S-1

As filed with the Securities and Exchange Commission on June 29, 2006

Registration No. 333-               

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

SHUTTERFLY, INC.

(Exact name of Registrant as specified in its charter)

Delaware	7384	94-3330068
(State or other jurisdiction of incorporation or organization)	(Primary standard industrial code number)	(I.R.S. employer identification no.)

2800 Bridge Parkway, Suite 101

Redwood City, CA 94065

(650) 610-5200

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Jeffrey T. Housenbold

Chief Executive Officer and President

Shutterfly, Inc.

2800 Bridge Parkway, Suite 101

Redwood City, CA 94065

(650) 610-5200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Gordon K. Davidson, Esq.
Daniel A. Dorosin, Esq.
Robert A. Freedman, Esq.
Fenwick & West LLP
801 California Street
Mountain View, CA 94041
(650) 938-8500 Kevin P. Kennedy, Esq.
Simpson Thacher & Bartlett LLP
2550 Hanover Street
Palo Alto, CA 94304
(650) 251-5000

     Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

     If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o                             

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o                             

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o                             

CALCULATION OF REGISTRATION FEE

	Proposed Maximum Aggregate	Amount of
Title of Each Class of Securities to be Registered	Offering Price(1)(2)	Registration Fee
Common Stock, par value $0.0001 per share	$92,000,000	$9,844

(1)	Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2)	Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion. Dated June 29, 2006.

                                Shares

Common Stock

       This is an initial public offering of shares of common stock of Shutterfly, Inc. All of the                      shares of common stock are being offered by Shutterfly, Inc.

       Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $          and $          . Application has been made for quotation on the Nasdaq National Market under the symbol “SFLY.”

       See “Risk Factors” on page 8 to read about factors you should consider before buying shares of the common stock.

       Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

	Per Share	Total
Initial public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to Shutterfly	$	$

       To the extent that the underwriters sell more than            shares of common stock, the underwriters have the option to purchase up to an additional                      shares from Shutterfly at the initial public offering price less the underwriting discount.

       The underwriters expect to deliver the shares against payment in New York, New York on                     , 2006.

Goldman, Sachs & Co. JPMorgan

Piper Jaffray Jefferies & Company

Prospectus dated                     , 2006.

PROSPECTUS SUMMARY

       This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before buying our common stock. You should read the entire prospectus carefully, including the section entitled “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment in our common stock. Unless otherwise indicated, the terms “Shutterfly”, “we”, “us”, and “our” refer to Shutterfly, Inc., a Delaware corporation, together with its subsidiary.

Shutterfly, Inc.

       We are a leading Internet-based social expression and personal publishing service that enables consumers to share, print and preserve their memories by leveraging our technology-based platform and manufacturing processes. Our vision is to make the world a better place by helping people share life’s joy. Our mission is to build an unrivaled service that enables deeper, more personal relationships between our customers and those who matter most in their lives. Today, with the evolution of digital cameras and technology, millions of people around the world are capturing their memories and communicating in more meaningful ways. We provide a full range of products and services that make it easy, convenient and fun for consumers to upload, edit, enhance, organize, find, share, create, print and preserve their digital photos in a creative and thoughtful manner.

       Consumers use our products and services to stay connected to their friends and family. Our customers purchase prints and other physical products both for their own personal use and for giving thoughtful and personalized gifts such as photo-based products, including photo books, calendars and greeting cards, as well as photo-based merchandise, including mugs, mouse pads, bags, puzzles, playing cards and apparel.

       We have experienced significant growth since launching our service in December 1999. Since inception, we have fulfilled more than 11 million orders, sold approximately 350 million prints and stored more than 900 million of our consumers’ photos in our image archives.

Industry Overview and Addressable Market

       Internet and digital photo-based technology today enables consumers to create an archive of memories that extends beyond photos to include highly personalized, more engaging solutions that can be protected and preserved for future generations. We believe that the key forces driving the expansion of the market for these solutions are:

•  the proliferation of digital cameras;

•  the increasing penetration of high-speed connectivity;

•  the increasing convenience and quality of online photo services;

•  the growing consumer desire to find an easy, hassle-free way to generate personalized content; and

•  the increasing participation by consumers in online communities.

       The addressable market for our products and services includes every person who enjoys the memories created by digital photographic devices such as cameras, camera cell phones or

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camcorders. We currently address several adjacent markets related to consumers’ desire to be thoughtful and creative with their memories, including:

•  Photo prints. Photo prints currently represent our largest market opportunity, with industry sources estimating the U.S. market for digital photo prints to be approximately $10 billion in 2005 and growing to approximately $30 billion in 2009. In addition, industry sources predict that in the United States, photos ordered over the Internet for mail delivery will grow from approximately $424 million in 2005 to approximately $1.9 billion in 2009.

•  Greeting cards. According to the Greeting Card Association’s website, U.S. consumers purchase approximately 7 billion greeting cards each year, generating nearly $7.5 billion in retail sales.

•  Scrapbooks. According to a 2004 survey by Creating Keepsakes and Craftrends magazines, the U.S. scrapbook industry was approximately $2.55 billion in 2004, up 27.8% from 2001.

•  Calendars. In a 2002 guide published by the Calendar Marketing Association, it estimated that 500 million calendars are produced annually in the United States.

•  Photo-based merchandise. Photo-based merchandise is a substantial market opportunity that includes any product that can be customized with the imprint of a digital image.

Value for Our Customers

       We seek to create value for our customers by providing the following:

       Broad offering. We offer a wide variety of premium products to customers, including prints, photo-based products and merchandise and a broad assortment of high-quality ancillary products such as frames, photo albums and scrapbooking accessories. In addition, we provide a number of valuable tools and services, such as the ability to upload and edit photos online, share photos with friends and family and permanently store an unlimited number of photos on our system at no cost.

       Trusted premium brand. Our focus on ease of use, image quality, secure photo storage, high-quality products and first-rate packaging has established Shutterfly as a trusted premium brand. This trust is maintained by fast, consistent fulfillment times, responsive customer service and continuous innovation.

       Customer-focused approach. The entire Shutterfly customer experience — including free membership, the ability to upload, edit, store and share an unlimited number of photos and the fact that membership is not required to view friends’ and family’s shared pictures — reflects our customer-focused approach.

The Shutterfly Solution

       We have developed compelling services and production capabilities that allow us to offer consumers a better way to enjoy, share and preserve their memories. We believe that our business model is supported by the following characteristics:

       Viral network effect. Our customers create a viral network of new users and customers in a number of ways. They generate most of the content on our service by uploading their photos. They share their photos electronically with their friends and families, extending and endorsing our brand and creating a sense of community. By giving Shutterfly branded products to colleagues, friends and loved ones throughout the year, our customers reinforce our corporate brand with our target market.

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       Attractive target demographics reflected in our loyal customer base. Our high-quality products and services, together with our focus on continuous innovation, have allowed us to establish high customer trust and loyalty. In addition, we believe that our business benefits from a customer base with attractive demographics. Based on our periodic customer surveys, we believe that our current customer base fits the following profile: approximately 84% female, approximately 63% in the 25-44 age range and approximately 53% with children. These surveys also indicate that the average household income of our customers is greater than $70,000.

       Premium pricing power. We believe that we are able to maintain premium pricing for many of our products as a result of our brand equity, the high-quality of our products and services and the loyal customer base we have created.

       Deep customer understanding. Customer insights are an important source of new product and service innovation for us, and we continually strive to understand our customers’ needs in order to improve customer satisfaction. We invest significant time and resources to understand and address the needs of our customers through market research, focus groups, customer surveys, usability testing, customer response to promotions and customer service interactions.

       Vertical integration and superior technology. We manufacture all of our prints and photo-based products in our Hayward, California manufacturing facility. We believe that our vertically integrated and highly technical manufacturing approach provides us with cost and innovation advantages and is essential to our quality control, agility in rolling out new products and ability to secure capacity at critical peak demand periods. We derived approximately 91% of our net revenues in 2005 from products we manufactured in our manufacturing facility.

Our Growth Strategy

       Our goal is to grow our business, build a premium lifestyle brand and become the leading online provider of products and services dedicated to improving the sharing and preservation of personal memories. In addition to the strong consumer trends supporting our business, we believe our growth will be supported by the following initiatives:

       Expand customer base. We intend to expand our customer base and continue to promote the Shutterfly brand. We will leverage existing channels, which include word-of-mouth referrals from existing customers, print advertising, catalogs, online advertising, search engine marketing and complementary strategic alliances with other e-commerce companies.

       Expand products and services offerings. We will continue to innovate in order to increase the breadth and depth of our products and services.

       Increase sales to existing customers. We intend to increase both average order size and repeat orders per customer by expanding our products and services, tailoring our offerings to encourage additional purchases for different use occasions and increasing our cross-selling and up-selling activities.

       Leverage vertical integration. We will continue to invest in making our business even more vertically integrated by adding additional in-house production capabilities.

       Incubate new lines of business. We intend to continue to leverage our existing systems and capabilities to develop additional adjacent lines of business.

       International expansion. We intend to develop additional business opportunities through international expansion, targeting consumers in key geographies where digital camera penetration is high and where Internet usage and e-commerce are widespread.

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Corporate Information

       We were incorporated in the State of Delaware in April 1999 under the name of Shortco, Inc. In June 1999, we changed our corporate name to Digital Finish, Inc., in September 1999, we changed our corporate name to Shutterfly.com, Inc., and in September 2000, we changed our corporate name to Shutterfly, Inc. Our principal executive offices are located at 2800 Bridge Parkway, Suite 101, Redwood City, California 94065 and our telephone number is (650) 610-5200. Our website address is www.shutterfly.com. The information on our website is not incorporated by reference into this prospectus and should not be considered to be a part of the prospectus.

       Shutterfly, the Shutterfly logo and VividPics are our registered trademarks and Shutterfly Collections and Shutterfly Studio are some of our trademarks. Other trademarks appearing in this prospectus are the property of their respective holders.

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The Offering

Common stock offered by us	shares
Common stock to be outstanding after this offering	shares
Use of proceeds	We expect to use the net proceeds of this offering for general corporate purposes, including working capital, potential capital expenditures for manufacturing and website infrastructure equipment and new and existing manufacturing facilities, and potential acquisitions. See “Use of Proceeds.”
Proposed Nasdaq National Market symbol	SFLY

       The number of shares to be outstanding after this offering is based on 17,820,533 shares outstanding as of March 31, 2006, and excludes:

•  3,198,994 shares issuable upon the exercise of stock options outstanding as of March 31, 2006 at a weighted average exercise price of approximately $4.41 per share;

•  1,755,738 additional shares reserved for issuance under our 1999 Stock Plan as of March 31, 2006; shares reserved for issuance under our 1999 Stock Plan that are not issued as of the date of this prospectus will become available for grant and issuance under our 2006 Equity Incentive Plan;

•  in addition to the shares that will roll over from the 1999 Stock Plan, an aggregate of 1,358,352 additional shares to be reserved for issuance under our 2006 Equity Incentive Plan, which will become effective on the first day that our common stock is publicly traded and which contains a provision that automatically increase its share reserve each year, as more fully described in “Management — Employee Benefit Plans”;

•  40,816 shares issuable upon the exercise of a warrant outstanding as of March 31, 2006 with an exercise price of $24.50 per share that expires upon the completion of this offering; and

•  an aggregate of 116,364 shares issuable upon the exercise of warrants outstanding as of March 31, 2006 at a weighted average exercise price of approximately $4.56 per share, which warrants do not expire upon the completion of this offering.

       Except as otherwise indicated, all information in this prospectus assumes:

•  the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 13,801,716 shares of common stock upon the completion of this offering;

•  the filing of our restated certificate of incorporation in Delaware immediately following the completion of this offering; and

•  no exercise by the underwriters of their 30-day option to acquire additional shares of our common stock.

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Summary Consolidated Financial Data

       The following tables summarize the consolidated financial data for our business. You should read this summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

       We derived the consolidated statements of operations data for the years ended December 31, 2003, 2004 and 2005 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2005 and 2006 and the consolidated balance sheet data as of March 31, 2006 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results to be expected in the future.

       Pro forma basic net income (loss) per share attributable to common stockholders has been calculated assuming the conversion of all outstanding shares of our preferred stock into 13,801,716 shares of common stock upon the completion of this offering. Pro forma diluted net income per share attributable to common stockholders further includes the incremental shares of common stock issuable upon the exercise of stock options and warrants.

												Three Months
			Year Ended December 31,									Ended March 31,
			2003			2004			2005			2005			2006
												(Unaudited)
			(In thousands, except per share amounts)
Consolidated Statements of Operations Data:
Net revenues			$	31,395		$	54,499		$	83,902		$	13,156		$	16,883
Cost of revenues(1)				14,310			24,878			36,941			6,446			8,749
		Gross profit		17,085			29,621			46,961			6,710			8,134
Operating expenses:
	Technology and development(1)			4,970			7,433			13,152			2,311			3,983
	Sales and marketing(1)			3,991			7,705			15,252			2,275			3,693
	General and administrative(1)			5,629			10,126			13,657			2,818			3,397
		Total operating expenses		14,590			25,264			42,061			7,404			11,073
Income (loss) from operations				2,495			4,357			4,900			(694	)		(2,939	)
Interest expense				(392	)		(471	)		(367	)		(54	)		(78	)
Other income (expense), net				9			81			(103	)		65			475
Income (loss) before income taxes and cumulative effect of change in accounting principle				2,112			3,967			4,430			(683	)		(2,542	)
Benefit (provision) for income taxes				(68	)		(258	)		24,060			—			874
Net income (loss) before cumulative effect of change in accounting principle				2,044			3,709			28,490			(683	)		(1,668	)
Cumulative effect of change in accounting principle				—			—			442			—			—
Net income (loss)			$	2,044		$	3,709		$	28,932		$	(683	)	$	(1,668	)
Net income (loss) allocable to common stockholders			$	—		$	—		$	4,720		$	(683	)	$	(1,668	)
Net income (loss) per common share
	Basic		$	—		$	—		$	1.45		$	(0.23	)	$	(0.44	)
	Diluted			—			—			1.34			(0.23	)		(0.44	)
	Pro forma basic									1.82						(0.09	)
	Pro forma diluted									1.68						(0.09	)
Shares used in computing net income (loss) per share attributable to common stockholders:
	Basic			1,574			2,231			3,255			2,918			3,805
	Diluted			1,574			2,231			4,609			2,918			3,805
	Pro forma basic									15,888						17,607
	Pro forma diluted									17,242						17,607

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(1) Includes stock-based compensation as follows:

							Three
							Months
	Year Ended						Ended
	December 31,						March 31,
	2003		2004		2005		2005		2006
							(Unaudited)
	(In thousands)
Cost of revenues	$	3	$	21	$	28	$	8	$	11
Technology and development		32		263		826		92		143
Sales and marketing		11		117		239		44		87
General and administrative		124		1,790		2,217		517		170
	$	170	$	2,191	$	3,310	$	661	$	411

       The balance sheet data as of March 31, 2006 is presented:

•  on an actual basis;

•  on a pro forma basis to reflect the automatic conversion of all outstanding shares of our preferred stock into 13,801,716 shares of common stock in connection with the completion of this offering; and

•  on a pro forma as adjusted basis to reflect the pro forma adjustments and the sale by us of                      shares of common stock offered by this prospectus at the assumed initial public offering price of $          per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.

	March 31, 2006
						Pro Forma
	Actual			Pro Forma		As Adjusted(1)
	(In thousands)
	(Unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	26,067		$	26,067	$
Property and equipment, net		20,371			20,371
Working capital		19,788			19,788
Total assets		76,671			76,671
Preferred stock warrant liability		1,413			—
Capital lease obligations, less current portion		2,608			2,608
Redeemable convertible preferred stock		89,652			—
Total stockholders’ equity (deficit)		(28,502	)		62,563

(1)  Each $1.00 increase or decrease in the assumed initial public offering price of $          per share would increase or decrease, respectively, our cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $          million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

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RISK FACTORS

       Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following risks occur, our business, financial condition or results of operations could be seriously harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business

Our net revenues, operating results and cash requirements are affected by the seasonal nature of our business.

       Our business is seasonal, with a high proportion of our net revenues, net income and operating cash flows generated during the fourth quarter. For example, we generated approximately 49% of our net revenues for 2005 in the fourth quarter of 2005, and the net income that we generated during the fourth quarter of 2005 was necessary for us to achieve profitability on an annual basis for 2005. In addition, we incur significant additional expenses in the period leading up to the fourth quarter holiday season in anticipation of higher sales volume in that period, including expenses related to the hiring and training of temporary workers to meet our seasonal needs, additional inventory and equipment purchases and increased advertising. If we are unable to accurately forecast and respond to consumer demand for our products during the fourth quarter, our reputation and brand will suffer and the market price of our common stock would likely decline.

       In addition, we base our operating expense budgets on expected revenue trends. A portion of our expenses, such as office leases and various personnel costs, are fixed and are based on our expectations of our peak levels of operations. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in revenues may cause significant variation in operating results in any quarter.

       Our limited operating history makes it difficult to assess the exact impact of the seasonal factors on our business or whether or not our business is susceptible to cyclical fluctuations in the U.S. economy. In addition, our rapid growth may have overshadowed whatever seasonal or cyclical factors might have influenced our business to date. Seasonal or cyclical variations in our business may become more pronounced over time and may harm our results of operations in the future.

