1995 compared to 1994, reflecting $14.9 million in capital
expenditures for the most recent twelve months, offset by the effect of certain
assets becoming fully depreciated. The increase in fixed assets was due to the
addition of new Departments and the renovation of existing Departments,
including $0.9 million in opening additional outlet stores.

MANAGEMENT TRANSITION AND CONSULTING EXPENSE. Included in 1994, in
connection with certain management changes, are compensation and benefits for a
former senior executive totaling $3.1 million as a result of the termination of
his employment agreement and other management transition expense totaling $1.0
million. In addition, included in 1994 are consulting expenses totaling $1.0

million in connection with a program undertaken with a management consulting
firm to increase comparable Department sales and improve operating efficiencies.

OTHER NONRECURRING INCOME. The Company received, during the second quarter
of 1995, proceeds of $5.0 million from a life insurance policy maintained on a
senior executive.

INTEREST EXPENSE, NET. Interest expense increased by $1.2 million in 1995
compared to 1994, reflecting an increase in average borrowings ($269.5 million
for 1995 compared to $267.7 million for 1994) and a higher weighted average
interest rate (10.5% for 1995 compared to 10.2% for 1994).

PROVISION (CREDIT) FOR INCOME TAXES. The income tax provision for 1995 and
1994 reflects an effective tax rate of 41.5%.

NET INCOME (LOSS). Net income of $14.3 million for 1995 represents an
increase of $11.5 million from $2.7 million in 1994, as a result of the factors
discussed above.

22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Finlay's primary capital requirements are for funding working capital for
new Departments and for working capital growth of existing Departments and, to a
lesser extent, capital expenditures for opening new Departments and renovating
existing Departments. For the twenty-six weeks ended August 3, 1996 and August
2, 1997, capital expenditures totaled $7.2 million and $8.5 million,
respectively. For 1996, capital expenditures totaled $17.5 million, which
included initial construction costs related to the Company's distribution and
warehouse facility, and in 1995 totaled $14.9 million. Capital expenditures for
1997, in total, are estimated to be approximately $18.0 million. Although
capital expenditures are limited by the terms of the Revolving Credit Facility,
to date this limitation has not precluded the Company from satisfying its
capital expenditure requirements.

Finlay's operations substantially preclude customer receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. Accordingly, management believes that relatively
modest levels of working capital are required in comparison to many other
retailers. The Company's working capital balance was $67.6 million at August 2,
1997, a decrease of $10.0 million from February 1, 1997. The decrease resulted
from capital expenditures and the impact of the interim net loss exclusive of
depreciation and amortization. Based on the seasonal nature of Finlay's
business, working capital requirements and therefore borrowings under the
Revolving Credit Facility can be expected to increase on an interim basis during
the first three quarters of any given fiscal year. See '-- Seasonality'.

The seasonality of Finlay's business causes working capital requirements
to reach their highest level in the months of October and November in
anticipation of the year-end holiday season. Accordingly, Finlay experiences
seasonal cash needs as inventory levels peak. The Revolving Credit Facility
provides Finlay with a line of credit of up to $225.0 million to finance
seasonal cash and other working capital needs. The Revolving Credit Facility

will initially bear interest at a rate equal to, at Finlay's option, (i) the
Index Rate (as defined in the Revolving Credit Agreement) plus 0.5% or (ii)
adjusted LIBOR plus 1.5%. Commencing in 1998, the Revolving Credit Facility will
bear interest at a rate equal to, at Finlay's option, (i) the Index Rate plus a
margin ranging from zero to 1.00% or (ii) adjusted LIBOR plus a margin ranging
from 1.00% to 2.00%, in each case depending on the financial performance of the
Company. Pursuant to the Debenture Indenture, the Company has pledged all of the
issued and outstanding shares of capital stock of Finlay Jewelry for the benefit
of the Debenture holders. Pursuant to the Revolving Credit Agreement, Finlay
Jewelry has pledged or caused to be pledged all of the issued and outstanding
capital stock (or other equity securities) of each of its direct and indirect
subsidiaries (including Sonab Holdings, Inc., Sonab International, Inc. and
Sonab) for the benefit of the lenders under the Revolving Credit Facility.

Pursuant to the Revolving Credit Agreement, Finlay is required to reduce
the balance of the Revolving Credit Facility in each year to $50.0 million or
less for a 30 consecutive day period (the 'Balance Reduction Requirement').
However, the Indentures require Finlay to reduce the balance of the Revolving
Credit Facility in each year to $10.0 million or less for a specified 25
consecutive day period. Borrowings under the Revolving Credit Facility at August
2, 1997 were $111.5 million, compared to a zero balance at February 1, 1997 in
accordance with the then-applicable Balance Reduction Requirement and $77.9
million at August 3, 1996. The average amounts outstanding were $70.5 million
and $96.4 million for the twenty-six weeks ended August 3, 1996 and August 2,
1997, respectively. The maximum amount outstanding for the twenty-six weeks
ended August 2, 1997 was $121.0 million. The average amounts outstanding for
1995 and 1996 were $68.4 million and $75.4 million, respectively. The maximum
amount outstanding under the Revolving Credit Facility in 1996 was $114.1
million. After giving effect to increased borrowings under the Revolving Credit
Facility to finance the Diamond Park Acquisition, the outstanding balance under
the Revolving Credit Facility at August 2, 1997 would have been $177.6 million.

Finlay financed the Diamond Park Acquisition with borrowings under the
Revolving Credit Facility. In addition, upon completion of the Offering, the
Company expects to use the net proceeds to it therefrom for working capital,
repayment of indebtedness or other general corporate purposes. The Indentures
restrict the Company's ability to use the net proceeds from the Offering to
repay indebtedness under the Revolving Credit Facility. See 'Risk Factors --
Substantial Leverage'.

Finlay believes that, with the increased borrowing capacity under the
Revolving Credit Facility, it has sufficient liquidity to meet its anticipated
working capital requirements for both its domestic and foreign operations.
Finlay does not expect that significant additional working capital will be
required in the near-term with respect to the operation of the Diamond Park
Departments because Finlay

23
<PAGE>
purchased the inventory of those Diamond Park Departments which it acquired. On
a going-forward basis, Finlay expects that inventory purchases for the Diamond
Park Departments will be financed in part by trade payables combined with an
increased utilization of consignment inventory compared to the amount of
consignment merchandise on hand at the time of the Diamond Park Acquisition. As

such, management believes that future working capital requirements for the
Diamond Park Departments may be reduced as compared to the amount of working
capital required at the time of the Diamond Park Acquisition. Finlay expects to
incur certain expenditures of approximately $1.0 million associated with the
integration of Diamond Park's operations.

Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. As of August 2, 1997, $205.5 million
of consignment merchandise from over 200 vendors was on hand as compared to
$194.3 million at August 3, 1996. For 1996, Finlay had an average balance of
consignment merchandise of $201.8 million as compared to an average balance of
$208.5 million in 1995. At the end of 1996, $194.3 million of consignment
merchandise was on hand as compared with $199.1 million at the end of 1995. See
'Business -- Store Relationships' and 'Business -- Purchasing and Inventory'.

A substantial amount of Finlay's operating cash flow is or will be required
to pay, directly or indirectly, interest with respect to the Notes and the
Debentures and amounts due under the Revolving Credit Facility, including the
payments required pursuant to the Balance Reduction Requirement. As of August 2,
1997, Finlay's outstanding borrowings were $327.6 million, which included a
$81.1 million balance under the Debentures, a $135.0 million balance under the
Notes and a $111.5 million balance under the Revolving Credit Facility. On May
1, 1998, Finlay will have a one-time option, in accordance with the Debenture
Indenture, to prepay all or a portion of the $39.0 million of accreted interest
on the Debentures as of such date. Finlay intends to prepay, subject to
satisfaction of certain covenants and conditions, all or a portion of such
accreted interest to reduce outstanding indebtedness and to take advantage of
the resulting tax benefits relating to the deductibility of such prepayment in
1998. Finlay intends to fund this prepayment using borrowings under the
Revolving Credit Facility or other available funds, including, upon completion
of the Offering, the net proceeds to it therefrom. The Debentures do not pay
cash interest until November 1, 1998. See 'Risk Factors -- Substantial
Leverage'.

In August 1995, Finlay Jewelry consummated the Gold Consignment Agreement,
which expires on February 28, 1998. The Gold Consignment Agreement enables
Finlay Jewelry to receive merchandise by providing gold, or otherwise making
payment, to certain vendors. Finlay Jewelry can obtain, pursuant to the Gold
Consignment Agreement, up to the lesser of (i) 85,000 fine troy ounces or (ii)
$25.0 million worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At August 2, 1997, amounts outstanding under the Gold
Consignment Agreement totaled 38,007 fine troy ounces, valued at approximately
$12.4 million. The average amount outstanding under the Gold Consignment
Agreement was $11.9 million in 1996.

Finlay is currently implementing financial and distribution software that
is Year 2000 compliant. Finlay has begun to assess the impact of the Year 2000
issue on its remaining operations, including the development of cost estimates
for and the extent of programming changes required to address this issue.
Although final cost estimates have yet to be determined, it is anticipated that
these Year 2000 costs will result in an increase to Finlay's expenses during
1998 and 1999 and are not expected to have a material impact on its ongoing

results of operations.

Finlay believes that, based upon current operations, anticipated growth,
and availability under the Revolving Credit Facility, Finlay Jewelry will, for
the foreseeable future, be able to meet its debt service and anticipated working
capital obligations, and to make distributions to the Company sufficient to
permit the Company to meet its debt service obligations and to pay certain other
expenses as they come due. No assurances, however, can be given that Finlay
Jewelry's current level of operating results will continue or improve or that
Finlay Jewelry's income from operations will continue to be sufficient to permit
Finlay Jewelry and the Company to meet their debt service and other obligations.
The Revolving Credit Facility, the Note Indenture and the Gold Consignment
Agreement restrict distributions from Finlay Jewelry to the Company to 0.25% of
Finlay Jewelry's net sales for the preceding fiscal year. The amounts required
to satisfy the aggregate of Finlay Jewelry's interest expense and required
amortization payments totaled $10.7 million and $10.6 million for the twenty-six
weeks ended August 3, 1996 and August 2, 1997, respectively, and $22.1 million
and $21.7 million for 1995 and 1996, respectively.

24
<PAGE>
Section 382 of the Internal Revenue Code of 1986, as amended (the 'Code')
restricts utilization of net operating loss carryforwards ('NOLs') after an
ownership change exceeding 50%. As a result of the Recapitalization
Transactions, a change in ownership of the Company exceeding 50% occurred within
the meaning of Section 382 of the Code. Similar restrictions apply to other
carryforwards. Consequently, there is a material limitation on the Company's
annual utilization of its NOLs and other carryforwards which requires a deferral
or loss of the utilization of such NOLs or other carryforwards. The Company had,
at October 31, 1996 (the Company's tax year end), a NOL for tax purposes of
approximately $14.0 million which is subject to an annual limit of approximately
$2.0 million per year. For financial reporting purposes, no NOL exists as of
February 1, 1997. An additional change in ownership within the meaning of
Section 382 of the Code may occur as a result of the Offering. However,
management does not believe that there would be any additional restrictions upon
the Company's ability to utilize its NOLs or other carryforwards as a result of
such ownership change. See Note 9 of Notes to Consolidated Financial Statements
included elsewhere in this Prospectus.

From time to time, Finlay enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from its payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the year ended February 1, 1997 and the twenty-six weeks
ended August 2, 1997, the gain or loss on open futures contracts was not
material. The Company did not have any open positions in futures contracts for
gold at February 1, 1997. In May 1997, the Company entered into a hedging
arrangement whereby its exposure to the fluctuation in the price of gold is
limited for the balance of 1997. There can be no assurance that these hedging
techniques will be successful or that hedging transactions will not adversely
affect the Company's results of operations or financial condition. See 'Risk
Factors -- Availability and Cost of Precious Metals and Precious and
Semi-Precious Stones'.

SEASONALITY

The Company's Sales and Income (loss) from operations during each quarter
of 1994, 1995 and 1996 and for the thirteen weeks ended May 3, 1997 and August
2, 1997 were as follows:

<TABLE>
<CAPTION>
FISCAL QUARTER
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1994:
Sales.............................................. $ 93,858 $109,209 $109,657 $239,366
Income (loss) from operations (1).................. (2,231) 2,255 2,440 34,035
1995:
Sales.............................................. 112,716 135,428 132,058 274,289
Income (loss) from operations...................... (1,220) 5,022 3,443 41,054
1996:
Sales.............................................. 130,719 137,188 136,140 281,227
Income (loss) from operations...................... 347 6,124 4,366 43,159
1997:
Sales.............................................. 134,592 148,060 -- --
Income (loss) from operations...................... 950 6,585 -- --
</TABLE>

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

INFLATION

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

<PAGE>
BUSINESS

GENERAL

Finlay is one of the leading retailers of fine jewelry in the United
States and France. The Company operates leased fine jewelry Departments in major
department stores for retailers such as May, Federated, Galeries Lafayette,
Belk, Carson Pirie Scott and Proffitt's. Finlay sells a broad selection of
moderately priced fine jewelry, including necklaces, earrings, bracelets, rings
and watches, and markets these items principally as fashion accessories with an
average sales price of approximately $150 per item. Average sales per Department
were $729,000 in 1996 and the average size of a Department is approximately
1,000 square feet. Finlay operates 946 Departments and in 1996 achieved sales of
$685.3 million, making Finlay the largest operator of Departments in the United
States and France.

fashion trends because unsold consigned merchandise can be returned to the
vendor.

RECENT DEVELOPMENTS

On September 11, 1997, Finlay amended the Revolving Credit Facility by (i)
increasing the line of credit from $135 million to $175 million, (ii) including
eligible international assets in the borrowing base

26
<PAGE>
formula, (iii) reducing interest rates, (iv) permitting higher balances during
the annual balance reduction period and (v) extending the maturity date from May
1998 to March 2003. Upon completion of the Diamond Park Acquisition, the line of
credit was further increased to $225 million and permitted balances during the
annual balance reduction period were further increased.

In connection with the Diamond Park Acquisition, Finlay acquired certain of
the assets relating to the operation of the Diamond Park Departments in
Mercantile Stores, Marshall Field's and Parisian, including lease agreements,
inventory and fixed assets. The purchase price also included goodwill, certain
other inventory and specified Diamond Park transition expenses. Zale Corporation
has agreed not to compete with Finlay in the operation of leased fine jewelry
departments in the United States for a period of seven years. See 'Risk
Factors--Expansion'.

On June 18, 1997, the Company announced the extension of its lease
agreements with Federated for an additional three years. The lease extensions
apply to all of Finlay's Departments within Federated stores, including leases
for Departments in Burdines, Rich's, Lazarus, Goldsmith's and The Bon Marche,
which have been extended through February 3, 2001, and the lease for Departments
in Stern's which has been extended through February 1, 2003.

GROWTH STRATEGY

Finlay intends to pursue the following key initiatives to increase sales
and earnings:

were achieved primarily by emphasizing key merchandise items, increasing
focus on holiday and event-driven promotions, participating in host store
marketing programs and positioning its Departments as a 'destination
location' for fine jewelry. Finlay believes that comparable Department
sales will continue to benefit from these merchandising and marketing
strategies, as well as from increasing demand for fine jewelry.

ADD DEPARTMENTS WITHIN EXISTING HOST STORE GROUPS. Finlay's well
established relationships with many of its host store groups have enabled
the Company to add Departments in new locations opened by existing host
stores. Finlay has operated Departments in May stores since 1948 and
operates the fine jewelry departments in all of May's 364 department
stores. Finlay also has operated Departments in Federated stores since 1983
and operates Departments in 155 of Federated's 411 department stores. Since
the beginning of 1992, host store expansion has added 126 net new
Departments including 52 net new Departments since the beginning of 1995.
Based on expansion plans recently announced by May, Finlay believes it will
have the opportunity to open approximately 100 new Departments in May
stores alone over the next five years (excluding possible closings).

ESTABLISH NEW HOST STORE RELATIONSHIPS. Finlay has an opportunity to
grow by establishing new relationships with department stores that
presently either lease their fine jewelry departments to Finlay's
competitors or operate their own fine jewelry departments. Finlay seeks to
establish these new relationships by demonstrating to department store
management the potential for improved financial performance. Since the
beginning of 1992, Finlay has added such host store groups as Burdines, The
Bon Marche, Elder Beerman and Stern's. Over the past two years, Finlay has
added 27 Departments in the Hecht's division of May as a result of May's
acquisition of John Wanamaker and Strawbridge's. By acquiring Diamond Park,
Finlay added Mercantile Stores, Marshall Field's and Parisian to its host
store relationships.

EXPAND INTERNATIONAL OPERATIONS. In October 1994, Finlay acquired
Sonab, the largest operator of Departments in France. In 1996, Finlay
expanded in France by adding 26 Departments in Monoprix and plans to open
an additional 15 Monoprix Departments in 1997. Finlay operates 138
Departments in France through five host store groups, including Galeries
Lafayette, Nouvelles Galeries and Bazar de L'Hotel de Ville. In addition,
in 1996, Finlay began operating seven Departments in Debenhams, a
department store chain which operates 90 stores throughout the United
Kingdom and Ireland. In 1996, the Company also opened a Department in a new
Galeries Lafayette store in Berlin, Germany and is exploring additional
opportunities in other European countries.

27
<PAGE>
CONTINUE TO IMPROVE OPERATING LEVERAGE. Selling, general and
administrative expenses as a percentage of sales declined from 44.2% in
1993 to 42.3% in 1996. Finlay seeks to continue to leverage expenses both
by increasing sales at a faster rate than expenses and by reducing its
current level of certain operating expenses. For example, Finlay has
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, management believes the Company will
benefit from recent investments in technology and refinements of operating
procedures designed to allow Finlay's sales associates more time for
customer sales and service. Finlay's new distribution and warehouse
facility, expected to become fully operational in the Spring of 1998, will
permit the Company to improve the flow of merchandise to Departments while
reducing payroll and freight costs.

