e10vk

STATE OF WASHINGTON

COUNTY OF KING

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended January 2, 2011
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number 000-50763

Blue Nile, Inc.

(Exact name of registrant as specified in its charter)


Delaware		91-1963165
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

705 Fifth Avenue South, Suite 900
Seattle, Washington 98104
(206) 336-6700
(Address and telephone number, including area code, of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of each exchange on which registered
Common Stock, $.001 Par Value		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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


Large accelerated filer þ		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

The aggregate market value of the voting stock held by non-affiliates of the registrant at July 4, 2010 was approximately $627 million, based on the last trading price of $45.17 per share, excluding approximately 0.4 million shares held by directors and executive officers of the registrant. This calculation does not exclude shares held by organizations whose ownership exceeds 10% of the registrant’s outstanding common stock as of July 4, 2010 that have represented on Schedule 13G filed with the Securities and Exchange Commission that they are registered investment advisers or investment companies registered under Section 8 of the Investment Company Act of 1940.

The number of shares outstanding of the registrant’s common stock as of February 17, 2011 was 14,573,161.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

PART I


Item 1.	*Business*

This Annual Report on Form 10-K contains forward-looking statements that involve many risks and uncertainties. These statements, which relate to future events and our future performance, are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management as of the date of this filing. In some cases, you can identify forward-looking statements by terms such as “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “target,” “seek,” or “continue,” the negative of these terms or other variations of such terms. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances, are forward-looking statements. These statements are only predictions based upon assumptions made that are believed to be reasonable at the time, and are subject to risk and uncertainties. Therefore, actual events or results may differ materially and adversely from those expressed in any forward-looking statement. In evaluating these statements, you should specifically consider the risks described under the caption “Item 1A Risk Factors” and elsewhere in this Form 10-K. These factors, and other factors, may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Incorporated in 1999 as a Delaware corporation, Blue Nile is the leading online retailer of high quality diamonds and fine jewelry. Our mission is to create a better way for consumers to purchase diamonds and fine jewelry. We offer an exceptional customer experience including substantial education, guidance, selection, customization capability, convenience and value. We have successfully built Blue Nile into a premium brand. Our principal corporate offices are located in Seattle, Washington.

We have three wholly-owned subsidiaries: Blue Nile, LLC (“LLC”), Blue Nile Worldwide, Inc. (“Worldwide”) and Blue Nile Jewellery, Ltd. (“Jewellery”). LLC serves our customers in the United States, Canada and Asia-Pacific. Worldwide serves customers in the European Union, and Jewellery operates a customer service and fulfillment center in Dublin, Ireland.

We derive our revenues through our three websites: www.bluenile.com, www.bluenile.ca and www.bluenile.co.uk. Our primary website serves the U.S. and 14 additional countries and territories throughout the world. All member states of the European Union (E.U.) are served from our United Kingdom (U.K.) website and Canadian customers are supported from our Canada website. Our domestic sales consist of products delivered to customers within the U.S. and our international sales consist of products delivered to customers outside the U.S. Financial information by geographic area is included in Note 11 to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

We have built a well respected consumer brand by employing an informative sales process that empowers our customers while offering a broad selection of high quality jewelry at very competitive prices. Our websites showcase tens of thousands of independently certified diamonds and styles of fine jewelry, including rings, wedding bands, earrings, necklaces, pendants, bracelets and watches. We specialize in the customization of diamond jewelry with our “Build Your Own” feature that offers customers the ability to customize diamond rings, pendants and earrings. We have developed an efficient online cost structure and a unique supply solution that eliminates traditional layers of diamond wholesalers and brokers, which generally allow us to purchase most of our product offerings at lower prices by avoiding mark-ups imposed by those intermediaries. While we may selectively acquire diamond inventory that we believe will be attractive to our customers, our supply solution enables us to purchase only those diamonds that our customers have ordered. As a result, we are able to minimize the costs associated with carrying diamond inventory and limit our risk of potential mark-downs.

The importance of a purchase of diamonds and fine jewelry leads consumers to seek out substantial information and trusted guidance throughout their purchasing process. Our comprehensive websites and

expertly trained customer service representatives (“diamond and jewelry consultants”) improve the traditional purchasing experience by providing education and detailed product information that enable our customers to objectively compare diamonds and fine jewelry products, and make informed decisions. Our websites feature an interactive search functionality that allows our customers to quickly find the products that meet their needs from our broad selection of diamonds and fine jewelry.

Business Strategies

Our objective is to maximize our revenue and profitability and increase market share both domestically and internationally by offering exceptional value to our customers through a high quality customer experience that leverages supply chain efficiencies and an efficient cost structure. We have established and will continue to refine our scalable, capital-efficient business model that enables growth with lower working capital requirements than traditional store-based jewelry retailers. We focus on optimizing the cash flow dynamics of our business by managing inventory balances along with vendor payment terms. Over the longer term, our goal is to increase revenues, profit, and cash flow by leveraging our relatively fixed cost technology and operations infrastructure as we achieve sales increases.

Blue Nile’s Product Offerings and Supplier Relationships

Our merchandise consists of high quality diamonds and fine jewelry, with a particular focus on engagement diamonds and settings. Our online business model, combined with the strength of our supplier relationships, enables us to pursue a dynamic merchandising strategy. Our exclusive diamond supplier relationships allow us to display suppliers’ diamond inventories on the Blue Nile websites for sale to consumers without holding the diamonds in our inventory until the products are ordered by customers. We purchase polished diamonds from several dozen suppliers, many of whom have long-standing relationships with us. We typically enter into multi-year agreements with diamond suppliers that provide for certain diamonds to be offered exclusively online to consumers through the Blue Nile websites. Our diamond supply agreements have expiration dates ranging from 2011 to 2015. Our diamond suppliers purchase rough and polished diamonds from sources throughout the world. Their ability to supply us with diamonds is dependent upon their ability to procure these diamonds.

While we currently offer over 70,000 independently certified diamonds, we aim to limit our diamond offerings to those possessing characteristics associated with high quality. Accordingly, we offer diamonds with specified characteristics in the areas of shape, cut, color, clarity and carat weight.

We generally purchase diamonds on a “just in time” basis from our suppliers when a customer places an order for a specific diamond. We then assemble the diamond with a ring, pendant or earring setting from our inventory into customized diamond jewelry according to our customer’s specifications. The finished jewelry is delivered to the customer generally within three business days from the order date and within one business day for Blue Nile Signature diamonds.

We offer a broad range of other fine jewelry products and watches to complement our selection of high quality customized diamond jewelry. Our fine jewelry selection includes diamond, gemstone, platinum, gold, pearl and sterling silver jewelry and accessories as well as settings, wedding bands, earrings, necklaces, pendants and bracelets. In the case of fine jewelry, unlike most diamonds that we sell, we typically take products into inventory before they are ordered by our customers. Our fine jewelry and watches are purchased from over 50 manufacturers, most of whom have long-standing relationships with us. We do not enter into long-term supply agreements with our fine jewelry and watch vendors. We do enter into purchase order agreements with suppliers of fine jewelry and watches. These purchase order agreements establish terms for quantity, price, payment and shipping. Additionally, we enter into operating agreements with these suppliers that include product quality requirements, product specifications and shipping procedures. We believe that our current suppliers are able to sufficiently meet our product needs and that there are alternative sources for most fine jewelry and watch items that we purchase.

Marketing

Our marketing strategy is designed to increase Blue Nile brand recognition, generate consumer traffic, acquire customers, build a loyal customer base and promote repeat purchases. We believe our customers generally seek high quality diamonds and fine jewelry from a trusted source in a non-intimidating environment, where information, guidance, reputation, convenience and value are important characteristics. Our marketing and advertising efforts include online and offline initiatives, which primarily consist of search engines, portals and targeted website advertising, affiliate programs, direct online marketing, online shopping clubs, social networking and public relations.

Customer Service and Support

A key element of our business strategy is our ability to provide a high level of customer service and support. We augment our online information resources with knowledgeable, highly trained support staff through our call centers to give customers confidence in their purchases. Our diamond and jewelry consultants are trained to provide guidance on all steps in the process of buying diamonds and fine jewelry, including, among other things, the process for selecting an appropriate item, the purchase of that item, financing and payment alternatives, and shipping services. Our commitment to customers is reflected in both high service levels that are provided by our extensively trained diamond and jewelry consultants, as well as in our guarantees and policies. We prominently display all of our guarantees and policies on our websites to create an environment of trust. These include policies relating to privacy, security, product availability, pricing, shipping, refunds, exchanges and special orders. We typically offer a return policy of 30 days. We generally do not extend credit to customers except through third-party credit cards, although we maintain a relationship with a consumer financing company that offers financing to our customers.

Fulfillment Operations

Our fulfillment operations are designed to enhance value for our customers by fulfilling orders quickly, securely and accurately. When an order for a customized diamond jewelry setting is received, the third-party supplier who holds the diamond in inventory generally ships it to us, or to independent third-party jewelers with whom we maintain ongoing relationships for assembly, within one business day. Upon receipt, the merchandise is sent to assembly for setting and sizing, which is performed by our jewelers or independent third-party jewelers. Each diamond is inspected upon arrival from our suppliers, and each finished product is inspected prior to shipment to a customer. Prompt and secure delivery of our products is a high priority, and we ship nearly all diamond and fine jewelry products via nationally recognized carriers. Loose diamonds and customized diamond jewelry products may be shipped by Blue Nile or directly by our suppliers or third-party jewelers to our customers.

Technology and Systems

Our technology systems use a combination of proprietary, licensed and open-source technologies. We focus our internal development efforts on creating and enhancing the features and functionality of our websites and order processing and fulfillment systems to deliver a high quality customer experience. We license third-party information technology systems for our financial reporting, inventory management, order fulfillment and merchandising. We use redundant Internet carriers to minimize the risk of downtime. Our systems are monitored continuously using third-party software, and an on-call team is staffed to respond to any emergencies or unauthorized access in the technology infrastructure.

Seasonality

We generally experience seasonal fluctuations in demand for our products. Our quarterly sales are impacted by various gift giving holidays including Valentine’s Day (first quarter), Mother’s Day (second quarter) and Christmas (fourth quarter). As a result, our quarterly revenue is generally the lowest in the third quarter (as a result of the lack of recognized gift giving holidays) and highest in the fourth quarter. The fourth

quarter accounted for approximately 34%, 34% and 29% of our net sales in the years ended January 2, 2011, January 3, 2010 and January 4, 2009, respectively.

Competition

The diamond and fine jewelry retail market is intensely competitive and highly fragmented. Our primary competition comes from online and offline retailers that offer products within the higher quality segment of the jewelry market. In the future, we may also compete with other retailers that move into the higher quality jewelry segment. Current or potential competitors include the following:


	•	independent jewelry stores,

	•	retail jewelry store chains,

	•	online retailers that sell jewelry,

	•	department stores, chain stores and mass retailers,

	•	online auction sites,

	•	catalog and television shopping retailers,

	•	discount superstores and wholesale clubs, and

	•	Internet shopping clubs.

In addition to these competitors, we may face competition from suppliers of our products that decide to sell directly to consumers, either through physical retail outlets or through an online store. We also face competition from entities that make and market synthetic stones and gems to compete in the market for diamonds and diamond jewelry.

We believe that the principal competitive factors in our market are product selection and quality, customer service and support, price, brand recognition, reputation, reliability and trust, website features and functionality, convenience, and delivery performance. We believe that we compete favorably in the market for diamonds and fine jewelry by focusing on these factors.

Intellectual Property

We rely on general intellectual property law and contractual restrictions and, to a limited extent, copyrights and patents, to protect our proprietary rights and technology. These contractual restrictions include confidentiality agreements, invention assignment agreements and nondisclosure agreements with employees, contractors, suppliers and strategic partners. Despite the protection of general intellectual property law and our contractual restrictions, it may be possible for a third-party to copy or otherwise obtain and use our intellectual property without our authorization. In addition, we pursue the registration of our trademarks and service marks in the U.S. and certain other countries. However, effective intellectual property protection or enforcement may not be available in every country in which our products and services are made available in the future. In the U.S. and certain other countries, we have registered “Blue Nile,” “bluenile.com,” the BN logo, the Blue Nile BN stylized logo and “Build Your Own Ring” as trademarks. We have also registered copyrights with respect to images and information set forth on our websites and the computer codes incorporated in our websites, and filed U.S. patent applications relating to certain features of our websites. We also rely on technologies that we license from third parties, particularly software solutions for financial reporting, inventory management, order fulfillment and merchandising.

Employees

At January 2, 2011, we employed 191 full-time employees and two part-time employees. We also utilize temporary personnel on a seasonal basis. Our employees are not party to any collective bargaining agreement and we have never experienced an organized work stoppage. We believe our relations with our employees are good.

Available Information

We make available, free of charge, through our primary website, www.bluenile.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after electronically filing such material with or furnishing it to the Securities and Exchange Commission (“SEC”). Our SEC reports, as well as our corporate governance policies and code of ethics, can be accessed through the investor relations section of our website. The information found on our website is not part of this or any other report filed with or furnished to the SEC. All of our filings with the SEC may be obtained at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. For information regarding the operation of the SEC’s Public Reference Room, please contact the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. Amendments to, and waivers from, the code of ethics that apply to our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions, and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K will be disclosed at the website address provided above and, to the extent required by applicable regulations, on a current report on Form 8-K.


Item 1A.	*Risk Factors*

You should carefully consider the risks described below and elsewhere in this report, which could materially and adversely affect our business, results of operations or financial condition. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may materially affect our business, results of operations, or financial condition. If any of these risks occur, the trading price of our common stock could decline and you may lose all or part of your investment.

General economic factors may materially and adversely affect our financial performance and results of operations.

Our financial performance and results of operations depend significantly on worldwide economic conditions and their impact on consumer spending. Luxury products, such as diamonds and fine jewelry, are discretionary purchases for consumers. Recessionary economic cycles, higher interest rates, higher fuel and energy costs, inflation, levels of unemployment, conditions in the residential real estate and mortgage markets, access to credit, consumer debt levels, unsettled financial markets, and other economic factors that may affect consumer spending or buying habits could materially and adversely affect demand for our products. In addition, the recent turmoil in the financial markets has had and may continue to have an adverse effect on the United States and world economies, which could negatively impact consumer spending patterns for the foreseeable future. A decline in the number of marriages or reductions in consumer spending or disposable income may affect us more significantly than companies in other industries and companies with a more diversified product offering. In addition, negative global economic conditions may materially and adversely affect our suppliers’ financial performance, liquidity and access to capital. This may affect their ability to maintain their inventories, production levels and/or product quality, and could cause them to raise prices, lower production levels or cease their operations.

Further, any reduction in our sales will affect our liquidity. As discussed under “Liquidity and Capital Resources” in Part II, Item 7 of this Form 10-K, our liquidity is primarily dependent upon our net cash from operating activities. Our net cash from operating activities is sensitive to many factors, including changes in working capital. Working capital at any specific point in time is dependent upon many variables, including our operating results, seasonality, inventory management and assortment expansion, the timing of cash receipts and payments, and vendor payment terms.

Although we do not anticipate needing additional capital in the near term, financial market disruption may make it difficult for us to raise additional capital, when needed, on acceptable terms or at all. The interest

rate environment and general economic conditions could also impact the investment income we are able to earn on securities we may hold from time to time.

The prices of commodity products upon which we are substantially dependent, such as diamonds, colored gemstones, platinum, gold and silver, are subject to fluctuations arising from changes in supply and demand, competition and market speculation. Rapid and significant changes in commodity prices, particularly diamonds, may materially and adversely affect our sales and profit margins by increasing the prices for our products. Economic factors such as increased shipping costs, inflation, higher costs of labor, insurance and healthcare, and changes in other laws, regulations, and taxes may also increase our cost of sales and our selling, general and administrative expenses, and otherwise adversely affect our financial condition and results of operations.

We expect our quarterly financial results to fluctuate, which may lead to volatility in our stock price.

We expect our net sales and operating results to vary significantly from quarter to quarter due to a number of factors, including changes in:


	•	demand for our products;

	•	the costs to acquire quality diamonds and precious metals;

	•	our ability to attract visitors to our websites and convert those visitors into customers;

	•	general economic conditions, both domestically and globally;

	•	our ability to retain existing customers or encourage repeat purchases;

	•	our ability to manage our product mix and inventory;

	•	wholesale diamond prices;

	•	consumer tastes and preferences for diamonds and fine jewelry;

	•	advertising and other marketing costs;

	•	our, or our competitors’ pricing and marketing strategies;

	•	the introduction of competitive websites, products, price decreases or improvements;

	•	conditions or trends in the diamond and fine jewelry industry;

	•	conditions or trends in the Internet and e-commerce industry;

	•	the success of our geographic, service and product line expansions;

	•	our ability to manage our operations;

	•	the extent to which we provide for and pay taxes;

	•	stock-based compensation expense as a result of the nature, timing and amount of stock options and restricted stock units granted, the underlying assumptions used in valuing stock options, the estimated rate of stock option and restricted stock unit forfeitures and other factors;

	•	foreign exchange rates;

	•	interest rates; and

	•	costs of expanding or enhancing our technology or websites.

As a result of the variability of these and other factors, our operating results in future quarters may be below the expectations of public market analysts and investors. In this event, the price of our common stock may decline.

As a result of seasonal fluctuations in our net sales, our quarterly results may fluctuate and could be below expectations.

We have experienced and expect to continue to experience seasonal fluctuations in our net sales. In particular, a disproportionate amount of our net sales has been realized during the fourth quarter as a result of the December holiday season, and we expect this seasonality to continue in the future. Approximately 34%, 34% and 29% of our net sales in the years ended January 2, 2011, January 3, 2010 and January 4, 2009, respectively, were generated during the fourth quarter of each year. In anticipation of increased sales activity during the fourth quarter, we may incur significant additional expenses, including higher inventory of fine jewelry and additional staffing in our fulfillment and customer support operations. If we experience lower than expected net sales during any fourth quarter, it may have a disproportionately large impact on our operating results and financial condition for that year. Further, we may experience an increase in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. We also experience considerable fluctuations in net sales in periods preceding other annual occasions such as Valentine’s Day and Mother’s Day. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel and fulfillment activities, and may cause a shortfall in net sales as compared with expenses in a given period, which could substantially harm our business and results of operations.

We may not accurately forecast net sales and appropriately plan our expenses.

We may base our current and future expense levels on our operating forecasts and estimates of future net sales. Net sales and operating results are difficult to forecast because they generally depend on the volume and timing of the orders we receive, which are uncertain. Additionally, our business is affected by general economic and business conditions in the U.S. and international markets. A softening in net sales, whether caused by changes in customer preferences or a weakening in the U.S. or global economies, may result in decreased revenue levels. Some of our expenses are fixed, and as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in net sales. This inability could cause our net income in a given quarter to be lower than expected. We also make certain assumptions when forecasting the amount of expense we expect related to our stock-based compensation, which includes the expected volatility of our stock price, the expected life of options granted and the expected rate of stock option and restricted stock unit forfeitures. These assumptions are partly based on historical results. If actual results differ from our estimates, our net income in a given quarter may be lower than expected.

Our failure to acquire quality diamonds and fine jewelry at commercially reasonable prices and lead times would result in higher costs and damage our operating results and competitive position.

Our high quality customer experience depends on our ability to provide expeditious fulfillment of customer orders. If we are unable to acquire quality diamonds and fine jewelry at commercially reasonable prices and lead times, our costs may exceed our forecasts, our gross margins and operating results and customer experience may suffer and our competitive position could be damaged. The success of our business model depends, in part, on our ability to offer quality products to customers at prices that are below those of traditional jewelry retailers. Because of our virtual inventory model, our prices are much more sensitive to rapid fluctuations in the prices of commodities, particularly diamonds, which traditional retailers hold in inventory.

A majority of the world’s supply of rough diamonds is controlled by a small number of diamond mining firms. As a result, any decisions made to restrict the supply of rough diamonds by these firms to our suppliers could substantially impair our ability to acquire diamonds at commercially reasonable prices, if at all. We do not currently have any direct supply relationships with these firms. Our ability to acquire diamonds and fine jewelry is also substantially dependent on our relationships with various suppliers. Approximately 28%, 24% and 22% of our payments to our diamond and fine jewelry suppliers for each of the years ended January 2, 2011, January 3, 2010 and January 4, 2009 were made to our top three suppliers for that year. Our inability to maintain and expand these and other future diamond and fine jewelry supply relationships on commercially reasonable terms or the inability of our current and future suppliers to maintain arrangements for the supply of

products sold to us on commercially reasonable terms would substantially harm our business and results of operations. The financial performance and viability of our suppliers are also significantly dependent upon worldwide economic conditions and consumer demand for diamonds and fine jewelry. The failure of any of our principal suppliers to remain financially viable could adversely impact our supply of diamonds and fine jewelry for sale to our customers.

Suppliers and manufacturers of diamonds as well as retailers of diamonds and diamond jewelry are vertically integrated and we expect they will continue to vertically integrate their operations either by developing retail channels for the products they manufacture or acquiring sources of supply, including, without limitation, diamond mining operations. To the extent such vertical integration efforts are successful, some of the fragmentation in the existing diamond supply chain could be eliminated, our ability to obtain an adequate supply of diamonds and fine jewelry from multiple sources could be limited and our competitors may be able to obtain diamonds at lower prices.

Our failure to meet customer expectations with respect to price would adversely affect our business and results of operations.

Demand for our products has been highly sensitive to pricing changes. Changes in our pricing strategies have had and may continue to have a significant impact on our net sales, gross margins and net income. In the past, we have instituted retail price changes as part of our strategy to stimulate growth in net sales and optimize gross profit. We may institute similar price changes in the future. Such price changes may not result in an increase in net sales or in the optimization of gross profits. In addition, many external factors, including the costs to acquire diamonds and precious metals and our competitors’ pricing and marketing strategies, can significantly impact our pricing strategies. If we fail to meet customer expectations with respect to price in any given period, our business and results of operations would suffer.

We may not succeed in sustaining and promoting the Blue Nile brand, which would prevent us from acquiring customers and increasing our net sales.

A significant component of our business strategy is the continued establishment and promotion of the Blue Nile brand. Due to the competitive nature of the market for diamonds and fine jewelry, if we do not sustain and promote our brand and branded products, we may fail to build the critical mass of customers required to substantially increase our net sales. Promoting and positioning our brand will depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality product and customer experience. To promote our brand and products, we have incurred and will continue to incur substantial expenses related to advertising and other marketing efforts. These expenses may not result in increased consumer demand for our products, which would negatively impact our financial results.

A critical component of our brand promotion strategy is establishing a relationship of trust with our customers, which we believe can be achieved by providing a high quality customer experience. In order to provide a high quality customer experience, we have invested and will continue to invest substantial amounts of resources in the development and functionality of our multiple websites, technology infrastructure, fulfillment operations and customer service operations. Our ability to provide a high quality customer experience is also dependent, in large part, on external factors over which we may have little or no control, including, without limitation, the reliability and performance of our suppliers, third-party jewelry assemblers, third-party carriers, third party diamond grading labs, and networking vendors. During our peak seasons, we rely on temporary employees to supplement our full-time customer service and fulfillment employees. Temporary employees may not have the same level of commitment to our customers as our full-time employees. If our customers are dissatisfied with the quality of the products or the customer service they receive, or if we are unable to deliver products to our customers in a timely manner or at all, our customers may stop purchasing products from us. We also rely on third parties for information, including product characteristics and availability that we present to consumers on our websites, which may, on occasion, be inaccurate. Our failure to provide our customers with high quality products and high quality customer experiences for any reason could substantially harm our reputation and adversely impact our efforts to develop Blue Nile as a trusted brand. The failure of our brand promotion activities could adversely affect our ability to

attract new customers and maintain customer relationships, and, as a result, substantially harm our business and results of operations.

We face significant competition and may be unsuccessful in competing against current and future competitors.

The retail jewelry industry is intensely competitive and online retail is rapidly evolving and subject to changing technology, shifting consumer preferences and tastes, and frequent introductions of new products and services. We expect the competition in the sale of diamonds and fine jewelry to increase and intensify in the future. Our current and potential competitors range from large and established companies to emerging start-ups. Larger more established companies have longer operating histories, greater brand recognition, existing customer and supplier relationships, and significantly greater financial marketing and other resources. Additionally, larger competitors seeking to establish an online presence may be able to devote substantially more resources to website systems development and exert more leverage over the supply chain for diamonds and fine jewelry than we can. Larger competitors may also be better capitalized to opportunistically acquire, invest or partner with other domestic and international businesses.

Emerging start-ups may be able to innovate and provide products and services faster than we can. In addition, competitors that are traditional store based retailers offer consumers the ability to physically handle and examine products in a manner that is not possible over the Internet, as well as a more convenient means of returning and exchanging purchased products. If our competitors are more successful than we are in offering compelling products or in attracting and retaining consumers, our revenues and growth rates could decline. Furthermore, in recent years, competitors have reduced the retail price of their diamonds and fine jewelry as a result of lack of consumer demand and/or inventory liquidations. Such reductions and/or inventory liquidations can have a short-term adverse effect on our sales. Current and potential competitors include:


	•	independent jewelry stores;

	•	retail jewelry store chains, such as Tiffany & Co.;

	•	online retailers that sell jewelry, such as Amazon.com;

	•	department stores, chain stores and mass retailers, such as Nordstrom and Neiman Marcus;

	•	online auction sites, such as eBay;

	•	catalog and television shopping retailers, such as Home Shopping Network and QVC;

	•	discount superstores and wholesale clubs, such as Wal-Mart and Costco Wholesale; and

	•	Internet shopping clubs, such as Gilt Groupe and Rue La La.

In addition to these competitors, we may face competition from suppliers of our products that decide to sell directly to consumers, either through physical retail outlets or through online stores. We also face competition from entities that make and market synthetic stones and gems to compete in the market for diamonds and diamond jewelry.

We may be unsuccessful in further expanding our operations internationally.

For the year ended January 2, 2011, international net sales represented 13% of our total net sales. In 2010, we continued to increase marketing and sales efforts throughout Europe, Canada and the Asia-Pacific region, and anticipate continuing to expand our international sales and operations in the future either by expanding local versions of our website for foreign markets or through acquisitions or alliances with third parties. Any international expansion plans we choose to undertake will increase the complexity of our business, require attention from management and other personnel and cause additional strain on our operations, technology systems, financial resources, and our internal financial control and reporting functions. Further, our expansion efforts may be unsuccessful. We have limited experience selling our products in international markets and in conforming to the local cultures, standards or policies necessary to successfully compete in those markets. We cannot be certain that we will be able to expand our global presence if we choose to further

expand internationally. In addition, we may have to compete with retailers that have more experience with local markets. Our ability to expand and succeed internationally may also be limited by the demand for our products, the ability to successfully transact in foreign currencies, the ability of our brand to resonate with consumers globally and the adoption of electronic commerce in these markets. Different privacy, censorship and liability standards and regulations, and different intellectual property laws in foreign countries may prohibit expansion into such markets or cause our business and results of operations to suffer.

Our current and future international operations may also fail to succeed due to other risks inherent in foreign operations, including:


	•	the need to develop new supplier and jeweler relationships;

	•	international regulatory requirements, tariffs and duties;

	•	difficulties in staffing and managing foreign operations;

	•	longer payment cycles from credit card companies;

	•	greater difficulty in accounts receivable collection;

	•	our reliance on third-party carriers for product shipments to our customers;

	•	risk of theft of our products during shipment;

	•	limited shipping and insurance options for us and our customers;

	•	potential adverse tax consequences;

	•	foreign currency exchange risk;

	•	lack of infrastructure to adequately conduct electronic commerce transactions or fulfillment operations;

	•	unclear foreign intellectual property protection laws;

	•	laws and regulations related to corporate governance and employee/employer relationships;

	•	price controls or other restrictions on foreign currency;

	•	difficulties in obtaining export, import or other business licensing requirements;

	•	changes in customs and import processes, costs or restrictions;

	•	increased payment risk and greater difficulty addressing credit card fraud;

	•	consumer and data protection laws;

	•	lower levels of adoption or use of the Internet;

	•	geopolitical events, including war and terrorism; and

	•	the need to conduct business in foreign languages on both the website and in our customer service efforts.

Our failure to successfully expand and manage our international operations may cause our business and results of operations to suffer.

If the single facility where substantially all of our computer and communications hardware is located fails, our business, results of operations and financial condition would be harmed.

Our ability to successfully receive and fulfill orders and to provide high quality customer service depends in part on the efficient and uninterrupted operation of our computer and communications systems. Substantially all of the computer hardware necessary to operate our websites is located at a single leased facility. Our systems and operations are vulnerable to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar events. We do not

presently have redundant systems in multiple locations and our business interruption insurance may be insufficient to compensate us for losses that may occur.

Our systems are vulnerable to security breaches.

Our technology systems may be breached due to the actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized third party may obtain access to our confidential data or our customers’ data. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information in order to obtain access to our data or our customers’ data. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our products and services that could potentially have an adverse effect on our business and results of operations. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

If our fulfillment operations are interrupted for any significant period of time, our business and results of operations would be substantially harmed.