If we are unable to meet our seasonal production requirements, our net revenues and results of operations would be harmed.

       We face significant production risks, particularly at peak holiday seasons, including the risks of identifying and hiring sufficient qualified seasonal production personnel. A majority of our workforce during the fourth quarter of 2005 was seasonal personnel hired on a temporary basis. We have had difficulties in the past with finding a sufficient number of qualified seasonal employees. We believe that we must significantly grow our current production capability to meet our projected revenue targets and, to date, have not yet identified or built out locations for the additional production capacity we expect to need beginning in 2007. We expect to invest between $30 million and $35 million in capital expenditures beginning in the second half of 2006 and through 2007. Our inability to meet our seasonal production requirements could lead to customer dissatisfaction and reduced net revenues. Moreover, if the costs of meeting production requirements were to increase, our results of operations would be harmed.

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

       Our future revenues and operating results may vary significantly from quarter-to-quarter due to a number of factors, many of which are outside of our control. Factors that could cause our quarterly operating results to fluctuate include:

•  demand for our products and services, including seasonal demand;

•  our pricing and marketing strategies and those of our competitors;

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

•  our ability to retain customers and encourage repeat purchases, particularly our high-volume customers from whom we derive a high proportion of our net revenues;

•  our ability to sustain our profit margins, particularly our ability to sell to consumers additional photo-based products such as photo books, calendars and cards;

•  the costs of customer acquisition;

•  our ability to manage our production and fulfillment operations;

•  the costs to produce our prints and photo-based products and merchandise and to provide our services;

•  the costs of expanding or enhancing our technology or website;

•  a significant increase in credits, beyond our estimated allowances, for customers who are not satisfied with our products;

•  declines or disruptions to the travel industry;

•  variations in weather, particularly heavy rain and snow which tend to depress travel and picture taking;

•  the timing of holidays, particularly Easter;

•  volatility in our stock price, which may lead to higher stock-based compensation expense under newly adopted accounting standards;

•  consumer preferences for digital photography services; and

•  improvements to the quality, cost and convenience of desktop printing of digital pictures and products.

       Based on the factors cited above, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is possible that in one or more future quarters, our operating results may be below the expectations of public market analysts and investors. In that event, the trading price of our common stock may decline.

We have incurred operating losses in the past and may not be able to sustain profitability in the future. Recent accounting changes may make it more difficult for us to sustain profitability.

       We have periodically experienced operating losses since our inception in 1999, and we make investments in our business that generally result in operating losses in each of the first three quarters of our fiscal year to enable us to generate net income during the fourth quarter. This net income is necessary for us to achieve profitability on an annual basis. As of March 31, 2006, we had an accumulated deficit of approximately $37.8 million. If we are unable to produce our products and provide our services at commercially reasonable costs, if revenues decline or if our expenses exceed our expectations, we may not be able to sustain or increase profitability on a quarterly or annual basis. In addition, as a publicly-traded company, we will be subject to the Sarbanes-Oxley Act of

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2002, including the requirement that our internal controls and procedures be compliant with Section 404 of the Sarbanes-Oxley Act, which we expect to be costly and could impact our results of operations in future periods. In addition, the Financial Accounting Standards Board now requires us to follow Statement No. 123 (revised 2004), “Share Based Payment,” or SFAS No. 123R. Under SFAS No. 123R, companies must calculate and record in their statement of operations the cost of equity instruments, such as stock options or restricted stock, awarded to employees for services received beginning in the first quarter of their 2006 fiscal year. SFAS No. 123R adversely impacted our first quarter of 2006 operating results in the amount of approximately $50,000, and we expect an adverse impact from the stock options we had outstanding as of March 31, 2006 in future periods in an aggregate amount of approximately $0.9 million. This, together with the impact on net income of any additional options we grant in the future, could make it difficult for investors to compare our results of operations for these periods against prior corresponding periods that were not impacted by SFAS No. 123R.

We have a limited operating history, which makes it difficult to evaluate our business and prospects.

       Our company was formed in April 1999, and we have only a limited operating history on which investors can base an evaluation of our business and prospects. As an e-commerce company in the early stage of development, we face increased risks, uncertainties, expenses and difficulties. To address these risks and uncertainties, we must do the following:

•  maintain and increase our number of customers;

•  maintain and enhance our brand;

•  maintain and grow our website and customer operations;

•  enhance and expand our products and services;

•  successfully execute our business and marketing strategy;

•  continue to develop and upgrade our technology and information processing systems;

•  continue to enhance our service to meet the needs of a changing market;

•  provide superior customer service;

•  respond to competitive developments; and

•  attract, integrate, retain and motivate qualified personnel.

       We may be unable to accomplish one or more of these things, which could cause our business to suffer. In addition, accomplishing one or more of these things might be very expensive, which could harm our financial results.

We may have difficulty managing our growth and expanding our operations successfully.

       We have grown from 157 employees as of March 31, 2005 to 202 employees as of March 31, 2006, with website operations, offices and customer support centers in Redwood City, California and a production facility in Hayward, California. Our growth has placed, and will continue to place, a strain on our administrative and operational infrastructure, and will likely require that we add an additional production facility in a different geographic location. Our ability to manage our operations and growth will require us to continue to refine our operational, financial and management controls, human resource policies and reporting systems.

       If we are unable to manage future expansion, we may not be able to implement improvements to our controls, policies and systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. Our ability to provide a high-quality customer experience could be

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compromised, which would damage our reputation and brand and substantially harm our business and results of operations.

If we fail to remedy the material weaknesses and significant deficiencies in our internal control over financial reporting, we may be unable to timely and accurately record, process and report financial data, fail to meet our periodic reporting obligations or have material misstatements in our financial statements.

       In connection with the audit of our 2005 consolidated financial statements for the year ended and as of December 31, 2005, our independent registered public accounting firm identified two control deficiencies which represent material weaknesses in our internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The two material weaknesses in our internal control over financial reporting as of December 31, 2005 were as follows:

•  We did not maintain effective controls to ensure adequate analysis, documentation, reconciliation and review of accounting records and supporting data. Specifically, we did not maintain effective controls to ensure that accruals and accounts payable were completely and accurately recorded in the proper period. We believe this occurred primarily because of insufficient management oversight and because several positions in our accounting and finance organization were unfilled or were staffed by temporary personnel unfamiliar with our policies and procedures. In addition, some personnel performing these functions did not have an appropriate level of accounting knowledge, experience and training. This control deficiency resulted in audit adjustments to our 2005 consolidated financial statements.

•  We did not maintain effective controls to prevent our personnel from reinstating expired prepaid print plans. Under our prepaid print plans, we offer customers the opportunity to purchase in advance larger quantities of prints at a discounted price from our current list price for prints. Our lack of controls resulted in the overstatement of revenue and understatement of deferred revenue. This control deficiency resulted in audit adjustments to our 2005 consolidated financial statements.

       In addition, our independent registered public accounting firm identified four control deficiencies which did not rise to the level of material weaknesses but did represent significant deficiencies in our internal control over financial reporting. These significant deficiencies related to our failure to properly account for fully depreciated assets; our lack of sufficient, adequately trained finance personnel; and our failure to maintain sufficient access controls as well as documentation and management oversight of our information technology systems.

       We have taken steps to strengthen our internal control processes to address these material weaknesses and significant deficiencies, including (1) hiring a corporate controller, a manager of accounting and additional experienced financial personnel, (2) modifying our website system controls to remove the capability of our customer service personnel to take certain actions related to our prepaid print plans and clarifying our policies related to our prepaid print plans for our personnel, (3) modifying our controls to include an additional review of fixed assets accounting, (4) implementing formal procedures to control employee access to systems and information and (5) creating procedures for the additional testing of our information technology systems. We cannot assure you that the measures we have taken, or will take, to remediate these material weaknesses and significant deficiencies will be effective or that we will be successful in implementing them. Moreover, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses or significant deficiencies. Our independent registered public accounting firm

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has not evaluated any of the measures we have taken, or that we propose to take, to address the material weaknesses and significant deficiencies discussed above. If we are unable to remediate these control weaknesses, they could result in material misstatements of our future annual or interim financial statements that would not be prevented or detected. Any such failure could also adversely affect management’s assessment of our disclosure controls and procedures, required with the filing of our quarterly and annual reports after we complete this offering, and the results of periodic management evaluations and the annual attestation reports regarding the effectiveness of our internal control over financial reporting that our independent registered public accounting firm will be required to provide when the SEC’s rules under Section 404 of the Sarbanes-Oxley Act for 2002 become applicable to us, which is currently scheduled to occur beginning with our Annual Report on Form 10-K for the year ending December 31, 2007, to be filed in the first quarter of 2008. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

Competitive pricing pressures, particularly with respect to 4×6 print pricing and shipping, may harm our business and results of operations.

       Demand for our products and services is sensitive to price. Many external factors, including our production and personnel costs and our competitors’ pricing and marketing strategies, can significantly impact our pricing strategies. If we fail to meet our customers’ price expectations, we could lose customers, which would harm our business and results of operations.

       Changes in our pricing strategies have had, and may continue to have, a significant impact on our net revenues and net income. For example, in the second quarter of 2005, certain of our competitors reduced the list prices of their 4×6 prints from $0.29 to $0.12. In response, we lowered the list price of our 4×6 prints to $0.19 in order to remain competitive. A drop in our 4×6 prices without a corresponding increase in volume would negatively impact our net revenues. Our larger competitors could elect to further reduce the list prices of their 4×6 prints or use lower pricing of prints as a loss leader. If this were to occur, we might not be able to remain competitive on pricing for 4×6 prints, which could result in a loss of customers.

       In addition, we generate a significant portion of our net revenues from the fees we collect from shipping our products. For example, these fees represented approximately 19% of our net revenues in 2005 and approximately 23% of our net revenues in the first quarter of 2006. We believe that these results are consistent with our seasonal historical trends. Many online businesses have begun offering discounted or free shipping as a means of attracting customers, and in the event that competitive pressures require us to offer discounted or free shipping to our customers, our net revenues and results of operations would be negatively impacted.

We face intense competition from a range of competitors and may be unsuccessful in competing against current and future competitors.

       The digital photography products and services industries are intensely competitive, and we expect competition to increase in the future. Competition may result in pricing pressures, reduced profit margins or loss of market share, any of which could substantially harm our business and results of operations. We face intense competition from a wide range of companies, many of which have significantly longer operating histories, larger and broader customer bases, greater brand recognition and greater financial, research and development and distribution resources than we do. These competitors include:

•  Online digital photography services companies such as Kodak EasyShare Gallery (formerly known as Ofoto), Snapfish, which is a service of Hewlett-Packard, Sony’s ImageStation and others;

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•  “Big Box” retailers such as Wal-Mart, Costco and others that are seeking to offer low cost digital photography solutions, such as in-store fulfillment and self-service kiosks for printing, and that may, among other strategies, offer their customers heavily discounted in-store solutions that compete directly with our offerings;

•  Drug stores such as Walgreens, CVS and others that offer in-store pick-up from Internet orders;

•  Regional photography companies such as Wolf Camera and Ritz Camera that have established brands and customer bases in existing photography markets;

•  Internet portals and search engines such as Yahoo!, AOL, Google and CNET that offer broad-reaching digital photography and related solutions to their large user bases;

•  Home printing solution providers such as Hewlett-Packard, Epson and Canon, that are seeking to expand their printer and ink businesses by gaining market share in the emerging digital photography marketplace; and

•  Photo-related software companies such as Adobe, Apple, Microsoft, Corel and others.

       The numerous choices for digital photography services can cause confusion for consumers, and may cause them to choose to use one of our competitors, many of whom may have greater name recognition than we do. In addition, some of our competitors who are seeking to establish an online presence may be able to devote substantially more resources to website and systems development. Also, larger, more established and better capitalized entities may acquire, invest in or partner with traditional and online competitors. We may also face competition from new entrants that are well funded and that may choose to prioritize growing their market share and brand awareness instead of profitability. Competitors and new entrants in the digital photography products and services industries may also seek to develop new products, technologies or capabilities that could render obsolete or less competitive many of the products, services and content that we offer, which could harm our business and results of operations.

If we are unable to adequately control the costs associated with operating our business, our results of operations will suffer.

       The primary costs in operating our business are related to producing prints, shipping products, acquiring customers and compensating our personnel, and if we are unable to keep these costs aligned with the level of revenues that we generate, our results of operations would be harmed. The challenge in controlling our business costs is made more difficult by the fact that many of the factors that impact these costs are beyond our control. For example, the costs to produce prints, such as the costs of photographic print paper, could increase due to a shortage of silver or an increase in worldwide energy prices. In addition, we may become subject to increased costs by the third-party shippers that deliver our products to our customers, and we may be unable to pass along any increases in shipping costs to our customers. The costs of online advertising and keyword search could also increase significantly due to increased competition, which would increase our customer acquisition costs.

The loss of key personnel, an inability to attract and retain additional personnel or difficulties in the integration of new members of our management team into our company could affect our ability to successfully grow our business.

       We are highly dependent upon the continued service and performance of our senior management team and key technical, marketing and production personnel. The loss of these key employees, each of whom is “at will” and may terminate his or her employment relationship with us at any time, may significantly delay or prevent the achievement of our business objectives.

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       We believe that our future success will also depend in part on our continued ability to identify, hire, train and motivate qualified personnel. We face intense competition for qualified individuals from numerous technology, marketing, financial services, manufacturing and e-commerce companies. In addition, competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are located. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing operational and managerial requirements, or may be required to pay increased compensation in order to do so, and our failure to attract and retain qualified personnel could impair our ability to implement our business plan.

       In addition, some members of our management team have only recently joined our company. For example, Stanford S. Au, our Senior Vice President, Technology, joined us in April 2006. We expect that it will take time for the new members of our management team to integrate into our company and our business could be harmed if the integration is not successful.

If we are unable to attract customers in a cost-effective manner, or if we were to become subject to e-mail blacklisting, traffic to our website would be reduced and our business and results of operations would be harmed.

       Our success depends on our ability to attract customers in a cost-effective manner. We rely on a variety of methods to bring visitors to our website and promote our products, including the payment of fees and revenue sharing to third parties who drive new customers to our website, purchased search results from online search engines, e-mail and direct mail. We pay providers of online services, search engines, directories and other website and e-commerce businesses to provide content, advertising banners and other links that direct customers to our website. We also use e-mail and direct mail to offer free products and services as a means of attracting customers, and offer substantial pricing discounts as a means of encouraging repeat purchases. Our methods of attracting customers can involve substantial costs, regardless of whether we acquire new customers. Even if we are successful in acquiring and retaining customers, the cost involved in these efforts may negatively impact our results of operations. If we are unable to enhance or maintain the methods we use to reach consumers, the costs of attracting customers using these methods significantly increase, or we are unable to develop new cost-effective means to obtain customers, our ability to attract new customers would be harmed, traffic to our website would be reduced and our business and results of operations would be harmed.

       In addition, various private entities attempt to regulate the use of e-mail for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain e-mail solicitations that comply with current legal requirements as unsolicited bulk e-mails, or “spam.” Some of these entities maintain blacklists of companies and individuals, and the websites, Internet service providers and Internet protocol addresses associated with those entities or individuals that do not adhere to what the blacklisting entity believes are appropriate standards of conduct or practices for commercial e-mail solicitations. If a company’s Internet protocol addresses are listed by a blacklisting entity, e-mails sent from those addresses may be blocked if they are sent to any Internet domain or Internet address that subscribes to the blacklisting entity’s service or purchases its blacklist. If we become subject to blacklisting, it could impair our ability to market our products and services, communicate with our customers and otherwise operate our business.

We may not succeed in promoting, strengthening and continuing to establish the Shutterfly brand, which would prevent us from acquiring new customers and increasing revenues.

       A component of our business strategy is the continued promotion and strengthening of the Shutterfly brand. Due to the competitive nature of the digital photography products and services markets, if we are unable to successfully promote the Shutterfly brand, we may fail to substantially increase our net revenues. Customer awareness of, and the perceived value of, our brand will depend largely on the success of our marketing efforts and our ability to provide a consistent, high-

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quality customer experience. To promote our brand, we have incurred, and will continue to incur, substantial expense related to advertising and other marketing efforts.

       Our ability to provide a high-quality customer experience also depends, in large part, on external factors over which we may have little or no control, including the reliability and performance of our suppliers and third-party Internet and communication infrastructure providers. For example, some of our products, such as select photo-based merchandise, are produced and shipped to customers by our third-party vendors, and we rely on these vendors to properly inspect and ship these products. In addition, we rely on third-party shippers, including the U.S. Postal Service and United Parcel Service, to deliver our products to customers. Strikes or other service interruptions affecting these shippers could impair our ability to deliver merchandise on a timely basis. Our products are also subject to damage during delivery and handling by our third-party shippers. Our failure to provide customers with high-quality products in a timely manner for any reason could substantially harm our reputation and our efforts to develop Shutterfly 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.

The success of our business depends on continued consumer adoption of digital photography.

       Our growth is highly dependent upon the continued adoption by consumers of digital photography solutions. The digital photography market is rapidly evolving, characterized by changing technologies, intense price competition, additional competitors, evolving industry standards, frequent new service announcements and changing consumer demands and behaviors. To the extent that consumer adoption of digital photography does not continue to grow as expected, our revenue growth would likely suffer. Moreover, we face significant risks that, if the market for digital photography evolves in ways that we are not able to address due to changing technologies or consumer behaviors, pricing pressures, or otherwise, our current products and services may become unattractive, which would likely result in the loss of customers and a decline in net revenues and/or increased expenses.