MERCHANDISING STRATEGY

Finlay seeks to maximize sales and profitability through a unique
merchandising strategy known as the 'Finlay Triangle', which integrates store
management (including host store management and Finlay's store group
management), vendors and Finlay's 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. Finlay's central office functions as a service
organization, assembling an assortment of merchandise for selection by Finlay's
store group management. Within pricing guidelines set by the central office,
Finlay's store group management contributes to the selection of the specific
merchandise most appropriate to the demographics and customer tastes within
their particular geographical area. Finlay's advertising initiatives and
promotional planning are closely coordinated with both host store management and
Finlay's store group management to ensure the effective use of Finlay's
marketing programs. Vendors participate in the decision-making process with
respect to merchandise assortment, including the testing of new products,
marketing, advertising, stock levels and pricing strategy. 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 Finlay. As a result, 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.

[CHART]

The
Finlay
Triangle

-----------------
| CENTRAL |
| OFFICE |
-----------------
/ \ / \
| | | |
| | | |
| | | |
\ / \ /
------------ -------------
| VENDORS | <---- | STORE |
| | ----> | MANAGEMENT |
-------------- --------------

28
<PAGE>
Finlay has structured its relationships with vendors to encourage sharing
of responsibility for marketing and merchandise management. Finlay furnishes to
vendors, through on-line access to Finlay's information systems, the same sales,
stock and gross margin information that is available to Finlay's store group
management and central office for each of the vendor's styles in Finlay's
merchandise assortment. Using this information, vendors are able to participate
in decisions to replenish inventory which has been sold and to return or
exchange slower-moving merchandise. In addition, vendors may input order
recommendations through Finlay's data processing system for approval by Finlay.
New items are tested in specially selected 'predictor' Departments where sales
experience can indicate an item's future performance in Finlay's other
Departments. Management believes that the access and input which vendors have in
the merchandising process results in a better assortment, timely replenishment,
higher turnover and higher sales of inventory, differentiating Finlay from its
competitors.

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

STORE RELATIONSHIPS

HOST STORE RELATIONSHIPS. Finlay operates 946 Departments in 28 host store
groups, located in 42 states, the District of Columbia, France, the United
Kingdom and Germany. By acquiring Diamond Park, Finlay added 139 Departments in
three host store groups, located in 20 states. Finlay's largest host store
relationship is with May, for which Finlay has operated Departments since 1948.
Finlay operates the fine jewelry departments in all of May's 364 department

stores, including Lord & Taylor and Filene's. Finlay's second largest host store
relationship is with Federated, for which Finlay has operated Departments since
1983. Finlay operates Departments in 155 of Federated's 411 department stores,
including Rich's and Burdines. Over the past three years, store groups owned by
May and Federated accounted for an average of 47% and 21%, respectively, of
Finlay's annual sales.

Finlay also operates Departments in numerous other host store groups, such
as Galeries Lafayette, Belk, Carson Pirie Scott and Proffitt's. Management
believes that it maintains excellent relations with its host store groups, 19 of
which have had leases with Finlay for more than five years (representing 80.9%
of Finlay's sales in 1996) and 15 of which have had leases with Finlay for more
than ten years (representing 72.8% of Finlay's sales in 1996). As a consequence
of the strong and, in many instances, long-term relationships, host store groups
have routinely renewed Finlay's lease agreements at their renewal dates.
Management believes that the majority of its lease agreements will continue to
be renewed routinely. See 'Risk Factors -- Dependence on Host Store
Relationships'.

29
<PAGE>
The following table identifies the host store groups in which Finlay
operated Departments at August 2, 1997, the year in which Finlay's relationship
with each host store group commenced and the number of Departments operated by
Finlay in each host store group. The table also provides similar information
regarding Finlay's international Departments, its domestic and international
stand-alone locations and the Departments added as a result of the Diamond Park
Acquisition.

<TABLE>
<CAPTION>
INCEPTION OF NUMBER OF
HOST STORE GROUP/LOCATION RELATIONSHIP DEPARTMENTS/STORES
- --------------------------------------------- ------------ ----------------------------------------
<S> <C> <C> <C>
MAY
Robinsons -- May............................. 1948 55
Filene's..................................... 1977 37
Lord & Taylor................................ 1978 62
L.S. Ayres/Famous Barr....................... 1979 30
Kaufmann's................................... 1979 47
Foley's...................................... 1986 55
Hecht's/Strawbridge's........................ 1986 70
Meier & Frank................................ 1988 8
---
Total May Departments...................... 364
FEDERATED
Rich's/Lazarus/Goldsmith's................... 1983 72
Burdines..................................... 1992 44
The Bon Marche............................... 1993 19
Stern's...................................... 1994 20
---
Total Federated Departments................ 155
OTHER DOMESTIC DEPARTMENTS

Crowley's/Steinbach.......................... 1968 19
Gottschalks.................................. 1969 30
Younkers..................................... 1973 32
Belk......................................... 1975 51
Carson Pirie Scott/Bergner's/Boston Store.... 1977 50
Liberty House................................ 1983 12
The Bon-Ton.................................. 1986 39
Dillard's.................................... 1988 5
Proffitt's................................... 1991 8
Elder Beerman................................ 1992 35
---
Total Other Domestic Departments........... 281
-------
Total Domestic Departments............... 800
INTERNATIONAL DEPARTMENTS (SONAB)
Bazar de L'Hotel de Ville.................... 1994 6
Galeries Lafayette........................... 1994 30
Monoprix/Inno/Baze........................... 1994 43
Nouvelles Galeries........................... 1994 59
Debenhams.................................... 1996 7
Jeanteur..................................... 1996 1
---
Total International Departments.......... 146
STAND-ALONE STORES
New York Jewelry Outlet...................... 1994 9
New Gold (Sonab)............................. 1994 3
---
Total Stand-Alone Stores................... 12
-------
Total Existing Departments and
Stand-Alone Stores..................... 958
DIAMOND PARK DEPARTMENTS*
Mercantile Stores............................ 1997 90
Marshall Field's............................. 1997 21
Parisian..................................... 1997 28
Total Diamond Park Departments........... 139
-------
Total Departments and Stand-Alone
Stores After Diamond Park
Acquisition......................... 1,097
-------
-------
</TABLE>

- ------------------
* Represents Departments added in connection with the Diamond Park Acquisition.

<PAGE>
TERMS OF LEASE AGREEMENTS. Finlay's lease agreements typically have an
initial term of one to five years. Finlay has, where possible, entered into
five-year lease agreements and expects to continue this policy. Finlay's lease
agreements generally contain renewal options or provisions for automatic renewal
absent prior notice of termination by either party. Lease renewals are for one
to five year periods. See 'Risk Factors -- Dependence on Host Store
Relationships'. On June 18, 1997, the Company announced the extension of its
lease agreements with Federated for an additional three years. The lease
extensions apply to all of Finlay's Departments within Federated stores,
including leases for Departments in Burdines, Rich's, Lazarus, Goldsmith's and
The Bon Marche, which have been extended through February 3, 2001, and the lease
for Departments in Stern's which has been extended through February 1, 2003. In
exchange for the right to operate a Department within the host store, Finlay
pays each host store group a lease fee, calculated as a percentage of sales
(subject to a minimum annual fee in a limited number of cases).

Finlay's domestic lease agreements generally require host stores to remit
sales proceeds for each month (without regard to whether such sales were cash,
store credit card or national credit card) to Finlay approximately three weeks
after the end of such month. However, during the months of November and
December, most domestic host store groups remit to Finlay 75% of the estimated
months' sales prior to or shortly following the end of that month. Finlay's
international lease agreements generally require host stores to remit sales
proceeds for each two-week period (without regard to whether such sales were
cash, store credit card or national credit card) to Finlay approximately two
weeks after the end of such period. Each host store group withholds from the
remittance of sales proceeds a lease fee and other expenditures, such as
advertising costs, which the host store group may have made on Finlay's behalf.

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

In many cases, Finlay is subject to limitations under its lease agreements
which prohibit Finlay from operating Departments for competing host store groups
within a certain geographical radius of the host stores (typically five to ten
miles). Such limitations restrict Finlay from further expansion within areas
where it currently operates Departments, including expansion by possible
acquisitions. For example, Finlay sought and received the consent of certain of
its existing host store groups in connection with the Diamond Park Acquisition.
However, certain domestic lease agreements make an exception for adding

Departments in stores established by groups with which Finlay has a preexisting
lease arrangement. In addition, Finlay has from time to time obtained the
consent of an existing host store group to operate in another host store group
within the prohibited area. May and Federated have granted consents of this type
to Finlay with respect to one another's stores. In addition, in certain cases,
Finlay has found that, notwithstanding the absence of any geographical
limitation in a lease agreement, it may be limited as a practical matter from
opening Departments for competing host store groups in close proximity to each
other because of the adverse effect such openings might have on its overall host
store group relationships. See 'Risk Factors -- Expansion'.

CREDIT. Substantially all customer credit risk is borne by the host store
rather than by Finlay. Purchasers of Finlay's merchandise at a host store are
entitled to the use of the host store's credit facilities on the same basis as
all of the host store's customers. Payment of credit card or check

31
<PAGE>
transactions is generally guaranteed to Finlay by the host store, provided that
the proper credit approvals have been obtained in accordance with the host
store's policy. Accordingly, payment to Finlay in respect of its sales proceeds
is generally not dependent on when (or if) payment is received by the host
store.

DEPARTMENTS OPENED/CLOSED. During 1996, Department openings offset by
closings resulted in a net decrease of two Departments. There were 36 openings
within existing store groups. In addition, Department openings included thirteen
Departments in the Hecht's division of May, as a result of May's acquisition of
Strawbridge's, 26 Departments in Monoprix stores in France, the opening of seven
Departments in Debenhams stores in the U.K. and the opening of two additional
outlet stores. These openings were offset by a number of Department closings,
including 29 Departments in the Emporium/Weinstocks chain resulting from the
acquisition of those stores by Federated and their integration into the Macy's
chain which currently operates its own fine jewelry business. An additional
Emporium/Weinstocks Department was closed in 1995. Eight Departments in The
Jones Store Co. and 17 Departments in the Maison Blanche/Gayfers chain were also
closed in 1996 as the result of those stores' decision to consolidate their
Departments under the management of one lessee. In addition, 32 Departments were
closed within existing host store groups. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- 1996 Compared with
1995' and 'Risk Factors -- Dependence on Host Store Relationships'.

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWENTY-SIX
------------------------------------------------------ WEEKS ENDED
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, AUGUST 2,
1993 1994 1995 1996 1997 1997
-------- -------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
DEPARTMENTS/STORES:

Open at beginning of period........... 662 746 757 903 941 939
Opened during period.................. 124 69 159 70 84 25
Closed during period.................. (40) (58) (13) (32) (86) (6)
-------- -------- -------- ------- ------- -----
Open at end of period................. 746 757 903 941 939 958
-------- -------- -------- ------- ------- -----
Net increase (decrease)............... 84 11 146 38 (2) 19
-------- -------- -------- ------- ------- -----
-------- -------- -------- ------- ------- -----
</TABLE>

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

PRODUCTS AND PRICING

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

32
<PAGE>
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1994, 1995, 1996 and the twenty-six weeks ended
August 2, 1997:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------- TWENTY-SIX
WEEKS ENDED
JAN. 28, 1995 FEB. 3, 1996 FEB. 1, 1997 AUGUST 2, 1997
--------------- --------------- --------------- ---------------
% OF % OF % OF % OF

SALES SALES SALES SALES SALES SALES SALES SALES
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CATEGORY:
Gemstones................. $132.3 24.5% $148.6 24.4% $153.1 24.1% $ 63.4 24.5%
Gold...................... 123.7 22.9 142.8 23.5 144.8 22.8 56.4 21.8
Watches................... 105.1 19.5 115.2 19.0 114.3 18.0 45.3 17.5
Diamonds.................. 102.7 19.1 118.3 19.5 129.2 20.3 53.3 20.6
Other (1)................. 75.5 14.0 82.8 13.6 93.5 14.8 40.4 15.6
------ ----- ------ ----- ------ ----- ------ -----
Total Sales............. $539.3 100.0% $607.7 100.0% $634.9 100.0% $258.8 100.0%
------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ -----
</TABLE>

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

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

Finlay sells its merchandise at prices generally ranging from $50 to
$1,000. In 1996, the average price of the items sold by Finlay was approximately
$150 per item. An average Department has over 4,000 items in stock. Consistent
with fine jewelry retailing in general, a substantial portion of Finlay's sales
are made at prices discounted from listed retail prices. Finlay's advertising
and promotional planning are closely coordinated with its pricing strategy.
Publicized sales events are an important part of Finlay's marketing efforts. A
substantial portion of Finlay's sales occur during such promotional events. The
amount of time during which merchandise may be offered at discount prices is
limited by applicable laws and regulations. See 'Legal Proceedings'.

PURCHASING AND INVENTORY

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

changing fashion trends is reduced because unsold consignment merchandise can be
returned to the vendor.

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

In 1996, merchandise obtained from Finlay's 40 largest vendors (out of a
total of approximately 400 vendors) generated approximately 78% of domestic
sales, and merchandise obtained from Finlay's

33
<PAGE>
largest vendor generated approximately 12% of domestic sales. Finlay does not
believe the loss of any one of its vendors would have a material adverse effect
on its business.

In addition, Finlay's new distribution and warehouse facility, expected to
become fully operational in the Spring of 1998, will permit the Company to
improve the flow of merchandise to Departments while reducing payroll and
freight costs.

GOLD CONSIGNMENT AGREEMENT. In August 1995, Finlay Jewelry consummated the
Gold Consignment Agreement, which enables Finlay to receive merchandise by
providing gold or otherwise making payment to certain vendors who currently
supply Finlay with merchandise on consignment. While the merchandise involved
remains consigned, the consignor and title to the gold content of the
merchandise transfers from the vendors to the gold consignor. As a result, such
vendors have reduced their working capital requirements and associated financing
costs. Consequently, Finlay has negotiated more favorable prices and terms with
the participating vendors. Finlay can obtain, pursuant to the Gold Consignment
Agreement, up to the lesser of (i) 85,000 fine troy ounces or (ii) $25.0 million
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. At August 2, 1997, amounts outstanding under the Gold Consignment
Agreement totaled 38,007 fine troy ounces, valued at approximately $12.4
million. The average amount outstanding under the Gold Consignment Agreement was
$11.9 million in 1996. The current term of the Gold Consignment Agreement
expires on February 28, 1998. Management presently intends to renew the Gold
Consignment Agreement upon its expiration.

Finlay pays a daily consignment fee on the dollar equivalent value of
ounces outstanding, a floating rate which, as of August 31, 1997, was
approximately 3.5% per annum. In addition, Finlay is required to pay an unused
line fee of 0.5% if the amount of gold consigned has a value equal to or less
than $10.0 million. In conjunction with the Gold Consignment Agreement, Finlay
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 Facility lenders.

OPERATIONS

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

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

34
<PAGE>
Finlay had average sales per linear foot of approximately $11,200 in 1994,
$11,800 in 1995 and $11,600 in 1996. The decrease in sales per linear foot
during 1996 is attributed to more European Departments, which on average, have
lower sales per linear foot as compared to the domestic Departments. Finlay had
average sales per Department of approximately $674,000, $710,000 and $729,000 in
1994, 1995 and 1996, respectively. Finlay determines average sales per linear
foot by dividing its sales by the aggregate estimated measurements of the outer
perimeters of the display cases of Finlay's Departments.

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

PERSONNEL AND TRAINING. Finlay considers its employees an important

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

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

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

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

GOLD HEDGING. The cost to Finlay of gold merchandise sold on consignment
in some cases is not fixed until the sale is reported to the vendor or 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 Finlay is exposed to the risk of fluctuations in the price of gold between
the time Finlay establishes the advertised or other retail price of a particular
item of merchandise and the date on which the sale of the item is reported to
the vendor. In order to hedge against this risk and to enable Finlay to

<PAGE>
determine the cost of such goods prior to their sale, Finlay must fix the price
of gold prior to the sale of such merchandise. Accordingly, Finlay at times
enters into futures contracts, such as options or forwards or a combination
thereof. The value of gold hedged under such contracts represented less than 1%
of the Company's cost of goods sold in 1996. Under such contracts, the Company
obtains the right to purchase a fixed number of troy ounces of gold at a
specified price per ounce for a specified period. Such contracts typically have
durations ranging from one to nine months and are generally priced at the spot
gold price plus an amount based on prevailing interest rates plus customary
transactions costs. When sales of such merchandise are reported to the
consignment vendors and the cost of such merchandise becomes fixed, Finlay sells
its related hedge position.

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

COMPETITION

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

With respect to the operation of Departments in host store groups, Finlay
competes with a limited number of established Department lessees, such as J.B.
Rudolph, and department store chains. Management believes that competition for
the operation of Departments is based principally on the reputation of the
operator for integrity, the expertise and experience of the operator in offering
an attractive selection of merchandise at competitive prices and the operator's
ability to generate lease fees for the host stores. See 'Risk
Factors -- Competition', 'Risk Factors -- Expansion' and '-- Store
Relationships -- Terms of Lease Agreements' with respect to certain limitations
on Finlay's ability to compete.

SEASONALITY

The retail jewelry business is highly seasonal. See 'Risk
Factors -- Seasonality', 'Selected Consolidated Financial Information' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality'.

PROPERTIES

The only real estate owned by Finlay is the recently acquired distribution
and warehouse facility, totaling 106,200 square feet (of which 17,350 is leased
to a tenant), at 205 Edison Avenue, Orange, Connecticut. Finlay leases
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 its executive,
accounting, advertising, the majority of its data processing operations and
other administrative functions. The leases for such space expire September 30,
2008. For certain operations at 500 Eighth Avenue, New York, New York, Finlay
has leased approximately 9,200 square feet under a lease which expires January
31, 2000. Finlay also leases retail space for its New York Jewelry Outlet and
French stand-alone stores and office space in France for Sonab's corporate
operations. Generally, as part of Finlay's domestic lease

36
<PAGE>
arrangements, host stores provide office space to Finlay's host store group
management personnel free of charge.