Our success depends on our ability to successfully receive and fulfill orders and to promptly and securely deliver our products to our customers. Most of our inventory management, jewelry assembly, packaging, labeling and product return processes are performed in a single fulfillment center located in the United States. We also have a fulfillment facility located in Ireland. These facilities are susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar events. Our business interruption insurance may be insufficient to compensate us for losses that may occur in the event operations at our fulfillment centers are interrupted. Any interruptions in our fulfillment center operations for any significant period of time could damage our reputation and brand and substantially harm our business and results of operations.

We rely on our suppliers, third-party carriers and third-party jewelers as part of our fulfillment process, and these third parties may fail to adequately serve our customers.

We significantly rely on our suppliers to promptly ship us diamonds ordered by our customers. Any failure by our suppliers to sell and ship such products to us in a timely manner will have an adverse effect on our ability to fulfill customer orders and harm our business and results of operations. Our suppliers, in turn, rely on third-party carriers to ship diamonds to us, and in some cases, directly to our customers. We also rely on a limited number of third-party carriers to deliver inventory to us and product shipments to our customers. We and our suppliers are therefore subject to the risks, including employee strikes, inclement weather, power outages, national disasters, rising fuel costs and financial constraints associated with such carriers’ abilities to provide delivery services to meet our and our suppliers’ shipping needs. In addition, for some customer orders we rely on third-party jewelers to assemble and ship the product. Our suppliers’, third-party carriers’ or third-party jewelers’ failure to deliver high-quality products to us or our customers in a timely manner or to otherwise adequately serve our customers would damage our reputation and brand and substantially harm our business and results of operations.

If we do not continuously innovate in response to the changing preferences of our customers, our business could be adversely affected.

The number of people who access the internet through devices other than personal computers, including mobile phones, smart phones, handheld computers such as notebooks and tablets, video game consoles, and television set-top devices, has increased dramatically in the past few years. The lower resolution, functionality, and memory associated with some alternative devices may make the use of our website and the purchasing our products more difficult; and the versions of our websites developed for these devices may not be compelling to consumers. Each manufacturer or distributor may establish unique technical standards for its devices, and our website may not work or be viewable on these devices as a result. We have limited experience to date in

developing and optimizing our website for users of alternative devices. As new devices and new platforms are continually being released, it is difficult to predict the problems we may encounter in developing versions of our website for use on these alternative devices and we may need to devote significant resources to the creation, support, and maintenance of such devices. If we are unable to attract consumers to our website through these devices or are slow to develop a version of our website that is more compatible with alternative devices, we may fail to capture a significant share of consumers in the market for diamonds and fine jewelry, which could adversely affect our business.

We have foreign exchange risk.

The results of operations of Blue Nile Jewellery, Ltd., our Ireland subsidiary, are exposed to foreign exchange rate fluctuations. Upon translation from foreign currency into U.S. dollars, operating results may differ materially from expectations, and we may record significant gains or losses.

Additionally, we allow customers to purchase our products in 24 foreign currencies. This exposes us to foreign exchange rate fluctuations and we may record significant gains or losses as a result of such fluctuations.

Our net sales may be negatively affected if we are required to collect taxes on purchases.

We collect sales and/or other taxes related to purchases by customers located in the State of Washington and the State of New York, and certain taxes required to be collected on sales to customers outside of the United States. One or more states or foreign countries have sought and others may seek to impose additional sales or other tax collection obligations on us in the future. A successful assertion by one or more states or foreign countries to require the collection of sales or other taxes on the sale of our products could result in substantial tax liabilities for past sales, discourage customers from purchasing products from us, decrease our competitive advantage, cause us to discontinue certain successful sales and marketing initiatives or otherwise substantially harm our business and results of operations.

While we believe that current law restricts state and local taxing authorities outside the State of Washington from requiring us to collect sales and use taxes from purchasers located within their jurisdictions, taxing authorities outside the State of Washington have, and in the future could, disagree with our interpretation. For example, a number of states, as well as the U.S. Congress, are considering or have adopted various initiatives designed to impose sales, use and other taxes on Internet sales. The successful implementation of any such initiatives could require us to collect sales, use and other taxes from purchasers located in states other than Washington. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us and could significantly decrease our future net sales.

We rely on the services of our small, specialized workforce and key personnel, many of whom would be difficult to replace.

We rely upon the continued service and performance of key technical, fulfillment and senior management personnel. If we lose any of these personnel, our business could suffer. Competition for qualified personnel in our industry is intense. We believe that our future success will depend on our continued ability to attract, hire and retain key employees. Other than for our Executive Chairman, we do not have “key person” life insurance policies covering any of our employees. In addition, illness, severe adverse weather conditions or natural disasters could impede our ability to service our customers.

We face the risk of theft of our products from inventory or during shipment.

We have experienced and may continue to experience theft of our products while they are being held in our fulfillment centers or during the course of shipment to our customers by third-party shipping carriers. We have taken steps to prevent such theft. However, if security measures fail, losses exceed our insurance coverage or we are not able to maintain insurance at a reasonable cost, we could incur significant losses from theft, which would substantially harm our business and results of operations.

Our failure to protect confidential information of our customers and our network against security breaches could damage our reputation and brand and substantially harm our business and results of operations.

A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. Our failure to prevent security breaches could damage our reputation and brand and substantially harm our business and results of operations. Currently, a majority of our sales are billed to our customers’ credit card accounts directly. We rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information, including credit card numbers. Advances in computer capabilities, human errors, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. In addition, any party who is able to illicitly obtain a user’s password could access the customer’s transaction data. An increasing number of websites and Internet companies have reported breaches of their security. Any such compromise of our security could damage our reputation, business and brand and expose us to a risk of loss or litigation and possible liability, which would substantially harm our business and results of operations. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations, damage our computers or those of our users, or otherwise damage our reputation and business. These issues are likely to become more difficult as we expand the number of countries in which we operate. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches.

Our net sales consist exclusively of diamonds and fine jewelry, and demand for these products could decline.

Our net sales and results of operations are highly dependent on the demand for diamonds and diamond jewelry, particularly engagement rings. Should prevailing consumer tastes for diamonds decline or customs with respect to engagement shift away from the presentation of diamond jewelry, demand for our products would decline and our business and results of operations would be substantially harmed.

The significant cost of diamonds results in part from their scarcity. From time to time, attempts have been made to develop and market synthetic stones and gems to compete in the market for diamonds and diamond jewelry. We expect such efforts to continue in the future. If any such efforts are successful in creating widespread demand for alternative diamond products, demand and price levels for our products would decline and our business and results of operations would be substantially harmed.

In recent years, increased attention has been focused on “conflict” diamonds, which are diamonds extracted from war-torn regions in Africa and sold by rebel forces to fund insurrection. Diamonds are, in some cases, also believed to be used to fund terrorist activities in some regions. We support the Kimberley Process, an international initiative intended to ensure diamonds are not illegally traded to fund conflict. As part of this initiative, we require our diamond suppliers to sign a statement acknowledging compliance with the Kimberley Process, and invoices received for diamonds purchased by us must include a certification from the vendor that the diamonds are conflict free. In addition, we prohibit the use of our business or services for money laundering or terrorist financing in accordance with the USA Patriot Act. Through these and other efforts, we believe that the suppliers from whom we purchase our diamonds exclude conflict diamonds from their inventories. However, we cannot independently determine whether any diamond we offer was extracted from these regions. Current efforts to increase consumer awareness of this issue and encourage legislative response could adversely affect consumer demand for diamonds. Consumer confidence is dependent, in part, on the certification of our diamonds by independent laboratories. A decline in the quality of the certifications provided by these laboratories could adversely impact demand for our products. Additionally, a decline in consumer confidence in the credibility of independent diamond grading certifications could adversely impact demand for our diamond products.

Our fine jewelry offerings must reflect the tastes and preferences of a wide range of consumers whose preferences may change regularly. Our strategy has been to offer primarily what we consider to be classic styles of fine jewelry, but there can be no assurance that these styles will continue to be popular with

consumers in the future. If the styles we offer become less popular with consumers and we are not able to adjust our product offerings in a timely manner, our net sales may decline or fail to meet expected levels.

System interruptions that impair customer access to our websites would damage our reputation and brand and substantially harm our business and results of operations.

The satisfactory performance, reliability and availability of our websites, transaction processing systems and network infrastructure are critical to our reputation, our ability to attract and retain customers, and to maintain adequate customer service levels. Any future systems interruptions, downtime or technical difficulties that result in the unavailability of our websites or reduced order fulfillment performance could result in negative publicity, damage our reputation and brand, and cause our business and results of operations to suffer. We may be susceptible to such disruptions in the future. We may also experience temporary system interruptions for a variety of other reasons in the future, including power failures, failures of Internet service and telecommunication providers, software or human errors, or an overwhelming number of visitors trying to reach our websites during periods of strong seasonal demand or promotions. Because we are dependent, in part, on third parties for the implementation and maintenance of certain aspects of our systems and because some of the causes of system interruptions may be outside of our control, we may not be able to remedy such interruptions in a timely manner, or at all.

In order to increase net sales and to sustain or increase profitability, we must attract customers in a cost-effective manner.

Our success depends on our ability to attract customers in a cost-effective manner. We have relationships with providers of online services, search engines, directories and other websites and e-commerce businesses to provide content, advertising banners and other links that direct customers to our websites. We rely on these relationships as significant sources of traffic to our websites. Our agreements with these providers generally have terms of one year or less. If we are unable to develop or maintain these relationships on acceptable terms, our ability to attract new customers would be harmed. In addition, many of the parties with whom we have online-advertising arrangements could provide advertising services to other companies, including retailers with whom we compete. As competition for online advertising has increased, the cost for these services has also increased. A significant increase in the cost of the marketing vehicles upon which we rely could adversely impact our ability to attract customers in a cost-effective manner and harm our business and results of operations.

The success of our business may depend on our ability to successfully expand our product offerings.

Our ability to significantly increase our net sales and maintain and increase our profitability may depend on our ability to successfully expand our product lines beyond our current offerings. If we offer a new product category that is not accepted by consumers, the Blue Nile brand and reputation could be adversely affected, our net sales may fall short of expectations and we may incur substantial expenses that are not offset by increased net sales. Expansion of our product lines may also strain our management and operational resources.

If we are unable to accurately manage our inventory of fine jewelry, our reputation and results of operations could suffer.

Except for loose diamonds, substantially all of the fine jewelry we sell is from our physical inventory. We are faced with the constant challenge of balancing our inventory levels with our ability to meet our customer needs. Based on internally generated projections, we purchase jewelry and jewelry components. These projections are based on many unknown assumptions around consumer demand, time to manufacture, pricing, etc. If these inventory projections are too high, our inventory may be too high, which may result in lower retail prices and gross margins, risk of obsolescence, and harm to our results of operations. Conversely, if these projections are too low, and we underestimate the consumer demand for a product(s), we are exposed to lost business opportunities which could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, as we increase our offering of products, we may be forced to increase inventory levels, which will increase our risks related to our inventory.

Our stock price has been volatile historically, and may continue to be volatile. Further, the sale of our common stock by significant stockholders may cause the price of our common stock to decrease.

The trading price of our common stock has been and may continue to be subject to wide fluctuations. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements by us or our competitors, including announcements relating to strategic decisions or key personnel, service disruptions, changes in financial estimates and recommendations by security analysts, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions. In addition, several of our stockholders own significant portions of our common stock. If these stockholders were to sell all or a portion of their holdings of our common stock, the market price of our common stock could be negatively impacted. The effect of such sales, or of significant portions of our stock being offered or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that they could experience significant short-term volatility in our stock if such stockholders decide to sell all or a portion of their holdings of our common stock at once or within a short period of time.

Repurchases of our common stock may not prove to be the best use of our cash resources.

We have and plan to continue to opportunistically repurchase shares of our common stock. Since the inception of our share repurchase program in the first quarter of 2005 through January 2, 2011, we have repurchased 4.9 million shares for a total of $186.5 million. In February 2010, our board of directors authorized the repurchase of up to $100 million of our common stock during the subsequent 24-month period. These repurchases and any repurchases we may make in the future may not prove to be at optimal prices and our use of cash for the stock repurchase program may not prove to be the best use of our cash resources and may adversely impact our future liquidity.

Our cash, cash equivalents and short-term investments are subject to a risk of loss based upon the solvency of the financial institutions in which they are maintained.

We maintain the majority of our cash, cash equivalents and short-term investments in accounts with major financial institutions within the United States, in the form of demand deposits, money market accounts, time deposits, U.S. Treasury Bills and other short-term investments. Deposits in these institutions may exceed the amounts of insurance provided, or deposits may not at all be covered by insurance. If any of these institutions becomes insolvent, it could substantially harm our financial condition and we may lose some, or all, of such deposits.

Failure to adequately protect or enforce our intellectual property rights could substantially harm our business and results of operations.

We rely on a combination of patent, trademark, trade secret and copyright law, and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect and enforce our proprietary rights, unauthorized parties have attempted, and may in the future attempt, to copy aspects of our website features, compilation and functionality or to obtain and use information that we consider as proprietary, such as the technology used to operate our websites, our content and our trademarks. We have registered “Blue Nile,” “bluenile.com,” the BN logo, the Blue Nile BN stylized logo and “Build Your Own Ring” as trademarks in the United States and in certain other countries. Our competitors have, and other competitors may, adopt service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to consumer confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term Blue Nile or our other trademarks. Any claims or consumer confusion related to our trademarks could damage our reputation and brand and substantially harm our business and results of operations.

We currently hold the bluenile.com, bluenile.co.uk and bluenile.ca Internet domain names and various other related domain names. Domain names generally are regulated by Internet regulatory bodies. If we lose the ability to use a domain name in a particular country, we would be forced to either incur significant

additional expenses to market our products within that country, including the development of a new brand and the creation of new promotional materials and packaging, or elect not to sell products in that country. Either result could substantially harm our business and results of operations. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain the domain names that utilize the name Blue Nile in all of the countries in which we currently or intend to conduct business.

Litigation or proceedings before the U.S. Patent and Trademark Office or similar international regulatory agencies may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain names and to determine the validity and scope of the proprietary rights of others. Any litigation or adverse priority proceeding could result in substantial costs and diversion of resources and could substantially harm our business and results of operations. We sell and intend to increasingly sell our products internationally, and the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States.

Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs and substantially harm our business and results of operations.

Third parties have, and may in the future, assert that we have infringed their technology or other intellectual property rights. We cannot predict whether any such assertions or claims arising from such assertions will substantially harm our business and results of operations. If we are forced to defend against any infringement claims, whether they are with or without merit or are determined in our favor, we may face costly litigation, diversion of technical and management personnel, or product shipment delays. Furthermore, the outcome of a dispute may be that we would need to develop non-infringing technology or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, or at all.

Increased product returns and the failure to accurately predict product returns could substantially harm our business and results of operations.

We generally offer our customers an unconditional 30-day return policy that allows our customers to return most products if they are not satisfied for any reason. We make allowances for product returns in our financial statements based on historical return rates and current economic conditions. Actual merchandise returns are difficult to predict and may differ from our allowances. Any significant increase in merchandise returns above our allowances would substantially harm our business and results of operations.

Purchasers of diamonds and fine jewelry may not choose to shop online, which would prevent us from growing our business.

The online market for diamonds and fine jewelry is significantly less developed than the online market for books, music, toys and other consumer products. If this market does not gain widespread acceptance, our business may suffer. Our success will depend, in part, on our ability to attract consumers who have historically purchased diamonds and fine jewelry through traditional retailers. Furthermore, we may have to incur significantly higher and more sustained advertising and promotional expenditures or price our products more competitively than we currently anticipate in order to attract additional online consumers to our websites and convert them into purchasing customers. Specific factors that could prevent consumers from purchasing diamonds and fine jewelry from us include:


	•	concerns about buying luxury products such as diamonds and fine jewelry without a physical storefront, face-to-face interaction with sales personnel and the ability to physically handle and examine products;

	•	delivery time associated with Internet orders;

	•	product offerings that do not reflect consumer tastes and preferences;

	•	pricing that does not meet consumer expectations;


	•	concerns about the security of online transactions and the privacy of personal information;

	•	delayed shipments or shipments of incorrect or damaged products;

	•	inconvenience associated with returning or exchanging Internet purchased items; and

	•	usability, functions and features of our websites.

If use of the Internet, particularly with respect to online commerce, does not continue to increase as we anticipate, our business and results of operations will be harmed.

Our future net sales and profits are substantially dependent upon the continued growth in the use of the Internet as an effective medium of business and communication by our target customers. Internet use may not continue to develop at historical rates and consumers may not continue to use the Internet and other online services as a medium for commerce. Failures by some online retailers to meet consumer demands could result in consumer reluctance to adopt the Internet as a means for commerce, and thereby damage our reputation and brand and substantially harm our business and results of operations.

In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including:


	•	actual or perceived lack of security of information or privacy protection;

	•	possible disruptions, computer viruses, spyware, phishing, attacks or other damage to the Internet servers, service providers, network carriers and Internet companies or to users’ computers; and

	•	excessive governmental regulation.

Our success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. Our business, which relies on a contextually rich website that requires the transmission of substantial secure data, is also significantly dependent upon the availability and adoption of broadband Internet access and other high speed Internet connectivity technologies.

Our failure to address risks associated with payment methods, credit card fraud and other consumer fraud could damage our reputation and brand and may cause our business and results of operations to suffer.

Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. We do not currently carry insurance against this risk. To date, we have experienced minimal losses from credit card fraud, but we face the risk of significant losses from this type of fraud as our net sales increase and as we expand internationally. Our failure to adequately control fraudulent credit card transactions could damage our reputation and brand and substantially harm our business and results of operations. Additionally, for certain payment transactions, including credit and debit cards, we pay interchange and other fees. These fees may increase over time, which would raise our operating costs and lower our operating margins.

We rely on our relationship with a third-party consumer credit company to offer financing for the purchase of our products.

The purchase of the diamond and fine jewelry products we sell is a substantial expense for many of our customers. We currently rely on our relationship with a consumer finance company to provide financing to our customers. If we are unable to maintain this or other similar arrangements, we may not be able to offer financing alternatives to our customers, which may reduce demand for our products and substantially harm our business and results of operations.

We may undertake acquisitions to expand our business, which may pose risks to our business and dilute the ownership of our existing stockholders.

A key component of our business strategy includes strengthening our competitive position and refining the customer experience on our websites through internal development. However, from time to time, we may selectively pursue acquisitions of businesses, technologies or services. Integrating any newly acquired businesses, technologies or services may be expensive and time-consuming. To finance any acquisitions, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us, and, in the case of equity financings, would result in dilution to our stockholders. If we do complete any acquisitions, we may be unable to operate such acquired businesses profitably or otherwise implement our strategy successfully. If we are unable to integrate any newly acquired entities or technologies effectively, our business and results of operations could suffer. The time and expense associated with finding suitable and compatible businesses, technologies or services could also disrupt our ongoing business and divert our management’s attention. Future acquisitions by us could also result in large and immediate write-offs or assumptions of debt and contingent liabilities, any of which could substantially harm our business and results of operations. We have no current plans, agreements or commitments with respect to any such acquisitions.

Our failure to rapidly respond to technological change could result in our services or systems becoming obsolete and substantially harm our business and results of operations.

As the Internet and online commerce industries evolve, we may be required to license emerging technologies useful in our business, enhance our existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of our prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We may not be able to successfully implement new technologies or adapt our websites, proprietary technologies and transaction-processing systems to customer requirements or emerging industry standards. Our failure to do so would substantially harm our business and results of operations. We may be required to upgrade existing technologies or business applications, or implement new technologies or business applications. Our results of operations may be affected by the timing, effectiveness and costs associated with the successful implementation of any upgrades or changes to our systems and infrastructure.

We may have exposure to greater than anticipated tax liabilities.

We are subject to income, payroll, duties and other business taxes in both the United States and foreign jurisdictions. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Our determination of our tax liability is always subject to review by applicable taxing authorities. Any adverse outcome of such a review could have a negative effect on our operating results and financial condition. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. In addition, the imposition of additional tax obligations on our business by state and local governments could create significant administrative burdens for us, decrease our future sales, and harm our cash flow and operating results.

Government regulation of the Internet and e-commerce is evolving and unfavorable changes could substantially harm our business and results of operations.

We are not currently subject to direct federal, state or local regulation other than regulations applicable to businesses generally or directly applicable to retailing and online commerce. However, as the Internet becomes increasingly popular, it is possible that laws and regulations may be adopted with respect to the Internet, which may impede the growth of Internet-based businesses. These regulations and laws may cover issues such as taxation, advertising, intellectual property rights, freedom of expression, pricing, restrictions on imports and exports, customs, tariffs, information security, privacy, data protection, content, distribution, electronic contracts and other communications, the provision of online payment services, broadband residential Internet access, and the characteristics and quality of products and services. Further, the growth of online commerce

may prompt calls for more stringent consumer protection laws. Several states have proposed legislation to limit the uses of personal user information gathered online or require online companies to establish privacy policies. The Federal Trade Commission has also initiated action against at least one online company regarding the manner in which personal information is collected from users and provided to third parties. The adoption of additional privacy or consumer protection laws could create uncertainty in Internet usage and reduce the demand for our products and services.

We are not certain how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, personal property, encryption and other intellectual property issues, taxation, libel, obscenity, qualification to do business, and export or import matters. The vast majority of these laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address these issues could create uncertainty for those conducting online commerce. This uncertainty could reduce demand for our products and services or increase the cost of doing business as a result of litigation costs or increased fulfillment costs and may substantially harm our business and results of operations.

We may need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization and to satisfy new reporting requirements.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with these and other new requirements may increase our costs and require additional management time and resources. We may need to implement additional finance and accounting systems, procedures and controls to satisfy new reporting requirements. If our internal control over financial reporting is determined to be ineffective, investors could lose confidence in the reliability of our internal control over financial reporting, which could adversely affect our stock price.

Our failure to effectively manage the growth in our operations may prevent us from successfully expanding our business.

We have experienced, and in the future may experience, rapid growth in operations, which has placed, and could continue to place, a significant strain on our operations, services, internal controls and other managerial, operational and financial resources. To effectively manage future expansion, we will need to maintain our operational and financial systems and managerial controls and procedures, which include the following processes:


	•	transaction processing and fulfillment;

	•	inventory management;

	•	customer support;

	•	management of multiple supplier relationships;

	•	operational, financial and managerial controls;

	•	reporting procedures;

	•	management of our facilities;

	•	recruitment, training, supervision, retention and management of our employees; and

	•	technology operations.

If we are unable to manage future expansion, our ability to provide a high quality customer experience could be harmed, which would damage our reputation and brand and substantially harm our business and results of operations.


Item 1B.	*Unresolved Staff Comments*

None.


Item 2.	*Properties*

As of January 2, 2011, our operational facilities consisted of three separate locations: a corporate headquarters and fulfillment center located in Seattle, Washington and a fulfillment center located in Dublin, Ireland. Our corporate headquarters consists of approximately 24,000 square feet of office space and is subject to a sub-lease that expires in April 2011. Our U.S. fulfillment center consists of approximately 27,000 square feet of warehouse space and is subject to a lease that expires in October 2011. Our Ireland fulfillment center consists of approximately 10,000 square feet of combined office and warehouse space and is subject to a lease expiring in December 2011. Certain of the leases include renewal provisions at our option. We believe that the facilities housing our fulfillment centers will be adequate to meet our current requirements for our operations and that suitable additional or substitute space will be available as needed. In January 2011, we signed a new lease agreement for office space for our corporate headquarters. The new lease will commence on May 1, 2011. See Note 13 to the consolidated financial statements included in Item 8 of this Report for additional information.


Item 3.	*Legal Proceedings*

See discussion of legal proceedings in Note 4 to the consolidated financial statements included in Item 8 of this Report.


Item 4.	*(Removed and Reserved)*

PART II


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

Market Information and Dividend Policy

Our Common Stock is quoted on The NASDAQ Stock Market LLC under the symbol “NILE.” On February 17, 2011 we had approximately 41 stockholders based on the number of record holders.

The following table sets forth the high and low sales prices of our common stock for fiscal years 2010 and 2009. The quotations are as reported in published financial sources.


	High		Low

Fiscal year 2010:
First Quarter	$	64.38	$	45.51
Second Quarter	$	58.71	$	44.91
Third Quarter	$	52.25	$	40.70
Fourth Quarter	$	63.10	$	40.86
Fiscal year 2009:
First Quarter	$	36.61	$	18.34
Second Quarter	$	51.23	$	32.03
Third Quarter	$	63.00	$	36.00
Fourth Quarter	$	67.16	$	55.03

We have not paid any cash dividends on our common stock since inception, and it is not anticipated that cash dividends will be paid on shares of our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors.

Performance Measurement Comparison(1)

The following graph compares the total cumulative stockholder return on the Company’s common stock with the total cumulative return of the Nasdaq Market Index and the RDG Internet Composite Index for the five-year period ending on January 2, 2011, our 2010 fiscal year end. Historical stock price performance should not be relied upon as an indication of future stock price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(2)

Among BlueNile, Inc., The NASDAQ Composite Index

and The RDG Internet Composite Index


(1)		This Section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any of our filings under the 1933 Act or the 1934 Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

(2)		Assumes $100 was invested on January 1, 2006 at the closing price on this day, in Blue Nile’s common stock and each index, and all dividends have been reinvested. No cash dividends have been declared on Blue Nile’s common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.


Item 6.	*Selected Consolidated Financial Data*

The table below shows selected consolidated financial data for each of our fiscal years ended January 2, 2011, January 3, 2010, January 4, 2009, December 30, 2007, and December 31, 2006. The consolidated statements of operations data and the additional operating data for each of the fiscal years ended January 2, 2011, January 3, 2010, and January 4, 2009 and the consolidated balance sheets as of January 2, 2011 and January 3, 2010 are derived from our audited consolidated financial statements included elsewhere in this report. The consolidated statements of operations for the fiscal years ended December 30, 2007 and December 31, 2006 and the consolidated balance sheet data as of January 4, 2009, December 30, 2007 and December 31, 2006, are derived from audited consolidated financial statements not included in this report.

You should read the following selected consolidated financial and operating information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The historical results presented below are not necessarily indicative of future results. See Note 10 of the related notes to our consolidated financial statements included in Item 8 of this Report for the calculation of weighted average shares outstanding used in computing basic and diluted net income per share.

BLUE NILE, INC.

SELECTED CONSOLIDATED FINANCIAL DATA


	Year Ended			Year Ended			Year Ended			Year Ended			Year Ended
	January 2,			January 3,			January 4,			December 30,			December 31,
	2011			2010			2009(2)			2007			2006
	(In thousands, except per share data)

Consolidated Statements of Operations Data:
Net sales	$	332,889		$	302,134		$	295,329		$	319,264		$	251,587
Gross profit		71,940			65,344			59,996			65,204			50,853
Selling, general and administrative expenses		50,654			45,997			44,005			42,792			34,296

Operating income		21,286			19,347			15,991			22,412			16,557
Income before income taxes		21,538			19,678			17,856			26,587			19,980
Income tax expense		7,396			6,878			6,226			9,128			6,916

Net income	$	14,142		$	12,800		$	11,630		$	17,459		$	13,064

Basic net income per share	$	0.98		$	0.88		$	0.78		$	1.10		$	0.79
Diluted net income per share	$	0.94		$	0.84		$	0.75		$	1.04		$	0.76
Shares used in computing basic net income per share		14,446			14,534			14,925			15,919			16,563
Shares used in computing diluted net income per share		15,080			15,216			15,505			16,814			17,278
Additional Operating Data:
Net cash provided by (used in) operating activities	$	41,608		$	39,018		$	(2,927	)	$	41,455		$	40,518
Gross profit margin		21.6	%		21.6	%		20.3	%		20.4	%		20.2	%
Selling, general and administrative expenses as a percentage of net sales		15.2	%		15.2	%		14.9	%		13.4	%		13.6	%


	As of		As of		As of		As of		As of
	January 2,		January 3,		January 4,		December 30,		December 31,
	2011		2010		2009(2)		2007		2006
	(In thousands)

Consolidated Balance Sheet Data:
Cash and cash equivalents	$	113,261	$	78,149	$	54,451	$	122,793	$	78,540
Marketable securities		—		—		—		—		19,767
Short-term investments		—		15,000		—		—		—
Accounts receivable		1,771		1,835		1,709		3,576		1,640
Inventories		20,166		19,434		18,834		20,906		14,616
Accounts payable		90,296		76,128		62,291		85,866		66,625
Working capital(1)		34,918		29,662		7,589		53,455		41,881
Total assets		151,811		130,415		89,665		160,586		122,106
Total long-term obligations		830		964		1,213		1,418		666
Total stockholders’ equity		49,061		43,269		19,308		63,477		47,303


(1)		Working capital consists of total current assets, including cash, cash equivalents and short-term investments, less total current liabilities.