Purchasers of digital photography products and services may not choose to shop online, which would harm our net revenues and results of operations.

       The online market for digital photography products and services is less developed than the online market for 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 customers who have historically used traditional retail photography services or who have produced photographs and other products using self-service alternatives, such as printing at home. Furthermore, we may have to incur significantly higher and more sustained advertising and promotional expenditures or reduce the prices of our products and services in order to attract additional online consumers to our website and convert them into purchasing customers. Specific factors that could prevent prospective customers from purchasing from us include:

•  the inability to physically handle and examine product samples;

•  delivery time associated with Internet orders;

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

•  delayed shipments or shipments of incorrect or damaged products; and

•  inconvenience associated with returning or exchanging purchased items.

If purchasers of digital photography products and services do not choose to shop online, our net revenues and results of operations would be harmed.

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If affordable broadband access does not become widely available to consumers, our revenue growth will likely suffer.

       Because our business currently involves consumers uploading and downloading large data files, we are highly dependent upon the availability of affordable broadband access to consumers. Many areas of the country still do not have broadband access, and the cost of broadband access may be too expensive for many potential customers. To the extent that broadband access is not available or not adopted by consumers due to cost, our revenue growth would likely suffer.

Interruptions to our website, information technology systems, print production processes or customer service operations could damage our reputation and brand and substantially harm our business and results of operations.

       The satisfactory performance, reliability and availability of our website, information technology systems, printing production processes and customer service operations are critical to our reputation, and our ability to attract and retain customers and to maintain adequate customer satisfaction. Any interruptions that result in the unavailability of our website or reduced order fulfillment performance or customer service could result in negative publicity, damage our reputation and brand and cause our business and results of operations to suffer.

       Because we depend in part on third parties for the implementation and maintenance of certain aspects of our communications and printing systems, and because many of the causes of system interruptions or interruptions in the production process may be outside of our control, we may not be able to remedy such interruptions in a timely manner, or at all. Our business interruption insurance policies do not address all potential causes of business interruptions that we may experience, and any proceeds we may receive from these policies in the event of a business interruption may not fully compensate us for the revenues we may lose.

If the single facility where substantially all of our computer and communications hardware is located fails or if our single production facility fails, our business and results of operations 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 website is located at a single third-party hosting facility in Sunnyvale, California, and our single production facility is in Hayward, California. Our systems and operations could suffer damage or interruption from human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war and similar events. In addition, Hayward is located on, and Sunnyvale is located near, a major fault line, increasing our susceptibility to the risk that an earthquake could significantly harm the operations of these facilities. 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. In addition, the impact of any of these disasters on our business may be exacerbated by the fact that we are still in the process of developing our formal disaster recovery plan and we do not have a final plan currently in place.

Capacity constraints and system failures could prevent access to our website, which could harm our reputation and negatively affect our net revenues.

       Our business requires that we have adequate capacity in our computer systems to cope with the high volume of visits to our website. As our operations grow in size and scope, we will need to improve and upgrade our computer systems and network infrastructure in the ordinary course of business to offer customers enhanced and new products, services, capacity, features and functionality. The expansion of our systems and infrastructure may require us to commit substantial

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financial, operational and technical resources before the volume of our business increases, with no assurance that our net revenues will increase.

       Our ability to provide high-quality products and service depends on the efficient and uninterrupted operation of our computer and communications systems. If our systems cannot be expanded in a timely manner to cope with increased website traffic, we could experience disruptions in service, slower response times, lower customer satisfaction, and delays in the introduction of new products and services. Any of these problems could harm our reputation and cause our net revenues to decline.

If we are not able to reliably meet our data storage and management requirements, customer satisfaction and our reputation could be harmed.

       As a part of our current business model, we offer our customers free unlimited online storage and sharing of photographs and, as a result, must store and manage hundreds of terabytes of data. This results in immense system requirements and substantial ongoing technological challenges, both of which are expected to continue to increase over time. If we are not able to reliably meet these data storage and management requirements, we could have disruptions in services which could impair customer satisfaction and our reputation and lead to reduced net revenues and increased expenses. Moreover, if the cost of meeting these data storage and management requirements increases, our results of operations would be harmed.

Our technology, infrastructure and processes may contain undetected errors or design faults that could result in decreased production, limited capacity or reduced demand.

       Our technology, infrastructure and processes may contain undetected errors or design faults. These errors or design faults may cause our website to fail and result in loss of, or delay in, market acceptance of our products and services. If we experience a delay in a website release that results in customer dissatisfaction during the period required to correct errors and design faults, we would lose revenue. In the future, we may encounter scalability limitations, in current or future technology releases, or delays in the commercial release of any future version of our technology, infrastructure and processes that could seriously harm our business.

We currently depend on single suppliers for some of our photographic print paper and for the machines used to manufacture our 4×6 prints and photo-based products, which exposes us to risks if these suppliers fail to perform under our agreements with them.

       We have historically relied on an exclusive supply relationship with Fuji Photo Film U.S.A. to supply all of our photographic paper for silver halide print production, such as 4×6 prints, and with GPA Acquisition Company for all of our paper for our photo-based products, such as photo books and calendars. In addition, we have purchased or rented all of the machines currently used to manufacture our 4×6 prints from Image Solutions and our photo-based products from Hewlett-Packard. Our reliance on these third parties subjects us to a degree of risk. We have an agreement with Fuji that expires in September 2007, but if Fuji fails to perform in accordance with the terms of our agreement and if we are unable to secure a paper supply from a different source in a timely manner, we would likely fail to meet customer expectations, which could result in negative publicity, damage our reputation and brand and harm our business and results of operations. We do not have long-term agreements with any of GPA Acquisition Company, Hewlett-Packard or Image Solutions, but purchase products from them on a purchase order basis, and, as a result, these parties could increase their prices, reallocate supply to others, including our competitors, or choose to terminate their relationship with us. In addition, Hewlett-Packard is one of our primary competitors in the area of online digital photography services, and this competition may influence their willingness to provide us with additional products or services. If we were required to switch vendors of machines for photo-based products, we may incur incremental costs, which could harm our operating results.

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If we are unable to develop, market and sell new products and services that address additional market opportunities, our results of operations may suffer. In addition, we may need to expand beyond our current customer demographic to grow our business.

       Although historically we have focused our business on consumer markets for silver halide prints, such as 4×6 prints, and photo-based products, such as photo books and calendars, we intend to address, and demand may shift to, expanding into new products and services. In addition, we believe we may need to address additional markets and expand our customer demographic in order to further grow our business. We may not successfully expand our existing services or create new products and services, address new market segments or develop a significantly broader customer base. Any failure to address additional market opportunities could result in loss of market share, which would harm our business, financial condition, and results of operations.

We may need to raise additional capital that may be required to grow our business, and we may not be able to raise capital on terms acceptable to us or at all.

       The operation of our business and growth efforts will require significant cash outlays and advance capital equipment expenditures and commitments. If cash on hand and cash generated from operations and from this offering are not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financings, to fund our growth. We cannot assure you that we will be able to raise needed cash on terms acceptable to us or at all. Financings may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the price per share of our common stock in this offering. The holders of new securities may also have rights, preferences or privileges which are senior to those of existing holders of common stock. If new sources of financing are required, but are insufficient or unavailable, we will be required to modify our growth and operating plans to the extent of available funding, which would harm our ability to grow our business.

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 website 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 is likely to 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 the acquired businesses profitably or otherwise implement our strategy successfully. If we are unable to integrate any newly acquired entities, technologies or services effectively, our business and results of operations will 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 future acquisitions.

Our net revenues and results of operations are affected by the level of vacation and other travel by our customers, and any declines or disruptions in the travel industry could harm our business.

       Because vacation and other travel is one of the primary occasions in which our customers utilize their digital cameras, our net revenues and results of operations are affected by the level of vacation and other travel by our customers. Accordingly, downturns or weaknesses in the travel industry could harm our business. Travel expenditures are sensitive to business and personal

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discretionary spending levels and tend to decline during general economic downturns. Events or weakness in the travel industry that could negatively affect the travel industry include price escalation in the airline industry or other travel-related industries, airline or other travel related strikes, safety concerns, including terrorist activities, inclement weather and airline bankruptcies or liquidations. In addition, high gasoline prices may lead to reduced travel in the United States. Any decrease in vacation or travel could harm our net revenues and results of operations.

Failure to adequately protect our intellectual property 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 protective measures afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our website features and functionalities or to obtain and use information that we consider proprietary, such as the technology used to operate our website, our production operations and our trademarks.

       As of May 31, 2006, we had 12 patents issued and more than 30 patent applications pending in the United States. We intend to pursue corresponding patent coverage in other countries to the extent we believe such coverage is appropriate and cost efficient. We cannot assure you that any of our pending applications will be granted. In addition, third parties could bring infringement, invalidity, co-inventorship or similar claims with respect to any of our currently issued patents or any patents that may be issued to us in the future. Any such claims, whether or not successful, could be extremely costly, could damage our reputation and brand and substantially harm our business and results of operations.

       Our primary brand is “Shutterfly.” We hold registrations for the Shutterfly service mark in our major markets of the United States and Canada, as well as in the European Community, Mexico, Japan, Australia and New Zealand. An additional application for the Shutterfly mark is pending in Brazil. Our competitors may adopt names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of marks that are similar to Shutterfly or one of our other marks. Any claims or customer confusion related to our marks could damage our reputation and brand and substantially harm our business and results of operations.

If we become involved in patent litigation or other proceedings related to a determination of rights, we could incur substantial costs, expenses or liability, lose our exclusive rights or be required to stop certain of our business activities.

       A third party may sue us for infringing its patent rights. In addition, we have in the past received claims, and in the future a third party may claim, that we have improperly obtained or used its confidential or proprietary information. Likewise, we may need to resort to litigation to enforce a patent issued to us or to determine the scope and validity of third-party proprietary rights.

       The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s efforts from growing our business. Some of our competitors may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.

       Alternatively, we may be required to, or decide to, enter into a license with a third party. For example, in May 2005, we entered into a settlement and license agreement to resolve litigation brought by a third party with respect to our alleged infringement of its patents. Under the terms of the agreement, we agreed to pay the third party a total of $2.0 million, and we received a license to its patents. Any future license required under any other party’s patents may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive

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and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may be unable to effectively conduct certain of our business activities, which could limit our ability to generate revenues and harm our results of operations and possibly prevent us from generating revenues sufficient to sustain our operations.

The inability to acquire or maintain domain names for our website could substantially harm our business and results of operations.

       We currently are the registrant of the “Shutterfly” mark in numerous jurisdictions and of the Internet domain name for our website, Shutterfly.com, as well as various related domain names. Domain names generally are regulated by Internet regulatory bodies and are controlled also by trademark and other related laws. If we lose the ability to use our Shutterfly mark in a particular country or our domain name, we could 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.

       Furthermore, the regulations governing domain names and laws protecting trademarks and similar proprietary rights could change in ways that block or interfere with our ability to use relevant domains or our current brand. Also, we might not be able to prevent third parties from registering or retaining domain names that interfere with our consumer communications or infringe or otherwise decrease the value of our trademarks and other proprietary rights. Regulatory bodies also may establish additional generic or country-code top-level domains or modify the requirements for holding domain names. As a result, we might not be able to acquire or maintain the domain names that utilize the name Shutterfly in all of the countries in which we currently or intend to conduct business.

Our net revenues may be negatively affected if we are required to charge sales taxes in additional jurisdictions or other taxes on purchases.

       We do not collect or have imposed upon us sales or other taxes related to the products and services we sell, except for certain corporate level taxes and sales tax in California, Nevada and Pennsylvania where we have a tax nexus. However, additional states or one or more countries may seek to impose sales or other tax collection obligations on us in the future. A successful assertion by any country or state in which we do business that we should be collecting 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 ability to compete with traditional retailers or otherwise substantially harm our business and results of operations.

       Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, implementation of the restrictions imposed by these Supreme Court decisions is subject to interpretation by state and local taxing authorities. While we believe that these Supreme Court decisions currently restrict state and local taxing authorities in the United States from requiring us to collect sales and use taxes from purchasers located within their jurisdictions, taxing authorities could disagree with our interpretation of these decisions. Moreover, a number of states in the United States, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any state or local taxing jurisdiction were to disagree with our interpretation of the Supreme Court’s current position regarding state and local taxation of Internet sales, or if any of these initiatives were to address the Supreme Court’s constitutional concerns and result in a reversal of its current position, we could be required to collect additional sales and use taxes from purchasers. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us and could decrease our future net sales.

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Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

       We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and e-commerce as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. Those laws that do reference the Internet are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. For example, the Digital Millennium Copyright Act, or DMCA, is intended, in part, to limit the liability of eligible online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights of others. Portions of the Communications Decency Act, or CDA, are intended to provide statutory protections to online service providers who distribute third-party content. We rely on the protections provided by both the DMCA and CDA in conducting our business. Any changes in these laws or judicial interpretations narrowing their protections will subject us to greater risk of liability and may increase our costs of compliance with these regulations or limit our ability to operate certain lines of business. The Children’s Online Protection Act and the Children’s Online Privacy Protection Act are intended to restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the ability of online services to collect user information from minors. In addition, the Protection of Children From Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. The costs of compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us to significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm our business and results of operations.

Legislation regarding copyright protection or content interdiction could impose complex and costly constraints on our business model.

       Because of our focus on automation and high volumes, our operations do not involve, for the vast majority of our sales, any human-based review of content. Although our website’s terms of use specifically require customers to represent that they have the right and authority to reproduce the content they provide and that the content is in full compliance with all relevant laws and regulations, we do not have the ability to determine the accuracy of these representations on a case-by-case basis. There is a risk that a customer may supply an image or other content that is the property of another party used without permission, that infringes the copyright or trademark of another party, or that would be considered to be defamatory, pornographic, hateful, racist, scandalous, obscene or otherwise offensive, objectionable or illegal under the laws or court decisions of the jurisdiction where that customer lives. There is, therefore, a risk that customers may intentionally or inadvertently order and receive products from us that are in violation of the rights of another party or a law or regulation of a particular jurisdiction. If we should become legally obligated in the future to perform manual screening and review for all orders destined for a jurisdiction, we will encounter increased production costs or may cease accepting orders for shipment to that jurisdiction which could substantially harm our business and results of operations.

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Our practice of offering free products and services could be subject to judicial or regulatory challenge.

       We regularly offer free products as an inducement for customers to try our products. Although we believe that we conspicuously and clearly communicate all details and conditions of these offers — for example, that customers are required to pay shipping, handling and/or processing charges to take advantage of the free product offer — we may be subject to claims from individuals or governmental regulators that our free offers are misleading or do not comply with applicable legislation, which claims may be expensive to defend and could divert management’s time and attention. If we become subject to such claims in the future, or are required or elect to curtail or eliminate our use of free offers, our results of operations may be harmed.

Our failure to protect the confidential information of our customers and networks against security breaches and the risks associated with credit card fraud could damage our reputation and brand and substantially harm our business and results of operations.

       A significant prerequisite 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. For example, a majority of our sales are billed to our customers’ credit card accounts directly, orders are shipped to a customer’s address, and customers log on using their e-mail address. We rely on encryption and authentication technology licensed from third parties to effect the secure transmission of confidential information, including credit card numbers. Advances in computer capabilities, 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 user’s transaction data or personal information. Any compromise of our security could damage our reputation 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. We may need to devote significant resources to protect against security breaches or to address problems caused by breaches.

       In addition, 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 continue to face the risk of significant losses from this type of fraud. Our failure to adequately control fraudulent credit card transactions could damage our reputation and brand and substantially harm our business and results of operations.

Changes in regulations or user concerns regarding privacy and protection of user data could harm our business.

       Federal, state and international laws and regulations may govern the collection, use, sharing and security of data that we receive from our customers. In addition, we have and post on our website our own privacy policies and practices concerning the collection, use and disclosure of customer data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, Federal Trade Commission requirements or other federal, state or international privacy-related laws and regulations could result in proceedings or actions against us by governmental entities or others, which could potentially harm our business. Further, failure or perceived failure to comply with our policies or applicable requirements related to the collection, use or security of personal information or other privacy-related matters could damage our reputation and result in a loss of customers.

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Expansion of our international operations will require management attention and resources and may be unsuccessful, which could harm our future business development and existing domestic operations.

       To date, we have conducted limited international operations, but we intend to expand into international markets in order to grow our business. These expansion plans will require management attention and resources and may be unsuccessful. We have limited experience in selling our products to conform to local cultures, standards and policies. We may have to compete with local companies which understand the local market better than we do. In addition, to achieve satisfactory performance for consumers in international locations it may be necessary to locate physical facilities, such as production facilities in the foreign market. We do not have experience establishing such facilities overseas. We may not be successful in expanding into any international markets or in generating revenues from foreign operations. In addition, different privacy, censorship and liability standards and regulations and different intellectual property laws in foreign countries may cause our business to be harmed.