LEGAL PROCEEDINGS

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

Commonly in the retail jewelry industry, a substantial amount of
merchandise is sold at a discount to the 'regular' or 'original' price. Finlay's
experience is consistent with this practice. See 'Business -- Products and
Pricing'. A number of states in which Finlay operates have regulations which
require retailers who offer merchandise at discounted prices to offer the
merchandise at the 'regular' or 'original' prices for stated periods of time.
Finlay has received inquiries and has been subject to investigation from time to
time by various states with respect to its compliance with such regulations. In
1987 and 1989, Finlay entered into consent decrees with the states of Wisconsin
and Georgia, respectively, in connection with Finlay's past sales discounting
and other practices and paid nominal fines to both states. In addition, one of
Finlay's store groups entered into a consent decree with the state of Oregon in
1988 and two others are subject to standing injunctions, one issued at the
request of the state of California in 1988 and the other issued at the request
of the state of Colorado in 1990, regarding the sales discounting practices of
the host store groups in the respective states. As a lessee of the host store
groups, Finlay is obligated to comply with the consent decree and injunctions in
effect with respect to the host store groups. Although Finlay receives inquiries
from various state authorities from time to time, management believes it is in
substantial compliance with all applicable federal and state laws with respect
to such practices.

<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

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.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
David B. Cornstein.................. 59 Chairman of the Company and Director
Arthur E. Reiner.................... 57 President, Chief Executive Officer and Vice Chairman
of the Company, Chairman and Chief Executive Officer
of Finlay Jewelry and Director
Joseph M. Melvin.................... 48 Executive Vice President and Chief Operating Officer
of the Company and President and Chief Operating
Officer of Finlay Jewelry
Leslie A. Philip.................... 50 Executive Vice President of the Company and Executive
Vice President--Merchandising and Sales Promotion of
Finlay Jewelry
Barry D. Scheckner.................. 49 Senior Vice President and Chief Financial Officer of
the Company and Finlay Jewelry
Edward Stein........................ 53 Senior Vice President and Director of Stores of
Finlay Jewelry
Rohit M. Desai...................... 58 Director
James Martin Kaplan................. 52 Director
Thomas H. Lee....................... 53 Director
Norman S. Matthews.................. 64 Director
Warren C. Smith, Jr................. 41 Director
</TABLE>

The Company, the Lee Investors, the Desai Investors, the Management
Stockholders and certain third parties are parties to the Stockholders'
Agreement which provides, among other things, that all parties thereto, subject
to certain conditions, vote their shares to fix the number of members of the
Board of Directors of the Company at eight and to vote in favor of six directors
who will be nominated as follows: two by the Lee Investors; one by the Desai
Investors; two by Mr. Cornstein (one of whom must be a management employee of
the Company); and one by Mr. Reiner. See 'Risk Factors -- Concentration of
Ownership'. The nomination and election of the remaining two directors is not
governed by the Stockholders' Agreement, although the Stockholders' Agreement
does require that such directors not be parties to the Stockholders' Agreement.

Notwithstanding the foregoing, the right of various persons to designate
directors will be reduced or eliminated at such time as they own less than
certain specified percentages of the shares of Common Stock then outstanding.
Pursuant to the Stockholders' Agreement (i) Messrs. Lee and Smith were nominated
to the Board of Directors as the designees of the Lee Investors, (ii) Mr. Desai
was nominated by the Desai Investors, (iii) Messrs. Cornstein and Kaplan were

nominated by Mr. Cornstein and (iv) Mr. Reiner nominated himself.

The Stockholders' Agreement also provides that the executive committee of
the Board of Directors will consist of five directors, including one independent
director selected by the Board of Directors, one member designated by Mr. Lee
(so long as the Lee Investors have the right to designate a nominee for
director), one member designated by the Desai Investors (so long as the Desai
Investors have the right to designate a nominee for director) and two members
designated by Mr. Cornstein (which number will be reduced to one if Mr.
Cornstein is only entitled to designate one nominee for director and none if Mr.
Cornstein ceases to have the right to designate a nominee for director). The
executive committee

38
<PAGE>
for the Company presently consists of Messrs. Lee, Desai, Matthews, Cornstein
and Kaplan. See 'Certain Transactions -- Stockholders' Agreement'.

Under the Company's Restated Certificate of Incorporation, the Company's
Board of Directors is classified into three classes. The members of each class
will serve staggered three-year terms. Messrs. Desai and Lee are Class I
directors; Messrs. Cornstein, Kaplan and Reiner are Class II directors; and
Messrs. Matthews and Smith are Class III directors. The terms of the Class III,
Class I and Class II directors expire at the annual meeting of stockholders to
be held in 1998, 1999 and 2000, 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.

DAVID B. CORNSTEIN has been Chairman of the Company since May 1993 and has
been a director of the Company and Finlay Jewelry since their inception in
December 1988. 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. Mr. Cornstein is a director of What A World!, Inc.,
a public specialty gift retailer.

ARTHUR E. REINER became President and Chief Executive Officer of the
Company effective January 30, 1996. He has been Vice Chairman of the Board of
the Company and Chairman of the Board and Chief Executive Officer of Finlay
Jewelry since January 3, 1995. Prior to joining Finlay, Mr. Reiner had spent
over 25 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 Loehmann's, 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 of the Board and Chief Operating Officer of Filene's.

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

BARRY D. SCHECKNER has been Senior Vice President and Chief Financial
Officer of Finlay Jewelry since December 1988. Mr. Scheckner has also been
Senior Vice President and Chief Financial Officer of the Company since September
1992. Prior to September 1992, he was Treasurer of the Company. From February
1983 through December 1988 Mr. Scheckner held various finance and accounting
positions with Finlay's predecessors.

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

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, including Equity-Linked Investors, L.P., Equity-
Linked Investors-II and Private Equity Investors III, L.P. Mr. Desai is also the
managing general partner of the general partners of each of Equity-Linked
Investors, L.P. and Equity-Linked Investors-II and the

39
<PAGE>
managing member of the general partner of Private Equity Investors III, L.P. Mr.
Desai serves as a director of The Rouse Company and Sunglass Hut International,
Incorporated.

JAMES MARTIN KAPLAN has been a director of the Company, Finlay Jewelry and
their predecessors since 1985. Mr. Kaplan has been a partner with the law firm
of Zimet, Haines, Friedman & Kaplan, counsel to the Company, since 1977. Mr.
Kaplan is also a director of What A World!, Inc.

THOMAS H. LEE has been a director of the Company and Finlay Jewelry since
May 1993. Since 1974, Mr. Lee has been President of Thomas H. Lee Company. He is
a director of First Security Services Corporation, Miller Import Corporation,
Sondik Supply Corporation, Livent Inc., Playtex Products, Inc., Signature
Brands, Inc. and Vail Resorts, Inc.

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
over six years. Prior to that time, Mr. Matthews served as President of
Federated. He is also a director of Toys 'R' Us, Inc., The Progressive
Corporation, Loehmann's, Inc. and Lechters, Inc.

WARREN C. SMITH, JR. has served as a director of the Company and Finlay

Jewelry since May 1993. Mr. Smith is a Managing Director of Thomas H. Lee
Company and has been employed by Thomas H. Lee Company since 1990. In addition,
Mr. Smith is Vice President of THL Equity Trust, a general partner of THL Equity
Advisors Limited Partnership, the general partner of Thomas H. Lee Equity
Partners, L.P. He is also a director of Rayovac Corporation.

<PAGE>
EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information with respect to the compensation
in 1996, 1995 and 1994 of Finlay's Chief Executive Officer and each of the four
other mostly highly compensated executive officers of the Company or Finlay
Jewelry, including the Company's former Chief Executive Officer (collectively,
the 'Named Executive Officers'). For information regarding compensation paid to
Mr. Joseph Melvin, who joined the Company in May 1997, see '-- Employment
Agreements and Change of Control Arrangements'.

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION NUMBER OF
--------------------------------------------- RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUSES COMPENSATION (1) AWARDS OPTIONS/SARS (2) COMPENSATION (3)
- --------------------- ---- -------- -------- ---------------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARTHUR E. REINER (4) 1996 $700,000 $253,750 -- -- -- $ 27,495
President, Chief 1995 666,660 215,900 -- -- -- 22,315
Executive Officer 1994 55,555 -- -- -- 69,263 --
and Vice Chairman
of the Company and
Chairman and Chief
Executive Officer
of Finlay Jewelry

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

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

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

EDWARD STEIN 1996 275,000 107,360 -- -- -- 9,105
Senior Vice 1995 267,086 40,000 -- -- 8,333 8,716
President and 1994 183,500 62,500 -- -- -- 8,686
Director of Stores
of Finlay Jewelry
</TABLE>

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

(2) See '-- Option/SAR Grants in 1996 and 1997'.

(Continued on following page)

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

<TABLE>
<CAPTION>
LIFE RETIREMENT MEDICAL ADDITIONAL
INSURANCE (A) BENEFITS (B) BENEFITS (C) BENEFITS (D)
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Arthur E. Reiner....................... 1996 $20,176 $5,375 $1,944 --
1995 20,176 -- 2,139 --
1994 -- -- -- --

David B. Cornstein..................... 1996 44,304 5,375 1,944 --
1995 44,304 5,310 2,139 --
1994 39,242 5,310 2,673 --

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

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

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

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

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

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

(d) Mr. Scheckner received a bonus in connection with the Initial Public
Offering.

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

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

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

LONG-TERM INCENTIVE PLANS

The Company currently has two long-term incentive plans, for which it has
reserved a total of 1,082,596 shares of Common Stock for issuance in connection
with awards. Of this total, 732,596 shares of Common Stock have been reserved
for issuance under the Company's Long Term Incentive Plan (the '1993 Plan'), of
which 79,750 shares have been issued to date in connection with exercises of
options granted under the 1993 Plan and 645,919 shares are reserved for issuance
upon exercise of currently outstanding options. The remaining 6,927 shares of
Common Stock are available for future grants under the 1993 Plan. In 1997, the
Company's Board of Directors and stockholders approved the Company's 1997 Long
Term Incentive Plan (the '1997 Plan' and, together with the 1993 Plan, the
'Incentive Plans'), which is intended as a successor to the 1993 Plan. The 1997
Plan is similar to the 1993 Plan and provides for the grant of the same types of
awards as are currently available under the 1993 Plan. The maximum number of
shares of Common Stock available for issuance under the 1997 Plan is 350,000.
The Company has granted options to purchase 312,815 shares of Common Stock under
the 1997 Plan. The remaining 37,185 shares of Common Stock are available for
future grants under the 1997 Plan. See '-- Option/SAR Grants in 1996 and 1997'.

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

42
<PAGE>
which are based upon attainment of performance goals during a period of not less
than two nor more than five years and which may be settled in cash or in Common
Stock in the discretion of the Company's Compensation Committee; or (vi) any
combination of the foregoing. The 1997 Plan provides, however, that no
participant thereunder may be granted, during any fiscal year, options or other
awards relating to more than 175,000 shares of Common Stock.

Under the Incentive Plans, the Company may grant stock options which are
either 'incentive stock options' ('Incentive Options') within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the 'Code'), or
non-incentive stock options ('Non-incentive Options'). Incentive Options are
designed to result in beneficial tax treatment to the optionee, but no tax
deduction for the Company. Nonincentive Options will not give the optionee the
tax benefits of Incentive Options, but generally will entitle the Company to a
tax deduction when and to the extent income is recognized by the optionee.

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

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

In making grants to employees under the Incentive Plans, the Company has on
occasion utilized a uniform Agreement and Certificate of Option (the 'Option
Agreement'), pursuant to which the Company grants ten-year options, 20% of which
vest on each of the first five anniversaries of the grant date. The Option
Agreement also contains transfer and certain other restrictions and provides
that options not vested may expire, or shares acquired upon exercise of options
may be repurchased at their exercise price, in the event of termination of
employment under certain circumstances. In addition, the Option Agreement
provides that (i) if an optionee's employment is terminated for 'Cause' (as
defined in the Option Agreement), such optionee's options will terminate
immediately, (ii) if an optionee's employment is terminated due to death,
'Disability' or 'Retirement' (each as defined in the Incentive Plans), such
optionee's options become fully vested and exercisable for a period of 21 days
following such termination and (iii) if an optionee's employment is terminated
for any other reason, such optionee's options remain exercisable to the extent
vested for a period of 21 days following such termination.

The Incentive Plans may be amended or terminated by the Board at any time,
but no such termination or amendment may, without the consent of a participant,
adversely affect such participant's rights with respect to previously granted
awards. Under the 1993 Plan, the approval of the Company's stockholders is
required for any amendment (i) to increase the maximum number of shares subject
to awards under the 1993 Plan, (ii) to change the class of persons eligible to
participate and/or receive incentive stock options under the 1993 Plan, (iii) to
change the requirements for serving on the Compensation Committee or (iv) to

increase materially the benefits accruing to participants under the 1993 Plan.
Under the 1997 Plan, the approval of the Company's stockholders is required to
amend the 1997 Plan if the Compensation Committee determines that such approval
would be necessary to retain the benefits of Rule 16b-3 under the Exchange Act
(with respect to participants who are subject to

43
<PAGE>
Section 16 thereof), Section 162(m) of the Code (with respect to 'covered
employees' within the meaning of Section 162(m) of the Code) or Section 422 of
the Code (with respect to Incentive Options), or if such stockholder approval is
otherwise required by federal or state law or regulation or the rules of any
exchange or automated quotation system on which the Common Stock may then be
listed or quoted, or if the Board of Directors otherwise determines to submit
such action for stockholder approval.

Subject to certain limitations set forth in the Incentive Plans, in the
event the Compensation Committee determines that any corporate transaction or
event affects the shares of Common Stock (or other securities or property
subject to an award under the Incentive Plans) such that an adjustment is
determined by the Compensation Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Incentive Plans, then the Compensation Committee shall,
in such manner as it may deem equitable, adjust any or all of (i) the number and
type of shares (or other securities or property) with respect to which awards
may be granted under the Incentive Plans, (ii) the number and type of shares (or
other securities or property) subject to outstanding awards under the Incentive
Plans or (iii) the grant or exercise price with respect to any awards under the
Incentive Plans or, if deemed appropriate, make provision for a cash payment to
the holder of an outstanding award in consideration for the cancellation of such
award (which, in the case of an option, will be equal to the positive
difference, if any, between the Market Value (as defined in the Incentive Plans)
of the shares covered by such option, as determined immediately prior to such
corporate transaction or event, and the exercise price per share of such
option).

OPTION/SAR GRANTS IN 1996 AND 1997

No options or stock appreciation rights were issued by the Company to the
Named Executive Officers during 1996. In 1997, the Company granted options to
purchase a total of 452,534 shares of Common Stock, of which options to purchase
300,000, 26,667, 13,000 and 12,667 shares were granted to Mr. Reiner, Ms.
Philip, Mr. Scheckner and Mr. Stein, respectively, at exercise prices ranging
from $13.875 to $14.00 per share. All of these options were granted under the
1997 Plan, except for the options with respect to 139,719 of the 300,000 shares
included in options granted to Mr. Reiner. The options vest and become
exercisable in equal installments on each of the first five anniversaries of the
date of grant, except for the options granted to Mr. Reiner, which vest and
become exercisable on January 2, 2001 so long as Mr. Reiner is employed by the
Company on such date, subject to various terms and conditions regarding early
vesting and early termination.

CERTAIN INFORMATION CONCERNING STOCK OPTIONS/SARS

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

AGGREGATED OPTION/SAR EXERCISES IN 1996 AND FISCAL YEAR-END OPTION/SAR VALUE

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES YEAR-END YEAR-END ($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE (6)
- -------------------------------------- ----------- -------- ------------------- -----------------
<S> <C> <C> <C> <C>
Arthur E. Reiner...................... -- -- 23,088 / 46,175(1) $17,316 / $34,631
David B. Cornstein.................... -- -- 26,667 / 40,000(2) 20,000 / 30,000
Leslie A. Philip...................... -- -- 6,667 / 26,666(3) 23,750 / 94,999
Barry D. Scheckner.................... -- -- 9,200 / 12,800(4) 55,644 / 42,096
Edward Stein.......................... -- -- 7,067 / 10,266(5) 41,858 / 32,072
</TABLE>

(Continued on following page)

44
<PAGE>
- ------------------
(1) Represents for Mr. Reiner 69,263 options granted on January 3, 1995 (all at
an exercise price of $14.00 per share), of which 34,631 are
performance-based and 34,632 are time-based. An aggregate of 23,088 of the
time-based options became exercisable on February 3, 1996 and February 1,
1997 and the balance of the time-based options, totaling 11,544, vest on
January 31, 1998.

(2) Represents for Mr. Cornstein 66,667 options granted on March 30, 1995 (all
at an exercise price of $14.00 per share), of which an aggregate of 26,667
became exercisable on March 30, 1995 and 1996 and the balance of 40,000
vest and become exercisable at a rate of 13,333 per annum on each
anniversary of the date of grant.

(3) Represents for Ms. Philip 33,333 time-based options granted on May 16, 1995
(all at an exercise price of $11.19 per share), of which 6,667 become
exercisable on May 16, 1996 and the balance of 26,666 vest and become
exercisable at a rate of 6,667 per annum on each anniversary of the date of
grant.

(4) Represents for Mr. Scheckner (i) 12,000 time-based options granted on May
26, 1993 at an exercise price of $7.23 per share, of which an aggregate of
7,200 became exercisable on May 26, 1994, 1995 and 1996 and the balance of
4,800 vest and become exercisable at a rate 2,400 per annum on each
anniversary of the date of grant and (ii) 10,000 time-based options granted

on April 5, 1995 at an exercise price of $14.00 per share, of which 2,000
became exercisable on April 5, 1996 and the balance of 8,000 vest and
become exercisable at a rate of 2,000 per annum on each anniversary of the
date of grant.

(5) Represents for Mr. Stein (i) 9,000 time-based options granted on May 26,
1993 at an exercise price of $7.23 per share, of which an aggregate of
5,400 became exercisable on May 26, 1994, 1995 and 1996 and the balance of
3,600 vest and become exercisable at a rate of 1,800 per annum on each
anniversary of the date of grant and (ii) 8,333 time-based options granted
on April 5, 1995 at an exercise price of $14.00 per share, of which 1,667
became exercisable on April 5, 1996 and the balance of 6,666 vest and
become exercisable at a rate of 1,667 per annum on each anniversary of the
date of grant.

(6) The values of Unexercised In-the-Money Options/SARs represent the aggregate
amount of the excess of $14.75, the closing price for a share of Common
Stock at year end, over the relevant exercise price of all 'in-the-money'
options.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is presently comprised of Rohit M. Desai and
Thomas H. Lee. All decisions with respect to executive compensation of both the
Company and Finlay Jewelry are currently made by the Compensation Committee.
None of the present Compensation Committee members were, at any time, an officer
or employee of the Company or any of its subsidiaries.