(2)		Fiscal year 2008 consists of 53 weeks, which is one week longer than the other fiscal years presented.


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

The following discussion should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the heading “Item 1A. Risk Factors.”

Management Overview

Our long-term financial focus is primarily on sustainable growth in free cash flow¹ Non-GAAP free cash flow is primarily driven by increasing our operating income and efficiently managing working capital and capital expenditures. Increases in operating income primarily result from increases in sales through our websites, improvements in operating margins and the efficient management of operating costs, offset by the investments that we make in longer-term strategic initiatives.

Commitment to Customer Service

Our focus is on delivering an unparalleled customer experience. We design our websites to offer easy to understand, step-by-step guides to visualizing, evaluating, selecting and purchasing diamonds and fine jewelry. We continue to refine the customer service experience in every step of the purchase process from our websites to our customer support, product quality and fulfillment operations. Our customer support centers are staffed with non-commissioned diamond and jewelry consultants who offer advice and guidance to customers via phone, chat or email. Our diamond and jewelry consultants are subject to ongoing training and carry expertise about diamonds and fine jewelry. We continue to invest in optimizing our fulfillment operations to ensure that our customized products can be delivered as soon as one business day, but generally within three business days of order.

Customer feedback and customer satisfaction ratings are among the key non-financial measures we review. We believe that maintaining high overall customer satisfaction is critical to customer referrals and our ongoing efforts to elevate the Blue Nile brand and to increase our net sales and net income. We actively solicit customer feedback on our website functionality as well as on the entire purchase experience.

Differentiating Factors and Value Proposition

We have built an innovative business model designed to deliver exceptional value and service to customers. We have developed relationships with a large number of diamond suppliers with whom we have exclusive agreements as an online retailer. Our unique inventory model allows us to offer our customers access to a large selection of high quality diamonds. In most cases, we purchase diamonds from our suppliers only as our customers place orders from us. As a result, we do not incur the significant costs that would be incurred by physical retail stores to carry high levels of diamond inventory. Our efficient operating model also provides for negative working capital benefits, since payments are received from customers within a few days of shipment of their order, but our vendor payment terms are typically in the 45-120 day range.

As an online retailer, we also do not incur most of the operating costs associated with physical retail stores, including occupancy costs and related overhead. As a result, while our gross profit margins are lower than those typically maintained by traditional diamond and fine jewelry retailers, we are able to realize relatively higher operating income as a percentage of net sales. In the year ended January 2, 2011, we had a 21.6% gross profit margin, as compared to what we believe to be gross profit margins of up to 50% or more by some traditional jewelry retailers. Our lower gross profit margins result from lower retail prices that we offer to our customers. We believe that these lower prices, in turn, will result in increasing our market share in the luxury jewelry retail space.

¹ Blue Nile defines free cash flow, a non-GAAP financial measure, as net cash provided by (used in) operating activities less cash outflows for purchases of fixed assets, including internal use software and website development.

Focus on Growth

A customer’s first purchase from Blue Nile is often an engagement ring. Our goal is to provide an unrivaled customer experience such that we become our customers’ jeweler for life. We have continued to expand our product lines to include non-engagement diamond jewelry as well as other products such as pearls, gemstones and various silver, gold and platinum offerings and watches. Expansion of our product lines has allowed us to broaden our reach with a wider range of price points and merchandise offerings, attracting new customers to our brand. Our satisfied customers are an important source of referrals that we believe will further drive growth.

During 2010, we launched a mobile website designed for iPhone, iPod touch and Android mobile device users. We also launched a free diamond shopping application for iPhone and iPod Touch. The iPhone app and mobile website allow consumers to browse our educational materials, search for diamonds and jewelry, connect to our diamond and jewelry consultants and make a purchase through their mobile device. We believe this blend of convenience and real-time, transparent and in-depth information enhances our customer experience. Further, we increased our marketing and public relations efforts via social media such as Facebook, to create a unique customer experience to celebrate the holidays and to enhance customer awareness. We plan to continue to pursue these opportunities and offerings to expand brand awareness and increase our market share.

We intend to selectively pursue opportunities in international markets in which we can leverage our existing infrastructure and value proposition. In 2010, our international sales grew 30.4% compared to 2009 and represented 13% of our sales for the year. International growth is a priority and we will continue to pursue international growth opportunities based on a number of factors, including, but not limited to, each market’s consumer spending on diamonds and jewelry, adoption rate of online purchasing and overall competitive landscape.

Trends

Throughout 2010, the macroeconomic conditions affected our business. Although U.S. consumer confidence improved in the fourth quarter, high levels of unemployment, unpredictable consumer behavior, economic volatility abroad and various other factors affected consumer spending in 2010. These conditions continue to have an impact on consumer spending, including the sale of luxury products such as diamonds and fine jewelry. Our low-cost business model provides us the flexibility to operate profitably throughout the difficult consumer environment while the industry as a whole has struggled. We believe that our broad selection, focus on exceptional service and the value that we offer resonated with consumers, as demonstrated by our sales and earnings growth in fiscal year 2010.

Critical Accounting Policies

The preparation of our consolidated financial statements requires that we make certain estimates and judgments that affect amounts reported and disclosed in our consolidated financial statements and related notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following are the critical accounting policies that we believe require significant estimation and management judgment.

Revenue Recognition

We recognize revenue and the related gross profit on the date on which ownership passes from Blue Nile to our customers. For customers in the U.S., Canada and the E.U., ownership passes at the time the package is received by the customer. For customers in other locations, ownership passes at the time the product is shipped. As we require customer payment prior to order shipment, any payments received prior to the transfer of ownership are not recorded as revenue. For U.S., Canadian and E.U. shipments, we utilize our freight vendors’ tracking information to determine when delivery has occurred, which is typically within one to three days after shipment. We reduce revenue by a provision for returns, which is estimated based on our historical

product return rates and current economic conditions. Our contracts with our suppliers generally allow us to return diamonds purchased and returned by our customers.

Stock-based Compensation

We account for stock-based compensation at fair value. We use the Black-Scholes-Merton option valuation model, which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”) and the estimated volatility of our common stock price over the expected term (“expected volatility”). Changes in these assumptions can materially affect the estimate of the fair value of employee stock options and consequently, the related amount of stock-based compensation expense recognized in the consolidated statements of operations.

We performed the following sensitivity analysis using changes in the expected term and expected volatility that could be reasonably possible in the near term. If we assumed a six-month increase or decrease in the expected term or a 500 basis point increase or decrease in expected volatility, the value of a newly granted hypothetical stock option would increase (decrease) by the following percentages:


	Increase			Decrease

Expected term(1)		5.4	%		(5.9	)%
Expected volatility(1)		7.2	%		(7.4	)%


(1)		Sensitivity to change in assumptions was determined using the Black-Scholes-Merton valuation model compared to the following original assumptions: stock price and exercise price equal to the closing market price of Blue Nile, Inc. common stock on December 31, 2010, expected term of 4.0 years, expected volatility of 57.93%, expected dividend yield of 0.0% and a risk-free interest rate of 1.22%.

In addition, we estimate the expected forfeiture rate and only recognize stock-based compensation expense for grants that are expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly.

Results of Operations

The following table presents our historical operating results for the periods indicated as a percentage of net sales:


	Year Ended			Year Ended			Year Ended
	January 2,			January 3,			January 4,
	2011			2010			2009

Net sales		100.0	%		100.0	%		100.0	%

Gross profit		21.6			21.6			20.3
Selling, general and administrative expenses		15.2			15.2			14.9

Operating income		6.4			6.4			5.4

Other income, net		0.1			0.1			0.6

Income before income taxes		6.5			6.5			6.0

Income tax expense		2.3			2.3			2.1

Net income		4.2	%		4.2	%		3.9	%

The following describes certain items set forth in our consolidated statements of operations:

Net Sales. Substantially all of our net sales consist of diamonds and fine jewelry sold via the Internet, net of estimated returns. Historically, net sales have been higher in the fourth quarter as a result of higher

consumer spending during the holiday season. We expect this seasonal trend to continue in the foreseeable future.

Gross Profit. Our gross profit consists of net sales less the cost of sales. Our cost of sales includes the cost of merchandise sold to customers, inbound and outbound shipping costs, depreciation on assembly-related assets, insurance on shipments and the costs incurred to set diamonds into ring, earring and pendant settings, including labor and related facilities costs. Our gross profit has fluctuated historically and we expect it to continue to fluctuate based primarily on our product acquisition costs, product mix and pricing decisions.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses consist primarily of payroll and related benefit costs for our employees, stock-based compensation, marketing costs and credit card fees. These expenses also include certain facility-related costs, and fulfillment, customer service, technology and depreciation expenses, as well as professional fees and other general corporate expenses.

Fiscal Year. Our fiscal year generally ends on the Sunday closest to December 31. Each fiscal year consists of four 13-week quarters, with one extra week added in the fourth quarter every five to six years. Our fiscal year 2008 included one extra week in the fourth quarter, or 53 weeks for the fiscal year, as a result of our 4-4-5 retail reporting calendar.

The following table presents our historical operating results, including a comparison of the financial results for the periods indicated (dollars in thousands, except per share data):


							Comparison of						Comparison of
							Year Ended						Year Ended
							January 2, 2011 to						January 3, 2010 to
	Year Ended		Year Ended		Year Ended		Year Ended						Year Ended
	January 2,		January 3,		January 4,		January 3, 2010						January 4, 2009
	2011		2010		2009(1)		$ Change			% Change			$ Change			% Change

Net sales	$	332,889	$	302,134	$	295,329	$	30,755			10.2	%	$	6,805			2.3	%
Cost of sales		260,949		236,790		235,333		24,159			10.2	%		1,457			0.6	%

Gross profit		71,940		65,344		59,996		6,596			10.1	%		5,348			8.9	%
Selling, general and administrative expenses		50,654		45,997		44,005		4,657			10.1	%		1,992			4.5	%

Operating income		21,286		19,347		15,991		1,939			10.0	%		3,356			21.0	%
Other income, net:
Interest income, net		35		122		1,420		(87	)		(71.3	)%		(1,298	)		(91.4	)%
Other income, net		217		209		445		8			3.8	%		(236	)		(53.0	)%

		252		331		1,865		(79	)		(23.9	)%		(1,534	)		(82.3	)%

Income before income taxes		21,538		19,678		17,856		1,860			9.5	%		1,822			10.2	%
Income tax expense		7,396		6,878		6,226		518			7.5	%		652			10.5	%

Net income	$	14,142	$	12,800	$	11,630	$	1,342			10.5	%	$	1,170			10.1	%

Basic net income per share	$	0.98	$	0.88	$	0.78	$	0.10			11.4	%	$	0.10			12.8	%

Diluted net income per share	$	0.94	$	0.84	$	0.75	$	0.10			11.9	%	$	0.09			12.0	%


(1)		Fiscal year 2008 consists of 53 weeks, which is one week longer than the other fiscal years presented

Comparison of Year Ended January 2, 2011 to Year Ended January 3, 2010

Net Sales

Net sales increased 10.2% in the year ended January 2, 2011, compared with the year ended January 3, 2010, due to an increase in average shipment value, and to a lesser extent, an increase in the number of orders

shipped to customers. Sales of our non-engagement jewelry grew at a rate above our overall sales growth rate. Year over year sales trends started strong in the first quarter but slowed down considerably in the third quarter as U.S. consumers pulled back on spending over concerns about high unemployment rates, limited access to credit and other macroeconomic factors. U.S. consumer confidence improved in the fourth quarter and combined with our increased marketing and public relations efforts, and expanded product offerings during the holiday season, sales grew to $114.8 million in the fourth quarter, a record high for any quarter in the Company’s history.

Net sales in the U.S. increased by 7.7% to $289.6 million in 2010 compared with $268.9 million in the prior year. International sales increased 30.4% to $43.3 million for the year ended January 2, 2011, compared to $33.2 million for the year ended January 3, 2010. Increased marketing efforts and expanded brand awareness contributed to the increase in U.S. and international sales. The strength of foreign currencies against the U.S. dollar also contributed to international sales growth. Internally, we monitor our international sales performance on a non-GAAP basis which eliminates the positive or negative effects that result from translating international sales into U.S. dollars (“constant exchange rate basis”). International sales growth was positively impacted approximately 7.2% due to changes in foreign exchange rates in 2010 compared to the rates in effect during 2009. Excluding the impact of changes in foreign exchange rates, international sales increased 23.2% in the year ended January 2, 2011.

Gross Profit

Gross profit increased $6.6 million or 10.1% in the year ended January 2, 2011 compared to the year ended January 3, 2010. The increase in gross profit is primarily due to the increase in net sales. Gross profit as a percentage of net sales was equivalent to the prior year at 21.6% in the year ended January 2, 2011 compared to 21.6% in the year ended January 3, 2010.

Costs for our jewelry products are impacted by prices for diamonds and precious metals, including gold, platinum and silver, which rise and fall based upon global supply and demand dynamics. In making retail pricing decisions, we take into account fluctuations in the pricing of diamonds and precious metals, which in turn, affect the gross margin that we realize from such products. While prices for diamonds and precious metals will continue to fluctuate based upon global supply and demand dynamics, we cannot adequately predict the amount and timing of any such fluctuations. We expect that gross profit will fluctuate in the future based on changes in product acquisition costs, particularly diamond prices, product mix and pricing decisions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 10.1% to $50.7 million in the year ended January 2, 2011 compared to $46.0 million in the year ended January 3, 2010 due to several factors. Marketing and advertising costs increased $2.8 million, primarily due to increased investment in online marketing and public relations to drive brand awareness and traffic in support of our growth initiatives. Compensation and related expenses increased $0.7 million due to increased headcount in support of key business initiatives and growth in sales volumes, partially offset by lower year-over-year incentive accruals. Credit card interchange and payment processing fees increased $0.7 million based upon higher sales volume. Depreciation expense related to additional capitalized assets added approximately $0.5 million to expenses. As a percentage of net sales, selling, general and administrative expenses were 15.2% for each of the years ended January 3, 2011 and January 3, 2010.

Other Income, Net

The decrease in interest income for the year ended January 2, 2011 as compared with the year ended January 3, 2010 was due to lower interest rates, partially offset by higher overall cash balances.

Income Taxes

The effective income tax rate for the year ended January 2, 2011 was 34.3% due to lower taxable income in fiscal year 2010 as compared to 35.0% for the year ended January 3, 2010.

Comparison of Year Ended January 3, 2010 to Year Ended January 4, 2009

Net Sales

Net sales increased 2.3% in the year ended January 3, 2010, compared with the year ended January 4, 2009. Excluding the additional week of sales included in 2008, net sales would have increased 3.3% in 2009 when compared to the prior year. The increase in net sales was due to an increase in the average retail value per order shipped, partially offset by a decrease in the number of orders shipped to customers. Year over year sales trends improved each quarter of the year culminating with strong performance in the fourth quarter of 2009, which had 20.0% sales growth. Net sales in the U.S. increased by 0.5% to $268.9 million in 2009 compared with $267.6 million in the prior year. International sales increased 19.9% to $33.2 million for the year ended January 3, 2010, compared to $27.7 million for the year ended January 4, 2009.

Our core bridal jewelry category experienced sales trends consistent with the overall business. Sales of our non-engagement jewelry, which is more discretionary, were more impacted by the pullback in consumer spending and were weak in the first half of 2009. Our non-engagement jewelry sales began to improve in the third quarter and strengthened considerably in the fourth quarter holiday season.

International sales contributed significantly to the overall increase in net sales in 2009, representing 1.9% of the 2.3% sales growth. In 2009, we enhanced our websites, expanding our customers’ ability to shop and transact in 22 additional foreign currencies. We believe this expansion, increased marketing efforts and expanded brand awareness contributed to the increase in our international sales in 2009 compared to 2008. International sales growth was negatively impacted approximately 7.5% due to changes in foreign exchange rates in 2009 compared to the rates in effect during 2008. Excluding the impact of changes in foreign exchange rates, international sales increased 27.4% in the year ended January 3, 2010.

Gross Profit

Gross profit increased $5.3 million or 8.9% in the year ended January 3, 2010 compared to the year ended January 4, 2009, primarily due to the $6.8 million increase in net sales. Gross profit as a percentage of net sales increased by 130 basis points to 21.6% in the year ended January 3, 2010 compared to 20.3% in the year ended January 4, 2009. The increase in gross profit as a percentage of sales is attributable to the continued emphasis on cost optimization related to product sourcing and product sales mix.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 4.5% to $46.0 million in the year ended January 3, 2010 compared to $44.0 million in the year ended January 3, 2009 due to several factors. Incentive compensation was approximately $1.3 million compared to zero in the prior year. A $0.4 million increase in payroll and related expenses was attributable to technology projects in support of business growth and key initiatives, as well as general staffing levels. Depreciation expense related to additional capitalized assets added approximately $0.5 million to expenses. Credit card processing fees increased $0.3 million due to higher sales volumes. Stock-based compensation expense increased approximately $0.2 million primarily due to lower expenses in the prior year related to forfeited options of former employees. These increases were offset by a $0.6 million decrease in marketing and advertising costs primarily related to decreased spending in online marketing vehicles and a $0.6 million decrease in legal expenses due to lower spending on intellectual property and other corporate matters. As a percentage of net sales, selling, general and administrative expenses were 15.2% and 14.9% for the years ended January 3, 2010 and January 4, 2009, respectively.

Other Income, Net

The decrease in interest income for the year ended January 3, 2010 as compared with the year ended January 4, 2009 was due to lower interest rates.

Income Taxes

The effective income tax rate for the year ended January 3, 2010 was 35.0% as compared to 34.9% for the year ended January 4, 2009.

Liquidity and Capital Resources

We are primarily funded by our cash flows from operations. The significant components of our working capital are inventory and liquid assets such as cash and trade accounts receivable, reduced by accounts payable and accrued expenses. Our business model provides certain beneficial working capital characteristics. While we collect cash from sales to customers within several business days of the related sale, we typically have extended payment terms with our suppliers.

Our liquidity is primarily dependent upon our net cash from operating activities. Our net cash from operating activities is sensitive to many factors, including changes in working capital. Working capital at any specific point in time is dependent upon many variables, including our operating results, seasonality, inventory management and assortment expansion, the timing of cash receipts and payments, and vendor payment terms.

As of January 2, 2011, working capital totaled $34.9 million, consisting of cash and cash equivalents of $113.3 million, inventory of $20.2 million and other current assets totaling approximately $3.3 million, offset by accounts payable of $90.3 million and other current liabilities totaling approximately $11.6 million. Due to the seasonal nature of our business, cash and cash equivalents, inventory and accounts payable are generally higher in the fourth quarter, resulting in fluctuations in our working capital.

Net cash provided by operating activities was $41.6 million in the year ended January 2, 2011 compared to net cash provided by operating activities of $39.0 million in the year ended January 3, 2010 and net cash used in operating activities of $2.9 million in the year ended January 4, 2009. The increase in cash provided by operating activities in the year ended January 2, 2011 was primarily attributable to higher net income and the tax benefits realized upon the exercise of stock options. The tax benefit realized from options exercises, which represent the tax deductions in excess of stock compensation expense recorded in the financial statements, increased to $4.6 million in the year ended January 2, 2011, from $1.8 million in the year ended January 3, 2010 due to the number of options exercised and the market price of our common stock. The increase in cash was also due to the working capital dynamics of our model associated with the increase in sales in the fourth quarter and the resulting build up in accounts payable. Accounts payable increased by $14.2 million in the year ended January 2, 2011 compared to an increase of $13.8 million in the year ended January 3, 2010. We experience greater cash flow from operations in our fourth quarter compared to other quarters due to the significant increase in revenue from our holiday sales. In the first quarter we typically have a significant pay down of our accounts payable balance that was accumulated during the fourth quarter holiday season. These increases were partially offset by a lower cash benefit provided by changes in accrued liabilities. Accrued liabilities increased by $1.7 million in the year ended January 2, 2011 compared to a net increase of $3.2 million in the year ended January 3, 2010.

The increase in cash provided by operating activities in the year ended January 3, 2010 compared to the year ended January 4, 2009 was primarily attributable to the increase in accounts payable of $13.8 million in the year ended January 3, 2010 compared to a decrease of $23.6 million in the year ended January 4, 2009. Similarly, accrued liabilities increased $3.2 million at January 3, 2010 compared to a net decrease of $3.0 million in the year ended January 4, 2009. Tax benefits realized upon the exercise of stock options increased to $1.8 million in the year ended January 3, 2010, from $0.5 million in the year ended January 4, 2009 due to the number of options exercised and the market price of our common stock. These increases were partially offset by a decrease in working capital from inventory of $0.6 million for the year ended January 3, 2010 compared to a net increase in working capital from inventory of $2.1 million for the year ended January 4, 2009.

Net cash of $13.2 million was provided by investing activities in the year ended January 2, 2011, due to the maturity of $15.0 million in short-term investments, partially offset by purchases of $1.8 million in property and equipment. Net cash of $17.3 million was used in investing activities in the year ended January 3,

2010 due to the purchase of $15.0 million in short-term investments and $2.3 million of property and equipment. Net cash used in investing activities of $2.0 million for the year ended January 4, 2009 was due to the net purchase of property and equipment.

Our capital needs are generally minimal and include investments in technology and websites enhancements, capital improvements to our leased warehouse and office facilities, and furniture and equipment. Additionally, we have the ability to reduce and/or delay capital investments in challenging economic conditions without significant disruption to our business or operations. Over the next 12 months, we expect to purchase property and equipment in connection with our new corporate office space resulting in higher capital expenditures in 2011 compared to 2010.

Net cash used by financing activities in the year ended January 2, 2011 was $19.6 million, primarily related to the repurchases of common stock. This was partially offset by proceeds from stock option exercises of $5.4 million. During the year ended January 2, 2011 we repurchased 0.5 million shares of our common stock for an aggregate purchase price of approximately $25.3 million. Since the inception of our buyback programs in the first quarter of 2005 through January 2, 2011, we have repurchased 4.9 million shares for a total of $186.5 million. Shares may be repurchased from time to time in open market transactions or in negotiated transactions off the market. The timing and amount of any shares repurchased are determined by management based on our evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan. We continually assess market conditions, our cash position, operating results, current forecasts and other factors when making decisions about stock repurchases.

Net cash provided by financing activities in the year ended January 3, 2010 was $2.0 million, primarily related to the proceeds from stock option exercises. Net cash used in financing activities in the year ended January 4, 2009 was $63.4 million, related to the repurchase of our common stock and partially offset by proceeds from stock option exercises.

The following table summarizes our contractual obligations and the expected effect on liquidity and cash flows as of January 2, 2011 (in thousands).


			Less Than						Over 5
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		Years

Operating leases(1)	$	792	$	299	$	360	$	133	$	—
Financing obligation		251		61		136		54		—
Purchase obligations(2)		9,661		9,661		—		—		—
Purchase obligations(3)		115		105		10		—		—

	$	10,819	$	10,126	$	506	$	187	$	—


(1)		On January 6, 2011, we entered a lease agreement for our new corporate headquarters, which we plan to occupy on May 2011 upon the expiration of our current lease. Future rental obligations for the new office lease are not included in the table and are as follows (in thousands): $279 (less than 1 year), $1,389 (1-3 years), $1,475 (3-5 years) and $4,630 (over 5 years).

(2)		Includes open merchandise purchase orders at January 2, 2011.

(3)		Includes commitments for advertising and marketing and other services at January 2, 2011.

We believe that our current cash and cash equivalent balances will be sufficient to meet our anticipated operating and capital expenditure needs for at least the next 12 months. We do not carry any long or short-term debt. However, projections of future cash needs and cash flows are subject to many factors and to uncertainty. We continually assess our capital structure and opportunities to obtain credit facilities, sell equity or debt securities, or undertake other transactions for strategic reasons or to further strengthen our financial position. However, there can be no assurance that additional equity, debt or other financing transactions will be available in amounts or on terms acceptable to us, if at all.

Off-Balance Sheet Arrangements

At January 2, 2011, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Impact of Inflation

The effect of inflation and changing prices on our operations was not significant during the periods presented.


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

Foreign Currency Exchange Risk

The majority of our revenue, expense and capital expenditures are transacted in U.S. dollars. Our customers’ ability to purchase our products in 24 foreign currencies exposes us to foreign currency exchange risk from the transaction date to when the cash is ultimately converted to U.S. dollars. Because the majority of foreign currency transactions are through third party credit cards that settle within three to four business days, the impact of foreign currency exchange was not material to our results of operations for the fiscal years ended January 2, 2011 and January 3, 2010.

The functional currency of Jewellery, our Irish subsidiary is the Euro. Assets and liabilities of Jewellery are translated into U.S. dollars at the exchange rate prevailing at the end of the period. Income and expenses are translated into U.S. dollars at an average exchange rate during the period. Foreign currency gains and losses from the translation of Jewellery’s balance sheet and income statement at January 2, 2011 was a net translation loss of $0.1 million that was recognized in other comprehensive income.

Interest Rate Risk

We are exposed to financial market risk that results primarily from fluctuations in interest rates. We maintain the majority of our cash, cash equivalents and short-term investments in accounts with major financial institutions within and outside the United States, in the form of demand deposits, money market accounts and other short-term investments. Deposits in these institutions may exceed the amounts of insurance provided, or deposits may not at all be covered by insurance. To date, we have not experienced any losses on our deposits of cash, cash equivalents and short-term investments.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in short-term, high quality, interest bearing securities. To minimize our exposure to an adverse shift in interest rates, we invest in short-term securities and maintain an average maturity of one year or less. If interest rates had averaged 100 basis points higher than they did in the year ended January 2, 2011, interest income for the year would have increased approximately 1,145.5%, or $0.6 million. If interest rates had averaged 100 basis points higher than they did in the year ended January 3, 2010, interest income for the year would have increased approximately 319%, or $0.5 million.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Blue Nile, Inc.

Seattle, Washington

We have audited the accompanying consolidated balance sheets of Blue Nile, Inc., and subsidiaries (the “Company”) as of January 2, 2011 and January 3, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended January 2, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of January 2, 2011 and January 3, 2010, and the results of its operations and its cash flows for each of the three fiscal years in the period ended January 2, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 2, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2011, expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Seattle, Washington

February 28, 2011

BLUE NILE, INC.

Consolidated Balance Sheets

(In thousands, except par value)


	January 2,			January 3,
	2011			2010

ASSETS
Current assets:
Cash and cash equivalents	$	113,261		$	78,149
Short-term investments		—			15,000
Trade accounts receivable		1,405			1,594
Other accounts receivable		366			241
Inventories		20,166			19,434
Deferred income taxes		557			449
Prepaids and other current assets		1,083			977

Total current assets		136,838			115,844
Property and equipment, net		6,157			7,332
Intangible assets, net		274			325
Deferred income taxes		8,424			6,769
Other assets		118			145

Total assets	$	151,811		$	130,415


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	90,296		$	76,128
Accrued liabilities		11,490			9,805
Current portion of long-term financing obligation		48			44
Current portion of deferred rent		86			205

Total current liabilities		101,920			86,182
Long-term financing obligation, less current portion		748			796
Deferred rent, less current portion		82			168
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.001 par value; 300,000 shares authorized; 20,212 shares and 19,810 shares issued, respectively; 14,539 shares and 14,644 shares outstanding, respectively		20			20
Additional paid-in capital		173,143			156,030
Accumulated other comprehensive (loss) income		(66	)		61
Retained earnings		63,141			48,999
Treasury stock, at cost; 5,673 shares and 5,166 shares outstanding, respectively		(187,177	)		(161,841	)

Total stockholders’ equity		49,061			43,269

Total liabilities and stockholders’ equity	$	151,811		$	130,415

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

BLUE NILE, INC.