Risks Related to This Offering

There has been no prior market for our common stock, our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

       There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us. This initial public offering price may vary from the market price of our common stock following this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon completion of this offering or, if it does develop, it may not be sustainable. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

•  price and volume fluctuations in the overall stock market;

•  changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

•  actual or anticipated fluctuations in our operating results;

•  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

•  changes in financial estimates by any securities analysts who follow our company, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our stock;

•  ratings downgrades by any securities analysts who follow our company;

•  the public’s response to our press releases or other public announcements, including our filings with the SEC;

•  announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

•  introduction of technologies or product enhancements that reduce the need for our products;

•  market conditions or trends in our industry or the economy as a whole;

•  the loss of key personnel;

•  lawsuits threatened or filed against us;

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•  future sales of our common stock by our executive officers, directors and significant stockholders; and

•  other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

       In addition, the stock markets, and in particular the Nasdaq National Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, it could have substantial costs and divert resources and the attention of management from our business.

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

       As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and the rules and regulations of The Nasdaq Stock Market. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources.

       The Sarbanes-Oxley Act will require, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. This can be difficult to do. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. We have a substantial effort ahead of us to implement appropriate processes, document the system of internal control over relevant processes, assess their design, remediate any deficiencies identified, including the two material weaknesses and four significant deficiencies identified by our independent registered public accounting firm in connection with the audit of our 2005 consolidated financial statements, and test their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business, financial condition and results of operations. These efforts will also involve substantial accounting related costs. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq National Market.

       Under the Sarbanes-Oxley Act and the rules and regulations of The Nasdaq Stock Market, we are required to maintain a board of directors with a majority of independent directors. We also expect that these rules and regulations will make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be considered independent for purposes of Nasdaq rules, and officers will be significantly curtailed.

Purchasers in this offering will suffer immediate dilution.

       If you purchase shares of our common stock in this offering, the value of your shares based on our actual book value will immediately be less than the offering price you paid. This effect is known as dilution. Based upon the pro forma net tangible book value of our common stock at March 31, 2006, your shares will have less book value per share than the price you paid in the offering. If previously granted options are exercised, additional dilution will occur. As of March 31, 2006, options to purchase 3,198,994 shares of our common stock at a weighted average exercise price of approximately $4.41 per share and warrants to purchase 116,364 shares of our common stock at a

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weighted average exercise price of approximately $4.56 per share, which options and warrants do not expire upon the completion of this offering, were outstanding. Subsequent to March 31, 2006, we granted additional options to purchase an aggregate of 1,620,015 shares of our common stock at a weighted average exercise price of $10.49 per share.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. If there are substantial sales of shares of our common stock, the price of our common stock could decline.

       The price of our common stock could decline if there are substantial sales of our common stock and if there is a large number of shares of our common stock available for sale. After this offering, we will have outstanding                      shares of our common stock based on the number of shares outstanding as of March 31, 2006. This includes the shares that we are selling in this offering, which may be resold in the public market immediately. The remaining 17,820,533 shares, or      % of our outstanding shares after this offering, are currently restricted as a result of market standoff and/or lock-up agreements but will be able to be sold in the near future as set forth below.

Number of Shares and	Date Available for Sale
% of Total Outstanding	into Public Market
shares, or      %	Immediately after this offering.
shares, or      %	45 days after the date of this prospectus.
shares, or      %	90 days after the date of this prospectus.
shares, or      %	180 days after the date of this prospectus.

       After this offering, the holders of an aggregate of 13,732,545 shares of our common stock outstanding as of March 31, 2006 or subject to warrants outstanding as of March 31, 2006, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register the issuance of all shares of common stock that we have issued and may issue under our employee equity incentive plans. Once we register the issuance of these shares, they can be freely sold in the public market upon issuance, subject to certain lock-up agreements.

       The market price of the shares of our common stock could decline due to sales of a substantial number of our shares in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.

Our directors, executive officers and principal stockholders will continue to have substantial control over Shutterfly after this offering and could delay or prevent a change in corporate control.

       After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, approximately      % of our outstanding common stock. As a result, these stockholders, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, acting together, may have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership may harm the market price of our common stock by:

•  delaying, deferring or preventing a change in control of our company;

•  impeding a merger, consolidation, takeover or other business combination involving our company; or

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•  discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

       We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including working capital, capital expenditures, possible acquisitions and other general corporate purposes. Our stockholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

Some provisions in our restated certificate of incorporation and restated bylaws and Delaware law may deter third parties from acquiring us.

       Our restated certificate of incorporation and restated bylaws that will each become effective immediately following the completion of this offering contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:

•  our board is classified into three classes of directors, each with staggered three-year terms;

•  only our chairman, our chief executive officer, our president or a majority of our board of directors is authorized to call a special meeting of stockholders;

•  our stockholders may take action only at a meeting of stockholders and not by written consent;

•  vacancies on our board of directors may be filled only by our board of directors and not by stockholders;

•  our certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and

•  advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.

       In addition, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock, for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

       This prospectus contains, in addition to historical information, forward-looking statements. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “continue,” “should,” “would,” “could,” “potentially,” “will,” or “may,” or other similar words and expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this prospectus include statements about:

•  our financial performance, including our net revenues, cost of revenues, operating expenses and ability to sustain profitability;

•  our planned capital expenditures;

•  our liquidity and working capital requirements;

•  our ability to expand our customer base;

•  our ability to expand our product and service offerings;

•  our efforts to make our business more vertically integrated;

•  our ability to develop additional adjacent lines of business;

•  our international expansion plans;

•  our ability to secure adequate facility space;

•  our ability to retain and hire necessary employees, including seasonal personnel, and appropriately staff our operations;

•  the impact of seasonality on our business;

•  our ability to remediate the material weaknesses and significant deficiencies in our internal control over financial reporting;

•  our ability to stay abreast of modified or new laws applying to our business; and

•  our spending of the net proceeds from this offering.

       The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important risks, uncertainties and factors include those factors we discuss in this prospectus under the caption “Risk Factors.” You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. These risk factors are not exhaustive and other sections of this prospectus may include additional factors which could harm our business and financial performance.

       The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

       This prospectus also contains statistical data that we obtained from industry publications and reports. Although we have not independently verified the data contained in these industry publications and reports, based on our industry experience, we believe that the publications are reliable and the conclusions contained in the publications and reports are reasonable.

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USE OF PROCEEDS

       We estimate that we will receive net proceeds from the sale of the                      shares of common stock that we are selling in this offering of approximately $           million, or approximately $           million if the underwriters’ over-allotment option is exercised in full, based on an assumed initial public offering price of $           per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Each $1.00 increase or decrease in the assumed initial public offering price of $           per share would increase or decrease, as applicable, the net proceeds to us by approximately $           million, assuming the number of shares offered by us as set forth on the cover of the prospectus remains the same and after deducting estimated underwriting discounts and commissions payable by us.

       We intend to use the net proceeds of this offering for general corporate purposes, including working capital and potential capital expenditures for manufacturing and website infrastructure equipment and new and existing manufacturing facilities. Although we may also use a portion of the net proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments.

       Our management will retain broad discretion in the allocation and use of the net proceeds of this offering, and investors will be relying on the judgment of our management regarding the application of these net proceeds. Pending specific utilization of the net proceeds as described above, we intend to invest the net proceeds of the offering in short-term, interest bearing obligations, investment grade instruments, certificates of deposit or direct or guaranteed obligations of the United States. The goal with respect to the investment of these net proceeds is capital preservation and liquidity so that such funds are readily available to fund our operations.

DIVIDEND POLICY

       We have not paid any cash dividends on our capital stock since we incorporated in April 1999. We currently intend to retain any future earnings to finance future growth and development of our business and do not anticipate paying any cash dividends in the future.

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CAPITALIZATION

       The following table sets forth our capitalization as of March 31, 2006:

•  on an actual basis;

•  on a pro forma basis to reflect (1) the automatic conversion of all outstanding shares of our preferred stock into 13,801,716 shares of common stock in connection with the completion of this offering and (2) the filing of our restated certificate of incorporation in Delaware immediately following the completion of this offering; and

•  on a pro forma as adjusted basis to reflect the pro forma adjustments and the sale by us of                      shares of common stock offered by this prospectus at the assumed initial public offering price of $           per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.

       You should read this table together with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

				As of March 31, 2006
										Pro Forma As
				Actual			Pro Forma			Adjusted(1)
							(Unaudited)
				(In thousands, except per share data)
Cash and cash equivalents				$	26,067		$	26,067		$
Preferred stock warrant liability				$	1,413		$	—		$
Capital lease obligations, including current portion					4,520			4,520
Redeemable convertible preferred stock, $0.0001 par value per share; 15,454 shares authorized, 13,802 shares issued and outstanding, actual; 15,454 shares authorized, no shares issued and outstanding, pro forma; no shares authorized, no shares issued and outstanding pro forma as adjusted					89,652			—
Stockholders’ equity (deficit):
	Undesignated preferred stock, $0.0001 par value per share; no shares authorized, no shares issued and outstanding, actual and pro forma; 5,000 shares authorized, no shares issued and outstanding pro forma as adjusted				—			—
	Common stock, $0.0001 par value per share; 38,251 shares authorized, 3,864 shares issued and outstanding, actual; 38,251 shares authorized, 17,666 shares issued and outstanding, pro forma; 100,000 shares authorized,           shares issued and outstanding, pro forma as adjusted				—			2
	Additional paid-in capital				10,568			101,631
	Deferred stock-based compensation				(1,264	)		(1,264	)
	Accumulated deficit				(37,806	)		(37,806	)
		Total stockholders’ equity (deficit)			(28,502	)		62,563
			Total capitalization	$	67,083		$	67,083		$

(1)  Each $1.00 increase or decrease in the assumed initial public offering price of $          per share would increase or decrease, respectively, the amount of additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $          million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

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       In the table above, the number of shares outstanding as of March 31, 2006, unless otherwise stated, does not include:

•  3,198,994 shares issuable upon the exercise of stock options outstanding as of March 31, 2006 at a weighted average exercise price of approximately $4.41 per share;

•  1,755,738 additional shares reserved for issuance under our 1999 Stock Plan as of March 31, 2006; shares reserved for issuance under our 1999 Stock Plan that are not issued as of the date of this prospectus will become available for grant and issuance under our 2006 Equity Incentive Plan;

•  in addition to the shares that will roll over from the 1999 Stock Plan, an aggregate of 1,358,352 shares to be reserved for issuance under our 2006 Equity Incentive Plan, which will become effective on the first day that our common stock is publicly traded and which contains a provision that automatically increase its share reserve each year, as more fully described in “Management — Employee Benefit Plans;”

•  40,816 shares issuable upon the exercise of a warrant outstanding as of March 31, 2006 with an exercise price of $24.50 per share that expires upon the completion of this offering; and

•  an aggregate of 116,364 shares issuable upon the exercise of warrants outstanding as of March 31, 2006 at a weighted average exercise price of approximately $4.56 per share, which warrants do not expire upon the completion of this offering.

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DILUTION

       As of March 31, 2006, our pro forma net tangible book value was approximately $                     million, or $           per share, based upon 17,820,533 shares outstanding as of such date. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of our outstanding shares of common stock, after giving effect to the automatic conversion of all outstanding shares of our preferred stock into 13,801,716 shares of common stock in connection with the completion of this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately following this offering.

       After giving effect to the receipt of the net proceeds from the sale of the shares of our common stock in this offering at an assumed initial public offering price of $           per share and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses, our pro forma as adjusted net tangible book value as of March 31, 2006 would have been approximately $           million, or $           per share. This represents an immediate increase in pro forma net tangible book value of $           per share to existing stockholders and an immediate dilution of $           per share to new investors purchasing shares at the initial public offering price. The following table illustrates the per share dilution:

Assumed initial public offering price per share			$
	Pro forma net tangible book value per share as of March 31, 2006	$
	Increase in pro forma net tangible book value per share attributable to new investors
Pro forma as adjusted net tangible book value per share after this offering
Dilution per share to new investors			$

       A $1.00 increase or decrease in the assumed initial public offering price of $                    would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $           per share and the dilution in pro forma as adjusted net tangible book value to new investors by $           per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

       The following table summarizes on the same pro forma as adjusted basis described above, the difference between the existing stockholders and the purchasers of shares of common stock in this offering with respect to the number of shares of common stock purchased from us, the total consideration and the average price paid per share, based on an assumed initial public offering price of $           per share, before deducting the estimated underwriting discounts and commissions:

						Total
		Shares Purchased				Consideration				Average Price
		Number	Percent			Amount	Percent			Per Share
Existing stockholders					%	$			%	$
New investors
	Total			100.0	%			100.0	%

       A $1.00 increase or decrease in the assumed initial public offering price of $           per share would increase or decrease, respectively, total consideration paid by new investors and total consideration paid by all stockholders by approximately $           million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

       The above discussion and tables assume no exercise of our in-the-money stock options or warrants outstanding as of March 31, 2006, consisting of 3,198,994 shares of common stock issuable upon the exercise of stock options with a weighted average exercise price of approximately $4.41 per share and 116,364 shares of common stock issuable upon exercise of warrants with a

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weighted average exercise price of approximately $4.56 per share. If all of these options and warrants were exercised, then:

•  there will be an additional $           per share of dilution to new investors;

•  our existing stockholders, including the holders of these options and warrants, would own      % and our new investors would own      % of the total number of shares of our common stock outstanding upon the completion of this offering; and

•  our existing stockholders, including the holders of these options and warrants, would have paid      % of total consideration, at an average price per share of $          , and our new investors would have paid      % of total consideration.

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SELECTED CONSOLIDATED FINANCIAL DATA

       You should read the following selected historical consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included in this prospectus.

       The consolidated statements of operations for the years ended December 31, 2003, 2004 and 2005 and the consolidated balance sheets data as of December 31, 2004 and 2005, are derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, which are included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2001 and 2002 and the consolidated balance sheets data as of December 31, 2001, 2002 and 2003 are derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2005 and 2006 and the consolidated balance sheet data as of March 31, 2006 are derived from our unaudited consolidated financial statements which are included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Historical results are not necessarily indicative of the results to be expected in the future.

       Pro forma basic net income (loss) per share attributable to common stockholders has been calculated assuming the conversion of all outstanding shares of our preferred stock into 13,801,716 shares of common stock upon the completion of this offering. Pro forma diluted net

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income per share attributable to common stockholders further includes the incremental shares of common stock issuable upon the exercise of stock options and warrants.

																	Three Months
		Year Ended December 31,															Ended March 31,
		2001			2002			2003			2004			2005			2005			2006
																	(Unaudited)
		(In thousands, except per share amounts)
Consolidated Statements of Operations Data:
Net revenues		$	7,499		$	16,009		$	31,395		$	54,499		$	83,902		$	13,156		$	16,883
Cost of revenues(1)			6,148			7,871			14,310			24,878			36,941			6,446			8,749
Gross profit			1,351			8,138			17,085			29,621			46,961			6,710			8,134
Operating expenses:
Technology and development(1)			6,424			4,039			4,970			7,433			13,152			2,311			3,983
Sales and marketing(1)			5,630			2,786			3,991			7,705			15,252			2,275			3,693
General and administrative(1)			7,401			4,421			5,629			10,126			13,657			2,818			3,397
Total operating expenses			19,455			11,246			14,590			25,264			42,061			7,404			11,073
Income (loss) from operations			(18,104	)		(3,108	)		2,495			4,357			4,900			(694	)		(2,939	)
Interest expense			(610	)		(478	)		(392	)		(471	)		(367	)		(54	)		(78	)
Other income (expense), net			239			12			9			81			(103	)		65			475
Income (loss) before income taxes and cumulative effect of change in accounting principle			(18,475	)		(3,574	)		2,112			3,967			4,430			(683	)		(2,542	)
Benefit (provision) for income taxes			(9	)		(3	)		(68	)		(258	)		24,060			—			874
Net income (loss) before cumulative effect of change in accounting principle			(18,484	)		(3,577	)		2,044			3,709			28,490			(683	)		(1,668	)
Cumulative effect of change in accounting principle			—			—			—			—			442			—			—
Net income (loss)		$	(18,484	)	$	(3,577	)	$	2,044		$	3,709		$	28,932		$	(683	)	$	(1,668	)
Net income (loss) allocable to common stockholders		$	(18,484	)	$	(3,577	)		—			—		$	4,720		$	(683	)	$	(1,668	)
Net income (loss) attributable to common stockholders:
	Basic	$	(15.45	)	$	(2.55	)	$	—		$	—		$	1.45		$	(0.23	)	$	(0.44	)
	Diluted	$	(15.45	)	$	(2.55	)	$	—		$	—		$	1.34		$	(0.23	)	$	(0.44	)
	Pro forma basic													$	1.82					$	(0.09	)
	Pro forma diluted													$	1.68					$	(0.09	)
Shares used in computing net income (loss) per share attributable to common stockholders:
	Basic		1,197			1,404			1,574			2,231			3,255			2,918			3,805
	Diluted		1,197			1,404			1,574			2,231			4,609			2,918			3,805
	Pro forma basic														15,888						17,607
	Pro forma diluted														17,242						17,607

(1)  Includes stock-based compensation as follows:

											Three Months
	Year Ended December 31,										Ended March 31,
	2001		2002		2003		2004		2005		2005		2006
											(Unaudited)
	(In thousands)
Cost of revenues	$	—	$	—	$	3	$	21	$	28	$	8	$	11
Technology and development		—		—		32		263		826		92		143
Sales and marketing		—		—		11		117		239		44		87
General and administration		86		20		124		1,790		2,217		517		170
	$	86	$	20	$	170	$	2,191	$	3,310	$	661	$	411

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	December 31,
																March 31,
	2001			2002			2003			2004			2005			2006
																(Unaudited)
	(In thousands)
Consolidated Balance Sheets Data:
Cash and cash equivalents	$	4,625		$	3,658		$	10,670		$	13,781		$	39,153		$	26,067
Property and equipment, net		4,109			3,617			5,140			11,723			20,761			20,371
Working capital		318			(1,050	)		2,002			690			22,687			19,788
Total assets		9,759			8,831			17,754			29,865			89,552			76,671
Capital lease obligations, less current portion		1,638			1,292			1,314			2,709			3,646			2,608
Preferred stock warrant liability		—			—			—			—			1,535			1,413
Redeemable convertible preferred stock		67,235			69,230			69,668			69,822			89,652			89,652
Total stockholders’ deficit		(64,316	)		(67,752	)		(65,333	)		(59,568	)		(27,262	)		(28,502	)

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

       You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

       We are a leading Internet-based social expression and personal publishing service that enables consumers to share, print and preserve their memories by leveraging our technology-based platform and manufacturing processes. Today, our primary focus is on helping consumers manage their memories through the powerful medium of photos. We provide a full range of products and services that make it easy, convenient and fun for consumers to upload, edit, enhance, organize, find, share, create, print and preserve their digital photos in a creative and thoughtful manner.