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

In connection with the Recapitalization Transactions in May 1993, the
Company and Finlay Jewelry entered into management agreements with each of
Thomas H. Lee Company (the 'Lee Management Agreement') and Desai Capital
Management Incorporated (the 'Desai Management Agreement' and, together with the
Lee Management Agreement, the 'Management Agreements'), affiliates of Mr. Lee
and Mr. Desai, respectively. Pursuant to the Management Agreements, Thomas H.
Lee Capital LLC (as assignee of Thomas H. Lee Company) and Desai Capital
Management Incorporated are entitled to receive $180,000 and $60,000 per year
plus expenses, respectively, during the five-year period commencing May 1993 for
consulting and management advisory services rendered to the Company and Finlay
Jewelry. After the initial five-year term, each of the Management Agreements
will be automatically renewable on an annual basis, unless any party thereto
serves notice of termination at least 90 days prior to the renewal date. Each of
the Management Agreements contains provisions entitling the managing company to
indemnification under certain circumstances for losses incurred in the course of

service to the Company or Finlay Jewelry.

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

45
<PAGE>
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

Effective January 3, 1995, Finlay entered into an employment agreement with
Arthur E. Reiner to employ Mr. Reiner as Vice Chairman of the Company and
Chairman and Chief Executive Officer of Finlay Jewelry. On January 30, 1996, as
contemplated by Mr. Reiner's employment agreement, the Company's Board of
Directors appointed Mr. Reiner to the office of President and Chief Executive
Officer of the Company. The employment agreement, as subsequently amended,
provides for Mr. Reiner to serve in such offices for a term expiring on January
31, 2001. Pursuant to the employment agreement, Mr. Reiner received an annual
base salary of approximately $666,660 in 1995, which was increased to $700,000
on the first day of 1996 and to $750,000 on the first day of 1997. Thereafter,
further increases will be at the discretion of the Board of Directors of the
Company. In addition to his annual base salary, Mr. Reiner will be entitled to
an annual bonus payment based on a target incentive amount equal to one-half of
his base salary for the applicable year (the 'Incentive Amount'). The payment of
the bonus in respect of a particular year will be based on the achievement by
Finlay of certain financial performance criteria based on EBITA-FIFO (the
'Target Level'), with 20% of the Incentive Amount payable if 90% of the Target
Level is achieved, increasing incrementally on a pro rata basis to 80% of the
Incentive Amount payable if 100% of the Target Level is achieved, increasing
further incrementally on a pro rata basis to 160% of the Incentive Amount
payable if 140% of the Target Level is achieved, and if over 140% of the Target
Level is achieved, the annual bonus payment shall equal 160% of the Incentive
Amount plus 1% of the Incentive Amount for each percentage point by which
Finlay's measured performance exceeds 140% of the Target Level. Notwithstanding
the foregoing, with respect to 1995, pursuant to the terms of his employment
agreement, Mr. Reiner received a bonus in the amount of $215,900.

Under the agreement, Mr. Reiner received in January 1995 options under the
1993 Plan to purchase 69,263 shares of Common Stock at and an exercise price of
$14.00 per share. Of those options, one-half are time-based and one-half
performance-accelerated, vesting in ten years subject to accelerated vesting
upon achievement of specified performance goals. Of the time-based options, one-
third became exercisable on each of February 3, 1996 and February 1, 1997, and
one-third will become exercisable on January 31, 1998. One-third of the
performance-accelerated options will vest for each fiscal year commencing with
1995 for which EBITA-FIFO in the applicable year equals or exceeds certain
specified target levels in that year and any subsequent year. To date, none of
the performance-accelerated options have vested.

In the event of Mr. Reiner's termination of employment either by the
Company for 'Cause' (as defined in the agreement), by Mr. Reiner for any reason

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

Upon the commencement of his employment, Mr. Reiner purchased 138,525
shares of Common Stock (the 'Purchased Shares') at a purchase price of $7.23 per
share. The aggregate purchase price of the Purchased Shares was paid in the form
of a note issued by Mr. Reiner to the Company, the repayment of which is secured
by the Purchased Shares and certain proceeds received by Mr. Reiner upon
disposition of the Purchased Shares or upon any distribution paid on or with
respect to the Purchased Shares. In the event Mr. Reiner's employment is
terminated, the Purchased Shares

46
<PAGE>
(together with vested options and shares issued upon exercise of vested options
('Option Shares')) are subject to certain call rights and the Option Shares are
additionally subject to certain put rights. In the event the Company does not
exercise its call rights, the rights may be exercised by the Lee Investors and
the Desai Investors, pro rata based on their respective ownership of Common
Stock. The Purchased Shares and Option Shares are subject to certain
restrictions on transfer and registration rights set forth in the agreement and
are subject to the Stockholders' Agreement and the Registration Rights
Agreement, other than the provisions thereof relating to restrictions on
transfer. See 'Certain Transactions -- Stockholders' Agreement' and 'Certain
Transactions -- Registration Rights Agreement'.

Under Mr. Reiner's agreement, subject to certain specified limitations,
Finlay is required to maintain life insurance on the life of Mr. Reiner in the
amount of $5.0 million, payable to his beneficiaries, and to provide Mr. Reiner
with catastrophic health insurance. In addition, Finlay is required to reimburse
Mr. Reiner for any income taxes owed by him as a result of the premiums paid by
Finlay with respect to such life insurance. The employment agreement also
provides for Mr. Reiner to receive an annual allowance for business use of an
automobile of up to $15,000.

Mr. Reiner's agreement provides that if his employment is terminated prior
to a 'Change of Control' either by the Company without 'Cause' or by Mr. Reiner
for 'Good Reason', Mr. Reiner will continue to receive his base salary for the
balance of the term and bonus compensation (calculated as though 110% of the

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

Under Mr. Reiner's agreement, a 'Change of Control' occurs when (i) a
person or group other than certain of the Company's existing stockholders and
certain related parties becomes the beneficial owner of 50% or more of the
aggregate voting power of the Company, (ii) during any period of two consecutive
calendar years, there are certain changes in the composition of the Company's
Board of Directors or (iii) there is a sale of all or substantially all of the
Company's assets.

On March 5, 1997, Mr. Reiner received an option under the 1993 Plan to
purchase an aggregate of 139,719 shares of Common Stock at an exercise price of
$14.00 per share. Such option vests and becomes exercisable on January 2, 2001
so long as Mr. Reiner is employed by the Company on such date; provided,
however, that such option is subject to early vesting and early termination
under certain circumstances and are subject to various conditions. The Company
has also granted to Mr. Reiner an additional option under the 1997 Plan to
purchase 160,281 shares of Common Stock, which option has an exercise price of
$13.875 per share and is subject to similar terms and conditions regarding
vesting and termination.

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

47
<PAGE>
January 31, 1999. Upon the expiration of the term of his employment agreement on
January 31, 1999, Mr. Cornstein is expected to become Chairman Emeritus of the
Company.

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

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

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

Under Mr. Cornstein's agreement, in the event of a 'Change of Control' (as
defined therein) of the Company, if at any time within twelve months following
the 'Change of Control' Mr. Cornstein is no longer employed by Finlay (or any
entity which succeeds to the obligations of Finlay under the employment
agreement following the 'Change of Control') for any reason other than death or
disability, Mr. Cornstein will be entitled to a lump sum payment ('Change of
Control Payment') equal to the net present value of the base salary and bonus
payable to him over the remainder of the term (calculated, in the case of the
bonus, assuming the annual bonuses payable for each remaining year shall equal
the average of the annual bonuses paid to him for preceding years during the
term). However, if the Change of Control Payment does not equal or exceed the
lesser of (i) 299% of the Severance Amount or (ii) the amount, if any, by which
the fair market value of (a) equity interests in the Company and Finlay Jewelry
which Mr. Cornstein continues to hold after the Change of Control, (b) amounts
which he is entitled to receive in exchange for or as a distribution in respect
of his equity interests in the Company and Finlay Jewelry as a result of the
'Change of Control' and (c) any other consideration received as a result of the
'Change of Control' (other than pursuant to his employment agreement) is less
than $7.5 million, then Mr. Cornstein shall receive, in lieu of the Change of
Control Payment, the lesser of (i) and (ii).

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

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

48
<PAGE>
On May 1, 1997, the Company appointed Mr. Melvin to serve as Executive Vice
President and Chief Operating Officer of the Company and President and Chief
Operating Officer of Finlay Jewelry. The Company has agreed to pay to Mr. Melvin
an annual base salary of $350,000 as well as an annual bonus based on the
achievement of certain targets, except that Mr. Melvin will receive a guaranteed
bonus of $75,000 during the first year of his employment. In addition, Mr.
Melvin was paid a $25,000 bonus upon his joining the Company. On May 1, 1997,
Finlay granted to Mr. Melvin an option under the 1997 Plan to purchase 50,000
shares of Common Stock at an exercise price per share equal to $14.875. The
option will vest in equal installments on each of the first five anniversaries
of the grant date. The option will be subject to early termination under certain
circumstances and will be subject to various conditions. Mr. Melvin is also
eligible for such benefits as are available to other senior executives of
Finlay, including reimbursement of moving and relocation expenses. In the event
Mr. Melvin's employment is terminated by Finlay without cause (not including
death or disability) or his title is changed to a lesser title, he is entitled
to receive a lump sum payment equal to one year's base salary.

DIRECTORS' COMPENSATION

Directors who are employees receive no additional compensation for serving
as members of the Board. Messrs. Lee, Desai, Smith and Kaplan receive no
compensation for serving as directors of the Company. For a discussion of
certain fees paid to affiliates of Messrs. Lee and Desai, see 'Compensation
Committee Interlocks and Insider Participation'. For serving as a director of
the Company, Mr. Matthews receives aggregate compensation at the rate of $20,000
per year. Prior to the Initial Public Offering, Finlay had an agreement to
engage Mr. Matthews as a consultant at a per diem rate of $2,500, with such fees
in the aggregate not to exceed $80,000 per year. In 1996, 1995 and 1994, Mr.
Matthews received a total of $20,000, $20,000 and $66,311, respectively, for his
services as a director and consultant. The consulting agreement between Finlay
and Mr. Matthews was terminated upon completion of the Initial Public Offering,
except that all of the provisions of the consulting agreement relating to
options to purchase Common Stock granted to Mr. Matthews (as described below)
remained in effect. Mr. Matthews was granted, effective as of July 1993, options
under the 1993 Plan to purchase 33,333 shares of Common Stock, 16,667 of which
have an exercise price of $12.00 per share and 16,666 of which have an exercise
price of $16.50 per share. Twenty percent of these options vest on each of the
first five anniversaries of the grant date, with the unvested portion of such
options fully vesting on a 'Change of Control' (as defined in the consulting

agreement). On March 30, 1995, Mr. Matthews was granted additional options under
the 1993 Plan to purchase 16,667 shares of Common Stock at a price of $14.00.
Twenty percent of these options vested immediately, and an additional twenty
percent of such options vest on each of the first four anniversaries of the
grant date. On January 30, 1996, Mr. Matthews was granted additional options
under the 1993 Plan to purchase 10,000 shares of Common Stock at a price of
$11.16 per share, which options vested and became exercisable in January 1997.
In addition, on March 6, 1997, Mr. Matthews was granted an option under the 1997
Plan to purchase 20,000 shares of Common Stock at an exercise price of $13.875
per share, twenty percent of which options will vest on each of the first five
anniversaries of the grant date. All of Mr. Matthews' options are subject to
early termination under certain circumstances and are subject to various
conditions.

INDEMNIFICATION AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS

Prior to the completion of the Initial Public Offering, Finlay entered into
indemnification agreements with each of its directors and executive officers.
For a complete description of these agreements, see 'Certain Transactions --
Certain Other Transactions'.

<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of September 1, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby
(including upon full exercise of the over-allotment option granted to the
Underwriters), by each of the Company's directors and the Named Executive
Officers, by all directors and executive officers as a group, by the Selling
Stockholder and by each of the Over-Allotment Selling Stockholders. No other
person is known by the Company to own beneficially more than 5% of the Common
Stock. The Company owns all of the issued and outstanding capital stock of
Finlay Jewelry.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
SHARES OF COMMON STOCK SHARES BENEFICIALLY OWNED
BENEFICIALLY OWNED SHARES TO SUBJECT AFTER SALE UNDER THIS
BEFORE BE SOLD TO OVER- PROSPECTUS AND FULL
SALE UNDER IN THE ALLOTMENT EXERCISE OF OVER-
THIS PROSPECTUS (1) OFFERING OPTION(2) ALLOTMENT OPTION (1)
----------------------- -------- --------- -----------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
NAME SHARES OF CLASS SHARES OF CLASS
- ---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Lee (3)........... 2,347,529 31.0% -- 274,953 2,072,576 21.2%
Rohit M. Desai (4).......... 1,657,441 21.9 953,029 -- 704,41 7.2
David B. Cornstein (5)(6)... 515,862 6.8 -- -- 515,862 5.3
Arthur E. Reiner (6)(7)..... 167,735 2.2 -- -- 167,735 1.7
Norman S. Matthews (8)...... 46,667 * -- -- 46,667 *
Warren C. Smith, Jr. (9).... 29,168 * -- 3,521 25,647 *
Barry D. Scheckner
(6)(10)................... 15,600 * -- -- 15,600 *
Leslie A. Philip (6)(11).... 13,333 * -- -- 13,333 *
Edward Stein (6)(12)........ 11,533 * -- -- 11,533 *
James Martin Kaplan (6)..... 4,000 * -- -- 4,000 *
All Directors and Executive
Officers as a group (11
persons) (13)............. 4,794,284 62.1% 953,029 278,474 3,562,781 35.9%
John W. Childs.............. 43,784 * -- 5,285 38,499 *
David V. Harkins (14)....... 29,180 * -- 3,522 25,658 *
C. Hunter Boll (15)......... 21,881 * -- 2,641 19,240 *
Scott A. Schoen (16)........ 14,499 * -- 1,750 12,749 *
Thomas M. Hagerty (17)...... 13,124 * -- 1,584 11,540 *
Anthony J. Dinovi (18)...... 13,123 * -- 1,584 11,539 *
Steven G. Segal (19)........ 9,825 * -- 1,186 8,639 *
Thomas R. Shepherd.......... 8,754 * -- 1,057 7,697 *
Joseph I. Incandela......... 4,794 * -- 579 4,215 *
Glenn A. Hopkins (20)....... 4,367 * -- 527 3,840 *
SGS Family Limited
Partnership............... 3,296 * -- 398 2,898 *
Charles W. Robins........... 2,057 * -- 248 1,809 *

James Westra................ 2,057 * -- 248 1,809 *
Terrence M. Mullen.......... 1,969 * -- 238 1,731 *
Adam L. Suttin.............. 1,644 * -- 198 1,446 *
Andrew D. Flaster........... 1,023 * -- 123 900 *
Wendy L. Masler............. 955 * -- 115 840 *
Kristina A. Weinberg........ 955 * -- 115 840 *
Todd M. Abbrecht............ 791 * -- 96 695 *
Kent R. Weldon.............. 263 * -- 32 231 *
</TABLE>

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

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

(2) Each Over-Allotment Selling Stockholder is a Lee Investor, including
certain present and former employees of Thomas H. Lee Company. See 'Risk
Factors -- Concentration of Ownership'.

(Footnotes continued on next page)

50
<PAGE>
(Footnotes continued from previous page)
(3) Includes 2,048,808 shares of Common Stock held of record by Thomas H. Lee
Equity Partners, L.P. ('THLEP'), the general partner of which is THL Equity
Advisors Limited Partnership, a Massachusetts limited partnership of which
Mr. Lee is a general partner, and 298,721 shares of Common Stock held of
record by 1989 Thomas H. Lee Nominee Trust (the 'Nominee Trust'). If the
over-allotment option is exercised in full, THLEP will sell 247,298 shares
and the Nominee Trust will sell 27,655 shares, following which 1,801,510
shares of Common Stock will be held of record by THLEP and 271,066 will be
held of record by the Nominee Trust. If the over-allotment option is not
exercised, Mr. Lee will beneficially own 24.4% of the Common Stock
following the Offering. Mr. Lee's address is c/o Thomas H. Lee Capital,
L.L.C., 590 Madison Avenue, New York, New York 10022.

(4) Includes 953,029 shares of Common Stock held of record by Equity-Linked
Investors, L.P. ('ELI-I') and 704,412 shares of Common Stock held of record
by Equity-Linked Investors-II ('ELI-II'). All 953,029 shares owned by ELI-I
are being sold in the Offering. ELI-I and ELI-II are limited partnerships,
the general partners of which are Rohit M. Desai Associates and Rohit M.
Desai Associates-II (together, the 'General Partners'), respectively. As
general partners, the General Partners have the power to vote and dispose
of these securities. Rohit M. Desai is the managing general partner of each
of the General Partners. Mr. Desai is also the sole stockholder, chairman
of the board and president of Desai Capital Management Incorporated
('DCMI'), which acts as an investment advisor to ELI-I and ELI-II. Under
the investment advisory agreements between DCMI and each of ELI-I and
ELI-II, decisions as to the voting or disposition of these securities may
be made by DCMI. DCMI and Mr. Desai disclaim beneficial ownership of the
securities. The address of Mr. Desai, ELI-I and ELI-II is c/o Desai Capital

Management Incorporated, 540 Madison Avenue, New York, New York 10022.

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

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

(7) Includes options to acquire 23,088 shares of Common Stock granted in 1994
having an exercise price of $14.00 per share. In accordance with applicable
Commission rules, does not include 346,175 shares subject to options not
exercisable within 60 days.

(8) Includes options to acquire 13,333 shares of Common Stock granted in 1993
having an exercise price of $12.00 per share, options to acquire 13,334
shares of Common Stock granted in 1993 having an exercise price of $16.50
per share, options to acquire 10,000 shares of Common Stock granted in 1995
having an exercise price of $14.00 per share and options to acquire 10,000
shares of Common Stock granted in 1996 having an exercise price of $11.16
per share. Mr. Matthew's address is 650 Madison Avenue, New York, New York
10022.

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

(10) Includes options to acquire 9,600 shares of Common Stock granted in 1993
having an exercise price of $7.23 per share and options to acquire 4,000
shares of Common Stock granted in 1995 having an exercise price of $14.00
per share.