Consolidated Statements of Operations

(In thousands, except per share data)


	Year Ended		Year Ended		Year Ended
	January 2,		January 3,		January 4,
	2011		2010		2009

Net sales	$	332,889	$	302,134	$	295,329
Cost of sales		260,949		236,790		235,333

Gross profit		71,940		65,344		59,996
Selling, general and administrative expenses		50,654		45,997		44,005

Operating income		21,286		19,347		15,991
Other income, net:
Interest income, net		35		122		1,420
Other income, net		217		209		445

Total other income, net		252		331		1,865

Income before income taxes		21,538		19,678		17,856
Income tax expense		7,396		6,878		6,226

Net income	$	14,142	$	12,800	$	11,630

Basic net income per share	$	0.98	$	0.88	$	0.78

Diluted net income per share	$	0.94	$	0.84	$	0.75

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

BLUE NILE, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands)


												Accumulated
					Additional							Other									Total
	Common Stock				Paid-in		Deferred Stock					Comprehensive			Treasury Stock						Stockholders’
	Shares		Amount		Capital		Compensation			Retained Earnings		Income (Loss)			Shares			Amount			Equity

Balance, December 30, 2007		19,513	$	20	$	134,207	$	(3	)	$	24,569	$	75			(3,540	)	$	(95,391	)	$	63,477
Net income		—		—		—		—			11,630		—			—			—			11,630
Other comprehensive income (loss):
Foreign currency translation adjustment		—		—		—		—			—		(58	)		—			—			(58	)

Total comprehensive income		—		—		—		—			—		—			—			—			11,572
Tax benefit from exercise of stock options		—		—		510		—			—		—			—			—			510
Amortization of deferred stock compensation		—		—				3			—		—			—			—			3
Exercise of common stock options		142		—		2,989		—			—		—			—			—			2,989
Issuance of common stock to directors		4		—		130		—			—		—			—			—			130
Stock-based compensation		—		—		7,077		—			—		—			—			—			7,077
Repurchase of common stock		—		—		—		—			—		—			(1,626	)		(66,450	)		(66,450	)

Balance, January 4, 2009		19,659		20		144,913		—			36,199		17			(5,166	)		(161,841	)		19,308
Net income		—		—		—		—			12,800		—			—			—			12,800
Other comprehensive income (loss):
Foreign currency translation adjustment		—		—		—		—			—		44			—			—			44

Total comprehensive income		—		—		—		—			—		—			—			—			12,844
Tax benefit from exercise of stock options		—		—		1,793		—			—		—			—			—			1,793
Exercise of common stock options		147		—		1,903		—			—		—			—			—			1,903
Issuance of common stock to directors		4		—		160		—			—		—			—			—			160
Stock-based compensation		—		—		7,261		—			—		—			—			—			7,261

Balance, January 3, 2010		19,810		20		156,030		—			48,999		61			(5,166	)		(161,841	)		43,269
Net income		—		—		—		—			14,142		—			—			—			14,142
Other comprehensive income (loss):
Foreign currency translation adjustment		—		—		—		—			—		(127	)		—			—			(127	)

Total comprehensive income		—		—		—		—			—		—			—			—			14,015
Tax benefit from exercise of stock options		—		—		4,595		—			—		—			—			—			4,595
Exercise of common stock options		393		—		5,392		—			—		—			—			—			5,392
Issuance of common stock to directors		3		—		120		—			—		—			—			—			120
Vesting of restricted stock units		6		—		—		—			—		—			—			—			—
Stock-based compensation		—		—		7,006		—			—		—			—			—			7,006
Repurchase of common stock		—		—		—		—			—		—			(507	)		(25,336	)		(25,336	)

Balance, January 2, 2011		20,212	$	20	$	173,143	$	—		$	63,141	$	(66	)		(5,673	)	$	(187,177	)	$	49,061

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

BLUE NILE, INC.

Consolidated Statements of Cash Flows

(In thousands)


	Year Ended			Year Ended			Year Ended
	January 2,			January 3,			January 4,
	2011			2010			2009

Operating activities:
Net income	$	14,142		$	12,800		$	11,630
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		3,129			2,593			2,110
Loss on disposal of property and equipment		26			63			20
Stock-based compensation		6,982			7,325			7,114
Deferred income taxes		(1,763	)		(1,534	)		(1,396	)
Tax benefit from exercise of stock options		4,595			1,793			510
Excess tax benefit from exercise of stock options		(413	)		(118	)		(142	)
Changes in assets and liabilities:
Receivables		64			(126	)		1,867
Inventories		(732	)		(600	)		2,072
Prepaid expenses and other assets		(78	)		36			(21	)
Accounts payable		14,199			13,794			(23,575	)
Accrued liabilities		1,663			3,196			(2,967	)
Deferred rent and other		(206	)		(204	)		(149	)

Net cash provided by (used in) operating activities		41,608			39,018			(2,927	)
Investing activities:
Purchases of property and equipment		(1,843	)		(2,345	)		(2,010	)
Proceeds from the sale of property and equipment		—			—			10
Purchase of short-term investments		—			(15,000	)		—
Proceeds from maturity of short-term investments		15,000			—			—

Net cash provided by (used in) investing activities		13,157			(17,345	)		(2,000	)
Financing activities:
Repurchase of common stock		(25,336	)		—			(66,450	)
Proceeds from stock option exercises		5,392			1,903			2,989
Excess tax benefit from exercise of stock options		413			118			142
Principal payments under long-term financing obligation		(44	)		(40	)		(38	)

Net cash (used in) provided by financing activities		(19,575	)		1,981			(63,357	)

Effect of exchange rate changes on cash and cash equivalents		(78	)		44			(58	)

Net increase (decrease) in cash and cash equivalents		35,112			23,698			(68,342	)
Cash and cash equivalents, beginning of period		78,149			54,451			122,793

Cash and cash equivalents, end of period	$	113,261		$	78,149		$	54,451

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

BLUE NILE, INC.

Consolidated Statements of Cash Flows

(In thousands)


	Year Ended		Year Ended		Year Ended
	January 2,		January 3,		January 4,
	2011		2010		2009

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	2,793	$	6,777	$	7,342
Cash paid for interest relating to long-term financing obligation		16		19		21

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

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.	Description of the Company and Summary of Significant Accounting Policies

The Company

Blue Nile, Inc. (the “Company”) is the leading online retailer of high quality diamonds and fine jewelry. In addition to sales of diamonds, fine jewelry and watches, the Company provides education, guidance and support to enable customers to more effectively learn about and purchase diamonds as well as classically styled fine jewelry. The Company, a Delaware corporation, based in Seattle, Washington, was formed in March 1999. The Company serves consumers in over 40 countries and territories all over the world and maintains its primary website at www.bluenile.com. The Company also operates the www.bluenile.co.uk and www.bluenile.ca websites.

Fiscal Year

The Company’s fiscal year ends on the Sunday closest to December 31. Each fiscal year consists of four 13-week quarters, with one extra week added in the fourth quarter every five to six years. The Company’s fiscal year 2008, which ended January 4, 2009, included one extra week in the fourth quarter as a result of the Company’s 4-4-5 retail reporting calendar.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Blue Nile, LLC (“LLC”), Blue Nile Worldwide, Inc. (“Worldwide”), and Blue Nile Jewellery, Ltd. (“Jewellery”). The Company, LLC and Worldwide are Delaware corporations located in Seattle, Washington. Jewellery is an Irish limited company located in Dublin, Ireland. All intercompany transactions and balances are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates include the allowance for sales returns and assumptions used to determine stock-based compensation expense. Actual results could differ materially from those estimates.

Foreign Currency

The functional currency of Jewellery is the Euro. The assets and liabilities of Jewellery have been translated to U.S. dollars using the exchange rates effective on the balance sheet dates, while income and expense accounts are translated at the average rates in effect during the periods presented. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss).

The Company offers customers the ability to transact in 24 foreign currencies. In addition, some of the Company’s entities engage in transactions denominated in currencies other than the entity’s functional currency. Gains or losses arising from these transactions are recorded in “Other income, net” in the consolidated statements of operations.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update No. 2010-06 (“ASU 2010-06”), “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 requires reporting entities to make new disclosures about

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-06 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 in the first quarter of 2010 did not have a material impact on the Company’s financial statement disclosures.

Concentration of Risk

The Company maintains the majority of its cash, cash equivalents and short-term investments in accounts with four major financial institutions within and outside the United States, in the form of demand deposits, money market accounts, time deposits and other short-term investments. Deposits in these institutions may exceed the amounts of insurance provided, or deposits may not at all be covered by insurance. The Company has not experienced any losses on its deposits of cash, cash equivalents or short-term investments. The Company’s trade accounts receivable are derived from credit card purchases from customers and the majority are settled within two business days.

The Company’s ability to acquire diamonds and fine jewelry is dependent on its relationships with various suppliers from whom it purchases diamonds and fine jewelry. The Company has reached agreements with certain suppliers to provide access to their inventories of diamonds for its customers, but the terms of these agreements are limited and do not govern the purchase of diamonds for its inventory. The Company’s inability to maintain these and other future diamond and fine jewelry supply relationships on commercially reasonable terms would cause its business to suffer and revenues to decline. Purchase concentration by major supply vendor in fiscal year 2010 with comparative information for fiscal years 2009 and 2008, is as follows:


	Year Ended
	January 2,			January 3,			January 4,
	2011			2010			2009
	Payments			Payments			Payments

Vendor A		12	%		10	%		9	%
Vendor B		8	%		7	%		7	%
Vendor C		8	%		7	%		6	%

		28	%		24	%		22	%

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less, from the date of purchase, to be cash equivalents.

Short-term Investments

The Company classifies highly liquid investments with maturities greater than three months but less than one year as short-term investments. In August 2009, the Company purchased an investment in the form of a time deposit with a financial institution. The $15.0 million investment matured in January 2010.

Inventories

The Company’s diamond, fine jewelry and watch inventories are classified at the lower of cost or market, using the specific identification method for diamonds and weighted average cost method for fine jewelry and watches. The Company also lists loose diamonds and watches on its websites that are typically not included in inventory until the Company receives a customer order for those diamonds or watches. Upon receipt of a

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

customer order, the Company purchases a specific diamond or watch and records it in inventory until it is delivered to the customer, at which time the revenue from the sale is recognized and inventory is relieved.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and the related gain or loss is reported in the statement of operations. Estimated useful lives by major asset category are as follows:


Asset		Life (in years)

Software		2-5
Computers and equipment		3-5
Leasehold improvements		Shorter of lease term or asset life
Building		Shorter of lease term or asset life
Furniture and fixtures		5-7

Capitalized Software

The Company capitalizes costs to develop its websites and internal-use software and amortizes such costs on a straight-line basis over the estimated useful life of the software once it is available for use.

Impairment of Long-Lived Assets

The Company reviews the carrying value of its long-lived assets, including property and equipment and definite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated future cash inflows attributable to the assets, less estimated future cash outflows, are less than the carrying amount, an impairment loss would be recognized.

Intangible Assets

Intangible assets are recorded at cost and consist primarily of the costs incurred to acquire licenses and other similar agreements with finite lives, which were acquired in October 2004 and April 2009. The gross carrying amount of these licenses was $0.5 million as of January 2, 2011 and $0.5 million as of January 3, 2010. Accumulated amortization was $260,000 and $209,000 as of January 2, 2011 and January 3, 2010, respectively. Amortization expense was $51,000 in the fiscal year ended January 2, 2011 and $46,000 in the fiscal year ended January 3, 2010. Amortization expense is estimated to be $51,000 in fiscal 2011, $51,000 in fiscal 2012, $48,000 in fiscal 2013, $30,000 in fiscal 2014, and $15,000 in fiscal 2015.

Intangible assets that are not being amortized relate to the Company’s domain names, with total carrying amounts of $33,000 as of January 2, 2011 and January 3, 2010 respectively. These assets are tested for impairment annually and more frequently if certain circumstances indicate that impairment may have occurred.

Fair Value of Financial Instruments

The carrying amounts for the Company’s cash, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities.

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Treasury Stock

Treasury stock is recorded at cost and consists primarily of the repurchase of the Company’s common stock in the open market.

Income Taxes

Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. Future tax benefits, such as return reserves, are recognized to the extent that realization of such benefits is considered to be more likely than not.

The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. The Company does not have any unrecognized tax benefits. If interest and penalties related to unrecognized tax benefits were incurred, such amounts would be included in the Company’s provision for income taxes.

Revenue Recognition

Net sales consist of products sold via the Internet and shipping revenue, net of estimated returns and promotional discounts and excluding sales taxes. The Company recognizes revenue when all of the following have occurred: persuasive evidence of an agreement with the customer exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectability of the selling price is reasonably assured. The Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned. Revenue is recorded at the gross amount when the Company is the primary obligor, is subject to inventory and credit risk, has latitude in establishing price and product specification, or has most of these indicators. When the Company is not primarily obligated and has no latitude in establishing the price, revenue will be recorded at the net amount earned.

The Company requires payment at the point of sale. Amounts received before the customer assumes the risk of loss are not recorded as revenue. For sales to customers in the U.S., Canada and the E.U., the Company recognizes revenue when delivery has occurred. For international sales, other than to Canada and the E.U., revenue is recognized upon shipment. The Company generally offers a return policy of 30 days and provides an allowance for sales returns during the period in which the sales are made. At January 2, 2011 and January 3, 2010, the reserve for sales returns was $1.0 million and $0.9 million, respectively, and was recorded as an accrued liability. Sales and cost of sales reported in the consolidated statements of operations are reduced to reflect estimated returns. The estimates are based on the Company’s historical product return rates and current economic conditions.

The Company generally does not extend credit to customers, except through third party credit cards. The majority of sales are through credit cards, and accounts receivable are composed primarily of amounts due from financial institutions related to credit card sales. The Company does not maintain an allowance for doubtful accounts because payment is typically received within two business days after the sale is complete.

Shipping and Handling Costs

The Company’s shipping and handling costs primarily include payments to third-parties for shipping merchandise to the Company’s customers. Shipping and handling costs of $3.2 million, $2.8 million and

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$3.0 million in the fiscal years ended January 2, 2011, January 3, 2010 and January 4, 2009, respectively, were included in cost of sales.

Cost of Sales

Cost of sales consists of the cost of merchandise sold to customers, inbound and outbound shipping costs, depreciation on assembly related costs, insurance on shipments and the costs incurred to set diamonds into ring, earring and pendant settings, including labor and related facility costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of payroll and related benefit costs for the Company’s employees, marketing costs, stock-based compensation and credit card fees. These expenses also include certain facility-related costs, and fulfillment, customer service, technology and depreciation expenses, as well as professional fees and other general corporate expenses.

Fulfillment costs include costs incurred in operating and staffing the fulfillment center, including costs attributable to receiving, inspecting and warehousing inventories and picking, packaging and preparing customers’ orders for shipment. Fulfillment costs in the years ended January 2, 2011, January 3, 2010 and January 4, 2009 were approximately $3.3 million, $3.0 million and $2.9 million, respectively.

The Company has procedures in place to detect and prevent credit card fraud because the Company has exposure to losses from fraudulent charges. The Company records a reserve for fraud losses based on the Company’s historical rate of such losses. This reserve is recorded as an accrued liability and amounted to $0.1 million at January 2, 2011 and $0.09 million at January 3, 2010.

Marketing

Marketing costs are expensed as incurred. Costs associated with web portal advertising contracts are amortized over the period such advertising is expected to be used. Costs of advertising associated with radio, print and other media are expensed when such services are used. Marketing expense for the years ended January 2, 2011, January 3, 2010 and January 4, 2009 was approximately $14.5 million, $11.6 million and $12.4 million, respectively.

Stock-Based Compensation

The Company measures compensation cost for all stock options and restricted stock units granted based on fair value on the date of the grant. Stock-based compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period for each stock option or restricted stock unit grant. The fair value of each stock option granted is estimated on the grant date using the Black-Scholes-Merton option valuation model. The fair value of each restricted stock unit is based on the fair market value of the Company’s common stock on the date of the grant. See Note 6 for additional details.


Note 2.	Inventories

Inventories consist of the following (in thousands):


	January 2,		January 3,
	2011		2010

Loose diamonds	$	732	$	297
Fine jewelry, watches and other		19,434		19,137

	$	20,166	$	19,434

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Property and Equipment

Property and equipment consist of the following (in thousands):


	January 2,			January 3,
	2011			2010

Computers and equipment	$	3,525		$	3,902
Software and website development		9,855			8,343
Leasehold improvements		4,940			5,467
Furniture and fixtures		682			679
Building		940			940

		19,942			19,331
Less: accumulated depreciation and amortization		(13,785	)		(11,999	)

Property and equipment, net	$	6,157		$	7,332

Total depreciation expense was $3.1 million, $2.5 million and $2.1 million in the years ended January 2, 2011, January 3, 2010 and January 4, 2009, respectively.

Capitalized software costs include external direct costs and internal direct labor and related employee benefits costs of developing software for internal use. Amortization begins in the period in which the software is ready for its intended use. The Company had $2.7 million of unamortized computer software and website development costs at January 2, 2011 and January 3, 2010. Depreciation and amortization of capitalized software and website development costs was $1.6 million, $1.1 million and $0.7 million in the years ended January 2, 2011, January 3, 2010 and January 4, 2009, respectively.


Note 4.	Commitments and Contingencies

Leases

The Company leases its office and warehouse facilities and some equipment under non-cancelable lease agreements with initial terms that generally range from three to seven years. Certain of the leases include renewal provisions at the Company’s option. At the inception of the lease, the Company evaluates each agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. The office and warehouse leases contain rent escalation clauses and rent holidays. Rent expense is recorded on a straight-line basis over the lease term with the difference between the rent paid and the straight-line rent expense recorded as a deferred rent liability. Lease incentive payments received from the landlord are recorded as deferred rent liabilities and are amortized on a straight-line basis over the lease term as a reduction in rent. At January 2, 2011 and January 3, 2010, the deferred rent balance related to lease incentives was $0.1 million and $0.3 million, respectively.

During 2007, the Company made tenant improvements to its U.S. fulfillment center. Due to its financial involvement in the construction of the leased property, the Company recorded the building as property and equipment during the construction period. Upon completion, the transaction did not meet the criteria for sale-leaseback accounting, and accordingly, has been recorded as a long-term financing obligation.

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Future minimum lease payments at January 2, 2011 are as follows (in thousands):


	Financing			Operating
	Obligation			Leases

2011	$	61		$	299
2012		68			181
2013		68			179
2014		54			133

Total minimum lease payments		251		$	792

Less: amounts representing interest		(30	)

Present value of minimum lease payments		221
Residual value		575
Less: current maturities		(48	)

Total long-term financing obligation less current maturities	$	748

As of January 2, 2011 and January 3, 2010, assets under the long-term financing obligation amounted to $0.8 million net of accumulated depreciation of $172,000 and $121,000, respectively. Such assets are classified within property and equipment, net, in the accompanying balance sheets. The residual value of the long-term financing obligation represents the estimated fair value of the financing at the end of the Company’s lease term. Rent expense, which includes certain common area maintenance costs, was approximately $0.6 million for each of the fiscal years ended January 2, 2011, January 3, 2010 and January 4, 2009.

Litigation

The Company is currently involved with a claim with respect to intellectual property arising from the ordinary course of business, and may be subject from time to time to various proceedings, lawsuits, disputes or claims. Although the Company cannot predict with assurance the outcome of any such claim or litigation, it does not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on the Company’s financial condition or results of operations.


Note 5.	Preferred Stock

The Company has 5,000,000 shares of undesignated preferred stock authorized for future issuance. Shares of preferred stock may be issued from time to time in one or more series, with designations, preferences, and limitations established by the Company’s board of directors.


Note 6.	Stock-Based Compensation

Stock Option Plans

The Company’s 1999 Equity Incentive Plan (“1999 Plan”) provides for the grant of incentive stock options, non-statutory stock options, stock bonuses and restricted stock awards, which may be granted to employees, including officers, non-employee directors and consultants. Options granted under the 1999 Plan generally provide for 25% vesting on the first anniversary from the date of grant with the remainder vesting monthly over the subsequent three years and expire 10 years from the date of grant. Options granted under the 1999 Plan were generally granted at fair value on the date of the grant. As of May 19, 2004, the effective date of the Company’s initial public offering, no additional awards were granted under the 1999 Plan.

The Company’s 2004 Equity Incentive Plan (“2004 Plan”) provides for the grant of non-statutory stock options, restricted stock awards, stock appreciation rights, restricted stock units and other forms of equity

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

compensation, which may be granted to employees, including officers, non-employee directors and consultants. As of January 2, 2011, the Company reserved 4,798,264 shares of common stock for future grants under the 2004 Plan, which amount will be increased annually on the first day of each fiscal year, up to and including 2014, by five percent of the number of shares of common stock outstanding on such date unless a lower number of shares is approved by the board of directors.

Options granted under the 2004 Plan generally provide for 25% vesting on the first anniversary of the date of grant with the remainder vesting monthly over the subsequent three years, and generally expire 10 years from the date of grant.

In the first quarter of 2010, the Company granted restricted stock units (RSUs) to an executive under the 2004 Equity Incentive Plan. The RSUs had a grant date fair value of $49,000 and vest 25% per year over four years, commencing on the first anniversary of the grant date. Each RSU is converted to one share of common stock when it vests.

The Company’s 2004 Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”) provides for the automatic grant of non-statutory stock options to purchase shares of common stock to non-employee directors. As of January 2, 2011, the Company reserved 413,401 shares of common stock for future grants under the Directors’ Plan, which amount will be increased annually on the first day of each fiscal year, up to and including 2014, by the number of shares of common stock subject to options granted during the prior calendar year unless a lower number of shares is approved by the board of directors. There were 15,000 options granted under the Directors’ Plan in the year ended January 2, 2011.

Employee Stock Purchase Plans

In April 2004, the Company adopted the 2004 Employee Stock Purchase Plan (the “Purchase Plan”). As of January 2, 2011, 1,000,000 shares of common stock are authorized to be sold under the Purchase Plan. Commencing on the first day of the fiscal year in which the Company first makes an offering under the Purchase Plan, this amount will be increased annually for 20 years. The increase in amount is the lesser of 320,000 shares or one and one half percent of the number of shares of common stock outstanding on each such date, unless a lower number of shares is approved by the board of directors. The Purchase Plan is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. As of January 2, 2011, no shares of common stock have been offered for sale under the Purchase Plan.

Option Grants to Non-Employees

The Company accounts for equity instruments issued to non-employees at their fair value on the measurement date.

Stock-Based Compensation Expense

The fair value of each stock option granted is estimated on the measurement date, which is typically the grant date, using the Black-Scholes-Merton option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair values of the stock options were estimated at the grant date with the following weighted average assumptions:


	Year Ended
	January 2,			January 3,			January 4,
	2011			2010			2009

Expected term		4.0 years			4.0 years			4.0 years
Expected volatility		57.9	%		55.1	%		48.1	%
Expected dividend yield		0.0	%		0.0	%		0.0	%
Risk-free interest rate		1.2	%		1.4	%		2.5	%
Estimated weighted average fair value per option granted	$	21.60		$	11.32		$	17.23


	•	Expected Term — This is the estimated period of time until exercise and is based primarily on historical experience for options with similar terms and conditions, giving consideration to future expectations. The Company also considers the expected terms of other companies that have similar contractual terms, expected stock volatility and employee demographics.

	•	Expected Volatility — This is based on the Company’s historical stock price volatility.

	•	Expected Dividend Yield — The Company has not paid dividends in the past and does not expect to pay dividends in the near future.

	•	Risk-Free Interest Rate — This is the rate on nominal U.S. Government Treasury Bills with lives commensurate with the expected term of the options on the date of grant.

The fair value of each restricted stock unit is based on the fair market value of the Company’s common stock on the date of the grant.

The Company recognizes compensation expense on a straight-line basis over the requisite service period for each stock option and restricted stock unit grant expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations.

The following table represents total stock-based compensation expense recognized in the consolidated financial statements (in thousands):


	Year Ended
	January 2,		January 3,		January 4,
	2011		2010		2009

Stock-based compensation expense in selling, general and administrative expenses	$	6,771	$	7,088	$	6,905
Stock-based compensation expense in cost of sales		91		77		79

Total stock-based compensation expense in the consolidated statements of operations	$	6,862	$	7,165	$	6,984

Total related tax benefit	$	2,354	$	2,508	$	2,437
Stock-based compensation capitalized	$	144	$	96	$	96

Stock-based compensation capitalized is included in property and equipment, net, in the consolidated balance sheets as a component of the cost capitalized for website development and the development of software for internal use. As of January 2, 2011, the Company had total unrecognized compensation costs related to unvested stock options and restricted stock units of $9.8 million, before income taxes. The Company expects to recognize this cost over a weighted average period of 2.4 years for stock options and 0.6 years for restricted stock units.

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following summarizes all stock option transactions from December 30, 2007, through January 2, 2011:


						Weighted Average
				Weighted Average		Remaining		Total
	Options			Exercise Price		Contractual Term		Intrinsic Value
	(In thousands)							(In thousands)

Balance, December 30, 2007		2,037			32.84
Granted		520			43.11
Exercised		(142	)		21.01
Canceled		(125	)		60.79

Balance, January 4, 2009		2,290			34.38
Granted		562			25.88
Exercised		(147	)		12.92
Canceled		(69	)		46.80

Balance, January 3, 2010		2,636			33.44
Granted		316			47.79
Exercised		(393	)		13.71
Canceled		(114	)		42.59

Balance, January 2, 2011		2,445		$	38.04		6.41	$	52,228

Vested and expected to vest at January 2, 2011		2,367		$	38.00		6.33	$	50,793
Exercisable at January 2, 2011		1,736		$	37.13		5.60	$	39,318

The following table summarizes additional information about stock options outstanding at January 2, 2011:


	Outstanding
			Weighted Average
			Remaining				Exercisable
			Contractual		Exercise				Weighted Average
Range of Exercise Price	Options		Life		Price		Options		Exercise Price
	(In thousands)		(In years)				(In thousands)

$0.25 — $30.00		782		5.86	$	23.56		550	$	24.48
$30.04 — $32.97		661		5.12		31.84		661		31.84
$33.10 — $49.11		692		7.84		44.15		298		41.96
$49.79 — $99.98		310		7.00		74.09		227		76.91

		2,445		6.37		38.04		1,736		37.13

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of restricted stock unit activity from January 4, 2009 through January 2, 2011 is as follows:


				Weighted Average		Weighted Average
				Grant Date Fair		Remaining		Aggregate Intrinsic
	RSUs			Value		Contractual Term		Value
	(In thousands)					(In years)		(In thousands)

Balance, January 4, 2009		—		$	—
Granted		12			21.22
Vested		—			—
Canceled		—			—

Balance, January 3, 2010		12		$	21.22
Granted		1			49.49
Vested		(6	)		21.22
Canceled		(1	)		21.22

Balance, January 2, 2011		6		$	25.61		0.38	$	367

Expected to vest at January 2, 2011		6		$	25.61		0.38	$	367

The aggregate intrinsic values in the tables above are before applicable income taxes and represent the amounts recipients would have received if all options had been exercised or restricted stock units had been converted on the last business day of the period indicated, based on the Company’s closing stock price.

The total intrinsic value of options exercised was $15.4 million, $6.2 million and $3.3 million in the years ended January 2, 2011, January 3, 2010 and January 4, 2009, respectively. During the years ended January 2, 2011, January 3, 2010 and January 4, 2009, the total fair value of options vested was $6.8 million, $7.4 million and $6.6 million, respectively.


Note 7.	Common Stock

On February 9, 2010, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock within the 24-month period following the approval date of such additional repurchase. In the year ended January 2, 2011, the Company repurchased 0.5 million shares of the Company’s common stock for an aggregate purchase price of approximately $25.3 million. In the year ended January 3, 2010, the Company did not repurchase shares of the Company’s common stock. In the year ended January 4, 2009, the Company repurchased 1.6 million shares of the Company’s common stock for an aggregate purchase price of approximately $66.5 million.


Note 8.	Employee Benefit Plan

The Company has a defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code covering all eligible officers and employees. The Company provides a discretionary matching contribution, which has generally been $0.50 for every $1.00 contributed by the employee up to 4% of each employee’s salary. Such contributions were approximately $0.2 million for each of the years ended January 2, 2011, January 3, 2010 and January 4, 2009.

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 9.	Income Taxes

The expense (benefit) for income taxes consists of the following (in thousands):


	Year Ended
	January 2,			January 3,			January 4,
	2011			2010			2009

Current income tax expense	$	4,564		$	6,619		$	7,112
Tax benefit from stock option exercises recorded in equity		4,595			1,793			510
Deferred income tax (benefit) expense:
Other, net		(1,763	)		(1,534	)		(1,396	)

Total income tax expense	$	7,396		$	6,878		$	6,226


A reconciliation of the statutory Federal income tax rate to the effective tax rate is as follows:

Statutory Federal income tax rate		35.0	%		35.0	%		35.0	%
Other, net		(0.7	) %		0.0	%		(0.1	) %

Effective tax rate		34.3	%		35.0	%		34.9	%

Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets are as follows (in thousands):


	Year Ended
	January 2,			January 3,
	2011			2010

Deferred tax assets:
Current:
Reserves and allowances	$	503		$	453
Deferred rent		30			72
Other		241			203
Noncurrent:
Stock options		8,941			7,156
Deferred rent		29			59
Financing obligation		262			279
Other		38			38

Gross deferred tax assets		10,044			8,260

Deferred tax liabilities:
Current:
Prepaid expenses		(217	)		(279	)
Noncurrent:
Leased building		(269	)		(287	)
Excess of book over tax depreciation and amortization		(577	)		(476	)

Gross deferred tax liabilities		(1,063	)		(1,042	)

Net deferred tax assets	$	8,981		$	7,218

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company had no valuation allowance against its deferred tax asset balances at January 2, 2011 and January 3, 2010 because it believes these deferred tax assets are more likely than not to be fully realized. Income taxes payable at January 2, 2011 and January 3, 2010 were $2.2 million and $0.5 million, respectively, and were included in accrued liabilities.