Basis of Presentation

       Net Revenues. We generate revenues primarily from the printing and shipping of photo prints, photo-based products, such as photo books, cards and calendars, photo-based merchandise, such as mugs, mouse pads and magnets, and ancillary products such as frames, photo albums and scrapbooking accessories. Revenues are recorded net of estimated returns, promotions redeemed by customers and other discounts. Customers place orders via our website and pay primarily using credit cards.

       Our print revenues are derived from sales of our photo processing of digital images, including sales of 4x6 prints, and the related shipping revenues from these sales. Historically, average selling prices for prints have declined, and they may continue to decline in the future.

       Our non-print revenues are derived from the sale of photo-based products, photo-based merchandise and ancillary products, and the related shipping revenues from these sales. We believe our products and services are differentiated from other traditional photo processors by our personalized non-print photo-based products and merchandise, which are key to attracting and retaining customers.

       Historically, a substantial majority of our revenues have been derived in the United States. For the quarter ended March 31, 2006 and each of the years ended December 31, 2003, 2004 and 2005, approximately 98% of our orders came from customers with billing addresses in the United States, representing approximately 97%, 98%, 98% and 98%, respectively, of our net revenues. We have in the past generated revenues from photo processing fulfillment services we provide to other online merchants as well as professional photographers. For the quarter ended March 31, 2006 and for the years ended December 31, 2003, 2004 and 2005, we generated less than 3%, 1%, 4% and 3%, respectively, of our net revenues from these fulfillment services.

       Our business is subject to seasonal fluctuations. In particular, we generate a disproportionate amount of our revenues during the holiday season in the fourth quarter of the calendar year. We also typically experience increases in revenues during other shopping-related seasonal events, such as Mother’s Day, Father’s Day, Halloween and Easter. We anticipate our revenues will continue to be subject to seasonality and therefore our financial results will vary significantly from period to period. Due to the relatively short lead time required to fulfill orders for our products, usually one to two business days, order backlog is not material to our business.

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       To further understand revenue trends, we monitor several key metrics including:

       Average Order Size. Average order size is net revenues for a given period of time divided by the total number of customer orders recorded during that same period. We seek to increase average order size as a means of increasing net revenues. Average order size has increased on an annual basis for each year since 2000, and we anticipate that this trend may continue in the future.

       Total Number of Orders. We closely monitor total number of orders as an indicator of revenue trends. We recognize the revenues associated with an order when the products have been shipped, consistent with our revenue recognition policy discussed in Critical Accounting Policies and Estimates below. Orders are typically processed and shipped within two business days after a customer places an order. Total number of orders has increased on an annual basis for each year since 2000, and we anticipate that this trend may continue in the future.

       Non-Print Revenues as Percentage of Net Revenues. We strive to increase our non-print revenues as a percentage of net revenues through the continued introduction and improvement of innovative quality products and services.

       We believe the analysis of these metrics provides us with important information on our overall revenue trends and operating results. Fluctuations in these metrics are not unusual and no single factor is determinative of our net revenues and operating results.

       Cost of Revenues. Cost of revenues consist primarily of direct materials (the majority of which consists of paper), payroll and related expenses for direct labor, shipping charges, packaging supplies, distribution and fulfillment activities, rent for production facilities, depreciation of production equipment and third-party costs for photo-based merchandise. Cost of revenues also includes payroll and related expenses for personnel engaged in customer service. In addition, cost of revenues includes any third-party software or patents licensed, as well as the amortization of capitalized website development costs. We capitalize eligible costs associated with software developed or obtained for internal use in accordance with the American Institute of Certified Public Accountants, or AICPA, Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” and Emerging Issues Task Force, or EITF, Issue No. 00-02, “Accounting for Website Development Costs.” Costs incurred in the development phase are capitalized and amortized in cost of revenues over the product’s estimated useful life. We anticipate that our cost of revenues will increase in absolute dollars as we sell additional products but will remain generally consistent with historical periods on an annual basis as a percentage of net revenues.

       Technology and Development Expense. Technology and development expense consists primarily of personnel and related costs for employees and contractors engaged in the development and ongoing maintenance of our website, infrastructure and software. These expenses include depreciation of the computer and network hardware used to run our website and store the customer data that we maintain, as well as amortization of purchased software. Technology and development expense also includes colocation and bandwidth costs. We expect our technology and development expense will increase in absolute dollars and will increase slightly from 2004 and 2005 levels as a percentage of net revenues, and will thereafter remain generally constant on an annual basis as a percentage of net revenues.

       Sales and Marketing Expense. Sales and marketing expense consists of costs incurred for marketing programs and personnel and related expenses for our customer acquisition, product marketing, business development and public relations activities. Our marketing efforts consist of various online and offline media programs, such as e-mail and direct mail promotions, the purchase of keyword search terms and various strategic alliances. We depend on these efforts to attract customers to our service. We anticipate our sales and marketing expense will increase in absolute dollars but will remain generally consistent with historical periods on an annual basis as a percentage of net revenues.

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       General and Administrative Expense. General and administrative expense includes general corporate costs, including rent for our corporate offices, insurance, depreciation on information technology equipment and legal and accounting fees. In addition, general and administrative expense includes personnel expenses of employees involved in executive, finance, accounting, human resources, information technology and legal roles. Third-party payment processor and credit card fees are also included in general and administrative expense and have historically fluctuated based on revenues for the period. We expect our general and administrative expense will increase in the near to intermediate term in absolute dollars and as a percentage of net revenues as we incur accounting and legal expenses associated with public reporting requirements and compliance with the requirements of the Sarbanes-Oxley Act of 2002, as well as increased costs for maintaining directors’ and officers’ insurance. On a longer-term basis, we anticipate that our general and administrative expense will decrease as a percentage of net revenues as we better leverage our administrative infrastructure.

       Interest Expense. Interest expense consists of interest costs recognized under our capital lease obligations and for borrowed money.

       Other Income (Expense), Net. Other income (expense), net consists primarily of the interest income on our cash accounts and the net income (expense) related to changes in the fair value of our convertible preferred stock warrants under FASB Staff Position, or FSP 150-5, “Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable” adopted in July 2005. Under FSP 150-5, the warrants are subject to re-measurement at each balance sheet date, and any changes in fair value are recognized as a component of other income (expense), net.

       Income Taxes. Provision for income taxes depends on the statutory rate in the countries where we sell our products. Historically, we have only been subject to taxation in the United States because we have sold almost all of our products to customers in the United States. If we continue to sell our products primarily to customers located within the United States, we anticipate that our long-term future effective tax rate will be between 38% and 45%, without taking into account the use of any of our net operating loss carryforwards. However, we anticipate that in the future we may further expand our sale of products to customers located outside of the United States, in which case we would become subject to taxation based on the foreign statutory rates in the countries where these sales took place and our effective tax rate could fluctuate accordingly.

       Our fiscal year end for federal and state tax purposes is September 30. As of December 31, 2005, for federal and state tax purposes, we had approximately $57.0 million of federal and $53.0 million of state net operating loss carryforwards available to reduce future taxable income. These net operating loss carryforwards begin to expire in 2020 and 2008 for federal and state tax purposes, respectively.

       Historically, we have recorded a valuation allowance on our deferred tax assets, the majority of which relates to net operating loss tax carryforwards generated before we achieved profitability. During the fourth quarter of 2005, we concluded that it was more likely than not that we would be able to realize the benefit of these deferred tax assets in the future. Consequently, we recognized a net tax benefit of $24.1 million in the fourth quarter of 2005 resulting primarily from the release of the entire net deferred tax valuation allowance.

Critical Accounting Policies and Estimates

       Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates,

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and in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations will be affected.

       In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

       Revenue Recognition. We generate revenues primarily from the printing and shipping of prints, photo-based products, such as photo books, cards and calendars, photo-based merchandise, such as mugs, mouse pads and magnets, and ancillary products such as frames, photo albums and scrapbooking accessories. We generally recognize revenues from product sales upon shipment when persuasive evidence of an arrangement exists (typically through the use of a credit card or receipt of a check), the selling price is fixed or determinable and collection of resulting receivables is reasonably assured. Revenues from amounts billed to customers, including prepaid orders, are deferred until shipment of fulfilled orders. We provide our customers with a 100% satisfaction guarantee whereby products can be returned within a 30-day period for a reprint or refund. We maintain an allowance for estimated future returns based on historical data. The provision for estimated returns is included in accrued liabilities. During the years ended December 31, 2003, 2004 and 2005, returns totaled less than 1% of net revenues and have been within management’s expectations. We periodically provide incentive offers to our customers in exchange for setting up an account and to encourage purchases. Such offers include free products and percentage discounts on current purchases. Discounts, when accepted by customers, are treated as a reduction to the purchase price of the related transaction and are presented in net revenues. Production costs related to free products are included in costs of revenues upon redemption. Shipping charged to customers is recognized as revenues.

       Inventories. Our inventories consist primarily of paper and packaging supplies and are stated at the lower of cost on a first-in, first-out basis or market value. The value of inventories is reduced by an estimate for excess and obsolete inventories. The estimate for excess and obsolete inventories is based upon management’s review of utilization of inventories in light of projected sales, current market conditions and market trends.

       Software and Website Development Costs. We capitalize eligible costs associated with software developed or obtained for internal use in accordance with the AICPA Statement of Position No. 98-1 and EITF Issue No. 00-2. Accordingly, payroll and payroll-related costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life, which is generally three years. Costs associated with minor enhancements and maintenance for our website are expensed as incurred.

       Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against our deferred tax assets. We believe that all net deferred tax assets shown on our balance sheet are more likely than not to be realized in the future and no valuation allowance is necessary. In the event that actual results differ from those estimates or we adjust those estimates in future periods, we may need to record a valuation allowance, which will impact deferred tax assets and the results of operations in the period the change in made.

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       Stock-based Compensation Expense. Prior to January 1, 2006, we accounted for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issues to Employees,” and related interpretations, including Financial Accounting Standards Board, or FASB, Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25.” Under this method, compensation expense was recorded for a stock option grant only if the deemed fair value of the underlying common stock exceeded the exercise price on the date of grant.

       The fair value of the shares of common stock that underlie the stock options we have granted has historically been determined by our board of directors. Because there has been no public market for our common stock, our board has determined the fair value of our common stock at the time of grant of the option by considering a number of objective and subjective factors, including our sales of preferred stock to unrelated third parties, our operating and financial performance, the lack of liquidity of our capital stock, trends in the broader e-commerce market and other similar technology stocks, arm’s length, third-party sales of our common stock and valuations preformed by an unrelated valuation specialist.

       For financial reporting purposes, in connection with the preparation of the audit of our 2005 financial statements, we reassessed the fair value of the common stock underlying the stock options granted to our employees during 2005. This reassessment was based primarily on retrospective valuation reports prepared for us in May 2006 by an unrelated valuation specialist as of various dates during 2005. As a result, we recorded stock-based compensation expense in our consolidated statement of operations for the year ended December 31, 2005 to the extent that these reassessed values of the underlying common stock exceeded the exercise price of the stock options as of the initial grant date. This deferred stock-based compensation expense is amortized over the vesting period of the stock options and is included as a component of stock-based compensation.

       The following table shows the computation of stock-based compensation amounts arising from the reassessed fair value of stock options granted to employees during the year ended December 31, 2005:

	Mar 31,		Jun 30,		Sep 30,		Dec 31,
	2005		2005		2005		2005
Stock options granted to employees		1,345,896		621,050		352,761		52,500
Weighted average exercise price for common share	$	5.00	$	5.50	$	5.50	$	7.39
Weighted average reassessed value of underlying common shares	$	5.60	$	6.00	$	6.76	$	9.35
Weighted average intrinsic value per common share	$	0.60	$	0.50	$	1.26	$	1.96
Deferred stock-based compensation recorded	$	0.8  million	$	0.3  million	$	0.4  million	$	0.1  million

       After taking into consideration these reassessed fair values of our common stock, in June 2006 our board of directors authorized us to seek from those employees who were granted options in January 2005 through October 2005 their consent to amend their options to increase the applicable exercise price from the initial grant price to the corresponding reassessed value as of the date of grant. We sought this consent from our employees in June 2006 to help them avoid potential adverse personal income tax consequences. Because this modification relates to individual taxation and not corporate accounting, there will be no impact on stock-based compensation that we recorded in 2005 and we believe the effect on 2006 or any future periods will not be significant, regardless of the number of employees who elect to amend their options.

       The total unamortized deferred stock-based compensation recorded for all outstanding option grants made through December 31, 2005 was approximately $1.6 million, and is expected to be amortized as follows: $1.0 million in 2006, $0.4 million in 2007, $0.1 million in 2008 and the balance in 2009.

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       Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R, “Share-Based Payment,” using the prospective transition method, which requires us to apply the provisions of SFAS 123R only to new awards granted, and to awards modified, repurchased or cancelled, after the effective date. Under this transition method, stock-based compensation expense recognized beginning January 1, 2006 is based on the following: (a) the grant-date fair value of stock option awards granted or modified after January 1, 2006; and (b) the balance of deferred stock-based compensation related to stock option awards granted prior to January 1, 2006, which was calculated using the intrinsic value method as previously permitted under APB Opinion No. 25.

       For the three months ended March 31, 2006, the total compensation cost related to stock-based awards granted under SFAS 123R to employees and directors but not yet recognized was approximately $0.9 million, net of estimated forfeitures of $0.1 million. This cost will be amortized on a straight-line basis over a weighted average period of approximately four years. Amortization in the three months ended March 31, 2006 was $50,000. Net loss per share for the three months ended March 31, 2006 would have been reduced by $(0.01) per share if we had not adopted SFAS No. 123R.

Results of Operations

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

										Three
										Months
	Year Ended									Ended
	December 31,									March 31,
	2003			2004			2005			2005			2006
										(Unaudited)
Net revenues		100	%		100	%		100	%		100	%		100	%
Cost of revenues		46	%		46	%		44	%		49	%		52	%
Gross profit		54	%		54	%		56	%		51	%		48	%
Operating expenses:
Technology and development		16	%		14	%		16	%		18	%		24	%
Sales and marketing		13	%		14	%		18	%		17	%		22	%
General and administrative		18	%		19	%		16	%		21	%		20	%
Income (loss) from operations		7	%		7	%		6	%		(5	)%		(18	)%
Interest expense		1	%		1	%		0	%		0	%		0	%
Other income (expense), net		0	%		0	%		0	%		0	%		3	%
Income (loss) before income taxes		6	%		6	%		6	%		(5	)%		(15	)%
Benefit (provision) for income taxes		0	%		0	%		29	%		0	%		5	%
Net income (loss)		6	%		6	%		35	%		(5	)%		(10	)%

Three Months Ended March 31, 2005 and 2006 (Unaudited)

	Three Months
	Ended March 31,
	2005		2006		% Change
	(In thousands)
Net revenues	$	13,156	$	16,883		28	%
Cost of revenues		6,446		8,749		36	%

       Net revenues increased $3.7 million, or 28%, from the three months ended March 31, 2005 to the three months ended March 31, 2006. Revenue growth was attributable to the increase in both print and non-print revenues. Print revenues increased from $9.3 million for the three months ended

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March 31, 2005 to $10.5 million for the three months ended March 31, 2006, an increase of $1.2 million, or 13%. Print revenues were positively affected by increased 4×6 print sales and negatively affected by a decrease in 4×6 print average selling prices due to competitive pricing pressures, as we reduced the list price of our 4×6 prints from $0.29 to $0.19 in the fourth quarter of 2005. Non-print revenues increased from $3.9 million for the three months ended March 31, 2005 to $6.4 million for the three months ended March 31, 2006, an increase of $2.5 million, or 64%. Net revenues for the three months ended March 31, 2006 was positively affected by increased sales of photo books, calendars and greeting cards. Total orders increased from 734,000 for the three months ended March 31, 2005 to 981,000 for the three months ended March 31, 2006, or 34%. Average order size decreased from approximately $18 per order for the three months ended March 31, 2005 to $17 per order for the three months ended March 31, 2006, due primarily to lower 4×6 print average selling prices.