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

(12) Includes options to acquire 7,200 shares of Common Stock granted in 1993
having an exercise price of $7.23 per share and options to acquire 3,333
shares of Common Stock granted in 1995 having an exercise price of $14.00
per share.

(13) Includes options to acquire 147,221 shares having exercise prices ranging
from $7.23 to $16.50 per share.

(14) Includes options to acquire 14,596 shares from the Nominee Trust.

(15) Includes options to acquire 10,943 shares from the Nominee Trust.

(16) Includes options to acquire 7,614 shares from the Nominee Trust.

(17) Includes options to acquire 6,563 shares from the Nominee Trust.

(18) Includes options to acquire 6,562 shares from the Nominee Trust.

(19) Includes options to acquire 6,563 shares from the Nominee Trust.

(20) Includes options to acquire 2,184 shares from the Nominee Trust.

51
<PAGE>
CERTAIN TRANSACTIONS

THE 1993 RECAPITALIZATION

In connection with the Recapitalization Transactions, the Lee Investors and
the Desai Investors invested in units consisting of the Company's Series C
Preferred Stock and Common Stock. Concurrently, certain other existing classes
of preferred stock and all outstanding warrants to purchase Common Stock were
redeemed. These equity related transactions resulted in the Lee Investors and
the Desai Investors obtaining beneficial ownership of 52.6% of the
then-outstanding Common Stock.

The Recapitalization Transactions also included the public issuance by the
Company of units consisting of the Debentures and Common Stock, the public
issuance by Finlay Jewelry of the Notes and the refinancing of the Company's
outstanding term loans and revolving indebtedness with the Revolving Credit
Facility. In connection with the Recapitalization Transactions, certain
executive officers and directors of the Company and Finlay Jewelry entered into
new employment agreements with Finlay. Also in connection with the
Recapitalization Transactions, Finlay entered into the Lee Management Agreement
with an affiliate of the Lee Investors and the Desai Management Agreement with
an affiliate of the Desai Investors. In July 1993, Finlay entered into a
consulting agreement with Norman Matthews, which agreement was terminated, in
part, upon completion of the Initial Public Offering. See '-- Employment
Agreements and Change of Control Arrangements', '-- Compensation Committee
Interlocks and Insider Participation' and '-- Directors' Compensation' under the
caption 'Management -- Executive Compensation'.

THE INITIAL PUBLIC OFFERING, SERIES C EXCHANGE AND STOCKHOLDER PURCHASE

In April 1995, the Company completed the Initial Public Offering, in which
2,615,000 shares of Common Stock were sold to the public at a price of $14.00
per share, 2,500,000 of which were sold by the Company and 115,000 of which were
sold by certain non-management selling stockholders. The Company used the net
proceeds of the Initial Public Offering to repurchase a portion of the
outstanding Debentures and the balance thereof to reduce a portion of the
outstanding balance under, and accrued interest on, the Revolving Credit
Facility and to pay transaction costs. As part of the Initial Public Offering,
the Lee Investors, the Desai Investors and the Management Stockholders purchased
an aggregate of 208,163 shares of Common Stock from the underwriters of the
Initial Public Offering at the initial public offering price of $14.00 per
share. Immediately prior to completion of the Initial Public Offering, the
holders of the Company's Series C Preferred Stock exchanged all outstanding
shares of Series C Preferred Stock with the Company for 2,581,784 shares of
Common Stock. For the purposes of the Series C Exchange, the outstanding Series
C Preferred Stock was (i) valued at its liquidation value of $30,000,000 plus
$6,145,000 of accrued dividends through April 13, 1995, paid in kind at a
quarterly rate of 2.5%, and (ii) exchanged for Common Stock at the price of the
Initial Public Offering. In connection with the Series C Exchange, a $10,000,000

non-recurring, non-cash charge representing the difference between the
liquidation value and the carrying value of the Series C Preferred Stock was
recorded.

STOCKHOLDERS' AGREEMENT

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

The Stockholders' Agreement, as amended, provides that the parties thereto
must vote their shares to fix the number of members of the Board of Directors of
the Company at eight and to vote in favor of six directors who are nominated as
follows: two by the Lee Investors; one by the Desai Investors; two by Mr.
Cornstein (one of whom must be a management employee of the Company); and one by

52
<PAGE>
Mr. Reiner. Notwithstanding the foregoing, the right of various persons to
designate directors will be reduced or eliminated at such time as they own less
than certain specified percentages of the shares of Common Stock then
outstanding or in certain cases are no longer an employee of the Company. The
designees of the Lee Investors currently serving on the Board of Directors are
Messrs. Lee and Smith; the designee of the Desai Investors is Mr. Desai; the
designees of Mr. Cornstein are Messrs. Cornstein and Kaplan; and Mr. Reiner is
his own designee. The Stockholders' Agreement also provides for the Executive
Committee to consist of five directors, including one director not a party to
the Stockholders' Agreement selected by the Board of Directors, one member
designated by Mr. Lee (so long as the Lee Investors have the right to designate
a nominee for director), one member designated by the Desai Investors (so long
as the Desai Investors have the right to designate a nominee for director) and
two members designated by Mr. Cornstein (which number will be reduced to one if
Mr. Cornstein is only entitled to designate one nominee for director and none if
Mr. Cornstein ceases to have the right to designate a nominee for director).
When a stockholder or group of stockholders loses the right to designate a
director, such director is to be designated instead by a majority of the
directors of the Company. The Executive Committee of the Company's Board
consists at present of Messrs. Lee, Desai, Matthews, Cornstein and Kaplan.

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

REGISTRATION RIGHTS AGREEMENT

The Registration Rights Agreement grants certain registration rights to the
Lee Investors, the Desai Investors, certain other investors and the Management
Stockholders. Lee Investors and Desai Investors who together hold at least 31%
of the outstanding 'Registrable Securities' (as defined in the Registration
Rights Agreement) are entitled to request jointly, and the Company shall be
obligated to effect, up to three registrations of 'Registrable Securities'. On
or after June 1, 1998, the Lee Investors and the Desai Investors may demand
registration without the other under certain circumstances. The Registration
Rights Agreement also provides that stockholders who are parties thereto (other
than the Lee Investors and the Desai Investors) holding in the aggregate at
least 20% of the 'Registrable Securities' then outstanding will have the right
on one occasion to require the Company to file a registration statement with the
Commission covering all or a portion of their 'Registrable Securities' in
certain circumstances. In addition, under the Registration Rights Agreement, if
the Company proposes to register shares of Common Stock under the Securities
Act, either for its own account or for the account of others (other than a
registration statement that relates to employee benefit plans or is otherwise
unavailable for registering the 'Registrable Securities' for sale to the
public), then each party to the Registration Rights Agreement will have the
right, subject to certain restrictions and priorities, to request that the
Company register its shares of Common Stock in connection with such
registration. Equity-Linked Investors, L.P., one of the Desai Investors, has
requested that the Company register all of the 953,029 shares of Common Stock
owned by it for sale in the Offering. See 'Principal and Selling Stockholders'.
Under the Registration Rights Agreement, the holders of 'Registrable
Securities', on the one hand, and the Company, on the other, agree to indemnify
each other for certain liabilities, including liabilities under the Securities
Act, in connection with any registration of shares subject to the Registration
Rights Agreement.

CERTAIN OTHER TRANSACTIONS

Prior to completion of the Initial Public Offering, Finlay entered into
indemnification agreements with each of Finlay's directors and certain executive
officers. The indemnification agreements require, among other things, that
Finlay indemnify its directors and executive officers against certain
liabilities and associated expenses arising from their service as directors and
executive officers of Finlay and reimburse certain related legal and other
expenses. In the event of a Change of Control (as defined

53
<PAGE>
therein) Finlay will, upon request by an indemnitee under the agreements, create
and fund a trust for the benefit of such indemnitee sufficient to satisfy
reasonably anticipated claims for indemnification. Finlay covers each director
and certain executive officers under a directors and officers liability policy
maintained by Finlay in such amounts as the Board of Directors of the Company
finds reasonable. Although the indemnification agreements offer coverage similar
to the provisions in the Company's Certificate of Incorporation and the DGCL,
they provide greater assurance to directors and officers that indemnification
will be available, because, as contracts, they cannot be modified unilaterally
in the future by the Board of Directors or by the stockholders to eliminate the

rights they provide.

The law firm of Zimet, Haines, Friedman & Kaplan provides legal services to
Finlay Jewelry and the Company. James Martin Kaplan, a director of Finlay
Jewelry and the Company, is a partner with Zimet, Haines, Friedman & Kaplan. In
1995, Finlay Jewelry and the Company paid an aggregate of $904,460 for legal
services rendered to them by such law firm.

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

DESCRIPTION OF CAPITAL STOCK

Prior to giving effect to the Offering, the authorized capital stock of the
Company consists of 25,000,000 shares of Common Stock, par value $.01 per share,
and 1,000,000 shares of preferred stock, par value $.01 per share, of which
7,569,478 shares of Common Stock are outstanding and no shares of Preferred
Stock are outstanding. The only shares of Common Stock reserved for issuance by
the Company's Board of Directors are the 1,002,846 shares of Common Stock
reserved for future issuance pursuant to the Incentive Plans. See 'Risk Factors
- -- Limited Public Market for Common Stock; Volatility of Market Price'.

Immediately following consummation of the Offering, the authorized capital
stock of the Company will consist of (i) 25,000,000 shares of Common Stock, of
which 9,616,449 shares will be outstanding and (ii) 1,000,000 shares of
preferred stock, none of which shares will be outstanding.

COMMON STOCK

VOTING RIGHTS. The Company's Certificate of Incorporation provides that
holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. The stockholders are not entitled to vote
cumulatively for the election of directors.

DIVIDENDS. Each share of Common Stock is entitled to receive dividends if,
as and when declared by the Board of Directors. Under Delaware law, a
corporation may declare and pay dividends out of surplus, or if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding year. No dividends may be declared, however, if
the capital of the corporation has been diminished by depreciation in the value
of its property, losses or otherwise to an amount less than the aggregate amount
of capital represented by any issued and outstanding stock having a preference
on the distribution of assets. Finlay's debt arrangements limit the ability of
the Company to pay dividends. See 'Risk Factors -- Substantial Leverage', 'Risk
Factors -- Restriction on Payment of Dividends' and 'Dividend Policy'. The
Company expects that there will be no source of funds available to it for the
payment of distributions other than dividends or other distributions paid to the
Company by Finlay Jewelry.

OTHER RIGHTS. Stockholders of the Company have no preemptive or other
rights to subscribe for additional shares. Subject to any rights of holders of
any preferred stock that may be issued subsequent to the Offering, all holders

of Common Stock are entitled to share equally on a share-for-share basis in any
assets available for distribution to stockholders on liquidation, dissolution or
winding up of the Company. No shares of Common Stock are subject to redemption
or a sinking fund. All outstanding shares of Common Stock are validly issued,
fully paid and nonassessable.

54
<PAGE>
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the
Common Stock is Marine Midland Bank.

PREFERRED STOCK

The Company's ability to issue preferred stock is subject to restrictions
contained in the Indentures and the Revolving Credit Agreement. Future financing
agreements may also restrict the Company's ability to issue preferred stock. The
Company's Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock from time to time in one or more classes or series and with such
voting powers, full or limited, or without voting powers, and with such
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, as the
Board of Directors may be permitted to fix under the laws of the State of
Delaware as in effect at the time such class or series is created.

CLASSIFICATION OF DIRECTORS

The Company's Board of Directors is classified into three classes which
shall at all times contain, as nearly as practicable, an equal number of
directors. The members of each class will serve staggered three-year terms. At
each annual meeting of stockholders, Directors will be elected for a full
three-year term to succeed those Directors whose terms are expiring. The
Company's classified Board of Directors could have the effect of increasing the
length of time necessary to change the composition of a majority of the Board of
Directors. In general, at least two annual meetings of stockholders will be
necessary for stockholders to effect a change in a majority of the members of
the Board of Directors. See 'Management -- Executive Officers and Directors' and
'Certain Transactions -- Stockholders' Agreement'.

DIRECTORS' LIABILITY

The Company has included in its Certificate of Incorporation provisions to
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty. This provision does not eliminate
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
violations under Section 174 of the DGCL concerning the unlawful payment of
dividends or stock redemptions or repurchases or for any transaction from which
the director derived an improper personal benefit. However, these provisions
will not limit the liability of the Company's directors under federal securities
laws. Management believes that these provisions are necessary to attract and
retain qualified persons as directors and officers.

SECTION 203 OF THE DGCL

The Company is subject to Section 203 of the DGCL. Section 203 prohibits
publicly held Delaware corporations from engaging in a 'business combination'
with an 'interested stockholder' for a period of three years following the time
of the transaction in which the person or entity became an interested
stockholder, unless (i) prior to such time, either the business combination or
the transaction which resulted in the stockholder becoming an interested
stockholder is approved by the Board of Directors of the corporation, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
outstanding voting stock of the corporation (excluding for this purpose certain
shares owned by persons who are directors and also officers of the corporation
and by certain employee benefit plans) or (iii) at or after such time the
business combination is approved by the Board of Directors of the corporation
and by the affirmative vote (and not by written consent) of at least 66-2/3% of
the outstanding voting stock which is not owned by the interested stockholder.
For the purposes of Section 203, a 'business combination' is broadly defined to
include mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. An 'interested stockholder' is a person
who, together with affiliates and associates, owns (or within the immediately
preceding three years did own) 15% or more of the corporation's voting stock.
The Lee Investors and the Desai Investors are not subject to the foregoing
restrictions.

55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
9,616,449 shares of Common Stock. Of the 9,616,449 shares of Common Stock
outstanding, the 3,000,000 shares offered hereby are being registered under the
Securities Act. In addition, 2,615,000 shares were registered under the
Securities Act and sold in the Initial Public Offering and 130,667 shares were
registered under the Securities Act when issued by the Company and sold in units
with the Debentures in May 1993. All of such shares will be freely tradeable
without restriction or further registration under the Securities Act, except for
any shares purchased or acquired by an 'affiliate' of the Company (as that term
is defined under the rules and regulations under the Securities Act). In
addition, the outstanding shares of Common Stock include an aggregate of
1,065,879 shares purchased by the Lee Investors and the Desai Investors in May
1993 in connection with the Recapitalization Transactions which were registered
under the Securities Act when issued by the Company and are not 'restricted
securities' within the meaning of Rule 144; however, so long as the holders of
such shares remain 'affiliates' and for 90 days thereafter, any sales of such
shares will be subject to the volume limitations and certain other restrictions
specified in Rule 144. The outstanding Common Stock also includes 79,750 shares
issued upon the exercise of options under the 1993 Plan, all of which were
registered under the Securities Act and are freely tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased or acquired by an 'affiliate' of the Company. The remaining shares of
Common Stock are 'restricted securities' and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemptions contained in Rule 144.

The Company has reserved 1,002,846 shares for future issuance pursuant to

the Incentive Plans. All of these shares have been registered under the
Securities Act and will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased or
acquired by an 'affiliate' of the Company.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned 'restricted' shares for
at least one year, including persons who may be deemed to be 'affiliates' of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock (96,164 shares after giving effect to the Offering) or (ii) the
average weekly trading volume of Common Stock during the four calendar weeks
preceding the date on which a notice of sale is filed with the Commission. A
person (or persons whose shares are aggregated) who is not at any time during
the 90 days preceding a sale an 'affiliate' is entitled to sell such shares
under Rule 144, commencing two years after the date such shares were acquired
from the Company or an affiliate of the Company, without regard to the volume
limitations described above. As currently defined in Rule 144, an 'affiliate' of
an issuer is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such issuer. Sales under Rule 144 are subject to certain other restrictions
relating to manner of sale, notice and the availability of current public
information about the Company.

The Company has agreed not to register for sale, and the Company, the Lee
Investors, the Desai Investors, the Selling Stockholder, the Over-Allotment
Selling Stockholders and the current directors and executive officers of Finlay
who hold Common Stock or options to purchase Common Stock have agreed, during
the period beginning from the date of the Underwriting Agreement and continuing
to and including the date 180 days after the date of this Prospectus, not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities which are substantially similar to the shares of Common Stock
or which are convertible into or exchangeable for, or represent the right to
receive, shares of Common Stock or securities which are substantially similar to
the shares of Common Stock without the prior written consent of the
representatives of the Underwriters, except, in the case of the Company, the
Selling Stockholder and the Over-Allotment Selling Stockholders, for the shares
of Common Stock offered in connection with the Offering and, in the case of the
Company, securities issued by the Company pursuant to employee stock option
plans existing on the date of this Prospectus.

56
<PAGE>
The Lee Investors, the Desai Investors, the Management Stockholders and
certain other individuals have the right to demand registration under the
Securities Act of their shares of Common Stock and have the right to have their
shares of Common Stock included in future registered public offerings of
securities by the Company. These stockholders have agreed not to exercise such
rights for a period of 180 days after the date of this Prospectus without the
prior written consent of the representatives of the Underwriters. See 'Certain
Transactions -- Registration Rights Agreement'.

Prior to the Offering, there has been a limited public market for Common
Stock and no prediction can be made as to the effect, if any, that the sale or

availability for sale of additional shares of Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of significant amounts of
such shares in the public market or the availability of large amounts of shares
for sale could adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of its
equity securities. See 'Risk Factors -- Limited Market for Common Stock;
Volatility of Market Price' and 'Risk Factors -- Shares Eligible For Future
Sale'.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company, the Selling Stockholder and the Over-Allotment Selling Stockholders by
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York and for the
Underwriters by Jones, Day, Reavis & Pogue, New York, New York.

EXPERTS

The audited Consolidated Financial Statements and Notes thereto of the
Company included elsewhere in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein and in the Registration Statement in
reliance upon the authority of said firm as experts in giving said reports.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission. Reports and other information filed by the Company may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth St., N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained upon written
request from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates, and its public reference facilities in New York, New York and Chicago,
Illinois. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants (such as the
Company) that file electronically with the Commission. The address of such site
is: http://www.sec.gov.

The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
'Registration Statement') under the Securities Act, with respect to the shares
of Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. For further information,
reference is hereby made to the Registration Statement, which may be inspected

or copied at the addresses and Web site indicated above.