The Company has not provided for deferred taxes on unremitted earnings of subsidiaries outside the United States where such earnings are permanently reinvested. At January 2, 2011, unremitted earnings of foreign subsidiaries were approximately $0.6 million. The amount of unrecognized deferred tax liability associated with these unremitted earnings is approximately $0.2 million. If these earnings were distributed in the form of dividends or otherwise, the Company would be subject to U.S. income taxes less an adjustment for applicable foreign tax credits.

The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2007.

The tax benefit realized for the tax deduction from stock option exercises totaled $5.3 million, $2.1 million and $0.9 million for the years ended January 2, 2011, January 3, 2010 and January 4, 2009, respectively.


Note 10.	Income Per Share

Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted average number of common shares and common share equivalents outstanding. Common share equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options and conversion of unvested restricted stock units except when the effect of their inclusion would be antidilutive.

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):


	Year Ended
	January 2,		January 3,		January 4,
	2011		2010		2009

Net income	$	14,142	$	12,800	$	11,630

Weighted average common shares outstanding		14,446		14,534		14,925

Basic net income per share	$	0.98	$	0.88	$	0.78

Dilutive effect of stock options and restricted stock units		634		682		580

Common stock and common stock equivalents		15,080		15,216		15,505

Diluted net income per share	$	0.94	$	0.84	$	0.75

The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on net income per share would have been antidilutive (in thousands):

Year Ended

January 2,

January 3,

January 4,

2011

2010

2009

Stock options

595

757

606


Note 11.	Segment Information

The Company’s only operating segment is online retail jewelry. The Company sells jewelry to customers within and outside the United States. No customer accounted for 10% or more of the Company’s revenues.

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net sales were attributed on the basis of the country to where the product was shipped. Revenue from customers in individual foreign countries was not material to the financial statements.

The tables below represent information by geographic area (in thousands):


	Year Ended
	January 2,		January 3,		January 4,
	2011		2010		2009

Net sales to customers:
United States	$	289,589	$	268,898	$	267,670
Other countries		43,300		33,236		27,659

Total	$	332,889	$	302,134	$	295,329


	Year Ended
	January 2,		January 3,		January 4,
	2011		2010		2009

Long-lived assets:
United States	$	6,009	$	7,044	$	7,148
Other countries		148		288		410

Total	$	6,157	$	7,332	$	7,558


Note 12.	Selected Quarterly Financial Information (unaudited)

Summarized quarterly financial information for fiscal years 2010 and 2009 is as follows (in thousands, except per share data):


	Q1		Q2		Q3		Q4

2010 quarter:
Net sales	$	74,060	$	76,599	$	67,451	$	114,779
Gross profit		15,801		16,199		14,638		25,302
Net income		2,388		2,803		2,772		6,179
Basic net income per share		0.16		0.19		0.19		0.43
Diluted net income per share		0.16		0.19		0.19		0.41


	Q1		Q2		Q3		Q4

2009 quarter:
Net sales	$	62,403	$	69,852	$	66,943	$	102,936
Gross profit		13,203		15,030		14,797		22,314
Net income		1,940		2,844		2,575		5,441
Basic net income per share		0.13		0.20		0.18		0.37
Diluted net income per share		0.13		0.19		0.17		0.35


Note 13.	Subsequent Events

On January 6, 2011, the Company entered into a lease agreement with Merrill Place LLC (“Landlord”) for the lease of new corporate office space in Seattle, Washington, subject to customary real estate lease conditions. The Company plans to move to the new location upon the expiration of its current lease in April 2011.

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The new lease commences on May 1, 2011 and, unless sooner terminated or extended, expires on August 31, 2021. The leased space consists of approximately 29,311 total square feet. The Company will begin paying rent on August 1, 2011. The base rent is subject to annual increases. In addition to base rent, the Company will reimburse the Landlord for a portion of the annual increase in common area maintenance expenses, building insurance and real property taxes, subject to a cap. As part of the lease, the Landlord has agreed to provide various financial allowances to facilitate the Company’s build out of the offices and related tenant improvements, subject to customary terms and conditions relating to landlord-funded tenant improvements. The future minimum rental payments on the new lease are as follows (in thousands):


2011	$	279
2012		684
2013		705
2014		727
2015		748
Thereafter		4,630

Total minimum lease payments	$	7,773

BLUE NILE, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS


			Charged to
	Balance at		Revenue,					Balance at
	Beginning		Costs or					End of
Description	of Period		Expenses		Deductions (A)			Period
	(In thousands)

Reserve for sales returns:
Year ended:
January 2, 2011	$	890	$	31,071	$	(30,942	)	$	1,019
January 3, 2010		828		25,896		(25,834	)		890
January 4, 2009		1,281		28,383		(28,836	)		828
Reserve for fraud:
Year ended:
January 2, 2011	$	93	$	128	$	(117	)	$	104
January 3, 2010		100		63		(70	)		93
January 4, 2009		130		20		(50	)		100


(A)		Deductions for sales returns and fraud consist of actual sales returns and credit card charge backs in each period.


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

None.


Item 9A.	*Controls and Procedures*

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed by us in our periodic reports filed with the SEC is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and SEC reports. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures.

Based on their evaluation, our certifying officers concluded that the Company’s disclosure controls and procedures, as defined in Rules 13a — 15(e) and 15d — 15(e) under the Exchange Act, were effective at the reasonable assurance level as of the end of the period covered by this report.

Report of Management on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

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

Under the supervision and with the participation of our management, including the certifying officers, we assessed the effectiveness of our internal control over financial reporting as of January 2, 2011, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this assessment, management has concluded that our internal control over financial reporting was effective at the “reasonable assurance” level as of January 2, 2011.

Deloitte & Touche LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of January 2, 2011, as stated in their audit report below.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended January 2, 2011, that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Blue Nile, Inc.

Seattle, Washington

We have audited the internal control over financial reporting of Blue Nile, Inc., and subsidiaries (the “Company”) as of January 2, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 2, 2011, of the Company, and our report dated February 28, 2011, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

Seattle, Washington

February 28, 2011


Item 9B.	*Other Information*

None.

PART III


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

The information required by this Item relating to our executive officers will be contained in our Proxy Statement with respect to our 2011 Annual Meeting of Stockholders under the caption “Executive Officers” and is incorporated herein by reference. The information required by this Item relating to our directors and nominees, including information with respect to audit committee financial experts and our code of ethics, will be contained in our Proxy Statement with respect to our 2011 Annual Meeting of Stockholders under the caption “Proposal 1 — Election of Directors” and is incorporated herein by reference. The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act will be contained in our Proxy Statement with respect to our 2011 Annual Meeting of Stockholders under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.


Item 11.	*Executive Compensation*

The information required by this Item will be contained in our Proxy Statement with respect to our 2011 Annual Meeting of Stockholders under the captions “Compensation of Executive Officers,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report” and “Compensation of Directors,” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.


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

The information required by this Item will be contained in our Proxy Statement with respect to our 2011 Annual Meeting of Stockholders under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.


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

The information required by this Item will be contained in our Proxy Statement with respect to our 2011 Annual Meeting of Stockholders under the captions “Transactions with Related Persons” and “Proposal 1-Election of Directors” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.


Item 14.	*Principal Accounting Fees and Services*

The information required by this Item will be contained in our Proxy Statement with respect to our 2011 Annual Meeting of Stockholders under the caption “Proposal 4-Ratification of Selection of Independent Auditors” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.

PART IV


Item 15.	*Exhibits, Financial Statement Schedules*

Index to Consolidated Financial Statements

a. The following documents are filed as part of this report:


		Page

1.	Financial Statements:
	Report of Independent Registered Public Accounting Firm		36
	Consolidated Balance Sheets, as of January 2, 2011 and January 3, 2010		37
	Consolidated Statements of Operations, for the fiscal years ended January 2, 2011, January 3, 2010 and January 4, 2009		38
	Consolidated Statements of Changes in Stockholders’ Equity, for the fiscal years ended January 2, 2011, January 3, 2010 and January 4, 2009		39
	Consolidated Statements of Cash Flows, for the fiscal years ended January 2, 2011, January 3, 2010 and January 4, 2009		40
	Notes to Consolidated Financial Statements		42
2.	Financial Statement Schedule:
	Schedule II, Valuation and Qualifying Accounts
	All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3.	Exhibits:
	The exhibits listed in the Index to Exhibits, which appears immediately following the signature page and is incorporated herein by reference, are filed as part of this Annual Report on Form 10-K.

SIGNATURES

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

Date: February 28, 2011

Blue Nile, Inc.

(Registrant)


	By	/s/ Vijay Talwar

Vijay Talwar

Senior Vice President and General Manager of

International and Chief Financial Officer

(Principal Accounting and Financial Officer)

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Diane M. Irvine and Vijay Talwar, and each or any one of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including posting effective amendments) to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-facts and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitutes or substitutes, may lawfully do or cause to be done by virtue hereof.

This report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated, pursuant to the requirements of the Securities Exchange Act of 1934.



By	/s/ Diane M. Irvine Diane M. Irvine, Chief Executive Officer, President and Director (Principal Executive Officer)	February 28, 2011

By	/s/ Vijay Talwar Vijay Talwar, Senior Vice President and General Manager of International and Chief Financial Officer (Principal Accounting and Financial Officer)	February 28, 2011

By	/s/ Mark C. Vadon Mark C. Vadon, Executive Chairman and Director	February 25, 2011

By	/s/ W. Eric Carlborg W. Eric Carlborg, Director	February 24, 2011

By	/s/ Leslie Lane Leslie Lane, Director	February 24, 2011



By	/s/ Ned Mansour Ned Mansour, Director	February 18, 2011

By	/s/ Michael Potter Michael Potter, Director	February 22, 2011

By	/s/ Steve Scheid Steve Scheid, Director	February 20, 2011

By	/s/ Mary Alice Taylor Mary Alice Taylor, Director	February 24, 2011

EXHIBIT INDEX

The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Where an exhibit is incorporated by reference, the number in parentheses indicates the document to which cross-reference is made. See the end of this exhibit index for a listing of cross-reference documents.


Exhibit
Number		Description

3.1(1)		Amended and Restated Certificate of Incorporation of Blue Nile, Inc.
3.2(2)		Amended and Restated Bylaws of Blue Nile, Inc.
4.1		Reference is made to Exhibits 3.1, and 3.2.
4.2(3)		Specimen Stock Certificate.
4.3(19)		Amended and Restated Investor Rights Agreement dated June 29, 2001 by and between Blue Nile, Inc. and certain holders of Blue Nile, Inc.’s preferred stock.
10.1.1(19)*		Blue Nile, Inc. Amended and Restated 1999 Equity Incentive Plan.
10.1.2(19)*		Form of Stock Option Agreement pursuant to the Blue Nile, Inc. 1999 Equity Incentive Plan.
10.2.1(11)*		Third Amended and Restated 2004 Non-Employee Directors’ Stock Option Plan.
10.2.2(6)*		Form of Stock Option Agreement pursuant to the Blue Nile, Inc. 2004 Non-Employee Directors’ Stock Option Plan.
10.3(19)*		Blue Nile, Inc. 2004 Employee Stock Purchase Plan.
10.4.1(12)*		Blue Nile, Inc. 2004 Equity Incentive Plan.
10.4.2(6)*		Form of Stock Option Agreement pursuant to the 2004 Equity Incentive Plan.
10.4.3(5)*		Blue Nile, Inc. Stock Grant Notice pursuant to the 2004 Equity Incentive Plan.
10.4.4(13)*		Form of Restricted Stock Unit Grant Notice and Form of Award Agreement under the Blue Nile, Inc. 2004 Equity Incentive Plan.
10.5.1(12)		Sublease Agreement, dated May 22, 2003, between Amazon.com Holdings, Inc. and the registrant.
10.5.2(12)		First Amendment to Sublease Agreement, dated July 3, 2003, between Amazon.com Holdings, Inc. and the registrant.
10.6.1(12)		Lease, dated June 28, 2001, between Gull Industries, Inc. and the registrant.
10.6.2(12)		First Amendment to Lease, dated December 11, 2002 between Gull Industries, Inc. and the registrant.
10.6.3(12)		Second Amendment to Lease, dated November 15, 2003, between Gull Industries, Inc. and the registrant.
10.7(8)		Commercial lease, dated July 21, 2006, between Gull Industries, Inc. and the registrant.
10.8(14)		Lease Agreement, dated January 6, 2011, between Merrill Place LLC and the registrant.
10.9(10)*		Offer Letter with Diane M. Irvine, dated December 1, 1999.
10.10(19)*		Offer Letter with Dwight Gaston, dated May 14, 1999.
10.11(19)*		Offer Letter with Susan S. Bell, dated August 22, 2001.
10.12(9)*		Offer Letter with Marc D. Stolzman, dated May 2, 2008.
10.13(13)*		Offer Letter with Marianne Marck, dated January 9, 2009.
10.14(20)*		Offer Letter with Vijay Talwar, dated August 20, 2010.
10.15(4)*		Blue Nile Inc. Form Indemnity Agreement
10.16(7)*		Executive Cash Bonus Plan for Fiscal Year 2010
10.17(15)*		Compensation Arrangements with the registrant’s Chief Executive Officer and Executive Chairman
10.18(13)*		Director Compensation
10.19(21)*		Severance Agreement between Blue Nile Inc. and Marc Stolzman, dated December 3, 2010
10.20(17)*		Performance Bonus Plan


Exhibit
Number		Description

10.21(18)*		Change of Control Severance Plan
21.1(14)		Subsidiaries of the Registrant.
23.1(14)		Consent of Deloitte & Touche LLP.
24.1		Powers of Attorney of Officers and Directors signing this report (see page 62).
31.1(14)		Certification of Principal Chief Executive Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2(14)		Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1(16)		Certification of Principal Chief Executive Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
32.2(16)		Certification of Principal Financial Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document


*		Denotes a management contract or compensatory plan, contract or agreement, in which the Company’s directors or executive officers may participate.

(1)		Previously filed as Exhibit 3.1 to Blue Nile, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended July 4, 2004 (No. 000-50763), as filed with the Securities and Exchange Commission on August 6, 2004, and incorporated by reference herein.

(2)		Previously filed as the like numbered exhibit to Blue Nile, Inc.’s Current Report on Form 8-K (No. 000-50763), as filed with the Securities and Exchange Commission on November 9, 2009, and incorporated by reference herein.

(3)		Previously filed as Exhibit 4.2 to Blue Nile, Inc.’s Registration Statement on Form S-1/A (No. 333-113494), as filed with the Securities and Exchange Commission on May 4, 2004, as amended, and incorporated by reference herein.

(4)		Previously filed Exhibit 10.1 to Blue Nile, Inc.’s Current Report on Form 8-K (No. 000-50763), as filed with the Securities and Exchange Commission on November 8, 2010, and incorporated by reference herein.

(5)		Previously filed as Exhibit 10.1 to Blue Nile, Inc.’s Current Report on Form 8-K (No. 000-50763), as filed with the Securities and Exchange Commission on December 13, 2004, and incorporated by reference herein.

(6)		Previously filed as the like numbered exhibit to Blue Nile, Inc.’s Annual Report on Form 10-K (No. 000-50763), as filed with the Securities and Exchange Commission on March 25, 2005, and incorporated by reference herein.

(7)		Previously filed as Exhibit 10.2 to Blue Nile, Inc.’s Current Report on Form 8-K (No. 000-50763), as filed with the Securities and Exchange Commission on May 25, 2010, and incorporated by reference herein.

(8)		Previously filed as Exhibit 10.1 to Blue Nile, Inc.’s Current Report on Form 8-K (No. 000-50763), as filed with the Securities and Exchange Commission on July 27, 2006, and incorporated by reference herein.


(9)		Previously filed as Exhibit 10.1 to Blue Nile, Inc.’s Current Report on Form 8-K (No. 000-50763), as filed with the Securities and Exchange Commission on May 6, 2008, and incorporated by reference herein.

(10)		Previously filed as Exhibit 10.7 to Blue Nile, Inc.’s Registration Statement on Form S-1 (No. 333-113494), as filed with the Securities and Exchange Commission on March 11, 2004, as amended, and incorporated by reference herein.

(11)		Previously filed as Exhibit 10.1 to Blue Nile, Inc.’s Quarterly Report on Form 10-Q (No. 000-50763) as filed with the Securities and Exchange Commission on November 7, 2008, and incorporated by reference herein.

(12)		Previously filed as the like numbered exhibit to Blue Nile, Inc.’s Registration Statement on Form S-1/A (No. 333-113494), as filed with the Securities and Exchange Commission on April 19, 2004, as amended, and incorporated by reference herein.

(13)		Previously filed as the like numbered exhibit to Blue Nile, Inc.’s Annual Report on Form 10-K (No. 000-50763), as filed with the Securities and Exchange Commission on March 5, 2009, and incorporated by reference herein.

(14)		Filed herewith.

(15)		Previously filed as Item 5.02 to Blue Nile, Inc.’s Current Report on Form 8-K (No. 000-50763), as filed with the Securities and Exchange Commission on March 5, 2008, and incorporated by reference herein.

(16)		Filed herewith. The certifications attached as Exhibits 32.1 and 32.2 accompany this Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by Blue Nile, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

(17)		Previously filed as Exhibit 10.1 to Blue Nile, Inc.’s Current Report on Form 8-K (No. 000-50763) as filed with the Securities and Exchange Commission on May 25, 2010, and incorporated by reference herein.

(18)		Previously filed as Exhibit 10.2 to Blue Nile, Inc.’s Quarterly Report on Form 10-Q (No. 000-50763) as filed with the Securities and Exchange Commission on May 13, 2009, and incorporated by reference herein.

(19)		Previously filed as the like numbered exhibit to Blue Nile, Inc.’s Registration Statement on Form S-1 (No. 333-113494) as filed with the Securities and Exchange Commission on March 11, 2004, and incorporated by reference herein.

(20)		Previously filed as Exhibit 10.1 to Blue Nile, Inc.’s Quarterly Report on Form 10-Q (No. 000-50763) as filed with the Securities and Exchange Commission on November 9, 2010 and incorporated by reference herein.

(21)		Previously filed as Exhibit 10.1 to Blue Nile, Inc.’s Current Report on Form 8-K (No. 000-50763), as filed with the Securities and Exchange Commission on December 9, 2010, and incorporated by reference herein.

EXHIBIT 10.8

411 FIRST AVENUE SOUTH
Seattle, Washington 98104

LEASE AGREEMENT

BETWEEN

MERRILL PLACE LLC,
Landlord

and

BLUE NILE, INC.,
Tenant

LEASE AGREEMENT

Table of Contents


			Page

1. LEASE DATA AND EXHIBITS			1
a. Buildings			1
b. Premises and Use Rights			1
c. Tenant’s Percentage of the Buildings			1
d. Commencement Date			1
e. Expiration Date			1
f. Rent			2
g. Security Deposit			2
h. Parking			2
i. Notice Addresses			3
j. Exhibits			3
2. PREMISES AND DEMISE			3
3. COMMENCEMENT AND EXPIRATION DATES			3
a. Commencement Date			3
b. Early Access			3
c. Confirmation of Commencement Date			4
d. Expiration Date			4
4. RENT			4
5. SECURITY DEPOSIT			4
6. USES			4
7. SERVICES AND UTILITIES			5
a. Standard Services			5
b. Interruption of Services			5
c. Additional Services			6
d. Security Services			7
8. COSTS OF OPERATIONS AND REAL ESTATE TAXES			7
a. Definitions			7
b. Base Amounts			9
c. Additional Rent for Service and Utility Costs			9
d. Additional Rent for Real Property Taxes			11
e. Calculations			11
f. Further Adjustment			11
g. Base Rent			11
9. PERSONAL PROPERTY TAXES			11

- i -


			Page

10. TENANT IMPROVEMENTS			12
11. ALTERATIONS			13
12. CARE OF PREMISES			14
a. Tenant’s Maintenance			14
b. Landlord’s Maintenance			14
13. ACCEPTANCE OF PREMISES			14
14. ACCESS			14
15. DAMAGE OR DESTRUCTION			15
a. Damage and Repair			15
b. Destruction During Last Year of Term			15
c. Business Interruption			15
d. Tenant Improvements			15
e. Express Agreement			15
16. WAIVER OF SUBROGATION			15
17. INDEMNIFICATION			16
18. INSURANCE			16
a. Liability Insurance			16
b. Property Insurance			16
c. Insurance Policy Requirements			16
d. Landlord’s Insurance			17
19. ASSIGNMENT AND SUBLETTING			17
a. Assignment or Sublease			17
b. Assignee Obligations			18
c. Sublessee Obligations			18
20. SIGNS			18
21. LIENS AND INSOLVENCY			18
a. Liens			18
b. Insolvency			19
22. DEFAULT			19
a. Cumulative Remedies			19
b. Tenant’s Right to Cure			19
c. Vacation and Abandonment			19
d. Landlords Re-entry			19
e. Reletting the Premises			20
f. Waiver of Redemption Rights			20
g. Nonpayment of Additional Rent			20
h. Landlord Default			21

- ii -


			Page

23. SUBORDINATION			21
24. SURRENDER OF POSSESSION			21
25. REMOVAL OF PROPERTY			21
a. Signs and Personal Property			21
b. Alterations			22
26. NON-WAIVER			22
27. HOLDOVER			22
28. CONDEMNATION			22
a. Entire Taking			22
b. Constructive Taking of Entire Premises			22
c. Partial Taking			23
d. Awards and Damages			23
29. NOTICES			23
30. COSTS AND ATTORNEYS’ FEES			23
31. LANDLORD’S LIABILITY			23
32. LANDLORD’S CONSENT			23
33. ESTOPPEL CERTIFICATES			23
34. TRANSFER OF LANDLORD’S INTEREST			24
35. RIGHT TO PERFORM			24
36. AUTHORITY			24
a. Corporate Authority			24
b. Partnership Authority			24
37. OPTION TO RENEW			25
38. TENANT’S RIGHT TO TERMINATE			25
39. EXPANSION RIGHTs			25
40. Right of first offer			26
41. GENERAL			26
a. Headings			26
b. Heirs and Assigns			26
c. Brokers			26
d. Rules and Regulations			26
e. Entire Agreement			27
f. Severability			27
g. Overdue Payments			27
h. Force Majeure			27

- iii -


			Page

i. Right to Change Public Spaces			27
j. Compliance With Americans With Disabilities Act			27
k. Hazardous Materials			28
l. Governing Law			29
m. Building Directory			29
n. Building Name			29

- iv -

LEASE AGREEMENT

THIS LEASE made effective this 6th day of January, 2011, (“Effective Date”) between MERRILL PLACE LLC, a Washington limited liability company (“Landlord”), and BLUE NILE, INC., a Delaware corporation (“Tenant”). As parties hereto, Landlord and Tenant agree:

1. LEASE DATA AND EXHIBITS. The following terms as used herein shall have the meanings provided in this Section 1, unless otherwise specifically modified by provisions of this Lease.

a. Buildings. The improvements situated on a portion of the real property (the “Property”) more particularly described on Exhibit A attached hereto and incorporated herein by reference, with a postal address of 411 First Avenue South, Seattle, Washington 98104. The improvements on the Property are shown on the site plan attached hereto as Exhibit A-1 and incorporated herein by this reference, and are referred to herein as the Sellar-Hambach

Building, the Schwabacher Building and the Theatre Building (collectively, the “Buildings”).

b. Premises and Use Rights. The “Premises” consist of (i) all of Floor 7, containing approximately 17,780 rentable square feet of space, and (ii) a portion of Floor 3 containing approximately 9,902 rentable square feet of space in the Sellar-Hambach Building (the “Building”), for a total of 27,682 rentable square feet, as outlined on the floor plan(s) attached hereto as Exhibit B and incorporated herein by reference. In addition, Tenant shall have the exclusive use of Tenant’s server room (the “Data Center”) on Floor 1, containing approximately 1,629 rentable square feet of space, as depicted on Exhibit B. Finally, Tenant shall have the non-exclusive right to use Building Common Areas including, without limitation, a bike rack area within the Property, the telecommunications closet in the basement of the Building, and portions of the roof, all on the terms and conditions provided herein. The bike rack area, telecommunications closet and rooftop area are referred to collectively herein as the “Specific Common Areas”. Tenant’s use of the Specific Common Areas does not limit Tenant’s use of other Building Common Areas.

c. Tenant’s Percentage of the Buildings. The actual rentable square footage of the Premises shall be calculated using BOMA Standards once the space plan of the Premises has been completed. “Tenant’s Percentage of the Buildings” will be calculated as the rentable square footage of the Premises, divided by the rentable square footage of the Buildings. In the event the rentable square footage of the Premises or the rentable square footage of the Buildings, as calculated using BOMA standards, is altered during the term of the Lease, Landlord shall adjust “Tenant’s Percentage of the Buildings” to properly reflect such changes.

d. Commencement Date. This Lease shall commence on May 1, 2011 (the “Commencement Date”), unless otherwise agreed to in writing by Landlord and Tenant.

e. Expiration Date. Ten (10) years and Four (4) months commencing on the Commencement Date and expiring on August 31, 2021.

- 1 -

f. Rent. “Rent” consists of fixed rental payments for the Premises and the Data Center. “Additional Rent” shall include any other payments required of Tenant under this Lease.

The annual fixed rental rate for the Premises is described in the schedule below and is payable in equal monthly installments on or before the first day of each month.


Period		Rent Per Rentable Square Feet
05/01/2011 — 07/31/2011		Free Rent
08/01/2011 — 04/30/2012		$23.50/rsf/year
05/01/2012 — 04/30/2013		$24.25/rsf/year
05/01/2013 — 04/30/2014		$25.00/rsf/year
05/01/2014 — 04/30/2015		$25.75/rsf/year
05/01/2015 — 04/30/2016		$26.50/rsf/year
05/01/2016 — 04/30/2017		$27.25/rsf/year
05/01/2017 — 04/30/2018		$28.00/rsf/year
05/01/2018 — 04/30/2019		$28.75/rsf/year
05/01/2019 — 04/30/2020		$29.50/rsf/year
05/01/2020 — 08/31/2021		$30.25/rsf/year

The annual fixed rental rate for the Data Center is described in the schedule below and is payable in equal monthly installments on or before the first day of each month


Period		Rent Per Rentable Square Feet
05/01/2011 — 07/31/2011		Free Rent
08/01/2011 — 04/30/2012		$12.00/rsf/year
05/01/2012 — 04/30/2013		$12.25/rsf/year
05/01/2013 — 04/30/2014		$12.50/rsf/year
05/01/2014 — 04/30/2015		$12.75/rsf/year
05/01/2015 — 04/30/2016		$13.00/rsf/year
05/01/2016 — 04/30/2017		$13.25/rsf/year
05/01/2017 — 04/30/2018		$13.50/rsf/year
05/01/2018 — 04/30/2019		$13.75/rsf/year
05/01/2019 — 04/30/2020		$14.00/rsf/year
05/01/2020 — 08/31/2021		$14.25/rsf/year

Additional Rent shall be adjusted from time to time as provided in Section 8 hereof.

g. Security Deposit. None.

h. Parking. Tenant shall have the right, but not the obligation, to lease one (1) parking stall per 1,000 rentable square feet leased in the parking garage on the Property on an unassigned basis at the prevailing monthly rates as established by Landlord from time to time. To the extent additional non-reserved parking stalls are available in the parking garage, Tenant shall have the option to secure such stalls for its employees’ use on a month-to-month basis and at the prevailing monthly rates. The prevailing monthly rate charged to Tenant or Tenant’s employees shall not be more than the rate charged to any other tenant in the Buildings excluding short term rates offered as tenant inducements. Access to the parking garage for Tenant’s monthly parkers, shall be available twenty four hours a day, every day. The leasing of parking

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stalls by Tenant shall be subject to such reasonable rules and regulations as Landlord or its parking operator may adopt from time to time. Tenant shall pay $180.00 plus tax for parking for the first four months of the Lease Term.

In addition, Landlord shall make parking in the Merrill Place Parking Garage available to clients and visitors of Tenant during normal business hours, including Saturdays (starting at 9:30 a.m. unless changed by mutual agreement of the parties) and such holidays as are mutually agreed to in writing by Landlord and Tenant. In this regard, Tenant shall purchase script to validate visitors in the parking garage, which is run via valet service. Such parking shall be made available to Tenant’s clients for the same charge as is made to the general public.

In addition, Landlord shall provide Tenant with racks for approximately fifty (50) bicycles in a non-exclusive enclosed, covered and secured area, with key-card access for Tenant’s employees, during the term of this Lease within the Building. Tenant’s use of the bike rack area shall be at no additional cost or expense.

i. Notice Addresses.


		Landlord:		95 South Jackson, Suite 100
				Seattle, WA 98104

		Tenant:		411 First Avenue South, Suite 700
				Seattle, WA 98104

j. Exhibits. The following exhibits or riders are made a part of this Lease:


Exhibit A:		Legal Description of the Property
Exhibit A-1:		Site Plan of Property
Exhibit B:		Floor Plan of Premises
Exhibit C:		Expansion Space Plan
Exhibit D:		Memorandum of Lease
Exhibit E:		Rules and Regulations

2. PREMISES AND DEMISE. Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, upon the terms and conditions herein set forth, the Premises described in Section 1.b hereof, as shown on Exhibit B, together with the exclusive right to use the Data Center, the non-exclusive right to use the Specific Common Areas, and appurtenances, including without limitation the right to use, in common with others, the lobbies, elevators and other common areas in and about the Buildings located on the Property.