       Cost of revenues increased $2.3 million, or 36%, from the three months ended March 31, 2005 to the three months ended March 31, 2006, driven by the increased volume of shipped products during this period. Cost of revenues as a percent of net revenues increased by 3% to 52%, from the three months ended March 31, 2005 to the three months ended March 31, 2006. This increase was the result of the decline in 4×6 print average selling prices, partially offset by the favorable impact of lower paper prices that we negotiated, as well as the reorganization of our workflows to achieve greater efficiencies, each of which occurred during the third and fourth quarters of 2005.

	Three Months
	Ended
	March 31,
	2005		2006		% Change
	(In thousands)
Technology and development expense	$	2,311	$	3,983		72	%
Sales and marketing expense		2,275		3,693		62	%
General and administrative expense		2,818		3,397		21	%

       Our technology and development expense increased $1.7 million, or 72%, from the three months ended March 31, 2005 to the three months ended March 31, 2006. The increase was attributable to increased personnel and related costs for employees involved with website development and website infrastructure support teams, which increased by $0.8 million in the three months ended March 31, 2006, as well as increased third-party hosting expenses which increased by $0.2 million in the three months ended March 31, 2006. We also continued to invest in our website infrastructure hardware to support our continued revenue growth, which resulted in increased depreciation expense of $0.6 million for the three months ended March 31, 2006. In addition, charges from the amortization of deferred stock-based compensation from employee grants were $92,000 in the three months ended March 31, 2005, compared to $143,000 in the three months ended March 31, 2006.

       Our sales and marketing expense increased $1.4 million, or 62%, from the three months ended March 31, 2005 to the three months ended March 31, 2006. Personnel and related costs increased by $0.5 million and our customer acquisition and promotion costs increased by $0.6 million in the three months ended March 31, 2006. In addition, charges from the amortization of deferred stock-based compensation related to employee grants were $44,000 in the three months ended March 31, 2005, compared to $87,000 in the three months ended March 31, 2006.

       Our general and administrative expense increased by $0.6 million, or 21%, from the three months ended March 31, 2005 to the three months ended March 31, 2006. Personnel and related costs increased by $0.3 million while legal and accounting costs decreased by $0.5 million from the three months ended March 31, 2005 to the three months ended March 31, 2006. Rent and related facilities charges increased by $0.2 million and recruiting costs increased by $0.2 million from the three months ended March 31, 2005 to the three months ended March 31, 2006. In addition,

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charges from the amortization of deferred stock-based compensation related to employee grants were $0.5 million in the three months ended March 31, 2005, compared to $0.2 million in the three months ended March 31, 2006. Payment processing fees paid to third parties increased by $0.1 million during the three months ended March 31, 2006 due to increased order volumes.

       Interest expense increased by $24,000, or 44%, from the three months ended March 31, 2005 to the three months ended March 31, 2006, due primarily to interest expense on additional capitalized lease obligations.

       Other income (expense), net increased by $410,000, or 631%, from the three months ended March 31, 2005 to the three months ended March 31, 2006, due to larger invested cash balances and higher interest rates.

       The provision for income taxes was $0 for the three months ended March 31, 2005 compared to a benefit of $874,000 for the three months ended March 31, 2006 due to changes in our effective tax rate as a result of releasing our valuation allowance in the fourth quarter of 2005.

Years Ended December 31, 2003, 2004 and 2005

	Year Ended December 31,						2003-2004			2004-2005
							%			%
	2003		2004		2005		Change			Change
	(In thousands)
Net revenues	$	31,395	$	54,499	$	83,902		74	%		54	%
Cost of revenues		14,310		24,878		36,941		74	%		48	%

       Net revenues increased $29.4 million, or 54%, from 2004 to 2005, attributable to the increase in both print and non-print revenues. Print revenues increased from $35.6 million in 2004 to $48.7 million in 2005, an increase of $13.1 million or 37%. Print revenues were positively affected by increased 4×6 print sales and negatively affected by a decrease in 4×6 print average selling prices due to competitive pricing pressures. Non-print revenues increased from $18.9 million in 2004 to $35.2 million in 2005, an increase of $16.3 million, or 86%. 2005 represented the first full year of photo book sales, and we also added photo-based merchandise to our product offering. Total orders increased from 2,618,000 in 2004 to 3,650,000 in 2005, or 39%. The overall growth during the period was driven by increases in average order sizes. Average order size increased from approximately $21 per order in 2004 to $23 per order in 2005.

       Net revenues increased $23.1 million, or 74%, from 2003 to 2004, attributable to an increase in print revenues and the addition of new non-print photo-based products. Print revenues increased from $22.7 million in 2003 to $35.6 million in 2004, an increase of $12.9 million, or 57%. Print revenues were positively affected by increased 4×6 print sales and negatively affected by a decrease in 4×6 print average selling prices due to competitive pricing pressures. Non-print revenues increased from $8.7 million in 2003 to $18.9 million in 2004, an increase of $10.2 million, or 117%. During 2004, we introduced hardcover and softcover photo books and began selling a variety of photo-based merchandise, including mugs and mouse pads. Total orders increased from 1,691,000 in 2003 to 2,618,000 in 2004, or 55%. The overall growth during the period was also driven by increases in average order sizes and revenues from repeat customers. Average order size increased from approximately $19 per order in 2003 to $21 per order in 2004.

       Cost of revenues increased by $12.1 million, or 48%, from 2004 to 2005, driven by the increased volume of shipped products during this period. Cost of revenues as a percent of net revenues decreased by 2% to 44% from 2004 to 2005. This improvement was driven by labor and production efficiencies which offset a decline in 4×6 average selling prices. During the fourth quarter holiday season, we employ a significant amount of temporary workers through several temporary staffing agencies, and in 2005, we were able to negotiate savings in these staffing costs. During

43

2005, we also negotiated lower paper prices and reorganized our workflows to achieve greater efficiencies.

       Cost of revenues increased by $10.6 million, or 74%, from 2003 to 2004, driven by the increased volume of shipped products during this period. The 74% increase in cost of revenues during 2004 matched the 74% increase in net revenues during the same period. Cost of revenues as a percent of net revenues also remained the same from 2003 to 2004 at 46% of net revenues. We were able to offset a decline in 4×6 average selling prices with improved labor and overhead cost efficiencies.

	Year Ended December 31,						2003-2004			2004-2005
							%			%
	2003		2004		2005		Change			Change
	(In thousands)
Technology and development expense	$	4,970	$	7,433	$	13,152		50	%		77	%
Sales and marketing expense		3,991		7,705		15,252		93	%		98	%
General and administrative expense		5,629		10,126		13,657		80	%		35	%

       Our technology and development expense increased $5.7 million, or 77%, from 2004 to 2005. The increase was attributable to increased personnel and related costs for employees and consultants involved with website development and website infrastructure support teams, which increased by $2.4 million in 2005, as well as increased third-party hosting expenses which increased by $0.7 million in 2005. We also continued to invest in our website infrastructure to support our continued revenue growth, which resulted in increased depreciation expense of $1.5 million for 2005. In addition, charges from the amortization of deferred stock-based compensation from employee grants were $263,000 in 2004, compared to $826,000 in 2005.

       Our technology and development expense increased $2.5 million, or 50%, from 2003 to 2004. The increase was attributable to increased personnel and related costs for employees involved with website development and website infrastructure support teams, which increased by $1.0 million in 2004, as well as increased third-party hosting expenses which increased $0.1 million in 2004. We also continued to invest in our website infrastructure to support our continued revenue growth, which resulted in increased depreciation expense of $0.6 million for 2004. In addition, charges from the amortization of deferred stock-based compensation related to employee grants were $32,000 in 2003, compared to $263,000 in 2004.

       Our sales and marketing expense increased $7.5 million, or 98%, from 2004 to 2005. Personnel and related costs increased by $1.1 million in 2005 and our customer acquisition and promotion costs increased by $4.4 million in 2005 as we increased our online and offline advertising, survey and research activities. In addition, charges from the amortization of deferred stock-based compensation related to employee grants were $117,000 in 2004, compared to $239,000 in 2005.

       Our sales and marketing expense increased $3.7 million, or 93%, from 2003 to 2004. Personnel and related costs increased by $0.6 million in 2004 and our customer acquisition and promotion costs increased by $2.3 million in 2004. In addition, charges from the amortization of deferred stock-based compensation related to employee grants were $11,000 in 2003, compared to $117,000 in 2004.

       Our general and administrative expense increased by $3.5 million, or 35%, from 2004 to 2005. Personnel and related costs increased by $0.8 million and legal and accounting costs increased $0.5 million over 2004 expenditures. Recruiting costs increased by $0.6 million due to increased hiring and depreciation increased $0.4 million related to our information technology equipment from 2004 to 2005. In addition, charges from the amortization of deferred stock-based compensation related to employee grants were $1.8 million in 2004, compared to $2.2 million in 2005. Payment processing fees paid to third parties also increased by $0.9 million in 2005 due to increased order volumes.

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       Our general and administrative expense increased by $4.5 million, or 80%, from 2003 to 2004. We increased our headcount in our finance organization, which contributed to the $0.7 million increase in personnel and related costs. Legal and accounting costs also increased $0.8 million over 2003 expenditures. In addition, charges from the amortization of deferred stock-based compensation related to employee grants were $124,000 in 2003, compared to $1.8 million in 2004. Payment processing fees paid to third parties also increased by $0.5 million in 2004 due to increased order volumes.

       Interest expense decreased by $104,000, or 22%, from 2004 to 2005, due to the repayment of a loan from Monaco Partners, L.P., which is controlled by James Clark, the Chairman of our board of directors, in 2004. Interest expense in 2005 also included amounts representing interest expense on capitalized lease obligations and interest expense and related loan fees for a term loan entered into and repaid during 2005.

       Interest expense increased by $79,000, or 20%, from 2003 to 2004, due to amounts representing interest expense on capitalized lease obligations, as well as the amortization of warrants issued to Monaco Partners, L.P. that was recorded as a discount to the loan from Monaco Partners, L.P.

       Other income (expense), net decreased by $184,000, or 227%, from 2004 to 2005, due to larger invested cash balances and higher interest rates, offset by $464,000 of expense related to changes in the fair value of our convertible preferred stock warrants under FSP 150-5.

       Other income, net increased by $72,000 from 2003 to 2004, due to larger invested cash balances and higher interest rates.

	Year Ended
	December 31,
	2003			2004			2005
Income tax benefit (provision)	$	(68	)	$	(258	)	$	24,060
Effective tax rate		(3	)%		(7	)%		494	%

       In 2003 and 2004, we recorded a provision for income taxes that was principally attributable to California state taxes and other minimum corporate taxes. In those periods, we offset our remaining taxable income through the utilization of net operating loss carryforwards. In the fourth quarter of 2005, we determined that it would be more likely than not that the cumulative net operating losses and other deferred tax benefits would be recoverable by us, creating a $24.1 million income tax benefit due to the deferred tax asset recorded on our balance sheet at the end of 2005.

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Quarterly Results of Operations Data

       The following tables set forth our unaudited quarterly consolidated statements of operations data and our unaudited statements of operations data as a percentage of net revenues for each of the nine quarters in the period ended March 31, 2006. In management’s opinion, the data has been prepared on the same basis as the audited consolidated financial statements included in this prospectus, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

		For the Three Months Ended,
		Mar 31,			Jun 30,			Sep 30,			Dec 31,			Mar 31,			Jun 30,			Sep 30,			Dec 31,			Mar 31,
		2004			2004			2004			2004			2005			2005			2005			2005			2006
		(In thousands, except per share amounts)
Consolidated Statements of Operations Data:
Revenues, net		$	7,761		$	9,180		$	11,587		$	25,971		$	13,156		$	14,115		$	15,610		$	41,021		$	16,883
Cost of revenues			3,604			4,230			5,321			11,723			6,446			6,804			6,809			16,882			8,749
Gross profit			4,157			4,950			6,266			14,248			6,710			7,311			8,801			24,139			8,134
Operating expenses:
Technology and development(1)			1,509			1,438			1,981			2,505			2,311			2,755			3,708			4,378			3,983
Sales and marketing(1)			1,103			905			1,761			3,936			2,275			2,879			3,755			6,343			3,693
General and administrative(1)			1,492			1,835			2,594			4,205			2,818			2,372			2,802			5,665			3,397
Income (loss) from operations			53			772			(70	)		3,602			(694	)		(695	)		(1,464	)		7,753			(2,939	)
Interest expense			(125	)		(104	)		(98	)		(144	)		(54	)		(47	)		(83	)		(183	)		(78	)
Other income (expense), net			8			14			23			36			65			66			(103	)		(131	)		475
Income (loss) before income taxes and cumulative effect of change in accounting principle			(64	)		682			(145	)		3,494			(683	)		(676	)		(1,650	)		7,439			(2,542	)
Benefit (provision) for income taxes			—			(16	)		—			(242	)		—			68			(68	)		24,060			874
Net income (loss) before cumulative effect of change in accounting principle		$	(64	)	$	666		$	(145	)	$	3,252		$	(683	)	$	(608	)	$	(1,718	)	$	31,499		$	(1,668	)
Cumulative effect of change in accounting principle			—			—			—			—			—			—			442			—			—
Net income (loss)		$	(64	)	$	666		$	(145	)	$	3,252		$	(683	)	$	(608	)	$	(1,276	)	$	31,499		$	(1,668	)
Net income (loss) allocable to common stockholders		$	(64	)	$	—		$	(145	)	$	333		$	(683	)	$	(608	)	$	(1,276	)	$	6,372		$	(1,668	)
Net income (loss) per common share:
	Basic	$	(0.04	)	$	—		$	(0.06	)	$	0.12		$	(0.23	)	$	(0.19	)	$	(0.38	)	$	1.78		$	(0.44	)
	Diluted		(0.04	)		—			(0.06	)		0.09			(0.23	)		(0.19	)		(0.38	)		1.23			(0.44	)
	Pro forma basic																										(0.09	)
	Pro forma diluted																										(0.09	)
Shares used in computing net income (loss) per share attributable to common stockholders:
	Basic		1,732			2,167			2,317			2,708			2,918			3,161			3,366			3,576			3,805
	Diluted		1,732			2,167			2,317			3,720			2,918			3,161			3,366			5,183			3,805
	Pro forma basic																										17,607
	Pro forma diluted																										17,607

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(1)  Includes stock-based compensation as follows:

	For the Three Months Ended,
	Mar 31,		Jun 30,		Sep 30,		Dec 31,		Mar 31,		Jun 30,		Sep 30,		Dec 31,		Mar 31,
	2004		2004		2004		2004		2005		2005		2005		2005		2006
	(In thousands)
Cost of revenues	$	3	$	3	$	7	$	8	$	8	$	6	$	4	$	10	$	11
Technology and development		33		32		98		100		92		90		447		197		143
Sales and marketing		7		11		50		49		44		72		47		76		87
General and administration		35		39		679		1,037		517		263		219		1,218		170
	$	78	$	85	$	834	$	1,194	$	661	$	431	$	717	$	1,501	$	411

	For the Three Months Ended,
	Mar 31,			Jun 30,			Sep 30,			Dec 31,			Mar 31,			Jun 30,			Sep 30,			Dec 31,			Mar 31,
	2004			2004			2004			2004			2005			2005			2005			2005			2006
Consolidated Statements of Operations Data:
Net revenues		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%
Cost of revenues		46	%		46	%		46	%		45	%		49	%		48	%		44	%		41	%		52	%
Gross profit		54	%		54	%		54	%		55	%		51	%		52	%		56	%		59	%		48	%
Operating expenses:
Technology and development		19	%		16	%		17	%		10	%		18	%		20	%		24	%		11	%		24	%
Sales and marketing		14	%		10	%		15	%		15	%		17	%		20	%		24	%		15	%		22	%
General and administrative		19	%		20	%		22	%		16	%		21	%		17	%		18	%		14	%		20	%
Income (loss) from operations		2	%		8	%		0	%		14	%		(5	)%		(5	)%		(10	)%		19	%		(18	)%
Interest expense		2	%		1	%		1	%		1	%		0	%		0	%		1	%		0	%		0	%
Other income (expense), net		0	%		0	%		0	%		0	%		0	%		0	%		(1	)%		0	%		3	%
Income (loss) before income taxes and cumulative effect of change in accounting principle		0	%		7	%		(1	)%		13	%		(5	)%		(5	)%		(12	)%		19	%		(15	)%
Benefit (provision) for income taxes		0	%		0	%		(0	)%		(1	)%		0	%		0	%		0	%		59	%		5	%
Net income (loss) before cumulative effect of change in accounting principle		0	%		7	%		(1	)%		12	%		(5	)%		(5	)%		(12	)%		78	%		(10	)%
Cumulative effect of change in accounting principle		0	%		0	%		0	%		0	%		0	%		0	%		3	%		0	%		0	%
Net income (loss)		0	%		7	%		(1	)%		12	%		(5	)%		(5	)%		(9	)%		78	%		(10	)%

       Our quarterly results of operations have varied significantly in the past and we expect our quarterly operating results to vary significantly in the future. Our business is seasonal, with a high proportion of our revenues and operating cash flows generated during the holiday season in the fourth quarter of the calendar year when people take more pictures and order more photo-based products and merchandise. We incur significant additional expenses in the period leading up to the fourth quarter holiday season in anticipation of higher sales volume in that period, including expenses related to the hiring of temporary workers to meet our seasonal needs, additional inventory and equipment purchases and increased advertising. During the fourth quarter, we also incur significant additional sales and marketing costs to promote our offerings for the holidays and attract customers. Our quarterly revenues and results of operations are also affected by factors such as the timing of expenditures and the mix of products and services sold.