<PAGE>
FINLAY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants.................................................................... F-2

Consolidated Statements of Operations for the years ended January 28, 1995,
February 3, 1996 and February 1, 1997 and the twenty-six weeks ended
August 3, 1996 (unaudited) and August 2, 1997 (unaudited)................................................. F-3

Consolidated Balance Sheets as of February 3, 1996 and February 1, 1997 and as of
August 2, 1997 (unaudited)................................................................................ F-4

Consolidated Statements of Changes in Stockholders' Equity for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997 and the twenty-six weeks ended August 2, 1997
(unaudited)............................................................................................... F-5

Consolidated Statements of Cash Flows for the years ended January 28, 1995,
February 3, 1996 and February 1, 1997 and the twenty-six weeks ended August 3, 1996 (unaudited) and August
2, 1997 (unaudited)....................................................................................... F-6

Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Finlay Enterprises, Inc. and
subsidiaries as of February 3, 1996 and February 1, 1997, and the results of

their operations and their cash flows for the fifty-two weeks ended January 28,
1995, the fifty-three weeks ended February 3, 1996 and the fifty-two weeks ended
February 1, 1997 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

New York, New York
March 18, 1997

F-2

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

<TABLE>
<CAPTION>
(UNAUDITED)
TWENTY-SIX WEEKS
YEAR ENDED ENDED
----------------------------------------- --------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1995 1996 1997 1996 1997
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales......................... $ 552,090 $ 654,491 $ 685,274 $267,907 $282,652
Cost of sales................. 261,263 314,029 330,300 129,883 137,834
----------- ----------- ----------- --------- ---------
Gross margin................ 290,827 340,462 354,974 138,024 144,818
Selling, general and
administrative expenses..... 240,274 282,504 290,138 126,169 131,591
Depreciation and
amortization................ 8,910 9,659 10,840 5,384 5,692
Management transition and
consulting expense.......... 5,144 -- -- -- --
----------- ----------- ----------- --------- ---------
Income (loss) from
operations................ 36,499 48,299 53,996 6,471 7,535
Proceeds from life
insurance................... -- (5,000) -- -- --
Interest expense, net......... 28,488 29,705 31,204 15,245 16,148
----------- ----------- ----------- --------- ---------
Income (loss) before income
taxes..................... 8,011 23,594 22,792 (8,774) (8,613)
Provision (credit) for income
taxes....................... 5,280 9,343 11,035 (2,807) (3,009)
----------- ----------- ----------- --------- ---------
Net income (loss)........... 2,731 14,251 11,757 (5,967) (5,604)
Dividends and amortization of
discount on Preferred Stock
and accretion on conversion
of Preferred Stock.......... 3,332 10,717 -- -- --
----------- ----------- ----------- --------- ---------
Net income (loss) applicable
to common shares............ $ (601) $ 3,534 $ 11,757 $ (5,967) $ (5,604)
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Net income (loss) per share
applicable to common
shares...................... $ (0.27) $ 0.53 $ 1.55 $ (0.80) $ (0.75)
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Weighted average shares
outstanding (a)............. 2,260,892 6,639,727 7,569,529 7,481,027 7,497,210

----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>

- ------------------
(a) The weighted average shares outstanding for 1994 and 1995 are based on the
number of shares of Common Stock issued and outstanding after reflecting the
stock split discussed in Note 6 as if such split occurred on January 30,
1994.

The accompanying notes are an integral part of these consolidated financial
statements.
F-3

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

<TABLE>
<CAPTION>
(UNAUDITED)
FEBRUARY 3, FEBRUARY 1, AUGUST 2,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................................. $ 26,014 $ 20,846 $ 3,453
Accounts receivable -- department stores............................... 18,889 15,362 29,884
Other receivables...................................................... 2,860 4,350 7,231
Merchandise inventories................................................ 195,926 222,445 221,393
Prepaid expenses and other............................................. 1,526 1,437 2,079
----------- ----------- -----------
Total current assets................................................. 245,215 264,440 264,040
----------- ----------- -----------
Fixed assets
Equipment, fixtures and leasehold improvements......................... 65,206 73,223 81,235
Less -- accumulated depreciation and amortization...................... 22,735 21,423 25,141
----------- ----------- -----------
Fixed assets, net.................................................... 42,471 51,800 56,094
----------- ----------- -----------
Deferred charges and other assets........................................ 9,012 9,770 11,615
Goodwill................................................................. 98,447 95,263 93,646
----------- ----------- -----------
Total assets......................................................... $ 395,145 $ 421,273 $ 425,395
----------- ----------- -----------
----------- ----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable.......................................................... $ -- $ -- $ 111,522
Current portion of long-term debt...................................... 206 2 4
Accounts payable -- trade.............................................. 125,817 133,252 48,103
Accrued liabilities:
Accrued salaries and benefits........................................ 14,100 15,061 12,242
Accrued miscellaneous taxes.......................................... 4,160 4,148 5,110
Accrued insurance.................................................... 1,115 762 941
Accrued interest..................................................... 3,703 3,833 4,188
Accrued management transition and consulting......................... 2,418 1,787 1,377
Other................................................................ 16,093 15,124 8,813
Income taxes payable................................................... 10,372 12,046 3,656
Deferred income taxes.................................................. 836 809 494
----------- ----------- -----------
Total current liabilities......................................... 178,820 186,824 196,450
Long-term debt........................................................... 202,905 211,427 216,084
Other non-current liabilities............................................ 636 517 507
----------- ----------- -----------

Total liabilities................................................. 382,361 398,768 413,041
----------- ----------- -----------
Stockholders' equity
Common Stock, par value $.01 per share; authorized
25,000,000 shares; issued and outstanding 7,524,356,
7,558,838 and 7,569,478 shares, respectively......................... 75 76 76
Additional paid-in capital............................................. 47,459 47,725 47,850
Distributions to investor group in excess of carryover basis........... (24,390) (24,390) (24,390)
Note receivable from stock sale........................................ (1,001) (1,001) (1,001)
Retained earnings (deficit)............................................ (8,612) 3,145 (2,459)
Foreign currency translation adjustment................................ (747) (3,050) (7,722)
----------- ----------- -----------
12,784 22,505 12,354
----------- ----------- -----------
Total liabilities and stockholders' equity........................ $ 395,145 $ 421,273 $ 425,395
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-4

<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DISTRIBUTIONS
COMMON STOCK TO NOTE FOREIGN
----------------- ADDITIONAL INVESTOR GROUP RECEIVABLE RETAINED CURRENCY TOTAL
NUMBER PAID-IN IN EXCESS OF FROM EARNINGS TRANSLATION STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL CARRYOVER BASIS STOCK SALE (DEFICIT) ADJUSTMENT EQUITY
--------- ------ ---------- --------------- ---------- -------- ---------- -------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 29, 1994...... 2,256,107 $ 23 $(20,887) $ (24,390) $ -- $(11,545) $ -- $ (56,799)
Net income (loss)............ -- -- -- -- -- 2,731 -- 2,731
Dividends on Series C
Preferred Stock............ -- -- -- -- -- (3,332) -- (3,332)
Foreign currency translation
adjustment................. -- -- -- -- -- -- (334) (334)
Issuance of Common Stock
in exchange for
Note receivable............ 138,525 1 1,650 -- (1,001) -- -- 650
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
Balance, January 28, 1995...... 2,394,632 24 (19,237) (24,390) (1,001) (12,146) (334) (57,084)
Net income (loss)............ -- -- -- -- -- 14,251 -- 14,251
Dividends on Series C
Preferred Stock............ -- -- -- -- -- (717) -- (717)
Foreign currency translation
adjustment................. -- -- -- -- -- -- (413) (413)
Exercise of stock options.... 47,940 -- 444 -- -- -- -- 444
Issuance of Common Stock..... 2,500,000 25 30,133 -- -- -- -- 30,158
Conversion of Series C
Preferred Stock to
Common Stock............... 2,581,784 26 36,119 -- -- (10,000) -- 26,145
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
Balance, February 3, 1996...... 7,524,356 75 47,459 (24,390) (1,001) (8,612) (747) 12,784
Net income (loss)............ -- -- -- -- -- 11,757 -- 11,757
Foreign currency translation
adjustment................. -- -- -- -- -- -- (2,303) (2,303)
Exercise of stock options.... 34,482 1 266 -- -- -- -- 267
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
Balance, February 1, 1997...... 7,558,838 76 47,725 (24,390) (1,001) 3,145 (3,050) 22,505
Net income (loss)............ -- -- -- -- -- (5,604) -- (5,604)
Foreign currency translation
adjustment................. -- -- -- -- -- -- (4,672) (4,672)
Exercise of stock options.... 10,640 -- 125 -- -- -- -- 125
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
Balance, August 2, 1997
(unaudited).................. 7,569,478 $ 76 $ 47,850 $ (24,390) $ (1,001) $ (2,459) $ (7,722) $ 12,354
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
--------- ------ ---------- --------------- ---------- -------- ---------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-5

<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

(UNAUDITED)
TWENTY-SIX WEEKS
YEAR ENDED ENDED
-------------------------------------------------- ---------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1995 1996 1997 1996 1997
-------------- -------------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................. $ 2,731 $ 14,251 $ 11,757 $ (5,967) $ (5,604)
Adjustments to reconcile net income (loss) to net
cash provided from (used in) operating
activities:
Depreciation and amortization...................... 9,935 10,764 12,067 5,995 6,315
Imputed interest on debentures..................... 7,385 7,697 8,494 4,122 4,634
Other, net......................................... (1,184) (1,534) (1,105) (516) (951)
Changes in operating assets and liabilities, net of
effects from purchase of Sonab (Note 12):
(Increase) decrease in accounts and other
receivables.................................... (3,642) (9,856) 1,548 (15,522) (18,267)
Increase in merchandise inventories.............. (29,412) (35,601) (28,380) (12,965) (2,146)
(Increase) decrease in prepaid expenses and
other.......................................... 57 (267) 72 (1,642) (675)
Increase (decrease) in accounts payable and
accrued liabilities............................ 41,327 9,783 8,645 (68,393) (101,653)
Decrease in deferred income taxes................ (2,376) (539) (27) -- --
-------------- -------------- -------------- --------- --------
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES................................... 24,821 (5,302) 13,071 (94,888) (118,347)
-------------- -------------- -------------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold
improvements..................................... (11,228) (14,933) (17,533) (7,224) (8,477)
Payment for purchase of Sonab, net of cash
acquired......................................... (276) -- -- -- --
Other, net......................................... (858) (1,582) (621) (99) (1,718)
-------------- -------------- -------------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES............ (12,362) (16,515) (18,154) (7,323) (10,195)
-------------- -------------- -------------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility............ 392,911 439,720 442,947 260,421 297,109
Principal payments on revolving credit facility.... (392,911) (439,720) (442,947) (182,476) (185,587)
Repayment of Sonab loans........................... (9,418) -- -- -- --
Repurchase of debentures........................... -- (5,789) -- -- --
Net proceeds from initial public offering of common
stock............................................ -- 30,158 -- -- --

Other, net......................................... (1,103) 75 61 4 126
-------------- -------------- -------------- --------- --------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES..................................... (10,521) 24,444 61 77,949 111,648
-------------- -------------- -------------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH........................................ (5) (221) (146) (21) (499)
-------------- -------------- -------------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 1,933 2,406 (5,168) (24,283) (17,393)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 21,675 23,608 26,014 26,014 20,846
-------------- -------------- -------------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 23,608 $ 26,014 $ 20,846 $ 1,731 $ 3,453
-------------- -------------- -------------- --------- --------
-------------- -------------- -------------- --------- --------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-6

<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Finlay Enterprises, Inc. (the 'Company'), 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, Finlay Jewelry and all predecessor businesses.
Finlay is a retailer of fine jewelry products and primarily operates leased fine
jewelry departments in department stores throughout the United States and
France. Finlay also operates leased fine jewelry departments in the United
Kingdom and Germany. All references herein to leased departments refer to
departments operated pursuant to license agreements or other arrangements with
host department stores.

INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS

On April 6, 1995, the Company completed an initial public offering (the
'Initial Public Offering') of 2,500,000 shares of its common stock, par value
$.01 per share ('Common Stock'), at a price of $14.00 per share. An additional
115,000 shares were sold by non-management selling stockholders. Net proceeds
from the Initial Public Offering after deducting the underwriting discount of
$2,300,000 and expenses of approximately $2,500,000 incurred in connection with
the Initial Public Offering, were $30,200,000. The net proceeds were used to
repurchase $6,103,000 accreted balance of the Company's 12% Senior Discount
Debentures due 2005 (the 'Debentures') at a price equal to $5,789,000, or
approximately 95% of the accreted amount. The balance of the net proceeds were
used to reduce a portion of the outstanding indebtedness under Finlay's
$135,000,000 Revolving Credit Facility (the 'Revolving Credit Facility') with
General Electric Capital Corporation ('G.E. Capital'), which was accounted for
as a capital contribution to Finlay Jewelry. Refer to Note 13 for a discussion
of a subsequent amendment to the Revolving Credit Facility.

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

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

THE 1993 RECAPITALIZATION

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

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

F-7
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- ORGANIZATION OF THE COMPANY, INITIAL PUBLIC OFFERING AND THE
RECAPITALIZATION TRANSACTIONS (CONTINUED)
resulted in the Lee Investors and the Desai Investors obtaining 52.6% beneficial
ownership of the outstanding Common Stock.

The Recapitalization Transactions also included the public issuance by the
Company of units consisting of Debentures and Common Stock, the public issuance
by Finlay Jewelry of the 10 5/8 Senior Notes due 2003 (the 'Notes') and the
refinancing of the Company's outstanding term loans (the 'WCC Term Loans') and
revolving indebtedness (the 'WCC Revolving Credit Facility' and collectively
with the WCC Term Loans, the 'WCC Loans') with Westinghouse Credit Corporation
('WCC'). The WCC Revolving Credit Facility was replaced by the $110 million
Revolving Credit Facility with G.E. Capital. The Revolving Credit Facility was
amended at the time of the acquisition of Societe Nouvelle d'Achat de Bijouterie
- -S.O.N.A.B. ('Sonab') in October 1994 to, among other things, increase the
amount available thereunder to $135 million. See Notes 4, 12 and 13.

ORGANIZATION AND THE 1988 LEVERAGED RECAPITALIZATION

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 (the
'Investor Group') of SL Holdings to acquire certain operations of SL Holdings.
In connection with the reorganization ('1988 Leveraged Recapitalization'), which
resulted in the merger of a wholly owned subsidiary of the Company into SL
Holdings, SL Holdings changed its name to Finlay Fine Jewelry Corporation and
became a wholly owned subsidiary of the Company.

The 1988 Leveraged Recapitalization was accounted for as a purchase in the
accompanying financial statements. Accordingly, the excess of the purchase price
over the net assets of Finlay Jewelry has been assigned to goodwill. Since
certain members of the Investor Group beneficially owned shares of SL Holdings
before the 1988 Leveraged Recapitalization and owned shares of the Company after
the 1988 Leveraged Recapitalization, the purchase method of accounting does not

apply to their ownership interest in SL Holdings. Accordingly, for accounting
purposes, stockholders' equity reflects the total shares of SL Holdings owned by
the Investor Group at their respective adjusted historical costs, reduced by the
consideration paid for the SL Holdings shares owned by the Investor Group. This
resulted in a reduction in stockholders' equity of $24,390,000 and is reflected
as Distributions to investor group in excess of carryover basis in the
accompanying Consolidated Balance Sheets.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

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

FISCAL YEAR: The Company's fiscal year ends on the Saturday closest to
January 31. References to 1994, 1995, 1996 and 1997 relate to the fiscal years
ended on January 28, 1995, February 3, 1996, February 1, 1997 and January 31,
1998. Each of the fiscal years includes 52 weeks except 1995, which includes 53
weeks.

MERCHANDISE INVENTORIES: Consolidated inventories are stated at the lower
of cost or market with cost for the domestic operations determined by the
last-in, first-out ('LIFO') method. Market represents estimated realizable value
after providing for a normal profit margin. The cost to Finlay of gold
merchandise sold on consignment, which typically varies with the price of gold,
is not fixed until the sale is reported to the vendor following the sale of the
merchandise. Finlay at times enters into futures

F-8
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contracts, such as options or forwards, based upon the anticipated sales of gold
product in order to hedge against the risk arising from those payment
arrangements. Changes in the market value of futures contracts are accounted for
as an addition to or reduction from the inventory cost. For the years ended
January 28, 1995, February 3, 1996 and February 1, 1997, and the twenty-six
weeks ended August 3, 1996 (unaudited) and August 2, 1997 (unaudited), the
gain/loss on open futures contracts was not material. The Company did not have
any open positions in futures contracts for gold at February 3, 1996 or February
1, 1997. In May 1997, the Company entered into a hedging arrangement whereby its
exposure to the fluctuation in the price of gold is limited for the balance of
1997 (unaudited).

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

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Finlay Jewelry. All

significant intercompany transactions have been eliminated in consolidation.

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

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

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

NET INCOME (LOSS) PER SHARE: Net income (loss) per share was computed
based on the weighted average number of shares of Common Stock and common
equivalent shares outstanding. Common stock equivalents include options to
purchase Common Stock. When dilutive, stock options are included as common
equivalent shares using the treasury stock method in accordance with APB Opinion
No. 15, 'Earnings per Share.' All share and per share amounts in the
Consolidated Financial Statements reflect the Reverse Stock Split (as defined in
Note 6) in conjunction with the Initial Public Offering.

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, 'Earnings per Share.' Under SFAS No. 128, the presentation of both basic
and diluted earnings per share is required on the statements of operations for
periods ending after December 15, 1997, at which time restatement

F-9
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for prior periods will be necessary. Had the provisions of SFAS No. 128 been in
effect as of February 1, 1997 and during 1997, the Company would have reported
basic net income (loss) per share of $(0.27), $0.55 and $1.59 for 1994, 1995 and
1996, respectively, and $(0.81) (unaudited) and $(0.76) (unaudited) for the

twenty-six weeks ended August 3, 1996 and August 2, 1997, respectively. Under
SFAS No. 128, diluted net income (loss) per share is equal to the net income
(loss) per share currently disclosed by the Company.

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES: The Company has reflected
in Net income (loss) applicable to common shares, dividends and accretion on
conversion of Preferred Stock for each period presented, as appropriate.