3. COMMENCEMENT AND EXPIRATION DATES.

a. Commencement Date. The Commencement Date shall be the date specified in Section 1.d hereof.

b. Early Access. Tenant shall be permitted access to the Premises, Data Center, telecommunications closet, rooftop area and other necessary Common Areas immediately upon full execution of this Lease in connection with the planning, build-out and construction of the Tenant Improvements (as hereinafter defined), installation of equipment, furnishings and telephone/data cabling, provided, however, that such early access or occupancy by Tenant shall be subject to the terms and conditions of this Lease, except that Tenant shall not

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be required to pay Rent during or with respect to such early access or occupancy period; and provided further that Tenant’s access to the Floor 3 portion of the Premises shall be limited until the current tenant vacates such space, which shall not be later than March 1, 2011 and Tenant’s access to the bike rack area shall not be required until the Commencement Date.

c. Confirmation of Commencement Date. At the request of either party, the parties will execute a Memorandum of Lease in the form attached hereto as Exhibit D and incorporated herein by this reference.

d. Expiration Date. The Lease shall expire on the date specified in Section l.e.

4. RENT. Tenant shall pay Landlord without notice the Rent stated in Section l.f hereof and Additional Rent as provided in Section 8 and any other additional payments due under this Lease without deduction or offset, except as expressly provided herein, in lawful money of the United States in advance on or before the first day of each month at Landlord’s Notice Address set forth in Section 1.i hereof, or to such other party at such other place as Landlord may hereafter from time to time designate in writing. Rent and Additional Rent for any partial month at the beginning or end of the Lease term shall be adjusted for the proportionate fraction of the month.

5. SECURITY DEPOSIT. Landlord has waived its right to require Tenant to provide security for the full and faithful performance of every covenant and condition of this Lease to be performed by Tenant by way of a Security Deposit.

6. USES. The Premises are to be used for any use permitted by applicable zoning, including (without limitation) an office and administrative functions (the “Permitted Uses”), and for no other business or purpose without the prior written consent of Landlord, which consent may be withheld if Landlord, in its reasonable discretion, determines that any proposed use is inconsistent with or detrimental to the maintenance and operation of the Buildings as a first-class office building in Seattle, Washington or is inconsistent with any restriction on use of the Premises, the Buildings or the Property contained in any lease, mortgage or other agreement or instrument by which the Landlord is bound or to which any of such property is subject. Landlord represents and warrants that the Premises are not subject to any agreements or restrictions that would adversely affect Tenant’s ability to use the Premises for the Permitted Uses. Tenant shall not commit any act that will increase the then existing rate of insurance on the Buildings without Landlord’s consent. If Landlord provides documentation showing that Tenant’s acts have caused an increase in insurance, Tenant shall promptly pay the amount of any increase in insurance rates caused by such act or acts. Tenant shall not commit or allow to be committed any waste upon the Premises, or any public or private nuisance or other act which disturbs the quiet enjoyment of any other tenant in the Buildings or which is unlawful. Tenant shall not, without the written consent of Landlord, use any apparatus, machinery or device in or about the Premises which will cause any substantial noise, vibration or fumes. If any of Tenant’s office machines or equipment should disturb the quiet enjoyment of any other tenant in the Buildings, then Tenant shall provide adequate insulation or take other action as may be necessary to eliminate the disturbance. Tenant shall comply with all laws relating to its use or occupancy of the Premises and shall observe such reasonable written rules and regulations (not inconsistent with the terms of this Lease) as may be adopted and made applicable to Tenant and other tenants of the Buildings by Landlord from time to time for the safety, care and cleanliness of the Premises or the Buildings, and for the preservation of good order therein, but Tenant shall not be required to make improvements or alterations to the Premises or the Buildings.

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7. SERVICES AND UTILITIES.

a. Standard Services. Landlord shall cause to be maintained the Premises and the public and common areas of the Buildings, such as lobbies, elevators, stairs, corridors and restrooms, in reasonably good order and condition consistent with the operation and maintenance of the Buildings as a first-class office buildings in Seattle, Washington. Landlord shall furnish the Premises with electricity for normal office use, including lighting and operation of personal computers, low power usage office machines, heating, cooling and ventilation services, hot and cold running water, and elevator service at all times and during all hours (24/7) during the term of the Lease, subject to the provisions below regarding payment for usage outside of Normal Business Hours, and for separately metered utilities. Landlord shall also provide lamp replacement service for building standard light fixtures, toilet room supplies, window washing at reasonable intervals, locker room cleaning, and customary building janitorial service five (5) days each week. No janitorial service shall be provided Saturdays, Sundays or legal holidays. The Rent stated in Section l.f hereof does not include the costs of any janitorial or other services provided or caused to be provided by Landlord to Tenant which are in addition to the services described herein or ordinarily provided Building tenants, and such costs for additional services, if any, shall be paid by Tenant as Additional Rent on the first day of the month following the month in which such additional services are provided and invoiced. Tenant shall pay all separately metered utilities.

From 7:00 a.m. to 6:00 p.m. on Monday through Friday, and 8:00 a.m. to 1:00 p.m. on Saturday, excluding Sundays and legal holidays (“Normal Business Hours”), Landlord shall furnish to the Premises heat and air conditioning. If requested by Tenant with reasonable advance notice, Landlord shall furnish heat and air conditioning at times other than Normal Business Hours and the actual cost of such services shall be paid by Tenant as Additional Rent. During other than Normal Business Hours, Landlord may restrict access to the Buildings in accordance with the Buildings’ security system, provided that Tenant shall have at all times during the term of this Lease (24 hours of all days) reasonable access to the Premises, Data Center, Specific Common Areas and necessary Common Area access ways.

Notwithstanding the foregoing, Landlord shall also provide HVAC, lighting and utilities to Tenant’s Data Center, to the call center on the third floor, and to the IDF rooms on the third and seventh floors, twenty four hours a day, every day; provided Tenant shall pay for such HVAC, lighting and utilities after Normal Business Hours, as provided herein, and for metered utilities. Landlord shall provide lighting to the bike rack area. The Data Center will be secured with key card access as part of the Tenant Improvements and bike rack area will be secure with key card access, or regular keys, depending on its location.

Any utility and service costs that are invoiced directly to Tenant (i.e. after hours HVAC, lighting and utilities shall be billed to Tenant at Landlord’s actual cost, without mark-up or overhead.)

b. Interruption of Services. Landlord shall not be liable for any loss, injury or damage to person or property caused by or resulting from any variation, interruption, or failure of such service due to any cause whatsoever, unless such loss, injury or damage is caused by Landlord’s negligence or unlawful intentional act. No temporary interruption or failure of such services incident to the making of repair, alterations or improvements for a reasonable duration, or due to accident, strike or conditions or events beyond Landlord’s reasonable control shall be deemed an eviction of Tenant or relieve Tenant from any of Tenant’s obligations hereunder. Notwithstanding the foregoing, in the event of an interruption of services for

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forty-eight (48) consecutive hours, Rent and Additional Rent shall be abated for the period commencing on the forty-ninth (49^th) consecutive hour of interruption until service is restored. Furthermore, and notwithstanding anything to the contrary herein (i) in the event of a material interruption of services, the cure for which is within Landlord’s control, for five (5) consecutive days, Tenant shall have the option to terminate this Lease upon written notice to Landlord and (ii) in the event of a material interruption of services, the cure for which is not within Landlord’s control, for thirty (30) or more consecutive days Tenant shall have the option to terminate this Lease upon written notice to Landlord; provided that if Landlord commences the cure within such five-day (5) period, or the third party commences the cure within such thirty-day (30) period, and, in either event, the Landlord: (1) uses its best efforts to cure to completion, and (2) the cure does not take more than 60 days, Tenant shall have not have a right to terminate this Lease.

c. Additional Services. The Building Standard mechanical system is designed to accommodate heating loads generated by lights and equipment using up to 3.0 watts per square foot, exclusive of Tenant’s Data Center, IDF rooms on the third and seventh floors and the seasonal service and customer service areas. Before installing lights and equipment in the Premises which in the aggregate exceed such amount, Tenant shall obtain the written permission of Landlord. Landlord may refuse to grant such permission unless Tenant shall agree to pay the costs of Landlord for installation of supplementary air conditioning capacity or electrical systems as necessitated by such equipment or lights. In addition, Tenant shall in advance, on the first day of each month during the Lease term, pay Landlord the reasonable amount estimated by Landlord as the cost of furnishing electricity for the operation of such equipment or lights. Tenant shall maintain, at its sole cost and expense, the mechanical and HVAC Systems for the Data Center and IDF rooms and customer service areas, through a contractor contract with providers of Tenant’s choice, approved by Landlord, which approval shall not be unreasonably withheld. The Rent stated in Section 1.f hereof does not include any amount to cover the cost of furnishing electricity or such additional air conditioning for such purposes and such costs shall be paid by Tenant as Additional Rent. If Landlord has reason to believe that Tenant’s use exceeds 3.0 watts per square foot, Landlord shall be entitled to install and operate at Tenant’s cost a monitoring/metering system in the Premises to measure the added demands on electrical, heating, ventilation and air conditioning systems resulting from such equipment and lights and from Tenant’s after-hours heating, ventilation and air conditioning service requirements. Landlord and Tenant shall mutually agree upon the cost of a monitoring/metering system in the Premises prior to installation. Tenant shall comply with Landlord’s instructions for the use of thermostats in the Buildings.

In addition, Landlord, at Landlord’s sole cost and expense, shall provide a new unused generator with a 24-hour fuel tank to meet Tenant’s needs (which shall not exceed 500 kW) for Tenant’s use to the exclusion of all other tenants during the Lease term. In addition, Landlord shall provide all wiring to, and electrical panels on, the applicable floors required to connect the generator to the first floor Data Center and equipment therein; the IDF rooms on the third and seventh floors and HVAC thereto; the third floor call center lighting, workstation, bathrooms, and convenience power; rooftop infrastructure required to support HVAC; egress lighting for the seventh and third floor IDF rooms, Data Center, and the third floor call center; and for the basement telecommunications POP. Tenant may designate additional needs for the generator prior to its installation, and, if Landlord installs a generator of a size greater than required to handle all of Tenant’s designated needs, including those listed above, Landlord may

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also connect Landlord’s equipment to such generator. In the event Tenant designates additional needs for the generator, Landlord shall provide the necessary wiring and panels to the applicable floors for such needs and Tenant shall pay any costs of such installation and equipment over and above the cost for installation and equipment for the specific Tenant needs set out above. The generator shall in all instances be and remain the property of Landlord. Tenant shall not be required to pay any Lease expense for the space occupied by the generator through the term of this Lease. Tenant shall be responsible, at its cost and expense, for the routine maintenance and repair of the generator, after the warranty period, if any, and the fueling contract for the generator; provided, that if Landlord connects to the generator, as provided above, such costs will be paid pro rata by Landlord and Tenant based on their respective load factors in the use of the generator. Notwithstanding the foregoing, if the repairs or maintenance of the generator are directly or indirectly caused by the Landlord or its employees, agents or tenants or if the repairs or maintenance are covered by insurance or a warranty, Tenant will not be required to pay for such maintenance or repairs.

d. Security Services. Landlord will provide security guards to patrol the Buildings and parking garage 24 hours per day, 7 days a week. In addition, such security guards will be available to escort personnel to and from the Buildings upon request at any time of day or night. Entrance to the Buildings after hours will be controlled by a computerized cardkey entry/exit system which electronically records who enters and exits the Buildings, and also the date and time of entry. Landlord will provide CATV cameras to monitor the access points of the Buildings. If requested by Tenant, Tenant may also install its own security system for entry to the Premises, which, if not compatible with the system for the Building, will not require Landlord to change such Building security system.

8. COSTS OF OPERATIONS AND REAL ESTATE TAXES.

a. Definitions. In addition to the Rent provided in Section 1.f of this Lease, commencing on January 1, 2012, Tenant shall pay to Landlord its proportionate share of any increases in Operating Costs under this Section 8 as “Additional Rent”; provided, however, that Operating Costs (as hereinafter defined), which are controllable by Landlord, shall not be increased by more than five percent (5%) on a non-cumulative basis in any one year. All Operating Costs are deemed controllable by Landlord except Real Property Taxes (as hereinafter defined), insurance premiums, utility charges, including garbage and recycling, government levied fees or assessments, and major capital items, which may be amortized and included as operating expenses under standard industry practice. Definitions:

i. “Operating Costs” shall include Real Property Taxes, Services and Utility Costs.

(1) “Real Property Taxes” shall mean taxes on real property and personal property; charges and assessments (or any installments thereof due during the Lease Year) levied with respect to the Property, the Buildings, any improvements, fixtures and equipment, and all other property of Landlord, real or personal, used directly in the operation of the Buildings and located in or on the Buildings; and any taxes levied or assessed (or any installment thereof due during the Lease Year) in addition to or in lieu of, in whole or in part, such real property or personal property taxes, or any other tax upon leasing of the Buildings or rents collected in lieu of such taxes on real property, but not including any federal or state income, estate, inheritance or franchise tax.

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(2) “Service and Utility Costs” shall mean all other expenses paid or incurred by Landlord for obtaining services and products for maintaining, operating and repairing the Buildings and the personal property used in conjunction therewith, including, without limitation, the costs of refuse collection, water, sewer and other utilities services, electricity, gas and other similar energy sources, supplies, janitorial and cleaning services, window washing, landscape maintenance, services of independent contractors, compensation (including employment taxes and fringe benefits) of all persons who perform duties in connection with the operation, maintenance and repair of the Buildings, its equipment and the Property upon which it is situated, insurance premiums, licenses, permits, and inspection fees, customary management fees, legal and accounting expenses and any other reasonable expenses or charges whether or not hereinabove described, which in accordance with generally accepted accounting and management practices would be considered an expense of maintaining, operating or repairing the Buildings, excluding or deducting, as appropriate:

(A) Costs of any special services, improvements or benefits rendered to individual tenants (including Tenant);

(B) Depreciation or amortization of costs required to be capitalized in accordance with generally accepted accounting practices (except other Operating Costs shall include amortization of capital improvements made subsequent to the initial development of the Buildings which are designed with a reasonable probability of improving the operating efficiency of the Premises or the Buildings, provided that such amortization expense shall not exceed reasonably expected savings in operating costs resulting from such capital improvements).

(D) Interest or amortization payments on any mortgage on the Premises or the Buildings;

(E) Expenses for repairs or other work occasioned by fire, windstorm or other insured casualty;

(F) Legal expenses incurred in enforcing the terms of any lease;

(G) Any other expenses that, in accordance with customary standard commercial leasing practices in the Seattle, Washington area, are included as expenses of operation and maintenance; and

(H) The cost of any capital addition, repair or replacement to the Buildings or Property except for matters undertaken to reduce Operating Costs or as otherwise required by GAAP, the costs of which, in all such cases, shall be amortized over the useful life of the improvement in accordance with GAAP. A capital expenditure that is undertaken to reduce Operating Costs must be shown to reduce Operating Costs by an amount greater than the amortized annual cost or Landlord shall not undertake such work.

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ii. “Lease Year” shall mean the twelve (12) month period commencing January 1 and ending December 31.

iii. Actual Operating Costs.

(1) “Actual Service and Utility Costs” shall mean the actual expenses paid or incurred by Landlord for Service and Utility Costs during any Lease Year of the term hereof.

(2) “Actual Real Property Taxes” shall mean the amount of Real Property Tax paid or incurred by Landlord during any Lease Year of the term hereof.

iv. Actual Operating Costs Allocable to the Premises.

(1) “Actual Service and Utility Costs Allocable to the Premises” shall mean the Tenant’s share of the Actual Service and Utility Costs determined by multiplying Tenant’s Percentage of the Building described in Section 1.c by the Actual Service and Utility Costs.

(2) “Actual Real Property Taxes Allocable to the Premises” shall mean the Tenant’s share of the Actual Real Property Taxes determined by multiplying Tenant’s Percentage of the Building described in Section 1.c by the Actual Real Property Taxes.

v. Estimated Operating Costs Allocable to the Premises.

(1) “Estimated Service and Utility Costs Allocable to the Premises” shall mean Landlord’s estimate of Actual Service and Utility Costs Allocable to the Premises for the following Lease Year to be given by Landlord to Tenant pursuant to Section 8.c.i below.

(2) “Estimated Real Property Taxes Allocable to the Premises” shall mean Landlord’s estimate of Real Property Taxes Allocable to the Premises for the following Lease Year to be given by Landlord to Tenant pursuant to Section 8.c.ii below.

vi. “Base Service Year” shall mean the calendar year 2011.

b. Base Amounts.

i. Real Property Taxes Base Amount. For purposes of this Section 8, the Real Property Taxes Base Amount for the initial lease term shall be the Actual Real Property Taxes Allocable to the Premises for the Base Service Year.

ii. Service and Utility Costs Base Amount. For purposes of this Section 8, the Service and Utility Costs Base Amount for the initial lease term shall be an annualized amount equal to the Actual Service and Utility Costs Allocable to the Premises for the Base Service Year.

c. Additional Rent for Service and Utility Costs.

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i. Additional Rent for Estimated Increases in Service and Utility Costs. At the beginning of each Lease Year after the Base Service Year, during the term hereof, Landlord shall furnish Tenant a written statement of the Estimated Service and Utility Costs Allocable to the Premises, for such Lease Year, and a calculation of the Additional Rent as follows: One-twelfth (1/12) of the amount, if any, by which such amount exceeds the Service and Utility Costs Base Amount shall be Additional Rent payable by Tenant as provided in Section 4 for each month during such Lease Year. If at any time or times during such Lease Year, it appears to Landlord that the Actual Service and Utility Costs Allocable to the Premises will vary from the Estimated Service and Utility Costs Allocable to the Premises by more than five percent (5%) on an annual basis, Landlord may, by written notice to Tenant, revise its estimate for such Lease Year and Additional Rent payments by Tenant for the remainder of such Lease Year shall be based on such revised estimate.

ii. Actual Service and Utility Costs. Within ninety (90) days after the close of each Lease Year during the term hereof for which an estimated statement was delivered to Tenant pursuant to subsection c.i, or as soon thereafter as practicable, Landlord shall deliver to Tenant a written statement setting forth the Actual Service and Utility Costs Allocable to the Premises during the preceding Lease Year or such prorated portion thereof if this Lease commences or terminates on a day other than the first or last day of a Lease Year (based on a 365 day Lease Year). Such statement shall provide as much detail as Tenant may reasonably request. If such costs for any Lease Year exceed Estimated Service and Utility Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subsection c.i, Tenant shall pay the amount of such excess to Landlord as Additional Rent within thirty (30) days after receipt of such statement by Tenant. If such statement shows such costs to be less than the amount paid by Tenant to Landlord pursuant to subsection c.i, then the amount of such overpayment by Tenant shall be credited by Landlord to the next Rent payable by Tenant or, if the Lease has terminated or expired, will be paid to Tenant within thirty (30) days. In addition, at any time within three (3) months of its receipt of Landlord’s written statement of the Actual Service and Utility Costs Allocable to the Premises, Tenant shall have the right, at its cost and expense, to independently audit such statement as well as the statements rendered by Landlord for increases in Real Property Taxes. If the results of such audit show that the charges exceed actual expenses by more than five (5) percent, Landlord shall reimburse Tenant for the overpayment and the costs of such audit. If the results of the audit show that Tenant was under-billed by more than five percent (5%) Tenant shall pay the underpayment to Landlord within thirty (30) days of invoice.

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d. Additional Rent for Real Property Taxes.

i. Additional Rent for Estimated Increases in Real Property Taxes. At the beginning of each Lease Year during the term hereof, Landlord shall furnish Tenant a written statement of the Estimated Real Property Taxes Allocable to the Premises, for such Lease Year, and a calculation of the Additional Rent as follows: one-twelfth (1/12) of the amount, if any, by which such amount exceeds the Real Property Taxes Base Amount shall be Additional Rent payable by Tenant as provided in Section 4 for each month during such Lease Year. If at any time or times during such Lease Year it appears to Landlord that the Actual Real Property Taxes Allocable to the Premises will vary from the Estimated Real Property Taxes Allocable to the Premises by more than five percent (5%) on an annual basis, Landlord shall, by written notice to Tenant, revise its estimate for such Lease Year and Additional Rent payments by Tenant for the remainder of such Lease Year shall be based on such revised estimate.

ii. Actual Real Property Taxes. Within ninety (90) days after the close of each Lease Year during the term hereof for which an estimated statement was delivered to Tenant pursuant to subsection d.i, or as soon thereafter as practicable, Landlord shall deliver to Tenant a written statement setting forth the Actual Real Property Taxes Allocable to the Premises during the preceding Lease Year or such prorated portion thereof if this Lease commences or terminates on a day other than the first or last day of a Lease Year (based on a 365 day Lease Year). If such taxes for any Lease Year exceed Estimated Real Property Taxes Allocable to the Premises paid by Tenant to Landlord pursuant to subsection d.i, Tenant shall pay the amount of such excess to Landlord as Additional Rent within thirty (30) days after receipt of such statement by Tenant. If such statement shows such cost to be less than the amount paid by Tenant to Landlord pursuant to subsection d.i, then the amount of such overpayment by Tenant shall be credited by Landlord to the next Rent payable by Tenant or, if the Lease has terminated, will be paid to Tenant within thirty (30) days.

e. Calculations. The calculation of Actual Costs and Taxes and Estimated Costs and Taxes Allocable to the Premises shall be made by Landlord. Landlord or its agent shall keep records in reasonable detail showing and supporting all expenditures made for the items enumerated above, which records and receipts shall be available for inspection by Tenant at any reasonable time.

f. Further Adjustment. In the event the Buildings for any Lease Year, including the Base Service Year, are not fully occupied, then the Estimated Costs and Actual Costs for such year shall be proportionately adjusted by Landlord to reflect those costs which would have occurred had the Buildings been fully occupied during such year.

g. Base Rent. Notwithstanding anything to the contrary in this Section 8, the Rent payable by Tenant shall in no event be less than the Rent specified in Section l.f of this Lease.

9. PERSONAL PROPERTY TAXES. Tenant shall pay, prior to delinquency, all Personal Property Taxes payable with respect to all personal property of Tenant located on the Premises or the Buildings and promptly, upon request of Landlord, shall provide written proof of such payment. As used herein, “personal property of Tenant” shall include all improvements which are paid for by Tenant. “Personal Property Taxes” shall include all property taxes assessed against the property of Tenant, whether assessed as real or personal property.

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10. TENANT IMPROVEMENTS. Landlord shall deliver the Premises to Tenant, and Tenant agrees to accept the same, in an “AS IS” and “WHERE IS” condition, except as provided otherwise in this Section 10.

The parties have generally agreed in the space plan for the Premises. Tenant shall deliver to Landlord Tenant’s proposed biddable construction drawings for the Premises (the “Construction Drawings”). Without limitation, the Construction Drawings shall show the location of (1) any abnormally heavy equipment, (ii) all major mechanical and electrical systems and (iii) all major built-in equipment. Landlord shall have ten (10) days from its receipt of the Construction Drawings in which to review and approve the same by giving written notice to Tenant (“Landlord’s Construction Drawings Notice”). In the event that Landlord disapproves the Construction Drawings or conditionally approves the Construction Drawings with certain changes, Landlord shall state the reasons for such disapproval or changes in the Landlord’s Construction Drawing Notice. Tenant shall have ten (10) days from receipt of such Landlord’s Construction Drawings Notice in which to correct the matters of disapproval or reject such requested changes in a written notice to Landlord. In the event that Landlord and Tenant cannot agree on the final Construction Drawings by the thirtieth (30^th) day after Landlord’s initial receipt of the proposed Construction Drawings, then either party may terminate this Lease on ten (10) day’s prior written notice to the other party.

After the Construction Drawings have been approved by Landlord and Tenant, Tenant shall retain a license and bonded contractor, approved by Landlord, pursuant to a contract approval by Landlord, to commence and complete, with reasonable diligence, the construction of the approved tenant improvements to the Premises as shown in the Construction Drawings (the “Tenant Improvements”). Tenant agrees, and agrees to include in the construction contract, that Tenant and its contractor will meet on a regular and as needed basis, not less than once per week, with Landlord’s construction manager to review the status and progress of the construction, to coordinate with other work to be performed by Landlord and to review any material changes to the Construction Drawings or the construction contract, all of which changes must be approved, in writing, by Landlord’s construction manager. Approval of any matters herein by Landlord or Landlord’s construction manager shall not be unreasonably withheld, delayed or conditioned. Further, Foushee, Chinn, and Gateway are each pre-approved contractors for Tenant Improvement Work.

So long as (i) Landlord has delivered possession of the entire Premises by March 1, 2011, (ii) the parties have approved the final Construction Drawings by January 31, 2011 and (iii) the acts or omissions of Landlord or its construction manager do not cause a material delay in the completion of the Tenant Improvements, then the Commencement Date shall occur on May 1, 2011 and Tenant shall begin paying Rent on August 1, 2011 regardless of whether Tenant has completed the Tenant Improvements prior to the Commencement Date. If, however, Landlord does not (i) deliver possession of the entire Premises by March 1, 2011, (ii) the parties have not agreed to the final Construction Drawings by January 31, 2011 or (iii) if acts or omissions of Landlord or its construction manager cause a material delay in the completion of the Tenant Improvements, then Tenant’s free rent period shall be increased on a day for day basis for each day of delay in completion of the Tenant Improvements that results from the foregoing.

Landlord shall be responsible for insuring that any HVAC system or electrical system servicing the Premises, which is not part of the Tenant Improvements, is in good working condition and that the ceiling grid meets current code and is in good condition. In addition,

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Landlord, at its sole cost and expense, shall replace all variable air volume (“VAV”) boxes within the Premises.

Landlord will make payments to Tenant’s contractor from the Tenant Improvement allowance as billed by the contractor and approved by the architect pursuant to the terms of the construction contract. Landlord agrees to pay $70.00 per rentable square feet of the Premises (e.g., 28,786 rsf) (the “Tenant Improvement Allowance”) towards the cost of the Tenant Improvements and the remaining cost, if any, shall be paid by Tenant. The Tenant Improvement Allowance may be used for construction costs, architectural and design fees, permits, Washington State sales tax, Tenant’s construction management fees and telephone/data cabling. Any unused portion of the Tenant Improvement Allowance shall be credited back to Tenant in the form of rent abatement or to offset any costs associated with architectural and design services, furniture acquisition, telephone/data cabling, Tenant’s physical relocation, or construction management fees. Landlord will not charge a construction management fee as part of the Tenant Improvement Allowance.

11. ALTERATIONS. Other than the Tenant Improvements, Tenant shall not make any structural alterations or improvements in or additions (“Alterations”) to the Premises or make any changes to locks on doors or add to, disturb or in any way change any of the wiring or plumbing in the Premises or the Buildings, without first obtaining the written consent of Landlord, and, when appropriate, in accordance with plans and specifications approved by Landlord, which consent shall not be unreasonably withheld. All such Alterations shall be at the sole cost and expense of Tenant and shall be performed by contractors or mechanics approved by Landlord, which consent shall not be unreasonably withheld. All work with respect to any such Alterations shall be done in a good and workmanlike manner, shall be of a quality equal to or exceeding the then existing construction standards for the Buildings and must be of a type, and the floors and ceilings must be finished in a manner, customary for general office use and other uses common to similar office buildings in the vicinity. Such Alterations shall be diligently prosecuted to completion. All such Alterations shall be made strictly in accordance with all laws, regulations and ordinances relating thereto, and no interior improvements installed by Landlord in the Premises may be removed unless the same are promptly restored to a condition similar or better. Landlord hereby reserves the right to require any contractor or mechanic working the Premises to provide lien waivers and liability insurance covering such Alterations to the Premises. Tenant shall give Landlord ten (10) days’ written notice of the commencement of any Alterations and agrees to allow Landlord and its Lender to enter the Premises at reasonable times and post appropriate notices to avoid liability to contractors or material suppliers for payment for such Alterations. Notwithstanding anything contained herein to the contrary, Tenant may make any nonstructural interior Alterations that do not adversely affect the value of the Premises, the structural integrity of the Buildings or any Building system without Landlord’s consent.

No Alterations shall adversely affect either the strength or exterior appearance, or the mechanical, electric or plumbing services of the Buildings. Tenant shall reimburse Landlord for any reasonable sums expended by Landlord for examination and approval of architectural or mechanical plans and specifications of the Alterations provided that Landlord shall not charge any examination fee in connection with the Tenant Improvements. Tenant shall also reimburse Landlord for reasonable direct costs incurred during any inspection of the Alterations. All damages or injury done to the Premises or Buildings by Tenant or by any persons who may be in or upon the Premises or Buildings with the express or implied consent of Tenant, including but not limited to the cracking or breaking of any glass of windows and doors, shall be paid for by

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Tenant and Tenant shall pay for all damage to the Buildings caused by negligent acts or omissions of Tenant or Tenant’s officers, contractors, agents, invitees while in the Premises, licensees, or employees.