       The increases in our net revenues for the quarters ended December 31, 2004 and 2005 are attributable to our overall growth as well as the seasonality of our business related to the fourth quarter holiday season. In the quarters ended March 31, 2005 and March 31, 2006, our cost of revenues were higher as a percentage of net revenues than the prior quarters due to the decline in 4x6 print average selling prices as well as increased depreciation from production equipment acquired during the preceding quarter. In the fourth quarter of 2004, we recorded $0.8 million of stock-based compensation expense in general and administrative expense related to a transition agreement with an executive and a settlement agreement with a former employee. In the fourth quarter of 2005, we recorded $1.0 million of stock-based compensation expense in general and

47

administrative expense related to a transition agreement with another executive. In the fourth quarter of 2005, we determined that it would be more likely than not that our cumulative net operating losses and other deferred tax benefits would be recoverable by us, creating a $24.1 million income tax benefit.

       In the third quarter of 2005, we adopted FSP 150-5. FSP 150-5 affirms that the outstanding warrants to purchase our common stock are subject to the requirements in SFAS No. 150, regardless of the timing of the redemption feature or the redemption price, and requires us to classify these warrants on our preferred stock as liabilities and adjust our warrant instruments to fair value at each reporting period. We recorded a $442,000 cumulative charge for adoption as of July 1, 2005, reflecting the fair value of the warrants as of that date, and recorded $159,000, $304,000 and $122,000 of additional expense in other income (expense), net in the quarters ended September 30, 2005, December 31, 2005 and March 31, 2006, respectively, to reflect the increase in fair value of the warrants.

       Our results of operations for any historical period are not necessarily indicative of results of operations for any future period.

Liquidity and Capital Resources

										Three Months
	Year Ended December 31,									Ended March 31,
	2003			2004			2005			2005			2006
										(Unaudited)
	(In thousands)
Consolidated Statements of Cash Flows Data:
Capital expenditures	$	3,674		$	7,400		$	10,858		$	1,201		$	1,764
Depreciation and amortization		2,761			3,769			6,246			1,280			2,176
Cash flows from operating activities		9,113			13,067			18,606			(2,817	)		(10,694	)
Cash flows from investing activities		(3,674	)		(7,386	)		(10,613	)		(1,195	)		(1,764	)
Cash flows from financing activities		1,573			(2,570	)		17,379			(625	)		(628	)

       Historically we have financed our operations and capital expenditures through operations, private sales of preferred stock, lease financing and the use of bank and related-party loans. We had cash and cash equivalents of $26.1 million as of March 31, 2006, a decrease from $39.2 million as of December 31, 2005. The decrease in our cash and cash equivalents as of March 31, 2006 was due primarily to the payment of our seasonally high accounts payable and accrued liabilities balances at December 31, 2005. In January 2006, we also made a $1.0 million payment pursuant to an intellectual property settlement and license agreement. The December 31, 2005 cash balance represented an increase of $25.4 million from the December 31, 2004 cash balance of $13.8 million. The increase in cash as of December 31, 2005 was primarily attributable to the issuance of shares of our Series F preferred stock for net proceeds of $19.8 million in November 2005.

       Operating Activities. For the three months ended March 31, 2006, net cash used in operations of $10.7 million resulted from a net loss of $1.7 million, which was offset by $2.2 million of depreciation and amortization expense and $0.4 million of non-cash amortization of stock-based compensation. In addition, for the three months ended March 31, 2006, cash was used in operating activities to fund accounts payable and accrued liabilities of $10.7 million resulting from seasonally high balances at December 31, 2005 related to our increased purchasing for the holiday season.

       In 2005, net cash provided from operating activities of $18.6 million resulted from net income of $28.9 million that was adjusted for $6.2 million of depreciation and amortization and $3.3 million of non-cash amortization of stock-based compensation. In addition, net cash from operating activities increased due to a $4.1 million increase in accounts payable and accrued liabilities due to seasonally high balances at December 31, 2005 related to increased purchasing for the fourth

48

quarter holiday season. Accounts payable and accrued liability balances were higher as of December 31, 2005 compared to as of December 31, 2004 due to higher sales in the 2005 fourth quarter holiday season.

       In 2004, net cash provided from operating activities of $13.1 million resulted from net income of $3.7 million that was adjusted for $3.8 million of depreciation and amortization and $2.2 million of non-cash amortization of stock-based compensation. In addition, net cash from operating activities increased due to a $2.6 million increase in accounts payable and accrued liabilities, a result of seasonally high balances at December 31, 2004 related to increased purchasing for the fourth quarter holiday season. Accounts payable and accrued liability balances were higher as of December 31, 2004 compared to as of December 31, 2003 due to higher sales in the 2004 fourth quarter holiday season.

       Investing Activities. For the three months ended March 31, 2006, cash used in investing activities was $1.8 million for capital expenditures for computer and network hardware to support our website infrastructure and information technology computer hardware, as well as capitalized website development costs related to projects that were placed into service.

       In 2004 and 2005, cash used in investing activities was $7.4 million and $10.6 million, respectively, primarily from the acquisition of computer and network hardware to support our website infrastructure and production equipment for our manufacturing and production operations at our Hayward, California facilities.

       We expect to have ongoing capital expenditure requirements to support our growing website infrastructure and to meet production and manufacturing requirements. We expect capital expenditures to be between $30 million and $35 million in the second half of 2006 and through 2007.

       Financing Activities. For the three months ended March 31, 2006, we used $0.6 million primarily for the payment of capitalized lease obligations.

       In 2005, we generated cash of $17.4 million, primarily the result of receiving net proceeds of $19.8 million from the sale of our Series F preferred stock in November 2005. This increase in cash was offset by $2.4 million in principal payments on capital lease obligations.

       In 2004, we used $2.6 million of cash, which was due to the repayment of a $2.5 million loan from Monaco Partners and $0.5 million in principal payments on capital lease obligations.

Contractual Obligations

       We lease website infrastructure computer and network hardware, production equipment, information technology equipment and software under various capital leases that expire through the year 2009. We also lease office space in Redwood City, California and production facilities in Hayward, California under various non-cancelable operating leases that expire between 2007 and 2010. We also have a colocation agreement with a third-party hosting facility that expires in 2006.

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       The following are contractual commitments at December 31, 2005 associated with lease obligations and contractual commitments:

				Less than						More than
		Total		1 Year		1-3 Years		3-5 Years		5 Years
		(In thousands)
Contractual Obligations
Capital lease obligations		$	5,626	$	1,669	$	3,474	$	483	$	—
Operating lease obligations			5,997		1,132		2,652		2,213		—
Purchase obligations(1)			2,820		2,820		—		—		—
Preferred stock warrant liability(2)			1,535		—		—		—		1,535
	Total contractual obligations	$	15,978	$	5,621	$	6,126	$	2,696	$	1,535

(1)

Purchase obligations includes commitments under non-cancellable marketing agreements, software patent license agreements and third-party hosting services. In January 2006, we entered into a three-year non-cancelable agreement with a new third party for colocation and hosting services that expires in 2009. The purchase obligations do not reflect the new colocation agreement as it was entered into subsequent to December 31, 2005. As a result of this new colocation agreement, our purchase obligations increased by $4.3 million, representing an increase of $1.0 million due less than one year, $3.1 million due in one to three years, and $0.2 million due in three to five years.

(2)

Upon the completion of this offering, all of our warrants to purchase shares of preferred stock will convert into warrants to purchase common stock and, accordingly, the liability will be reclassified as common stock and additional paid-in capital.

       Other than the obligations, liabilities and commitments described above, we have no significant unconditional purchase obligations or similar instruments. We are not a guarantor of any other entities’ debt or other financial obligations.

       We anticipate that our current cash and cash equivalents balances and cash generated from operations, along with the net proceeds we receive from this offering will be sufficient to meet our working capital requirements, capital lease obligations, expansion plans and technology development projects for at least the next 18 months. The adequacy of these resources to meeting our liquidity needs beyond that period will depend on our growth, operating results and the capital expenditures required to meet possible increased demand for our products. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity. The sale of additional equity could result in additional dilution to our stockholders. Financing arrangements may not be available to us, or may not be in amounts or on terms acceptable to us.

Off-Balance Sheet Arrangements

       We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Recent Accounting Pronouncements

       In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, handling costs and

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wasted material (spoilage). Among other provisions, the new rule requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. The statement was adopted as of January 1, 2006, and did not have a material effect on our financial position, results of operations or liquidity.

       In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces Accounting Principles Board Opinion, or APB, No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS No. 154”). This statement requires retrospective application, unless impracticable, for changes in accounting principles in the absence of transition requirements specific to newly adopted accounting principles. The provisions of SFAS No. 154 will be effective for us beginning on September 1, 2006. We are currently evaluating the impact, if any, of this statement on our financial position and results of operations.

       In November 2005, the FASB issued FSP SFAS 115-1 and SFAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1 and 124-1”), which clarifies when an investment is considered impaired, whether the impairment is other than temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain related disclosures. FSP 115-1 and 124-1 will be effective for all reporting periods beginning after December 15, 2005. We do not believe that adopting or applying either standard will have a material impact on our financial statements.

Quantitative and Qualitative Disclosures About Market Risk

       Interest Rate and Credit Risk. We have exposure to interest rate risk that relates primarily to our investment portfolio. All of our current investments are classified as cash equivalents and carried at cost, which approximates market value. We do not currently use or plan to use derivative financial instruments in our investment portfolio. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates will have a significant impact on our interest income, operating results or liquidity.

       As of December 31, 2004 and 2005, our cash and cash equivalents were maintained by financial institutions in the United States and our deposits may be in excess of insured limits. We believe that the financial institutions that hold our investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.

       Inflation. We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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BUSINESS

Overview

       We are a leading Internet-based social expression and personal publishing service that enables consumers to share, print and preserve their memories by leveraging our technology-based platform and manufacturing processes. Today, our primary focus is on helping consumers manage their memories through the powerful medium of photos. We provide a full range of products and services that make it easy, convenient and fun for consumers to upload, edit, enhance, organize, find, share, create, print and preserve their digital photos in a creative and thoughtful manner.

       Consumers use our products and services to stay connected to their friends and family, to organize their memories in a single location, to tell stories and to preserve their memories for themselves and their children. Our customers purchase physical products both for their own personal use and for giving thoughtful and personalized gifts such as photo books, calendars, greeting cards and other photo-based products and merchandise.

       We currently generate revenues by selling high-quality prints, ranging in size from wallet to jumbo sized 20x30 enlargements and photo-based products such as professionally-bound photo books, personalized calendars and greeting cards. We manufacture all of these items in our Hayward, California manufacturing facility. By controlling the production process in this facility, we are able to ensure high-quality products, maintain a favorable cost structure and ensure timely shipment to customers, even during peak demand. Additionally, we sell a variety of photo-based merchandise that is currently manufactured for us by third parties, such as mugs, mouse pads, coasters, tote bags, desk organizers, puzzles, playing cards, multi-media DVDs, magnets and keepsake boxes, and ancillary products, such as frames, photo albums and scrapbooking accessories.

       Our high-quality products and services, together with our focus on continuous innovation, have earned us numerous third-party accolades and, more importantly, allowed us to establish a premium lifestyle brand that is trusted by our customers. We believe that we realize the benefits of a trusted lifestyle brand through high customer loyalty, low customer acquisition costs and premium pricing.

       Our customers are a central part of our business model. They generate most of the content on our service by uploading their photos and storing their memories. In addition, they share their photos electronically with their friends and families, extending and endorsing our brand and creating a sense of community. Finally, by giving Shutterfly branded products to colleagues, friends and loved ones throughout the year, customers reinforce the Shutterfly brand. Through these various activities, our customers create a viral network of new users and customers.

       In addition to driving lower customer acquisition costs through viral marketing, our customers provide input on new features and functionalities. Close, frequent customer interactions, coupled with significant investments in sophisticated customer relationship management, or CRM, capabilities, enable us to fine-tune and tailor our promotions and website presentation to specific customer segments. Consequently, customers are presented with a highly personalized Shutterfly shopping experience, which helps foster a unique and deep relationship with our brand.

       We have experienced significant growth since launching our service in December 1999. Since inception, we have fulfilled more than 11 million orders, sold approximately 350 million prints and stored more than 900 million of our consumers’ photos in our image archives. According to industry sources, in May 2006, Shutterfly.com had approximately 4.1 million unique visitors.

Vision and Mission

       Our vision is to make the world a better place by helping people share life’s joy. Our mission is to build an unrivaled service that enables deeper, more personal relationships between our customers and those who matter most in their lives.

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       We believe that people have an intrinsic desire for social expression, as they wish to capture and share their experiences and pass them on to future generations. Since the beginning of humankind, people have shared detailed stories of their lives through visual expression. Today, with the evolution of digital cameras and technology, millions of people around the world are capturing their memories and communicating in deeper, more meaningful ways.

       We believe people will continue to take more pictures of important moments in their lives across various touch points throughout the year, including vacations, weddings, birthdays, graduations, family reunions and holidays. Our products and services make sharing, printing and preserving those memories easy, convenient and fun, and allow for our customers to be more thoughtful and creative with their memories. As our customers share these joyous memories, either digitally through our sharing service or physically through giving personalized gifts, they are enhancing their personal relationships, creating more joy in the world and making the world a better place.

Industry Overview

       Historically, preserving photos and creating original, thoughtful compilations of memories was a difficult, expensive, manual, time-consuming and often inconvenient process for consumers. As a result of these constraints, the need for easy, convenient, versatile, affordable and trusted online photo services has emerged.

       Until the widespread adoption of the Internet and digital cameras, there were significant inefficiencies and quality limitations associated with capturing, developing, processing, storing, editing and sharing images. Photos had to be stored in physical form and were vulnerable to deterioration, destruction or loss. Most people chose the limited option of storing their 4x6 prints in shoeboxes or simple photo albums because photography-related markets — including film processing, photo printing and scrapbooking — either did not exist or were relatively distinct. In particular, convenient options for photo production, storage and sharing were very limited; consumers had to settle for ordering duplicate 4x6 prints from either mail-order or local processing labs with varied capabilities and often poor quality control. Furthermore, the “shoebox” approach created significant difficulties for consumers in organizing their photos and limited their ability to be thoughtful and creative with their memories. The photo-related industries had not found a way to capitalize on the public’s need to preserve memories across generations in a secure, convenient, creative and engaging manner. Despite these limitations, the photo-finishing market was more than a $6 billion industry in 2000.

       Internet and digital photo-based technology enables consumers to create an archive of memories that extends beyond photos to include highly personalized, more engaging solutions that can be protected and preserved for future generations. We believe that the key forces driving the expansion of the market for these solutions are:

•  Proliferation of digital cameras. The growing use of digital cameras, largely driven by price decreases, has increased the demand for online photo-printing services. Industry sources estimate that in 2005, worldwide shipments of digital cameras reached approximately 94 million units, a 27% increase from the approximately 74 million units shipped in 2004. The United States accounted for more than 20 million of those units shipped in 2005, with the penetration of digital cameras reaching nearly half of U.S. households.

•  Penetration of high-speed connectivity. High-bandwidth, high-speed Internet access has spurred the integration of the Internet into daily life and provides consumers with improved performance and speed for sharing information, especially large files such as digital images. Industry sources estimate that by the end of 2006, there will be more than 1 billion Internet users worldwide. Another industry source estimates that in 2004, nearly 204 million Americans, representing approximately 75% of the U.S. population, had access to the Internet in their homes. In addition, more Internet users now have high-speed Internet

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	access. Industry sources estimate that by the end of 2006, approximately 63% of all online U.S. households will have broadband Internet connectivity.
•	Increasing convenience and quality of online photo services. Online photo services provide multiple advantages over at-home or retail printing. Although it enables instantaneous printing, at-home photo printing requires an investment in a printer, photo paper and ink, resulting in a much higher cost per print. In addition, the quality rendered is usually inferior compared to commercially produced prints. Retail printing, while offering higher quality than at-home printing, requires the consumer to make a trip to the retail establishment to pick up his or her prints. Both at-home and retail solutions can produce prints of inconsistent quality, have a limited variety of photo-based products and few or no personalization options, and require the consumer to handle shipping or delivery of the product to the final recipient, often with additional costs in time and money. In contrast, online photo services can conveniently provide a wide variety of customized, high-quality photo-based products delivered anywhere directly to consumers’ doorsteps.
•	Growing consumer desire to find an easy, hassle-free way to generate personalized content. Consumers are interested in creating highly customized and personalized photo-based products and merchandise to preserve their precious memories, express their creativity and make gift giving more personal and thoughtful. Improvements in software and editing tools have enabled consumers to modify their photos quickly and easily using a personal computer. Consumers are now able to create digital compilations of memories that were previously only possible through a physical and more time-consuming process.
•	Participation in online communities. Consumers have increasingly become comfortable with using the Internet as a forum for sharing and publishing information in open or permission-based networks. Many of the most popular online communities include user generated rich-media content like photos and videos because of the inherent power that visual content has to communicate beyond the written word.