DEBT ISSUANCE COSTS: Debt issuance costs of $8,527,000 arising principally
from the Recapitalization Transactions are being amortized using the straight
line method over the terms of the related debt agreements. These debt issuance
costs totaled approximately $5,600,000 at February 3, 1996 and $4,600,000 at
February 1, 1997. The debt issuance costs are reflected as a component of
Deferred charges and other assets in the accompanying Consolidated Balance
Sheets. Amortization of debt issuance costs for 1994, 1995 and 1996 totaled
$1,018,000, $1,037,000 and $1,056,000, respectively, and have been recorded as a
component of Interest expense, net in the accompanying Consolidated Statements
of Operations. Amortization of debt issuance costs for the twenty-six weeks
ended August 3, 1996 and August 2, 1997 totaled $599,000 (unaudited) for each
period.

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

STATEMENTS OF CASH FLOWS: The Company considers cash on hand, deposits in
banks and deposits in money market funds as cash and cash equivalents. Interest
paid during 1994, 1995 and 1996 was $20,071,000, $21,027,000 and $21,480,000,
respectively. Interest paid during the twenty-six weeks ended August 3, 1996 and
August 2, 1997 was $10,473,000 (unaudited) and $10,548,000 (unaudited),
respectively. Income taxes paid in 1994, 1995 and 1996 totaled $6,567,000,
$9,372,000 and $9,368,000, respectively. Income taxes paid for the twenty-six
weeks ended August 3, 1996 and August 2, 1997 totaled $6,325,000 (unaudited) and
$8,013,000 (unaudited), respectively. Refer to Note 12 for a discussion of the
Sonab acquisition.

FAIR VALUE OF FINANCIAL INSTRUMENTS: Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of these
instruments. Marketable securities are recorded in the financial statements at
current market values, which approximates cost. The fair values of the Company's
debt and off-balance sheet financial instruments are disclosed in Note 4.

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

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS: SFAS No. 121,
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of,' requires long-lived assets as well as identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable. Upon adoption of this

Statement in 1996 and to date, there was no impact on the Company's financial
position or results of operations.

F-10
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEASONALITY: A significant portion of Finlay's 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
11 for unaudited quarterly financial data.

UNAUDITED FINANCIAL STATEMENTS: The unaudited consolidated financial
statements for the twenty-six weeks ended August 3, 1996 and August 2, 1997 have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, the unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of the Company as of August 2, 1997, and the
results of operations and cash flows for the twenty-six weeks ended August 3,
1996 and August 2, 1997. The unaudited consolidated financial statements have
been prepared on a basis consistent with that of the audited consolidated
financial statements as of February 1, 1997. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.

NOTE 3 -- MERCHANDISE INVENTORIES

Merchandise inventories consisted of the following:

<TABLE>
<CAPTION>
(UNAUDITED)
FEBRUARY 3, FEBRUARY 1, AUGUST 2,
1996 1997 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Jewelry goods -- rings, watches and other fine
jewelry (specific identification basis)............ $ 202,860 $ 231,298 $ 230,246
Excess of specific identification cost over LIFO
inventory value.................................... 6,934 8,853 8,853
----------- ----------- -----------
$ 195,926 $ 222,445 $ 221,393
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The LIFO method had the effect of decreasing Income (loss) before income
taxes in 1994, 1995 and 1996 by $845,000, $943,000 and $1,919,000, respectively.
For the twenty-six weeks ended August 3, 1996 the LIFO method had the effect of
decreasing Income (loss) before income taxes by $391,000 (unaudited). The LIFO

method had no effect on Income (loss) before income taxes for the twenty-six
weeks ended August 2, 1997 (unaudited). Finlay determines its LIFO inventory
value by utilizing selected producer price indices published for jewelry and
watches by the Bureau of Labor Statistics. Due to the application of APB Opinion
No. 16, inventory valued at LIFO for income tax reporting purposes is
approximately $22,000,000 lower than that for financial reporting purposes at
February 1, 1997.

Approximately $199,079,000 and $194,276,000 at February 3, 1996 and
February 1, 1997, respectively, and $205,466,000 (unaudited) at August 2, 1997
of merchandise received on consignment has been excluded from Merchandise
inventories and Accounts payable-trade in the accompanying Consolidated Balance
Sheets.

In August 1995, Finlay Jewelry entered into a gold consignment agreement
(the 'Gold Consignment Agreement') with Rhode Island Hospital Trust National
Bank ('RIHT'), which expires on February 28, 1998. The Gold Consignment
Agreement enables Finlay Jewelry to receive merchandise by providing gold, or
otherwise making payment, to certain vendors who currently supply Finlay with
merchandise on consignment. While the merchandise involved remains consigned,
the consignor and title to the gold content of the merchandise changes from the
vendors to RIHT. As a result, such

F-11
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 -- MERCHANDISE INVENTORIES (CONTINUED)
vendors have reduced their working capital requirements and associated financing
costs. Consequently, Finlay has negotiated more favorable prices and terms with
the participating vendors.

Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement, up
to the lesser of (i) 85,000 fine troy ounces or (ii) $25 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At
February 3, 1996, February 1, 1997 and August 2, 1997, amounts outstanding under
the Gold Consignment Agreement totaled 22,090, 36,916 and 38,007 (unaudited)
fine troy ounces, respectively, valued at approximately $9.0 million, $12.8
million and $12.4 million (unaudited), respectively. The purchase price per
ounce is based on the daily Second London Gold Fixing. For financial statement
purposes, the consigned gold is not included in Merchandise inventories on the
Company's Consolidated Balance Sheet and, therefore, no related liability has
been recorded. RIHT charges Finlay a daily consignment fee on the dollar
equivalent value of ounces outstanding, a floating rate which, as of August 31,
1997, was approximately 3.5% per annum (unaudited). In addition, Finlay is
required to pay an unused line fee of 0.5% if the amount of gold consigned has a
value equal to or below $10 million. Included in interest expense for the years
ended February 3, 1996 and February 1, 1997 are consignment fees of $189,000 and
$638,000, respectively. For the twenty-six weeks ended August 3, 1996 and August
2, 1997, consignment fees included in interest expense totaled $257,000
(unaudited) and $298,000 (unaudited), respectively.

In conjunction with the Gold Consignment Agreement, Finlay Jewelry granted

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

The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the incurrence or creation of liens, engaging in certain
transactions with affiliates and related parties and limitations on the payment
of dividends. The Gold Consignment Agreement also contains various financial
covenants, including fixed charge coverage ratio requirements and certain
maximum debt limitations. Finlay Jewelry was in compliance with all of its
financial covenants as of and for the year ended February 1, 1997 and as of and
for the twenty-six weeks ended August 2, 1997 (unaudited).

NOTE 4 -- SHORT AND LONG-TERM DEBT

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

F-12
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- SHORT AND LONG-TERM DEBT (CONTINUED)
The Revolving Credit Facility bears interest at a rate equal to, at
Finlay's option, (i) the Index Rate (as defined) plus 1.0% or (ii) for one or
more portions of the Revolving Credit Facility of $1.0 million or any greater
integral multiple thereof, reserve adjusted LIBOR plus 2.0%. 'Index Rate' is
defined as the higher of (i) the highest daily prime or base rate publicly
announced by any of the four largest member banks of the New York Clearing House
Association and (ii) the latest rate of dealer ninety-day commercial paper as is
customarily published in the 'Money Rates' section of The Wall Street Journal.
Upon the occurrence (and during the continuance) of an event of default under
the Revolving Credit Facility, interest would accrue at a rate which is 2% in

excess of the rate otherwise applicable, and would be payable upon demand.

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

The Revolving Credit Facility contains customary covenants, including
limitations on capital expenditures, limitations on borrowing transactions
between Finlay and its officers, directors, employees and affiliates and
limitations on payments of dividends. In addition, G.E. Capital has the right to
approve (such approval not to be unreasonably withheld) certain private sales of
Common Stock. The Revolving Credit Facility also contains various financial
covenants, including minimum earnings and fixed charge coverage ratio
requirements and certain maximum debt limitations. Finlay was in compliance with
all of its financial covenants as of and for the year ended February 1, 1997 and
as of and for the twenty-six weeks ended August 2, 1997 (unaudited).

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

There were no amounts outstanding at February 3, 1996 or February 1, 1997
under the Revolving Credit Facility. There was $111,522,000 (unaudited)
outstanding at August 2, 1997 which is reflected in the Consolidated Financial
Statements as Notes Payable. The maximum amounts outstanding under the Revolving
Credit Facility during 1994, 1995 and 1996 and the twenty-six weeks ended August
3, 1996 and August 2, 1997 were $108,800,000, $99,100,000, $114,100,000,
$94,079,000 (unaudited) and $120,984,000 (unaudited), respectively. The average
amounts outstanding for the same periods were $69,300,000, $68,400,000,
$75,400,000, $70,500,000 (unaudited) and $96,400,000 (unaudited), respectively.
The weighted average interest rates (calculated based on actual interest expense
divided by the average amount outstanding during the period) were 7.6%, 8.9%,
8.0%, 8.1% (unaudited) and 8.0% (unaudited) for 1994, 1995, 1996 and the
twenty-six weeks ended August 3, 1996 and August 2, 1997, respectively.

At February 3, 1996 and February 1, 1997, Finlay had letters of credit
outstanding totaling $11.0 million and $11.1 million, respectively, which
guarantee various trade activities. At August 2, 1997 the outstanding letters of
credit totaled $5.7 million (unaudited). The contract amount of the letters of
credit approximate their fair value.

Refer to Note 13 for a discussion of a subsequent amendment to the
Revolving Credit Facility.

F-13
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
(UNAUDITED)
FEBRUARY 3, FEBRUARY 1, AUGUST 2,
1996 1997 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Senior Notes (a)..................................... $ 135,000 $ 135,000 $ 135,000
Debentures (b)....................................... 67,903 76,427 81,084
Other................................................ 208 2 4
----------- ----------- -----------
203,111 211,429 216,088
Less current portion................................. 206 2 4
----------- ----------- -----------
$ 202,905 $ 211,427 $ 216,084
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

(a) On May 26, 1993, as part of Finlay's recapitalization, Finlay Jewelry issued
10 5/8% Senior Notes due 2003 with an aggregate principal amount of
$135,000,000. Interest on the Notes is payable semi-annually on May 1 and
November 1 of each year, and commenced on November 1, 1993. Except in the
case of certain equity offerings, the Notes are not redeemable prior to May
1, 1998. Thereafter, the Notes will be redeemable, in whole or in part, at
the option of Finlay, at specified redemption prices plus accrued and unpaid
interest, if any, to the date of the redemption. In the event of a Change of
Control (as defined in the indenture with respect to the Notes (the 'Note
Indenture')), each holder of the Notes will have the right to require Finlay
Jewelry to repurchase its Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest thereon to the
repurchase date. The Notes rank senior in right of payment to all
subordinated indebtedness of Finlay and pari passu in right of payment with
all senior borrowings, including borrowings under the Revolving Credit
Facility. However, because the Revolving Credit Facility is secured by a
pledge of substantially all the assets of Finlay Jewelry, the Notes are
structurally subordinated to the borrowings under the Revolving Credit
Facility. The Note Indenture contains restrictions relating to, among other
things, the payment of dividends, the repurchase of stock and the making of
certain other restricted payments, the incurrence of additional
indebtedness, the creation of certain liens, certain asset sales
transactions with subsidiaries and other affiliates and mergers and
consolidations.

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

(b) On May 26, 1993, as part of Finlay's recapitalization, the Company sold, for
$55,167,140, an aggregate of 98,000 units consisting of $98,000,000 12%
Senior Discount Debentures due 2005 and 130,667 shares of Common Stock.
Based on a fair market value of $7.23 per share on May 26, 1993, $944,067

was allocated to Common Stock with a resulting discount to the Debentures.
Commencing May 1, 1998, interest will accrue until maturity. Interest on the
Debentures is payable semi-annually on May 1 and November 1 of each year,
commencing November 1, 1998. Except in the case of certain equity offerings,
the Debentures are not redeemable prior to May 1, 1998. In the event of a
Change of Control (as defined in the indenture with respect to the
Debentures (the 'Debenture Indenture')), each holder of the Debentures will
have the right to require the Company to repurchase its Debentures at a
purchase price equal to 101% of the principal amount thereof plus accrued
and unpaid interest thereon to the repurchase date. Thereafter, the
Debentures will be redeemable, in whole or in part, at the option of the
Company, at specified redemption prices plus accrued and unpaid interest, if
any, to the date of redemption. The Debentures rank pari passu in right of
payment to all senior indebtedness of the Company and senior in right of
payment to all subordinated indebtedness of the Company. The Debentures are
secured by a first priority lien on

F-14
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- SHORT AND LONG-TERM DEBT (CONTINUED)
and security interest in all of the issued and outstanding stock and
intercompany indebtedness, if any, of Finlay Jewelry. However, the
operations of the Company are conducted through Finlay Jewelry and,
therefore, the Company is dependent upon the cash flow of Finlay Jewelry to
meet its obligations, including its obligations under the Debentures. As a
result, the Debentures are effectively subordinated to all indebtedness and
all other obligations of Finlay Jewelry. The Debenture Indenture contains
restrictions relating to, among other things, the payment of dividends, the
repurchase of stock and the making of certain other restricted payments, the
incurrence of additional indebtedness, the creation of certain liens,
certain asset sales transactions with subsidiaries and other affiliates and
mergers and consolidations. The amount of imputed interest recorded in 1994,
1995, 1996 and the twenty-six weeks ended August 3, 1996 and August 2, 1997
was $7,385,000, $7,697,000, $8,494,000, $4,122,000 (unaudited) and
$4,634,000 (unaudited), respectively.

A portion of the proceeds from the Initial Public Offering were used to
repurchase $6,103,000 accreted balance of the Debentures at a price equal to
$5,789,000, or approximately 95% of the accreted amount.

The fair value of the Debentures, determined based on market quotes, was
$80,364,000 at February 1, 1997.

Finlay was in compliance with all of the provisions of the Note and
Debenture Indentures as of and for the year ended February 1, 1997 and as of
and for the twenty-six weeks ended August 2, 1997 (unaudited).

The aggregate amounts of long-term debt payable in each of the five years
in the period ending February 2, 2002 and thereafter are as follows:

<TABLE>

<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997...................................................... $ 2
1998...................................................... --
1999...................................................... --
2000...................................................... --
2001...................................................... --
Thereafter................................................ 211,427
--------------
$211,429
--------------
--------------
</TABLE>

Interest expense for 1994, 1995, 1996 and the twenty-six weeks ended August 3,
1996 and August 2, 1997 was $28,514,000, $29,859,000, $31,301,000, $15,267,000
(unaudited) and $16,160,000 (unaudited), respectively. Interest income for the
same periods was $26,000, $154,000, $97,000, $22,000 (unaudited) and $12,000
(unaudited), respectively.

NOTE 5 -- SERIES C PREFERRED STOCK

Concurrently with the consummation of the Recapitalization Transactions,
the Company and Finlay Jewelry entered into a stock purchase agreement (the
'1993 Stock Purchase Agreement') with the Lee/Desai Investors, pursuant to which
the Lee/Desai Investors purchased from the Company the Lee/Desai Units
consisting of an aggregate of 1,384,259 shares of Common Stock of the Company
and 300,000 shares of Series C Preferred Stock. The Common Stock issued to the
Lee/Desai Investors as part of the Lee/Desai Units constituted 52.6% of the
outstanding Common Stock of the Company on a fully diluted basis. The aggregate
purchase price for the Lee/Desai Units, payable to the Company in cash at the
closing, was $30 million, of which $10 million was allocated to the Common Stock
of the

F-15
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- SERIES C PREFERRED STOCK (CONTINUED)
Company and $20 million was allocated to the Series C Preferred Stock.
Immediately prior to the Initial Public Offering, as a result of the Series C
Exchange, the holders of the Series C Preferred Stock exchanged all outstanding
shares of Series C Preferred Stock for shares of Common Stock. In conjunction
with the Series C Exchange, a $10,000,000 nonrecurring noncash charge
representing the difference between the liquidation value and the carrying value
of the Series C Preferred Stock was recorded, decreasing Net income (loss)
applicable to common shares in 1995. See Note 1. Dividends accrued in 1994 and
1995 totaled $3,332,000 and $717,000, respectively.

NOTE 6 -- STOCKHOLDERS' EQUITY

The Company's Long Term Incentive Plan (the '1993 Plan') permits the
Company to grant to key employees of the Company and its subsidiaries,
consultants and certain other persons, and directors of the Company (other than
members of the Compensation Committee of the Company's Board of Directors), the
following: (i) stock options; (ii) stock appreciation rights in tandem with
stock options; (iii) limited stock appreciation rights in tandem with stock
options; (iv) restricted or nonrestricted stock awards subject to such terms and
conditions as the Compensation Committee shall determine; (v) performance units
which are based upon attainment of performance goals during a period of not less
than two nor more than five years and which may be settled in cash or in Common
Stock in the discretion of the Compensation Committee; or (vi) any combination
of the foregoing. Under the 1993 Plan, the Company may grant stock options which
are either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the 'Code'), or non-incentive stock
options. As of February 1, 1997, an aggregate of 663,486 shares of Common Stock
of the Company has been reserved for issuance pursuant to the 1993 Plan.

The Company has adopted the disclosure-only provisions of SFAS No. 123,
'Accounting for Stock-Based Compensation,' which became effective in 1996. As
permitted by SFAS No. 123, the Company has elected to continue to account for
stock-based compensation using the intrinsic value method. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the fair value method of accounting been applied to the Company's stock
option plans, which requires recognition of compensation cost ratably over the
vesting period of the stock options, net income would have been reduced by
$228,000, or $0.03 per share, in 1995 and $219,000, or $0.03 per share, in 1996.
This pro forma impact only reflects options granted since the beginning of 1995
and therefore the resulting compensation cost may not be representative of that
to be expected in future years.

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

F-16
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 -- STOCKHOLDERS' EQUITY (CONTINUED)
The following summarizes the transactions pursuant to the 1993 Plan for
1994, 1995 and 1996:

<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ---------------------- ----------------------
NUMBER OF WTD. AVG. NUMBER OF WTD. AVG. NUMBER OF WTD. AVG.
OPTIONS EX. PRICE OPTIONS EX. PRICE OPTIONS EX. PRICE
--------- --------- --------- --------- --------- ---------

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

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

On March 5, 1997, a senior officer of the Company received options under
the 1993 Plan to purchase an aggregate of 139,719 shares of Common Stock at an
exercise price of $14.00 per share. Such options vest and become exercisable on
January 2, 2001.