12. CARE OF PREMISES.

a. Tenant’s Maintenance. Tenant shall take good care of the Premises throughout the term of the Lease.

b. Landlord’s Maintenance. Landlord shall make, at its sole cost and expense, all repairs and replacements and perform all maintenance necessary to keep the Premises, the Buildings and the common areas, the bike rack area and the generator area in good working order and repair and to maintain the Buildings and Premises in a clean, safe and tenantable condition comparable to other first class office buildings in Seattle, Washington. Notwithstanding the foregoing, repairs and replacements required by the wrongful acts of Tenant shall be paid by Tenant; provided, however, if the damaged caused by the wrongful acts of Tenant is included in the insurance that Landlord is required to be carry pursuant to the terms of this Lease, then Tenant’s maximum liability for repairs and replacements shall be the insurance policy deductible. This provision does not modify the waiver of subrogation clause contained herein. Landlord’s maintenance and repair shall include without limitation the roof, foundation, exterior walls, interior structural walls, all structural components, utility lines, all systems, equipment and facilities serving the Premises and the Buildings, such as mechanical, electrical, HVAC, plumbing and sewer, replacement of lighting tubes, lamp ballasts and bulbs, and extermination and pest control when necessary, and snow and ice removal, unless such repair is Tenant’s responsibility pursuant to Section 12.a. Landlord’s work under this Section 12 shall be accomplished with the least possible amount of interference with the conduct of Tenant’s business and, to the extent practicable, shall be done after normal business hours.

13. ACCEPTANCE OF PREMISES. Tenant shall be deemed to have accepted the Premises in their current condition, except as otherwise provided in this Lease.

14. ACCESS. During the term of this Lease, Tenant shall have access to the Premises 24 hours per day, seven (7) days per week, and three hundred sixty-five (365) days per year.

Tenant shall permit Landlord and its agents to enter into and upon the Premises at all reasonable times upon timely notice to Tenant, except in emergencies, for the purpose of inspecting the same or for the purpose of cleaning maintaining and repairing, and with the consent of Tenant (not to be unreasonably withheld) altering or improving, the Premises. Tenant shall not impede Landlord’s necessary access to building components within Common Areas. Nothing contained in this Section 14 shall be deemed to impose any obligation upon Landlord not expressly stated elsewhere in this Lease. When reasonably necessary, Landlord may temporarily close entrances, doors, corridors, elevators or other facilities for a reasonable duration, without liability to Tenant by reason of such closure and without such action by Landlord being construed as an eviction of Tenant or release of Tenant from the duty of observing and performing any of the provisions of this Lease. Landlord shall have the right to enter the Premises upon timely notice to Tenant, except in emergencies, for the purpose of showing the Premises to prospective tenants within the period of one hundred eighty (180) days prior to the expiration or sooner termination of the Lease term. Landlord will use its best efforts to minimize the impact on Tenant’s business of any entry by Landlord on the Premises and shall endeavor when possible to enter and make repairs after normal business hours.

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15. DAMAGE OR DESTRUCTION.

a. Damage and Repair. If the Buildings or the Premises are damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Landlord, will equal or exceed thirty percent (30%) of the replacement value of the Buildings (exclusive of foundations) just prior to the occurrence of the damage, or if insurance proceeds sufficient for restoration are for any reason unavailable, then Landlord may no later than the sixtieth (60th) day following the damage, give Tenant a notice of Landlord’s election to terminate this Lease. In addition, if Landlord’s estimate shows that it will take longer than one hundred and eighty (180) days from the date of casualty to restore the Premises to the condition they were in before such damage, Tenant may elect to terminate this Lease. In the event of such election this Lease shall be deemed to terminate on the third day after the giving of such notice, and Tenant shall surrender possession of the Premises within a reasonable time thereafter, and the Rent and Additional Rent shall be apportioned as of the date of Tenant’s surrender and any Rent paid for any period beyond such date shall be repaid to Tenant. If the cost of restoration as estimated by Landlord shall amount to less than thirty percent (30%) of said replacement value of the Buildings and insurance proceeds sufficient for restoration are available, or neither party elects to terminate this Lease, Landlord shall restore the Buildings and the Premises (to a functional unit similar to the Premises prior to such damages) with reasonable promptness, subject to delays beyond Landlord’s control and delays in the making of insurance adjustments by Landlord, and Tenant shall have no other right to terminate this Lease except as provided in this Section 15. If all or any portion of the Premises are to be restored, the Rent and Additional Rent shall abate as to the portion of the Premises damaged by said casualty and/or made reasonably unusable by Tenant due to such casualty until such portion of the Premises are completely restored.

b. Destruction During Last Year of Term. In case the Premises shall be substantially destroyed by fire or other cause at any time during the last Lease Year of this Lease, either Landlord or Tenant may immediately terminate this Lease by written notice to the other party.

c. Business Interruption. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises or the Buildings. Landlord shall use its best efforts to effect such repairs promptly.

d. Tenant Improvements. Landlord will not be required to carry insurance of any kind for any Tenant improvement or for Tenant’s furniture, furnishings, fixtures, equipment or appurtenances of Tenant under this Lease, and Landlord shall not be obligated to repair any damage thereto or replace the same, unless such damage is caused by Landlord’s negligence.

e. Express Agreement. The provisions of this Section 15 shall be considered an express agreement governing any case of damage or destruction of the Buildings or Premises by fire or other casualty.

16. WAIVER OF SUBROGATION. Whether any loss or damage to the Premises, the Buildings, or any property therein, is due to the negligence of either Landlord or Tenant, their agents or employees, or any other cause, Landlord and Tenant do each hereby waive any rights each may have against the other on account of any loss or damage arising from any risk actually covered by insurance policies held by the damaged party. Each party shall use best efforts to

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cause its insurance carriers to consent to the foregoing waiver of rights of subrogation against the other party. This clause shall be effective if, and only to the extent, that it does not impair any insurance carried by either party, only if the required waiver of subrogation endorsements can be obtained at a commercially reasonable cost, and only to the extent of proceeds actually received.

17. INDEMNIFICATION. Each party shall indemnify and hold the other harmless from and against all common law or statutory liabilities, damages, injuries, obligations, losses, claims, civil actions, costs, or expenses, including attorneys fees, arising with respect to Tenant, from any act, omission, or negligence of Tenant or its officers, contractors, licensees, agents, servants, employees, guests, or invitees, in or about the Buildings or the Premises, with respect to Landlord, from any act, omission or negligence of Landlord or its officers, agents and employees, occurring in or about the Buildings or the Premises or with respect to either party arising from any breach or default under this Lease. As part of such indemnity, each party waives its immunity from suit under the provisions of RCW 51, et seq.

Neither party shall be liable for any loss or damage to persons or property sustained by the other party or other persons, which may be caused by theft, or by any act or neglect of any tenant or occupant of the Buildings or any other third parties unless such loss or damage is due to the other party’s negligence.

In the event any indemnification hereunder is in connection with or collateral to a contract or agreement relative to the construction, alteration, repair, addition to, subtraction from, improvement to or maintenance of the Premises or the Buildings, such indemnification shall be subject to the provisions of RCW 4.24.115.

18. INSURANCE.

a. Liability Insurance. Tenant shall, throughout the term of this Lease and any renewal hereof, at its own expense, keep and maintain in full force and effect, a policy of comprehensive general liability insurance including a contractual liability endorsement covering Tenant obligations under Section 17, insuring Tenant’s activities upon, in or about the Premise, the Buildings, or the Property, against claims of bodily injury or death or property damage or loss with a limit of not less than Two Million Dollars ($2,000,000) combined single limit. The $2,000,000 limit may be met with a combination of a general liability and umbrella policy.

b. Property Insurance. Tenant shall throughout the term of this Lease and any renewal hereof at its own expense, keep and maintain in full force and effect, what is commonly referred to as “Special Form” perils coverage insurance (but excluding earthquake and flood) on the leasehold improvements constructed by Tenant in the Premises and on the personal property of Tenant in the Premises in an amount not less than the current one hundred percent (100%) replacement value thereof.

c. Insurance Policy Requirements. All insurance required under this Section 18 shall be with companies reasonably approved by Landlord. No insurance policy required under this Section 18 shall be cancelled or reduced in coverage and each insurance policy shall provide that it is not subject to cancellation or a reduction in coverage except after thirty (30) days prior written notice to Landlord.

Tenant shall deliver to Landlord on or before the Commencement Date and from time to time thereafter, copies of policies of such insurance or certificates evidencing the existence and amounts of same and naming Landlord as additional insured thereunder. In no event shall the

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limits of any insurance policy required under this Section 18 be considered as limiting the liability of Tenant under this Lease.

d. Landlord’s Insurance. Landlord shall maintain at all times during the Lease term a policy or policies of property insurance with extended coverage endorsement covering the Buildings in an amount equal to the full replacement cost of the Buildings. Further, Landlord shall maintain at all times during the Lease term a policy or policies of commercial general liability, or a combination of commercial general liability and umbrella or excess liability insurance, with combined limits as determined to be appropriate by Landlord, but in no event less than Two Million Dollars ($2,000,000). The liability insurance required hereunder shall cover all of Landlord’s operations and activities and all contingent liability of Landlord for all operations performed at the Buildings on Landlord’s behalf by Landlord’s contractors or subcontractors.

19. ASSIGNMENT AND SUBLETTING.

a. Assignment or Sublease. Tenant shall not assign, mortgage, encumber or otherwise transfer this Lease or sublet the whole or any part of the Premises without in each case first obtaining Landlord’s prior written consent. Such consent shall not be unreasonably withheld, conditioned or delayed. It shall not be deemed unreasonable for Landlord to withhold its consent if in Landlord’s reasonable judgment occupancy by any proposed assignee, subtenant or other transferee: (i) is not consistent with the maintenance and operation of a first class office building due to the proposed occupant’s nature or manner of conducting business, (ii) is likely to cause disturbance to the customary use and occupancy of the Buildings by other tenants, their employees, customers, clients or other guests or visitors, or (iii) is not reasonably deemed by Landlord to be financially responsible. Landlord may withhold, in its absolute and sole discretion, consent to any mortgage, hypothecation, pledge or other encumbrance of any interest in this Lease by Tenant or any subtenant, whereby this Lease or any interest therein becomes collateral for any obligation of Tenant or any other person. Further, Landlord may withhold its consent, in its absolute and sole discretion, for any assignment or sublease to an existing tenant in the Buildings or to any prospective tenant with whom Landlord had recently had negotiations regarding space in the Buildings, so long as Landlord has competing space available. Finally, Landlord may withhold its consent to the extent Landlord determines necessary to comply with a restriction on use of the Premises, the Buildings or the Property contained in any lease, mortgage, or other agreement or instrument that was in effect on the Effective Date of this Lease and by which the Landlord is bound or to which any of such property is subject.

No assignment, subletting or other transfer shall relieve Tenant of any liability under this Lease. Consent to any such assignment, subletting or transfer shall not operate as a waiver of the necessity for consent to any subsequent assignment, subletting or transfer.

Notwithstanding anything to the contrary in this Article 19, Tenant may assign this Lease without Landlord’s consent as follows (each of which is a “Permitted Transfer”): (a) to an affiliate or an entity under common ownership or control with Tenant, (b) to any entity with which Tenant is merging, or (c) to a person or entity that purchases all or substantially all of Tenant’s assets or all or substantially all of the ownership interests in Tenant.

Landlord reserves the right to terminate this Lease in the event that Landlord receives from Tenant a written request for assignment or subletting of this Lease or more than fifty percent (50%) of the Premises by Tenant, except that Landlord shall have no such right with respect to a Permitted Transfer. In the event more than fifty percent of the Premises but less than

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the entire Premises are to be subleased, Landlord retains the right to terminate this Lease with respect to the portion of the Premises for which such consent is requested, at the proposed effective date of such subletting, in which event Landlord shall enter into the relationship of Landlord and Tenant with any such subtenant or assignee as to the subleased portion, based on the rent (and/or other compensation) and the term agreed to by such subtenant or assignee and otherwise upon the terms and conditions of this Lease. Notwithstanding anything to the contrary herein, Landlord may only exercise the termination right described in this Section upon delivery of written notice to Tenant informing Tenant of Landlord’s intent to terminate and recapture. Tenant shall have ten (10) days after delivery of Landlord’s notice of same to rescind Tenant’s request from assignment or sublease in writing delivered to Landlord. If Tenant sends a timely rescission then Landlord’s notice of termination and recapture shall be nullified and of no further force and effect.

In connection with an assignment or subletting for which Landlord’s consent is required, Tenant shall pay the reasonable cost of processing such assignment or subletting, including attorneys’ fees, upon demand of Landlord. Tenant shall provide Landlord with copies of all assignments, subleases and assumption instruments.

b. Assignee Obligations. As a condition to Landlord’s approval of any assignment, any potential assignee otherwise approved by Landlord shall assume in writing all obligations of Tenant under this Lease and shall be jointly and severally liable with Tenant for the payment of Rent and performance of all terms, covenants and conditions of this Lease.

c. Sublessee Obligations. Any sublessee shall assume all obligations of Tenant as to the portion of the Premises which is subleased to such sublessee and shall be jointly and severally liable with Tenant for rental and other payments and performance of all terms, covenants and conditions of such approved sublease.

20. SIGNS. Tenant shall not inscribe any inscription, or post, place, or in any manner display any sign, graphics, notice, picture, placard or poster, or any advertising matter whatsoever upon the glass panes or supports of the windows and doors, or upon the exterior walls of the Premises or the Buildings, or at any places visible (either directly or indirectly as an outline or shadow on a glass pane) from anywhere outside the Premises without first obtaining Landlord’s written consent thereto, such consent to be at Landlord’s sole discretion. Notwithstanding the foregoing, Tenant shall have the right to install Building signage at the main entrance at 411 First Avenue, subject to Landlord’s reasonable approval and compliance with the City of Seattle building code. Any such consent by Landlord shall be upon the understanding and condition that Tenant shall remove the same at the expiration or sooner termination of this Lease and Tenant shall repair any damage to the Premises or the Buildings caused thereby.

Notwithstanding the foregoing, Landlord, at its sole cost and expense, will provide Tenant with its standard Building signage package, which includes a listing in the tenant directory board in the lobby of the Building, floor elevator vestibules and at Tenant’s main suite entry.

21. LIENS AND INSOLVENCY.

a. Liens. Tenant shall keep its interest in this Lease and any property of Tenant in the Premises (other than unattached personal property), the Premises, the Property and the Buildings free from all liens arising out of any work performed or materials ordered or obligations incurred or on behalf of Tenant and Tenant hereby indemnifies and holds Landlord

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harmless from any liability from any such lien. In the event any lien is filed against the Buildings, the Property or the Premises by any person claiming by, through or under Tenant, Tenant shall, upon request of Landlord, at Tenant’s expense and within thirty (30) days of such filing, either cause such lien to be released of record or furnish to Landlord a bond in form and amount and issued by a surety satisfactory to Landlord, indemnifying Landlord, the Property and the Buildings against all liability, costs and expenses, including attorneys fees, which Landlord may incur as a result thereof. Provided that such bond has been furnished to Landlord, Tenant, at its sole cost and expense and after written notice to Landlord, may contest, by appropriate proceedings conducted in good faith and with due diligence, any lien, encumbrance or charge against the Premises, the Property or the Buildings arising from work done or materials provided to and for Tenant, provided such proceedings suspend the collection thereof against Landlord, and the Premises, Buildings and Property, and neither the Premises, the Buildings, the Property nor any part thereof or interest therein is or will be in any danger of being sold, forfeited or lost.

b. Insolvency. If Tenant becomes insolvent or voluntarily or involuntarily bankrupt, or if a receiver, assignee or other liquidating officer is appointed for the business of Tenant, Landlord at its option may terminate this Lease and Tenant’s right of possession under this Lease and in no event shall this Lease or any rights or privileges hereunder be an asset of Tenant in any bankruptcy, insolvency or reorganization proceeding. Landlord’s right to terminate shall not take effect if the proceeding related to receivership or insolvency is dismissed within ninety (90) days of filing.

22. DEFAULT.

a. Cumulative Remedies. All rights of Landlord and Tenant herein enumerated shall be cumulative, and none shall exclude any other right or remedy allowed by law. In addition to the other remedies in this Lease provided, either party shall be entitled to restrain by injunction the violation or attempted violation by the other party of any of the covenants, agreements or conditions of this Lease.

b. Tenant’s Right to Cure. Tenant shall have a period of ten (10) business days from the day of written notice from Landlord to Tenant within which to cure any default in the payment of Rent, Additional Rent or other sums due hereunder. Each party shall have a period of twenty (20) days from the date of written notice from the other party within which to cure any other default hereunder; provided, however, that with respect to any such default which cannot be cured within twenty (20) days, the default shall not be deemed to be uncured if the defaulting party commences to cure within twenty (20) days and for so long as such party is diligently prosecuting the cure thereof.

c. Vacation and Abandonment. Any abandonment of the Premises by Tenant shall be considered a default with no right to cure, allowing Landlord to re enter the Premises under Section 22.d. Abandonment shall be defined as an absence from the Premises of five (5) business days or more, without legal excuse (i.e. casualty), while Tenant is in default after the expiration of all cure periods. Any vacation or abandonment by Tenant shall be considered a default with no right to cure, allowing Landlord to re enter the Premises under Section 22.d.

d. Landlords Re-entry. Upon an uncured default of this Lease by Tenant, Landlord, besides other rights or remedies it may have, at its option, may enter the Premises or any part thereof, either with or without process of law, and expel, remove or put out Tenant or any other persons who may be thereon, together with all personal property found therein; and

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Landlord may terminate this Lease, or it may from time to time, without terminating this Lease and as agent of Tenant, rent the Premises or any part thereof for such term or terms (which may be for a term less than or extending beyond the term hereof), and at such rental or rentals and upon such other reasonable terms and conditions as Landlord in its sole discretion may deem advisable, with the right to repair, renovate, remodel, redecorate, alter and change the Premises, Tenant remaining liable for any deficiency computed as hereinafter set forth. In the case of any default, re-entry and/or dispossession, by summary proceedings or otherwise, all Rent and Additional Rent shall become due thereupon and be paid up to the time of such reentry or dispossession together with such expenses as Landlord may reasonably incur for attorneys fees, advertising expenses, brokerage fees and/or putting the Premises in good order or preparing the same for re-rental, together with interest thereon as provided in Section 41.g hereof, accruing from the date of any such expenditure by Landlord.

e. Reletting the Premises. At the option of Landlord, rents received by Landlord from such reletting shall be applied first to the payment of any indebtedness from Tenant to Landlord other than Rent and Additional Rent due hereunder; second, to the payment of any costs and expenses of such reletting and including, but not limited to, attorneys’ fees, advertising fees and brokerage fees, and to the payment of any repairs, reasonable renovations, reasonable remodeling, reasonable redecoration, reasonable alterations and changes in the Premises; third, to the payment of Rent and Additional Rent due and to become due hereunder, and if after so applying said rents there is any deficiency in the Rent or Additional Rent to be part by Tenant under this Lease, Tenant shall pay any deficiency to Landlord monthly on the dates specified herein and any payment made or suits brought to collect the amount of the deficiency for any month shall not prejudice in any way the right of Landlord to collect the deficiency for any subsequent month. Landlord shall have an affirmative obligation to use commercially reasonable efforts to obtain another tenant for the Premises promptly, at a fair market rental, and to otherwise mitigate its damages, but the failure of Landlord to relet the Premises (or any part or parts thereof) despite such efforts shall not release or affect Tenant’s ability hereunder. In no event shall Tenant be entitled to receive any excess of net rents collected over sums payable by Tenant to Landlord hereunder. No such re-entry or taking possession of the Premises shall be construed as an election on Landlord’s part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach and default. Should Landlord at any time terminate this Lease by reason of any default, in addition to any other remedy it may have, it may recover from Tenant any deficiency in the Rent and Additional Rent reserved in this Lease for the balance of the Term, plus all court costs and attorneys fees incurred by Landlord in the collection of the same.

f. Waiver of Redemption Rights. Tenant, for itself, and on behalf of any and all persons claiming through or under it, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Premises or to have a continuance of this Lease for the term hereof, as it may have been extended, after having been dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as herein provided.

g. Nonpayment of Additional Rent. All costs and expenses which Tenant assumes or agrees to pay to Landlord pursuant to this Lease shall be deemed Additional Rent and, in the event of nonpayment thereof, Landlord shall have all the rights and remedies herein provided for in case of nonpayment of Rent.

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h. Landlord Default. In the event of a uncured Landlord default, Tenant, at its option shall have the right to any one or more of the following remedies in addition to all other rights and remedies provided at law or in equity or elsewhere herein: (i) to remedy such default or breach and deduct the costs thereof (including attorneys’ fees) from the installments of Rent next falling due; (ii) to pursue the remedy of specific performance; (iii) to seek money damages for loss arising from Landlord’s failure to discharge its obligations under this Lease; and (iv) if the default materially interferes with Tenant’s ability to operate in the Premises in accordance with standard business practice, to terminate this Lease; provided, however, Tenant shall give thirty (30) days prior written notice before terminating the Lease pursuant to this Section 22(h) and if Landlord cures within said thirty (30) day period, or if the cure takes longer than thirty (30) days, but Landlord: (1) begins the cure within such thirty-day (30) period and uses its best efforts to cure to completion; and (2) the cure does not take longer than 60 days, Tenant’s termination shall be deemed rescinded. Nothing herein contained shall relieve Landlord from its obligations hereunder, nor shall this Section be construed to obligate Tenant to perform Landlord’s repair obligations.

23. SUBORDINATION. This Lease shall be subordinate to any first mortgage or deed of trust (and any other mortgage or deed of trust upon the written election of Landlord) now existing or hereafter placed upon the Property, the Buildings or the Premises, created by or at the instance of Landlord, and to any and all advances to be made thereunder and to interest thereon and all modifications, renewals and replacements or extensions thereof (“Landlord’s Mortgage”), provided that, so long as Tenant is not in default under this Lease, Tenant’s peaceable possession of the Premises and its rights under this Lease will not be disturbed on account thereof. In the event of any foreclosure or sale pursuant to the Landlord’s Mortgage, Tenant agrees to attorn to such beneficiary or purchaser. Tenant shall properly execute, acknowledge and deliver documents which the holder of any Landlord’s Mortgage may require to effectuate the provisions of this Section 23.

24. SURRENDER OF POSSESSION. Subject to the terms of Section 15 relating to damage and destruction, upon expiration of the term of this Lease, whether by lapse of time or otherwise Tenant shall promptly and peacefully surrender the Premises to Landlord in as good condition as when received by Tenant from Landlord or as thereafter improved, reasonable use, wear and tear and damage by casualty, described in Section 15 excepted. Notwithstanding the foregoing, Tenant shall not have any obligation to remove any Alterations, except as provided otherwise in Section 25.b.

25. REMOVAL OF PROPERTY.

a. Signs and Personal Property. Tenant shall remove (i) all identifying insignia and design elements which are unique to Tenant’s business and installed by Tenant in or on the Premises, and (ii) all articles of personal property and all business and trade fixtures, machinery and equipment, furniture and movable partitions owned by Tenant or installed by Tenant at its expense in the Premises which can be removed without damage to the Premises at the expiration or sooner termination of this Lease. Tenant shall pay Landlord for any damages for injury to the Premises or Buildings resulting from such removal. If Tenant shall fail to remove any of its property of any nature whatsoever from the Premises or the Buildings within five (5) business days after the expiration or earlier termination of this Lease, Landlord may remove and store said property without liability for loss thereof or damage thereto, such storage to be for the account and at the expense of Tenant. If Tenant shall not pay the cost of storing any such property after it has been stored for a period of thirty (30) days or more, Landlord may, at

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its option, sell, or permit to be sold, any or all such property at public or sale, in such manner and at such times and places as Landlord in its sole discretion may deem proper, without notice to Tenant, unless notice is required under applicable statutes, and shall apply the proceeds of such sale: first, to the cost and expense of such sale, including reasonable attorneys’ fees actually incurred; second, to the payment of the costs or charges for storing any such property; third, to the payment of any other sums of money which may then be or thereafter become due Landlord from Tenant under any of the terms hereof; and, fourth, the balance, if any, to Tenant.

b. Alterations. All Alterations shall remain in and be surrendered with the Premises as a part thereof at the expiration or earlier termination of this Lease, without disturbance, molestation or injury, provided that Landlord may, together with the written notice consenting to the construction of any such Alterations, notify Tenant that they be removed upon the expiration or earlier termination of this Lease. In such event, all expense to remove such Alterations and to restore the Premises to standards, prior to such Alterations, less normal wear and tear, shall be borne by Tenant.

26. NON-WAIVER. Waiver by either party of any term, covenant or condition herein contained any breach thereof shall not be deemed to be a waiver of such term, covenant, or condition or of any subsequent breach of the same or any other term, covenant, or condition herein contained. In addition, the subsequent acceptance of Rent or Additional Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent or Additional Rent so accepted, regardless of Landlord’s knowledge of such preceding breach at the time of acceptance of such Rent or Additional Rent.

27. HOLDOVER. If Tenant shall, with the written consent of Landlord, hold over after the expiration of the term of this Lease, such tenancy shall be deemed a month-to-month tenancy, which may be terminated as provided by applicable state law. During such tenancy, Tenant shall be bound by all of the terms, covenants and conditions herein so far as applicable, except rental which shall be the greater of (a) the then quoted rates for similar space in the Buildings, or (b) the Rent and Additional Rent stated herein.

28. CONDEMNATION.

a. Entire Taking. If all of the Premises or such portions of the Buildings as may be required for the reasonable use by Tenant of the Premises, are taken by eminent domain, this Lease shall automatically terminate as of the date title vests in the condemning authority and all Rent, Additional Rent and other payments shall be paid to or reimbursed as of that date.

b. Constructive Taking of Entire Premises. In the event of a taking of a material part of but less than all of the Buildings, where Landlord shall determine that the remaining portions of the Buildings cannot be economically and effectively used by it (whether on account of physical, economic, aesthetic or other reasons) or where Landlord determines the Buildings should be restored in such a way as to materially alter the Premises, Landlord shall forward a written notice to Tenant of such determination not more than sixty (60) days after the date of taking. The term of this Lease shall expire upon such date as Landlord shall specify in such notice but not earlier than sixty (60) days after the date of such notice. In the event of a taking of a material part, but less than all, of the Premises, Tenant shall have the right to terminate this Lease as of the date of such taking.

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c. Partial Taking. Subject to the provisions of the preceding Section 28.b, in case of taking of a thirty percent (30%) or less of the square footage of the Premises, or a portion of the Buildings not required for the reasonable use of the Premises, then this Lease shall continue in full force and effect and the Rent shall be equitably reduced based on the proportion by which the square footage of the Premises is reduced, such Rent reduction to be effective as of the date title to such portion vests in the condemning authority.

d. Awards and Damages. Landlord reserves all rights to damages to the Premises for any partial, constructive, or entire taking by eminent domain, and Tenant hereby assigns to Landlord any right Tenant may have to such damages or award, and Tenant shall make no claim against Landlord or the condemning authority for damages for termination of the leasehold interest. Tenant shall have the right, however, to claim and recover from the condemning authority compensation for any loss to which Tenant may be put for Tenant’s moving expenses, business interruption or taking of Tenant’s personal property (not including Tenant’s leasehold interest) provided that such damages may be claimed only if they are awarded separately in the eminent domain proceedings and not out of or as part of the damages recoverable by Landlord.

29. NOTICES. All notices under this Lease shall be in writing and delivered in person or sent either by recognized courier service or by registered or certified mail, postage prepaid, to Landlord and to Tenant at the Notice Addresses provided in Section l.i (provided that after the Commencement Date any such notice shall be mailed or delivered by hand to Tenant at the Premises) and to the holder of any Landlord’s Mortgage at such place as such holder shall specify to Tenant in writing; or such other addresses as may from time to time be designated by any such party in writing. Notices mailed as aforesaid shall be deemed given on the date of such mailing.

30. COSTS AND ATTORNEYS’ FEES. If Tenant or Landlord shall bring any action for any relief against the other, declaratory or otherwise, arising out of this Lease, including any suit by Landlord for the recovery of Rent, Additional Rent or other payments hereunder or possession of the Premises, the losing party shall pay the prevailing party a reasonable sum for attorneys’ and paralegal’s fees in such suit, at trial and on appeal, and such attorneys fees shall be deemed to have accrued on the commencement of such action.

31. LANDLORD’S LIABILITY. Anything in this Lease to the contrary notwithstanding, covenants, undertakings and agreements herein made on the part of Landlord are made and intended not as personal covenants, undertakings and agreements for the purpose of binding Landlord personally or the assets of Landlord but are made and intended for the purpose of binding only the Landlord’s interest in the Premises, the Buildings, and the Property, as the same may from time to time be encumbered. No personal liability or personal responsibility is assumed by, nor shall at any time be asserted or enforceable against Landlord or its members or their respective heirs, legal representatives, successors or assigns on account of the Lease or on account of any covenant, undertaking or agreement of Landlord in this Lease contained.

32. LANDLORD’S CONSENT. Except as specified in other provisions of this Lease, whenever Landlord’s consent is required under the terms hereof, such consent shall not be unreasonably withheld.

33. ESTOPPEL CERTIFICATES. Tenant shall, from time to time, upon written request of Landlord, execute, acknowledge and deliver to Landlord or its designee a written

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statement stating: the date this Lease was executed and the date it expires; the date the term commenced and the date Tenant accepted the Premises; the amount of minimum monthly Rent and the date to which such Rent has been paid; and certifying: that this Lease is in full force and effect and has not been assigned, ratified, supplemented or amended in any way (or specifying the date and terms of agreement so affecting this Lease); that this Lease represents the entire agreement between the parties as to this leasing; that all conditions under this Lease to be performed by the Landlord have been satisfied; that all required contributions by Landlord to Tenant on account of Tenant’s improvements have been received; that on this date there are no existing claims, defenses or offsets which Tenant has against the enforcement of this Lease by the Landlord; that no Rent has been paid more than one month in advance; and that no security has been deposited with Landlord (or, if so, the amount thereof). It is intended that any such statement delivered pursuant to this paragraph may be relied upon by a prospective purchaser of Landlord’s interest or assignee of any mortgage upon Landlord’s interest in the Buildings. If Tenant shall fail to respond within twenty (20) days of receipt by Tenant of a written request by Landlord as herein provided, Landlord may give a second notice reminding Tenant of its failure to respond. If Tenant does not respond within five (5) days of Landlord’s second notice, Tenant shall be deemed to have given such certificate as above provided without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee and to have certified that this Lease is in full force and effect, that there are no uncured defaults in Landlord’s performance, that the security deposit is as stated in the Lease, and that not more than one month’s Rent has been paid in advance.

34. TRANSFER OF LANDLORD’S INTEREST. In the event of any transfer or transfers of Landlord’s interest in the Premises, the Buildings, or the Property other than a transfer for security purposes only, the transferor shall be automatically relieved of any and all obligations and liabilities on the part of Landlord accruing from and after the date of such transfer, provided the transferee accepts the obligations of Landlord under the Lease, and such transferee shall have no obligation or liability with respect to any matter occurring or arising prior to the date of such transfer. Tenant agrees to attorn to the transferee.

35. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money required to be paid by it hereunder; or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for ten (10) days after notice thereof by Landlord, Landlord may, but shall not be obligated so to do, and without waiving or releasing Tenant from any obligations of Tenant, make such payment or perform any such other act on Tenant’s part to be made or performed as provided in this Lease. Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the nonpayment of sums due under this Section 35 as in the case of default by Tenant in the payment of Rent.

36. AUTHORITY.

a. Corporate Authority. If Tenant is a corporation, each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant, in accordance with a duly adopted resolution of the Board of Directors of Tenant and in accordance with the bylaws of Tenant, and that this Lease is binding upon Tenant in accordance with its terms.

b. Partnership Authority. If Tenant is a partnership, each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant, in accordance with the partnership agreement of Tenant, and that this Lease is binding upon Tenant in accordance with its terms.

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37. OPTION TO RENEW. Landlord grants Tenant the option to extend the Lease term for two (2) additional periods of five (5) years (each, an “Extended Term”), commencing at the end of the initial term of the Lease. Each Extended Term shall be upon the same terms and conditions contained in this Lease, except for Rent. Tenant shall have no further right to extend the Lease term after the second Extended Term. In the event Tenant is not then in default under the terms of the Lease, the option to extend may be exercised by Tenant giving Landlord written notice thereof no more than twelve (12) months and no less than nine (9) months prior to the end of the term of this Lease then in effect.

Rent for each Extended Term shall be equal to ninety-five percent (95%) of the then fair market rental value (“FMV”) for the Premises, but not less than the Rent payable on exercise of the option. The FMV shall be established as follows: At least one hundred eighty (180) days prior to the last day of the initial term of this Lease or the last day of the first Extended Term, as the case may be, the parties shall meet to discuss the FMV. The parties shall attempt in good faith to agree on the FMV. In the event the parties are unable to agree on the FMV before a date which is one hundred fifty (150) days prior to the end of the last day of the initial term of this Lease or the last day of the first Extended Term, as the case may be, and confirm such agreement in writing, Landlord and Tenant shall jointly appoint an appraiser to determine the FMV. In the event Landlord and Tenant cannot agree on an appraiser, each shall appoint an appraiser and shall notify the other party in writing of such appointment and identify the respective appraisers so chosen. Any appraiser so selected under this paragraph shall be an MAI appraiser or a licensed real estate broker (experienced in commercial leasing in the area of the Premises) who shall have not less than ten (10) years experience with respect to building ownership, management and marketing in the geographical real estate market where the Premises are situated, which person shall not be regularly employed, directly or indirectly, during the past two (2) years by the respective party selecting such person. Not later than ten (10) days after both appraisers are so appointed, they shall meet to determine the FMV. If either party fails to appoint an appraiser within the time specified above for such appointment, then the appraiser appointed shall determine the FMV and his/her decision shall be final and binding. If the two (2) selected appraisers agree on the FMV, such determination shall be the Rent for the first Extended Term or second Extended Term, as applicable. If the two (2) selected appraisers are unable to agree on the FMV within said ten (10) days, then each appraiser shall submit to the other appraiser an opinion as to the FMV, and the FMV shall be an amount equal to the average of the two (2) amounts submitted by the appraisers. The final decision of the appraiser(s) shall be binding on Landlord and Tenant. Landlord and Tenant shall each be responsible for the costs, charges and expenses of its respective appointed appraiser.

38. TENANT’S RIGHT TO TERMINATE. Tenant shall have a one time right to terminate this Lease at any time after the eighty-fourth (84th) month of the Lease term by (a) providing at least nine (9) months’ prior written notice to Landlord, and (b) paying Landlord, in cash, an early termination fee equal to the unamortized cost of the Tenant Improvement Allowance and leasing commissions.

39. EXPANSION RIGHTS. Tenant shall have an option to expand the Premises (the “Space B Option”) as of September 1, 2012, by 2,109 rentable square feet on Floor 3 of the Sellar-Hambach Building, as shown on Exhibit C attached hereto and incorporated herein by this reference (“Space B”). The combined total square footage of the Premises thereafter will be 29,701 rentable square feet. Rent for Space B shall be the rent per square footage Tenant is then obligated to pay (i.e. $24.25/rsf), with the prorated Tenant Improvement Allowance of $59.50 per rsf. Any unused portion of the Tenant Improvement Allowance shall be credited back to Tenant

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in the form of rent abatement or to offset any costs associated with architectural and design services, furniture acquisition, telephone/data cabling. Tenant shall exercise the Space B Option by providing Landlord with nine (9) months written notice prior to September 1, 2012, of its intention to do so.

Tenant shall also have an option to expand the Premises (the “Space C Option”), as of the third anniversary of the Commencement Date, by leasing 4,423 rentable square feet on Floor 3 of the Sellar-Hambach Building, as shown on Exhibit C (“Space C”). The combined total square footage of the Premises thereafter will be 34,124 rentable square feet. Rent for Space C shall be the rent per square footage Tenant is then obligated to pay (i.e. $25.75/rsf), with a prorated Tenant Improvement Allowance of $49.00 per rsf. Any unused portion of the Tenant Improvement Allowance shall be credited back to Tenant in the form of rent abatement or to offset any costs associated with architectural and design services, furniture acquisition, telephone/data cabling. Tenant shall exercise the Space C Option by providing Landlord with nine (9) months written notice, prior to the third anniversary of the Commencement Date of its intention to do so.

40. RIGHT OF FIRST OFFER. Tenant shall have an ongoing first right to lease any new space that becomes available in the Sellar-Hambach Building (the “FRL Space”) during the term of this Lease. At the time Landlord learns of the availability of any space, Landlord shall notify Tenant in writing (the “Landlord’s FRL Notice”) of such availability, and Tenant shall have ten (10) days after receipt of Landlord’s FRL Notice in which to advise Landlord in writing (the “Tenant’s FRL Notice”) whether or not it will lease the FRL Space at the then FMV of the FRL Space. In the event Landlord and Tenant cannot agree on such FMV, it shall be determined as provided in Section 37 above. If Tenant fails to provide the Tenant’s FRL Notice to Landlord within such time period, (i) Tenant shall be deemed not to exercise its option to lease the FRL Space, (ii) Landlord shall be free to lease such space to other tenants so long as Landlord does not offer terms to the market that are more favorable to the proposed tenant by more than ten percent (10%) relative to those terms initially offered to Tenant, and (iii) Tenant shall have no further first rights to lease that particular FRL Space. To the extent Landlord offers terms to the market that are more than ten percent (10%) more favorable to the proposed tenant than the terms initially offered to Tenant, then Landlord must first offer the new “more favorable” terms to Tenant, in which case, Tenant shall provide the Tenant’s FRL Notice in the manner provided above.

41. GENERAL.

a. Headings. Titles to Sections of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof.

b. Heirs and Assigns. All of the covenants, agreements, terms and conditions contained in this Lease shall inure to and be binding upon the Landlord and Tenant and their respective heirs, executors, administrators, successors and assigns.

c. Brokers. Landlord and Tenant each represent to the other that it has dealt with no broker in connection with this Lease other than Clay Nielsen and Ed Curtis of Washington Partners, Inc. (“Tenant’s Brokers”) who represented Tenant in this transaction. Landlord shall pay Tenant’s Brokers a fee pursuant to a written broker agreement.

d. Rules and Regulations. Tenant shall observe the rules and regulations attached to this Lease as Exhibit E. Tenant shall also observe such additional rules and

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regulations as Landlord may from time to time make for the operation, reputation, safety, care, security or cleanliness of the Buildings, Property and the parking garage, the operation and maintenance of equipment, the use of common areas of the Property, the hours of business, parking areas for vehicles operated by Tenant and its employees, servants, agents and contractors, the lighting of the Premises, and other matters affecting the operation of the Buildings, Property and parking garage, and the establishing and maintaining of a suitable image to the customers of the Buildings; provided however, such new rules and regulations may not increase Tenant’s costs or adversely affect Tenants access to, or use and occupancy of, the Premises or designated common areas.

e. Entire Agreement. This Lease contains all covenants and agreements between Landlord and Tenant relating in any manner to the leasing, use and occupancy of the Premises, and to Tenant’s use of the Buildings and other matters set forth in this Lease. No prior agreements or understanding pertaining to the same shall be valid or of any force or effect. The covenants and agreements of this Lease shall not be altered, modified or added to except in writing signed by Landlord and Tenant.

f. Severability. Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof and the remaining provisions hereof shall nevertheless remain in full force and effect.

g. Overdue Payments. Any Rent, Additional Rent or other sums payable by Tenant to Landlord under this Lease which shall not be paid within five (5) days of the due date thereof, shall bear interest at a rate equal to three percentage points above the prime rate of interest stated from time to time by Bank of America or its successor, or, in the absence of an established prime rate, five percentage points over that bank’s rate for one year certificates of deposit, but not in excess of the highest lawful rate permitted under applicable laws, calculated from the original due date thereof to the date of payment.

h. Force Majeure. Except for the payment of Rent, Additional Rent or other sums payable by Tenant to Landlord, time periods for Tenant’s or Landlord’s performance under any provision, of this Lease shall be extended for periods of time during which Tenant’s or Landlord’s performance is prevented due to circumstances beyond Tenant’s or Landlord’s control, including without limitation, strikes, embargoes, shortages of labor or materials, governmental regulations, acts of God, war or other strife.

i. Right to Change Public Spaces. Landlord shall have the right at any time after the completion of the Buildings, without thereby creating an actual or constructive eviction or incurring any liability to Tenant therefor, to change the arrangement or location of such of the following as are not contained within the Premises or any part thereof: entrances, passageways, doors and doorways, corridors, stairs, toilets and other like public service portions of the Buildings. Nevertheless, in no event shall Landlord diminish any service, change the arrangement or location of the elevators serving the Premises, make any change which shall diminish the area of the Premises, materially adversely affect access to the Premises, or make any change which shall change the character of the Buildings from that of a first-class office building.

j. Compliance With Americans With Disabilities Act. Landlord shall insure that as of the Commencement Date of this Lease, and except as may be attributable to the act of, or omission, of Tenant and other tenants of the Buildings, the Buildings and Property are, or will be, in compliance with all applicable laws, including the Americans With Disabilities Act

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(“ADA”); provided, however, Landlord and Tenant must agree on any renovations required to bring the Buildings and Property into compliance with the ADA. If they cannot so agree within sixty (60) days after the execution of the Lease, Landlord shall determine what renovations, if any, to make.

k. Hazardous Materials. Landlord warrants to Tenant that Landlord has not released or deposited on the Premises any hazardous substances, waste, or materials, or any toxic substances and Landlord has no knowledge of the presence of any such substances on the Premises. Landlord agrees to defend, indemnify, and hold harmless Tenant, its employees, agents, and contractors and lenders from and against any and all losses, claims, liabilities, damages, demands, fines, costs, and expenses (including reasonable attorneys’ fees) arising out of or resulting from any breach of the foregoing warranty. If any hazardous substances are determined to be present in the Premises or the Buildings (other than through the act of Tenant or its employees, contractors or agents), and if the presence of such substances materially adversely affects Tenant’s ability to construct the Tenant Improvements or to use or occupy the Premises, Landlord shall promptly remediate the hazardous substances (after written notice from Tenant) at Landlord’s cost and expenses. Without limitation, Tenant shall have the right to terminate this Lease unless the hazardous substances are remediated to Tenant’s reasonable satisfaction and in accordance with applicable laws within thirty (30) days of the first date of interference with Tenant’s build out or occupancy.

Tenant covenants and warrants that Tenant, its employees, contractors, or agents, shall not use the Premises in a manner which violates any applicable federal, state or local law, regulation or ordinance governing the handling, transportation, storage, treatment, usage or disposal of hazardous substances, waste, and material or toxic substance in the Buildings or in the Premises.

Tenant covenants that it will indemnify, defend, and hold harmless Landlord from any claims, judgments, damages, penalties, fines, expenses, liabilities (including sums paid in settlements of claims) or losses arising out of or in any way relating to a breach of the environmental warranty made by Tenant above. Such indemnity shall include, without limitation, reasonable attorneys’, consultant’s and expert’s fees, as well as costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision or other third party.

Tenant shall immediately notify Landlord of all spills or releases of any toxic or hazardous substances, wastes, or materials or toxic substances, all failures to comply with any federal, state, or local law, regulation or ordinance, all inspection of the Premises by any regulatory entity concerning the same, all regulatory orders or fines, and all response or interim clean-up action taken by or proposed to be taken by any government entity or private party on the Premises.

For the purpose of this Section 41, the term, “toxic or hazardous substances, wastes and materials” or “toxic substance” includes any material or substance which is (1) defined as a “hazardous substance” pursuant to Section 101 of the Comprehensive Environmental Response, Liability and Compensation Act, 42 U.S.C. 9601 (14); (2) defined as a “hazardous waste” pursuant to Section 1004 or Section 3001 of the Resource, Conservation and Recovery Act, 42 U.S.C. 6903, 42 U.S.C. 6921; (3) included on the toxic pollutant list under Section 307(a) of the Federal Water Pollution Control Act, 33 U.S.C. 1317(a); (4) defined as a “hazardous substance” pursuant to Section 311 of the Federal Water Pollution Control Act,

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33 U.S.C. 1321; (5) defined as a “hazardous air pollutant” under Section 112 of the Clean Air Act, 42 U.S.C. 7412; (6) defined as a “hazardous substance” under Washington’s Hazardous Waste Cleanup Act, RCW 70.105B.020; and (7) defined as a “hazardous substance” pursuant to the hazardous waste site clean-up law, the Model Toxics Control Act (Initiative 97). “Toxic or hazardous substances, wastes and materials” specifically includes, but is not limited to, asbestos, polychlorinated biphenyls (PCBs), petroleum and petroleum products, and urea formaldehyde.

The covenants and warranties in this Section 41.k shall survive the termination or expiration of this Lease.

l. Governing Law. This Lease shall be governed by and construed in accordance with the laws of the state of Washington.

m. Building Directory. Landlord shall maintain in the lobby of the Buildings a directory which shall include the name of Tenant and any other names reasonably requested by Tenant in proportion to the number of listings given to comparable tenants of the Buildings.

n. Building Name. The Buildings will be known by such name as Landlord may designate from time to time.

[Signatures on Next Page]

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IN WITNESS WHEREOF this Lease has been executed the day and year first above set forth.


“LANDLORD”	MERRILL PLACE, LLC,
	a Washington limited liability company

	By:	NSD, LLC, a Washington limited liability company, its Manager

		By	Kevin Daniels, Member

“TENANT”	BLUE NILE, INC.,
	a Delaware corporation

	By

		Its

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I certify that I know or have satisfactory evidence that KEVIN DANIELS is the person who appeared before me, and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as a Member of NSD, LLC, in its capacity as the Manager of MERRILL PLACE LLC, to be the free and voluntary act and deed of each of said limited liability companies, for the uses and purposes mentioned in the instrument.

WITNESS my hand and official seal hereto affixed this ______ day of ________________________, 2010.



		(Signature of Notary)


		(Print or stamp name of Notary)
		NOTARY PUBLIC in and for the State of Washington
		My Appointment Expires:

I certify that I know or have satisfactory evidence that ______________________ is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the ____________________ of BLUE NILE, INC., to be the free and voluntary act and deed of such corporation, for the uses and purposes mentioned in the instrument.

WITNESS my hand and official seal hereto affixed this _____ day of _____________________, 2010.



		(Signature of Notary)


		(Print or stamp name of Notary)
		NOTARY PUBLIC in and for the State of Washington
		My Appointment Expires:

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EXHIBIT A

Legal Description of Property

Legal Description

PARCEL 1:

THAT PORTION OF BLOCK 4 OF D. S. MAYNARD’S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY, AND OF VACATED ALLEY IN SAID BLOCK, AND OF AN UNPLATTED STRIP OF LAND IN SECTION 6, TOWNSHIP 24 NORTH, RANGE 4 EAST W.M., DESCRIBED AS FOLLOWS:

BEGINNING ON THE NORTHERLY LINE OF LOT 8 IN SAID BLOCK AT A POINT 9.00 FEET WESTERLY OF THE NORTHEAST CORNER THEREOF; THENCE SOUTHERLY PARALLEL WITH THE EASTERLY LINE OF SAID BLOCK, A DISTANCE OF 75.00 FEET;

THENCE WESTERLY PARALLEL WITH THE NORTHERLY LINE OF SAID BLOCK, A DISTANCE OF 119.00 FEET TO THE CENTERLINE OF THE ALLEY THEREIN; THENCE SOUTHERLY ALONG THE CENTERLINE OF SAID ALLEY, 165.00 FEET TO THE EASTERLY PRODUCTION OF THE SOUTHERLY LINE OF SAID LOT 4 IN SAID BLOCK; THENCE CONTINUING SOUTHERLY ALONG THE PRODUCTION OF THE CENTERLINE OF SAID ALLEY, A DISTANCE OF 16.716 FEET TO THE GOVERNMENT MEANDER LINE; THENCE WEST ALONG SAID MEANDER LINE, 150.408 FEET TO AN ANGLE POINT IN SAID MEANDER LINE; THENCE NORTHERLY ALONG SAID MEANDER LINE TO A POINT DUE WEST OF THE NORTHWEST CORNER OF LOT 1 IN SAID BLOCK; THENCE EAST TO THE NORTHWEST CORNER OF SAID LOT 1; THENCE EASTERLY ALONG THE NORTHERLY LINE OF SAID BLOCK, A DISTANCE OF 247.00 FEET TO THE POINT OF BEGINNING; EXCEPT ALL COAL AND MINERALS AND THE RIGHT TO EXPLORE FOR AND MINE THE SAME, AS EXCEPTED BY DEED RECORDED UNDER KING COUNTY RECORDING NO. 3528837, COVERING THE SOUTH 45 FEET OF LOT 2, ALL OF LOTS 3 AND 4, THAT PORTION OF THE WEST 1/2 OF VACATED ALLEY ADJOINING, AND THOSE PORTIONS OF THE UNPLATTED STRIP IN SECTION 6 ADJOINING; SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.

PARCEL 2:

THE WEST 111 FEET OF LOT 5 IN BLOCK 4 OF D. S. MAYNARD’S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY; TOGETHER WITH THAT PORTION OF UNPLATTED STRIP OF LAND IN SECTION 6, TOWNSHIP 24 NORTH, RANGE 4 EAST W.M., LYING BETWEEN THE WEST 111 FEET OF LOT 5 IN BLOCK 4 OF D. S. MAYNARD’ S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY, AND THE GOVERNMENT MEANDER LINE, DESCRIBED AS FOLLOWS:

BEGINNING AT THE SOUTHWEST CORNER OF SAID LOT 5; THENCE SOUTHERLY 16.801 FEET TO THE SAID MEANDER LINE; THENCE EASTERLY ALONG THE SAID MEANDER LINE 111.00 FEET, MORE OR LESS, TO THE WEST MARGINAL LINE OF FIRST AVENUE SOUTH; THENCE NORTHERLY ALONG THE WEST MARGINAL LINE OF FIRST AVENUE SOUTH 17.971 FEET TO THE SOUTH MARGINAL LINE OF SAID LOT 5; THENCE WESTERLY 111.00 FEET TO THE POINT OF BEGINNING; AND TOGETHER WITH THAT PORTION OF THE EASTERLY 1/2 OF THE VACATED ALLEY IN BLOCK 4 OF D. S. MAYNARD’S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY, DESCRIBED AS FOLLOWS: BEGINNING AT THE NORTHWEST CORNER OF LOT 5 IN BLOCK 4 OF SAID PLAT; THENCE WEST 8 FEET; THENCE SOUTHERLY ALONG THE CENTERLINE OF SAID VACATED ALLEY 76.716 FEET TO THE GOVERNMENT MEANDER LINE; THENCE EASTERLY ALONG THE SAID MEANDER LINE 8 FEET, MORE OR LESS, TO THE EASTERLY MARGINAL LINE OF SAID VACATED ALLEY PRODUCED SOUTH; THENCE NORTHERLY 76.801 FEET TO THE POINT OF BEGINNING; SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.

PARCEL 3:

THE WEST 111 FEET OF LOT 6 AND THE WEST 111 FEET OF THE SOUTH 45 FEET OF LOT 7 IN BLOCK 4 OF D. S. MAYNARD’S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY; TOGETHER WITH THE EAST 1/2 OF VACATED ALLEY ADJOINING;

SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.

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EXHIBIT A-1

Site Plan Property

- 33 -

EXHIBIT B

Floor Plan of Premises and Data Center

(See Attached, Fl 7 Premises, Fl 3 Premises)
Data Center to be attached hereto no later than January 31, 2011

- 34 -

EXHIBIT C

Expansion Space Plan

(See Attached, Next Page)

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EXHIBIT D

MEMORANDUM OF LEASE

THIS MEMORANDUM OF LEASE, made effective as of the _____ day of ______________________, 2010, by and between MERRILL PLACE LLC, a Washington limited liability company (“Landlord”), and BLUE NILE, INC., a Delaware corporation (“Tenant”).

WITNESSETH:

IN CONSIDERATION of the rents reserved in that certain Lease Agreement between the parties dated ____________________, 2010, and of the terms, covenants, conditions and agreements on the part of Tenant therein, Landlord leases to Tenant certain real property located in the City of Seattle, County of King, State of Washington, upon which Landlord owns a building to be used for Tenant’s offices, which property is designated in said Lease Agreement and located on a portion of the real property described on Exhibit A attached hereto and made a part hereof; together with all and singular the building or buildings, privileges and advantages, with any and all appurtenances belonging or in any way appertaining to the real property hereby leased, including the right in Tenant, its successors, assigns, subtenants, employees, customers, licensees and invitees or use the sidewalks, common areas and access areas to and from public streets and highways.

TO HAVE AND TO HOLD the premises for a term commencing on May 1, 2011, and ending ten (10) years thereafter, together with two (2) options to extend the term for two (2) consecutive periods of five (5) years each, upon the terms, covenants and conditions specified in the Lease Agreement.

IN WITNESS WHEREOF, the parties executed this instrument the date first above written.


“LANDLORD”	MERRILL PLACE, LLC,
	a Washington limited liability company

	By:	NSD, LLC, a Washington limited liability company, its Manager

		By	Kevin Daniels, Member

“TENANT”	BLUE NILE, INC.,
	a Delaware corporation

	By

		Its

- 39 -

WITNESS my hand and official seal hereto affixed this ______ day of ________________________, 2010.



		(Signature of Notary)


		(Print or stamp name of Notary)
		NOTARY PUBLIC in and for the State of Washington
		My Appointment Expires:

WITNESS my hand and official seal hereto affixed this ____ day of ________________________, 2010.



		(Signature of Notary)


		(Print or stamp name of Notary)
		NOTARY PUBLIC in and for the State of Washington
		My Appointment Expires:

- 40 -

EXHIBIT E

Rules and Regulations

[To be attached hereto no later than January 31, 2011.]

- 41 -

EXHIBIT 21.1

Subsidiaries


Name of Subsidiary		Jurisdiction
Blue Nile, LLC		Delaware


Blue Nile Worldwide, Inc		Delaware


Blue Nile Jewellery, Ltd.		Ireland

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-115700, 333-123962, 333-132588, 333-141379, 333-149444, 333-157734, and 333-165067 on Form S-8 of our reports relating to the consolidated financial statements and financial statement schedule of Blue Nile, Inc. (the “Company”), dated February 28, 2011 (which report expresses an unqualified opinion), and the effectiveness of the Company’s internal control over financial reporting dated February 28, 2011, appearing in the annual report on Form 10-K of the Company for the year ended January 2, 2011.

/s/ Deloitte & Touche LLP

Seattle, Washington
February 28, 2011

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) or 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Diane Irvine, certify that:

1. I have reviewed this Annual Report on Form 10-K of Blue Nile, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ Diane M. Irvine Diane M. Irvine
Date: February 28, 2011		Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) or 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Vijay Talwar, certify that:

1. I have reviewed this Annual Report on Form 10-K of Blue Nile, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ Vijay Talwar Vijay Talwar
Date: February 28, 2011		Senior Vice President and General Manager of International and Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(b) AND 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002

I, Diane Irvine, Chief Executive Officer of Blue Nile, Inc. (the “Company”) in compliance with Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, to the best of my knowledge:

the Company’s Annual Report on Form 10-K for the period ended January 2, 2011 fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

that the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned has set her hand hereto as of the 28th day of February, 2011.


		/s/ Diane M. Irvine Diane M. Irvine
		Chief Executive Officer

This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Blue Nile, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(b) AND 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002

I, Vijay Talwar, Chief Financial Officer of Blue Nile, Inc. (the “Company”) in compliance with Rule 13a—14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, to the best of my knowledge:

that the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned has set his hand hereto as of the 28th day of February, 2011.


		/s/ Vijay Talwar Vijay Talwar
		Senior Vice President and General Manager of International and Chief Financial Officer


			Page

PART I
	Item 1.	Business		3
	Item 1A.	Risk Factors		7
	Item 1B.	Unresolved Staff Comments		22
	Item 2.	Properties		22
	Item 3.	Legal Proceedings		22
	Item 4.	(Removed and Reserved)		22

PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		22
	Item 6.	Selected Consolidated Financial Data		24
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		34
	Item 8.	Financial Statements and Supplementary Data		35
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		58
	Item 9A.	Controls and Procedures		58
	Item 9B.	Other Information		60

PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		60
	Item 11.	Executive Compensation		60
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		60
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		60
	Item 14.	Principal Accounting Fees and Services		60

PART IV
	Item 15.	Exhibits and Financial Statement Schedules		61
SIGNATURES				62
EXHIBIT INDEX				64
EX-10.8
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


Item 8.	*Financial Statements and Supplementary Data*


	Page

Financial Statements
Report of Independent Registered Public Accounting Firm		36
Consolidated Balance Sheets, as of January 2, 2011 and January 3, 2010		37
Consolidated Statements of Operations, for the fiscal years ended January 2, 2011, January 3, 2010 and January 4, 2009		38
Consolidated Statements of Changes in Stockholders’ Equity, for the fiscal years ended January 2, 2011, January 3, 2010 and January 4, 2009		39
Consolidated Statements of Cash Flows, for the fiscal years ended January 2, 2011, January 3, 2010 and January 4, 2009		40
Notes to Consolidated Financial Statements		42
Selected Quarterly Financial Information (unaudited)		55
Financial Statement Schedule
Schedule II, Valuation and Qualifying Accounts		57
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.