On March 6, 1997, the Board of Directors of the Company adopted the 1997
Long Term Incentive Plan ('1997 Plan'), which was approved by the Company's
stockholders in June 1997. The 1997 Plan, which is similar to the 1993 Plan, is
intended as a successor to the 1993 Plan and provides for the grant of the same
types of awards as were available under the 1993 Plan. The 1997 Plan provides,
however, that no participant thereunder may be granted, during any fiscal year,
options or other awards relating to more than 175,000 shares of Common Stock. An
aggregate of 350,000 shares of the Company's Common Stock have been reserved for
issuance pursuant to the 1997 Plan, of which a total of 312,815 shares
(unaudited) as of September 1, 1997 are subject to options granted to certain
senior management, key employees and a director. The exercise price of such
options range from $13.875 per share to $14.875 per share.

Upon the commencement of his employment, a senior officer of the Company
purchased 138,525 shares of Common Stock (the 'Purchased Shares'), at a price of
$7.23 per share. The aggregate purchase price of these shares was paid in the
form of a note issued to the Company in the amount of $1,001,538. The note is
secured by the Purchased Shares and certain proceeds from sale of the Purchased
Shares or any distribution paid on or with respect to the Purchased Shares.
Interest accrues on the unpaid balance of the note at a rate equal to 7.92% per
annum, compounded annually. In the event of termination of employment, the
Purchased Shares (together with vested options and shares issued upon exercise
of vested options ('Option Shares')) are subject to certain call rights and the
Option Shares are additionally subject to certain put rights. In the event the
Company does not exercise its call rights, the rights may be exercised by the
Lee Investors and the Desai Investors, pro rata based on their respective
ownership of Common Stock. The Purchased Shares and Option Shares are subject to
certain restrictions on transfer. As a result of the terms of the note, the
amount of the note is reflected as a reduction to equity and is reflected in the
Company's Consolidated Balance Sheets as Note receivable from stock sale. The
Company recorded $650,000 of compensation expense in 1994 representing the
excess of the fair market value over the purchase price of these shares.

In connection with and prior to the Initial Public Offering and the related
transactions, the Board of Directors and the shareholders of the Company
approved a change in the Company's capital stock to authorize 25,000,000 shares
of Common Stock, par value $.01 per share. On March 7, 1995, the Company
effected a two-for-three stock combination of its issued and outstanding Common
Stock (the

F-17
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 -- STOCKHOLDERS' EQUITY (CONTINUED)
'Reverse Stock Split'). Stockholders' equity has been retroactively restated to
reflect the impact of the Reverse Stock Split.

NOTE 7 -- LEASE AGREEMENTS

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

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

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

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

<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED TWENTY-SIX WEEKS ENDED
----------------------------------------- --------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Minimum fees....................... $ 8,606 $ 10,555 $ 6,188 $ 2,437 $ 3,810
Contingent fees.................... 80,211 94,679 103,319 40,442 41,705
----------- ----------- ----------- ----------- -----------
Total......................... $88,817 $ 105,234 $ 109,507 $42,879 $45,515
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

</TABLE>

Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows as of February 1, 1997:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997...................................................... $ 9,732
1998...................................................... 3,876
1999...................................................... 3,368
2000...................................................... 2,978
2001...................................................... 2,417
Thereafter................................................ 13,089
--------------
Total minimum payments required...................... $ 35,460
--------------
--------------
</TABLE>

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

NOTE 8 -- PENSION PLANS

Finlay maintains a defined contribution profit-sharing plan to provide
retirement benefits for all personnel. This plan provides for company matching
contributions of $.25 for each $1.00 of employee contribution, up to 5% of the
employee's salary, as limited by the Code. Additionally, Finlay contributes

F-18
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- PENSION PLANS (CONTINUED)
2% of the employees' earnings annually, as limited by the Code. Vesting in
Finlay's contributions begins upon completion of three years of employment and
accrues at the rate of 20% per year.

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

The cost of the defined contribution plan maintained by Finlay and the
retirement benefits for certain former employees aggregated $1,603,000,
$1,728,000, $1,753,000, $840,000 (unaudited) and $865,000 (unaudited) for 1994,
1995, 1996 and for the twenty-six weeks ended August 3, 1996 and August 2, 1997,
respectively.

NOTE 9 -- INCOME TAXES

For income tax reporting purposes, the Company has an October 31 year end.
The Company files a consolidated Federal income tax return with its 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-19

<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 -- INCOME TAXES (CONTINUED)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at year end are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
Uniform inventory capitalization..................................................... $ 3,154 $ 3,462
Expenses not currently deductible.................................................... 4,398 4,074
ITC carryover........................................................................ 1,100 1,100
AMT credit........................................................................... 566 566
Deferred financing costs-current..................................................... 200 203
----------- -----------
9,418 9,405
Valuation allowance.................................................................. 1,200 1,200
----------- -----------
Total current................................................................... 8,218 8,205
----------- -----------
Imputed interest on Debentures....................................................... 6,433 9,407
Deferred financing costs-non-current................................................. 606 371
----------- -----------
Total non-current............................................................... 7,039 9,778
----------- -----------
Total deferred tax assets.................................................... 15,257 17,983
----------- -----------
Deferred Tax Liabilities
LIFO inventory valuation............................................................. 9,054 9,014
----------- -----------
Total current................................................................... 9,054 9,014
----------- -----------
Depreciation......................................................................... 6,050 7,029
----------- -----------
Total non-current............................................................... 6,050 7,029
----------- -----------
Total deferred tax liabilities............................................... 15,104 16,043
----------- -----------
Net deferred income tax assets............................................. $ 153 $ 1,940
----------- -----------
----------- -----------
Net current deferred income tax liabilities..................................... $ (836) $ (809)
Net non-current deferred income tax assets...................................... 989 2,749
----------- -----------
Net deferred income tax assets............................................... $ 153 $ 1,940

----------- -----------
----------- -----------
</TABLE>

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

F-20
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 -- INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision computed by applying the
federal statutory rate to Income (loss) before income taxes to the Provision for
income taxes on the accompanying Consolidated Statements of Operations is as
follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory provision................................... $ 2,804 $ 8,258 $ 7,977
Foreign taxes................................................. 449 1,238 1,045
State tax, net of federal benefit............................. 1,232 1,688 1,857
Non-deductible amortization................................... 1,037 1,037 1,037
Life insurance proceeds....................................... -- (1,750) --
Benefit of foreign tax credit................................. (449) (1,238) (1,045)
Other......................................................... 207 110 164
----------- ----------- -----------
Provision for income taxes.................................... $ 5,280 $ 9,343 $11,035
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

Section 382 of the Code restricts utilization of net operating loss
carryforwards ('NOLs') after an ownership change exceeding 50%. Such utilization
is generally restricted to an annual limit computed by applying the federal
long-term tax exempt rate to the fair market value of the stock of the company
immediately prior to the time of the ownership change. As a result of the
Recapitalization Transactions, a change in ownership of the Company exceeding
50% occurred within the meaning of Section 382 of the Code (a 'Change of
Control'). Similar restrictions will apply to other carryforwards. Consequently,
there is a material limitation on the annual utilization of the Company's net
operating loss and other carryforwards which requires a deferral or loss of the
utilization of such carryforwards. The IRS permits taxpayers who obtain a
private letter ruling to close their books at the change of ownership date and
to offset pre-Change of Control income by the NOL available to that year,
regardless of the annual limitation. The Company has received such a ruling and,
as a result, at October 31, 1996, has a NOL carryforward for tax purposes of
$14,000,000 which is subject to an annual limit of approximately $2,000,000 per
year, of which $10,000,000 expires in 2004 and $4,000,000 expires in 2005. At
October 31, 1996, the Company had investment tax credit ('ITC') carryovers of
approximately $1,100,000, of which $150,000 expires in 1997, $649,000 in 1998,
$264,000 in 1999 and $37,000 in 2000. At October 31, 1996, the Company also had
alternative minimum tax credit ('AMT') carryovers of $566,000 which may be used
indefinitely to reduce federal income taxes.

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

NOTE 10 -- COMMITMENTS AND CONTINGENCIES

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

The Company has employment agreements with two senior members of management
which provide for minimum salary levels as well as incentive compensation based
on meeting specific

F-21
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
financial goals. Such agreements have remaining terms of one year and have a
remaining aggregate minimum value of approximately $1,400,000 as of February 1,
1997.

The Revolving Credit Facility with G.E. Capital, the Gold Consignment
Agreement with RIHT and the Note Indenture restrict distributions from Finlay
Jewelry to the Company to 0.25% of Finlay Jewelry's net sales for the preceding
fiscal year. During 1996, dividends of $1,636,000 were declared and $818,000 was
distributed to the Company. During 1995, dividends of $1,380,000 were declared
and $1,810,000 was distributed to the Company. During 1994, dividends of
$984,000 were declared and $738,000 was distributed to the Company. For the
twenty-six weeks ended August 2, 1997, dividends of $856,000 (unaudited) were
declared.

The Company's concentration of credit risk consists principally of accounts
receivable. Approximately 70%, 71% and 75% of Finlay's domestic sales in 1994,
1995, and 1996, respectively, were from operations in two major department store
groups of which 49%, 48% and 51% represents Finlay's domestic sales from one
department store group in the respective years. The Company believes that the
risk associated with these receivables, other than those from department store
groups indicated above, would not have a material adverse effect on the
Company's financial position or results of operations.

The Company is committed to expend a total of approximately $17,500,000 for
the completion of a 106,200 square foot distribution and warehouse facility in
Orange, Connecticut, of which approximately $6,000,000 has been disbursed during
1996. Expenditures included the purchase of machinery and equipment,
construction costs and the purchase and installation of computer systems.

F-22

<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table summarizes the quarterly financial data for 1994, 1995,
1996 and the thirteen weeks ended May 3, 1997 and August 2, 1997 (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 28, 1995
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(C)
------- -------- -------- ----------
<S> <C> <C> <C> <C>
Sales......................................................... $93,858 $109,209 $109,657 $ 239,366
Gross margin.................................................. 49,087 56,973 57,697 127,070
Net income (loss)............................................. (5,661) (3,344) (3,376) 15,112
Net income (loss) per share applicable to common shares (a)... (2.87) (1.85) (1.87) 6.26
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 3, 1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(B) QUARTER(C) QUARTER QUARTER
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Sales........................................................ $112,716 $135,428 $132,058 $ 274,289
Gross margin................................................. 58,875 70,327 68,773 142,487
Net income (loss)............................................ (5,381) 3,171 (2,760) 19,221
Net income (loss) per share applicable to common shares (a).. (4.36) 0.42 (0.37) 2.55
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1, 1997
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Sales........................................................ $130,719 $137,188 $136,140 $ 281,227
Gross margin................................................. 66,681 71,343 70,360 146,590
Net income (loss)............................................ (4,400) (1,567) (2,637) 20,361
Net income (loss) per share applicable to common shares (a).. (0.59) (0.21) (0.35) 2.67
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998

----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Sales........................................................ $134,592 $148,060 -- --
Gross margin................................................. 68,870 75,948 -- --
Net income (loss)............................................ (4,226) (1,378) -- --
Net income (loss) per share applicable to common shares (a).. (0.56) (0.18) -- --
</TABLE>

- ------------------
(a) 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.

(b) The first quarter of 1995 includes a $10,000,000 nonrecurring, noncash
charge relating to the conversion of the Series C Preferred Stock. See Note
5.

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

F-23
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 -- ACQUISITIONS

On October 28, 1994, Finlay Jewelry completed the acquisition of Sonab, a
French company which at that time operated 95 leased jewelry departments and
three free standing locations in France. The leased fine jewelry departments
operate in department stores such as Galeries Lafayette, Nouvelles Galeries and
Monoprix, S.A. Simultaneously with the acquisition of Sonab, G.E. Capital agreed
to provide additional financing by increasing Finlay's Revolving Credit Facility
by $25,000,000, from $110,000,000 to $135,000,000. The acquisition was recorded
under the purchase method of accounting. The Sonab acquisition required
approximately $11,000,000 primarily for the purpose of repaying existing
intercompany loans to Galeries Lafayette, as well as an outstanding gold credit
line. Finlay Jewelry paid approximately $356,000 for the common stock of Sonab.
Goodwill associated with this transaction was not significant.

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

<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED
JANUARY 28, 1995
----------------
<S> <C>
Sales.................................................. $572,965
Net income............................................. $ 3,356
Net income per share................................... $ 0.01
</TABLE>

NOTE 13 -- SUBSEQUENT EVENTS (UNAUDITED)

On September 11, 1997, Finlay amended its $135,000,000 Revolving Credit
Facility by (i) increasing the line of credit to $175,000,000, (ii) including
eligible international assets in the borrowing base formula, (iii) reducing
interest rates, (iv) permitting higher balances during the annual balance
reduction period and (v) extending the maturity date from May 1998 to March
2003.

On October 6, 1997, Finlay completed the previously announced acquisition
of certain assets of the Diamond Park Fine Jewelers division of Zale Corporation
('Diamond Park'), a leading operator of departments, for approximately $63
million. By acquiring Diamond Park, Finlay added 139 departments that had total
sales of approximately $93 million for the twelve months ended February 1, 1997
and also added new host store relationships with Mercantile Stores, Marshall
Field's and Parisian. Upon completion of the Diamond Park Acquisition, the line
of credit was further increased to $225,000,000 and permitted balances during
the annual balance reduction period were further increased. Finlay financed the
Diamond Park Acquisition with borrowings under the Revolving Credit Facility.

The Company is in the process of a public offering of 3,000,000 shares of
its Common Stock (the 'Offering'), of which 2,046,971 shares are to be issued
and sold by the Company. Upon the completion of the Offering, the Company
expects to use the net proceeds to it therefrom for working capital, repayment
of indebtedness or other general corporate purposes.

F-24

<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholder have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., Donaldson, Lufkin & Jenrette Securities Corporation and SBC Warburg
Dillon Read Inc. are acting as representatives, has severally agreed to purchase
from the Company and the Selling Stockholder, the respective number of shares of
Common Stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
- ---------------------------------------------------------------------------------------------------- ---------
<S> <C>
Goldman, Sachs & Co................................................................................. 703,334
Donaldson, Lufkin & Jenrette Securities Corporation................................................. 703,333
SBC Warburg Dillon Read Inc......................................................................... 703,333
George K. Baum & Company............................................................................ 45,000
Bear, Stearns & Co. Inc............................................................................. 95,000
A.G. Edwards & Sons, Inc............................................................................ 95,000
EVEREN Securities, Inc.............................................................................. 95,000
Janney Montgomery Scott Inc......................................................................... 45,000
McDonald & Company Securities, Inc.................................................................. 45,000
Needham & Company, Inc.............................................................................. 45,000
BancAmerica Robertson Stephens...................................................................... 95,000
Rodman & Renshaw, Inc............................................................................... 45,000
Smith Barney Inc.................................................................................... 95,000
Sutro & Co. Incorporated............................................................................ 95,000
Tucker Anthony Incorporated......................................................................... 95,000
---------
Total............................................................................................. 3,000,000
---------
---------
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $0.60 per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.

The Company and the Over-Allotment Selling Stockholders have granted the

Underwriters an option exercisable for 30 days after the date of this Prospectus
to purchase up to an aggregate of 150,000 and 300,000 additional shares of
Common Stock, respectively, solely to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 3,000,000 shares of Common
Stock offered. The Company has agreed with the Over-Allotment Selling
Stockholders that the first 300,000 shares as to which the Underwriters'
over-allotment option is exercised will be sold by such Over-Allotment Selling
Stockholders on a pro rata basis based on the relative amounts subject to sale
by such persons as set forth under 'Principal and Selling Stockholders', and any
of the remaining 150,000 shares as to which the Underwriters' over-allotment
option is exercised will be sold by the Company.

U-1
<PAGE>
including the date 180 days after the date of this Prospectus, not to offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock or any
securities which are substantially similar to the shares of Common Stock or
which are convertible into or exchangeable for, or represent the right to
receive, shares of Common Stock or securities which are substantially similar to
the shares of Common Stock without the prior written consent of the
representatives of the Underwriters, except, in the case of the Company, the
Selling Stockholder and the Over-Allotment Selling Stockholders for the shares
of Common Stock offered in connection with the Offering and, in the case of the
Company, securities issued by the Company pursuant to employee stock option
plans existing on the date of this Prospectus.

The Company, the Selling Stockholder and the Over-Allotment Selling
Stockholders have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.

In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions, 'passive' market making and purchases to cover
syndicate short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company and
the Selling Stockholder in the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the

Common Stock, which may be higher than the price that might otherwise prevail in
the open market, and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.

As permitted by Rule 103 under the Exchange Act, Underwriters (and any
selling group members, if any) that are market makers ('passive market makers')
in the Common Stock may make bids for or purchases of the Common Stock in the
Nasdaq National Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (i) a passive market
maker's net daily purchases of Common Stock may not exceed 30% of its average
daily trading volume in such securities for the two full consecutive calendar
months (or any 60 consecutive days ending within the ten days) immediately
preceding the filing date of the registration statement of which this Prospectus
forms a part, (ii) a passive market maker may not effect transactions or display
bids for the Common Stock at a price that exceeds the highest independent bid
for the Common Stock by persons who are not passive market makers and (iii) bids
made by passive market makers must be identified as such.

U-2

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SALE IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................. 3
Risk Factors....................................... 9
Special Note Regarding
Forward-Looking Statements....................... 14
Use of Proceeds.................................... 15
Price Range of Common Stock........................ 15
Dividend Policy.................................... 15
Capitalization..................................... 16
Selected Consolidated Financial
Information...................................... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 19
Business........................................... 26
Management......................................... 38
Principal and Selling Stockholders................. 50
Certain Transactions............................... 52
Description of Capital Stock....................... 54
Shares Eligible for Future Sale.................... 56
Legal Matters...................................... 57
Experts............................................ 57
Available Information.............................. 57
Index to Consolidated Financial
Statements....................................... F-1
Underwriting....................................... U-1
</TABLE>

3,000,000 SHARES
FINLAY ENTERPRISES, INC.
COMMON STOCK

(PAR VALUE $.01 PER SHARE)

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

[LOGO]

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

GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SBC WARBURG DILLON READ INC.
REPRESENTATIVES OF THE UNDERWRITERS

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