Addressable Market

       Digital cameras, digital image processing and the Internet have dramatically changed the photo-related services market, and have created entirely new ways for consumers to capture, edit, enhance, organize, find, share, create, print and preserve images. In particular, the range and quality of printed photos, photo-based products, photo-based merchandise and ancillary products has expanded and improved significantly, while associated production costs and the time required to create this output have decreased dramatically. Consequently, companies like Shutterfly are now addressing a larger portion of the consumer value chain and multiple, large markets in ways not possible with earlier technology.

       We currently address several adjacent markets related to consumers’ desire to be thoughtful and creative with their memories. These include, but are not limited to:

•  Photo prints. Industry sources estimate the worldwide market for digital photo prints to be approximately $38 billion in 2005 and growing to approximately $107 billion in 2009, and the U.S. market for digital photo prints to be approximately $10 billion in 2005 and growing to approximately $30 billion in 2009. In addition, industry sources predict that in the United States, photos ordered over the Internet for mail delivery will grow from approximately $424 million in 2005 to approximately $1.9 billion in 2009.

•  Greeting cards. According to the Greeting Card Association’s website, U.S. consumers purchase approximately 7 billion greeting cards each year, generating nearly $7.5 billion in retail sales. More than 90 percent of all U.S. households buy greeting cards, with the average household purchasing 30 individual cards per year. This website also reports that nine out of ten Americans say they look forward to receiving personal letters and greeting

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	cards because cards allow them to keep in touch with friends and family and make them feel they are important to someone else.
•	Scrapbooks. According to a 2004 survey by Creating Keepsakes and Craftrends magazine, the U.S. scrapbook industry was approximately $2.55 billion in 2004, up 27.8% from 2001. Additionally, approximately 61% of scrapbookers have at least a college degree and spend almost three hours a week assembling their memories into scrapbooks.
•	Calendars. In a 2002 guide published by the Calendar Marketing Association, it estimated that 500 million calendars are produced annually in the United States and that approximately 98% of American households have at least one calendar.
•	Photo-based merchandise. Photo-based merchandise is a substantial market opportunity that includes any product that can be customized with the imprint of a digital image. Photo-based merchandise includes, but is not limited to, mugs, mouse pads, bags, puzzles, playing cards and apparel.

       The addressable market for our products and services includes every person who enjoys the memories created by digital photographic devices such as cameras, camera cell phones or camcorders. Although photofinishing products and services are purchased by a broad consumer base, we believe that women, in particular, play a key role in many photo-based purchasing decisions. The U.S. Census Bureau reports that there, were approximately 42 million women age 25-44 in 2005, and, according to industry sources during 2002, more than 85% of women 18 years and older identified themselves as the principal shopper in their household. Securing the loyalty of this core consumer base represents a sizable market opportunity.

Value for Our Customers

       Creating value for our customers is the basis for our success. We offer customers easy, convenient and fun ways to:

•  share and preserve memories for family, friends and themselves;

•  organize all of their photos in a single, safe and easily accessible location;

•  maintain emotional connections to friends and family, despite being time-constrained, through thoughtful and personal photo-based communications and gifts; and

•  achieve satisfaction and self-expression through creativity and telling stories with photos.

       We accomplish this through providing the following benefits to our customers:

       Broad offering. We offer a wide variety of premium products to customers, including prints, photo-based products ranging from custom greeting cards to photo books, photo-based merchandise ranging from mugs to mouse pads, and a broad assortment of high-quality ancillary products such as frames, photo albums and scrapbooking accessories. In addition, we provide a number of valuable tools and services, such as the ability to upload and edit photos online, share photos with friends and family and permanently store an unlimited number of photos on our system at no cost. With many creative options from which to choose, we enable customers to become engaged in the Shutterfly experience and feel a sense of pride in their creations.

       Trusted premium brand. We have built strong relationships with our customers who trust us to preserve and protect their photos in a central photo repository. We enable customers to enhance, share and make projects with their photos at their convenience. Our focus on ease of use, image quality, secure photo storage, high-quality products and first-rate packaging has established Shutterfly as a trusted premium brand. Our customers have grown to expect the best quality and service from us. This trust is maintained by fast, consistent fulfillment times, responsive customer service and continuous innovation.

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       Customer-focused approach. The entire Shutterfly customer experience reflects our customer-centered approach. Membership is free and offers customers the ability to upload, edit, store and share an unlimited number of photos. Membership is not required to view friends’ and family’s shared pictures, which can be viewed with a simple click. We conveniently mail orders to our customers’ homes or offices, or directly to a gift recipient. We also offer a year-round direct-mail greeting card service where customers upload their electronic address books to Shutterfly and we mail their cards and party invitations on their behalf. We take special care to focus on our customers’ requests for new features and functionality, products and services.

The Shutterfly Solution

       We have developed compelling services and production capabilities that allow us to offer consumers a easy, convenient and fun way to enjoy, share and preserve their memories. We satisfy traditional consumer needs — such as photo printing, storing and sharing — and also introduce consumers to new forms of communication and creative expression through our website features and functionality, photo prints, photo-based products, photo-based merchandise and ancillary products. We believe that many people are intimidated by the process of creating photo-based products or merchandise or fear that it will take too much work. We believe that we have removed much of the difficulty and intimidation of the process and have made it easy and enjoyable. In addition to these consumer benefits, we believe that our business model is supported by the following characteristics:

       Viral network effect. We benefit from a viral network in several ways. When our existing customers upload and share their personal memories through photos, they are providing compelling user-generated content that attracts their friends and family to our website, thus enlarging our network of users and potential customers. This implicit endorsement, coupled with user-friendly policies, such as not requiring share recipients to register to view pictures, reinforces our trusted brand and leads to lower customer acquisition costs. In addition, as our customers create and give thoughtful and unique physical gifts such as greeting cards, calendars and photo books, these products create numerous opportunities for potential customers to interact with our brand. Many of our customers also use our website to create community-oriented products such as a photo book celebrating a school play or a yearbook for their children’s soccer team, and they often proactively introduce and sell these items to larger groups of potential new customers. Lastly, as our products and services delight our customers, they often become enthusiastic evangelists for Shutterfly and introduce our products and services to their friends and family through word-of-mouth.

       Attractive target demographics reflected in our loyal customer base. We send a survey every month to approximately 5,000 of our customers selected by us to represent customers who have made varying numbers of purchases from us historically and who have purchased products from us within the prior 90 days, to which we typically receive a response rate of approximately 14%. Based upon these surveys, we believe that our current customer base fits the following profile: approximately 84% female, approximately 63% in the 25-44 age range and approximately 53% with children. These surveys also indicate that the average household income of our customers is greater than $70,000. Our customers have described themselves as being interested in maintaining personal connections with friends and family, wanting to tell stories, wishing to preserve their memories for themselves and their children and wanting a solution that is intuitive and easy to use. As a result, we believe that they are looking for an easy and convenient way to be both thoughtful and creative with their memories. Our customers use our website to share, enhance and preserve memories from vacations, holidays and family events and to create gifts for events such as birthdays, weddings, anniversaries, Halloween, Hanukkah, Christmas, Valentine’s Day, Easter, Mother’s Day and Father’s Day. We believe that our customer loyalty is also aided by the time our customers have invested in uploading and organizing their photos on our website. If a customer were to leave Shutterfly, he or she would have to spend significant time uploading and organizing photos on a new service.

       Premium pricing power. We believe that we are able to maintain premium pricing power for many of our products because of the brand equity and loyal customer base we have created. We

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believe that our brand equity and loyal customer base exists because we have differentiated ourselves in the marketplace by delivering high-quality products, outstanding customer service, an intuitive and easy user experience and continuous innovation across our products and services.

       Deep customer understanding. Customer insights are an important source of new product and service innovation for us, and we continually strive to understand our customers’ needs in order to improve customer satisfaction. We invest significant time and resources to understand and address the needs of our customers through market research, focus groups, customer surveys, usability testing, customer response to promotions and customer service interactions. We believe a coordinated focus on understanding the customer allows us take measures to increase customer loyalty, consumer awareness of Shutterfly, customer satisfaction and repeat purchases.

       Vertical integration and superior technology. We derived approximately 91% of our net revenues in 2005 from products we manufactured in our Hayward, California facility. Our vertically integrated and highly technical manufacturing approach is essential to our quality control, agility in rolling out new products and ability to secure capacity at critical peak demand periods. We believe that vertical integration also provides us with cost and innovation advantages, including:

•  greater consistency and quality of output;

•  increased ability to control and optimize costs for raw materials and production;

•  fully automated image processing and print scheduling;

•  more flexibility to provide rapid, responsive order fulfillment and processing;

•  assured high-quality capacity, even during peak demand such as the fourth quarter holiday season;

•  additional insights into new and existing photo products and production processes;

•  rapid prototyping, testing and refinement of new products and services; and

•  the ability to address customer inquiries quickly.

       We have devoted more than six years to developing our proprietary software, technology and production systems that we believe give us an advantage over our competitors. It is our intention to continue investing in and protecting our proprietary technology, platforms and processes that help us differentiate ourselves from the competition and control costs.

Our Growth Strategy

       Our goal is to grow our business, build a premium lifestyle brand and become the leading online provider of products and services dedicated to improving the sharing and preservation of personal memories. We believe the combination of our focus, dedication to customers and the benefits we derive from our vertically integrated production facilities will allow us to profitably capture a significant share of our addressable market. In addition to strong consumer trends supporting our business — such as the proliferation of digital cameras, higher broadband penetration and greater adoption of Internet related e-commerce and communication services — we believe our growth will be supported by the following initiatives:

       Expand customer base. We intend to expand our customer base and continue to promote the Shutterfly brand. We will leverage existing channels, which include word-of-mouth referrals from existing customers, print advertising, catalogs, online advertising, search engine marketing and complementary strategic alliances with other e-commerce companies such as Amazon.com, Buy.com, Evite and HSN.

       Expand products and services offerings. We will continue to innovate in order to increase the breadth and depth of our products and services, including prints, photo-based products, photo-based merchandise and ancillary products. For example, in the past six quarters, we have launched

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numerous new products, including canvas prints, keepsake boxes, desk organizers, multi-media DVD slideshows, magnets, coasters, year-at-a-glance calendars, tiled mugs, playing cards, puzzles, scrapbooking supplies and frames, as well as numerous enhancements to our photo books, including new covers, layouts and page designs. In addition to new products, we have created new services, including: the ability to search, tag and organize photos; the launch of Shutterfly Studio, our consumer software application that allows for uploading, organizing, printing, sharing and editing from the desktop; a redesigned and easier to use website; a new store that makes shopping easier and more accessible; and dozens of new borders that customers can use to enhance their pictures, cards and photo books.

       Increase sales to existing customers. We intend to increase both average order size and repeat orders per customer by expanding our products and services, tailoring our offerings to encourage additional purchases for different use occasions and increasing our cross-selling and up-selling activities.

       Leverage vertical integration. We will continue to invest in making our business even more vertically integrated by adding additional in-house production capabilities. We believe this will allow us to extend our objectives to provide the highest quality products and services at the lowest possible costs, to provide exceptional fulfillment and customer service, even at peak demand periods, and to continue to innovate rapidly with new products and services.

       Incubate new lines of business. We intend to continue to leverage our existing systems and capabilities to develop additional adjacent lines of business. For example, we are in the early stages of developing our Pro Gallery service, which provides an end-to-end fulfillment solution for professional photographers seeking to sell their photos online. Photographers manage their own galleries (for example, by uploading images and setting print and product pricing), while we host the galleries and provide the printing, payment and order fulfillment functions. For our Pro Gallery line of business, we earn revenues from annual gallery maintenance fees, individual print orders and a transaction fee.

       International expansion. We intend to develop additional business opportunities through international expansion, targeting consumers in key geographies where digital camera penetration is high and where Internet usage and e-commerce are widespread.

Products and Services

       Using the Shutterfly service is easy, convenient and fun. Our website is designed to be simple, uncluttered and inviting. There are only five navigational “tabs,” which correspond to the primary activities offered by the website — Add Pictures, View & Enhance, Share Online, Order Prints and Shutterfly Store. If consumers decide to either upload pictures or purchase products, they register on the website and begin the following process:

       Upload. Customers can upload digital photos from their computer to our website one at a time, many at once through simple drag-and-drop or by using Shutterfly Studio, our new photo organization software. There are no limits to photo file sizes and the upload processes are accelerated by multi-threading, which enables photos to be uploaded simultaneously, thereby reducing image upload times. Unlike some competitive services, we do not compress image files as part of the upload process, which we believe preserves quality and photo resolution.

       Organize and find. Customers initially upload their photos into user-defined albums. We offer multiple ways to further organize and find pictures. For example, customers can automatically sort photos within albums by upload date, photo titles or original filenames. Additionally, customers can

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quickly search for photos in a number of ways, including by text, date taken, upload date and images ordered on prints or specified products. Customers can also use our “favorites” function to tag their favorite photos with a star rating system on both the website and within Shutterfly Studio.

       View and enhance. Once photos have been uploaded to Shutterfly, customers can choose to view their photos in a variety of ways, including photo slideshows. To improve picture quality, customers also have access to our free online editing and image enhancement tools. In addition to cropping and red-eye removal, we offer a variety of creative options, such as saturating photos with additional color or changing color shots to black-and-white or sepia. Customers are also able to choose from a wide variety of photo borders, and we offer free customized back printing on photos and the option to add captions to many of our products. Customers can view and enhance their photos online or on their desktop via Shutterfly Studio, which easily integrates with our website. Shutterfly Studio provides advanced viewing and enhancing capabilities such as full screen slideshows, cropping, red-, blue- and green-eye removal, sharpening, auto adjustments and captioning.

       Create. We enable customers to create a variety of personalized products from their photos, including prints in wallet, 4x6, 5x7, 8x10, 11x14, 16x20 and 20x30 sizes, greeting cards, calendars, photo books and other photo-based products and merchandise. Our highly-interactive, design-it-yourself “creation paths” help even first-time customers make professional-looking, high-quality prints and products. Customers can easily design each product by following simple step-by-step instructions and using intuitive features, such as dragging and dropping an image into a template. Our technology then generates an image of the customer’s product on screen so that customers can make any desired design choices or changes and then view the final product to ensure satisfaction before purchase. Customers can also save in-process projects and return to them at a more convenient time to finish and purchase.

       Share. We enable our customers to share images in several different ways. Customers can e-mail friends, family and colleagues with a link to an individual album that can be viewed as a slideshow of images. In order to view those images, e-mail recipients simply click on the URL link in the e-mail and view images immediately without the need to register with Shutterfly. Recipients can then order prints or save them into their own album. To save our customers time, we offer an easy way to copy names, e-mail addresses and mailing addresses from various software such as Outlook, Outlook Express, Entourage, Palm and Eudora into their Shutterfly address book. Another way to share photos is by creating a Shutterfly Collection, which is linked to a personal web address that is powered by Shutterfly, where customers can store and share an unlimited number of photo albums. Customers can invite friends and family to view the photos, add additional photos and post comments to both albums and individual photos via the Guestbook feature. To ensure the privacy of Collections, we offer users optional password protection. Shutterfly customers can create up to two free Collections. We also sponsor seasonal and topical photo contests that promote sharing of photos by our customers.

       Order and ship. We provide convenient ordering and flexible shipping options. To order a product after it is created, the customer adds it to his or her shopping cart and completes the billing and shipping information. Shipping addresses can be typed in or easily added directly from a customer’s Shutterfly address book. When a picture or product is being ordered, we flag photos of poor quality, usually due to low resolution, to alert customers of potential quality issues. This helps ensure that a customer does not order an out-of-focus or poor quality picture. Customers can ship single orders to multiple recipients. We also offer several different shipping options, such as next-day, two-day or regular service. Standard turn-around times from the time an order is placed to the time it is shipped are one business day for most print orders and two business days for other photo-based products manufactured by Shutterfly. For our photo-based merchandise manufactured on our behalf by third parties, turn-around times vary, but generally range from two to five days from the time we receive the order and transmit it to our manufacturer. We also offer premium services for addressing, stamping and mailing greeting cards directly to recipients.

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       Archive. We provide customers with permanent, unlimited storage of their photos, Collections and projects at no cost to the customer. Customers can also order a copy of their photos on a CD or DVD for an extra fee.

Marketing, Advertising and Promotion

       We use a variety of advertising, direct marketing technologies, channels, methods and strategic alliances to attract and retain our customers. These methods include direct marketing over the Internet, e-mail marketing to prospects and existing customers, search engine marketing, and traditional direct marketing mailings such as postcards and seasonal catalogs. In addition, because many of our products are either shared via the Internet or given as gifts, the appearance of our brand on the products and packaging provides ongoing distribution as well as viral advertising.

       We place advertisements that cater to women and families on websites and in publications, contract for targeted e-mail marketing services and contract for advertising placement on leading search engines. We also maintain an affiliate program under which we pay program participants for referral sales generated from hyperlinks to our website from the affiliate’s website and in promotional materials.

       We maintain strategic alliances with complementary e-commerce companies, such as Amazon.com, where we are the sole photo services provider to Amazon.com’s and Evite’s customers, as well as other marketing and promotion arrangements with companies such as Buy.com and HSN, which distribute our marketing literature and promotions with purchases of digital cameras from their programs.

       We also sponsor and manage photo contests as a turn-key solution for major corporations, such as with 1-800-Flowers.com, HSN, Lions Gate Entertainment, Petco and Procter & Gamble. These corporations promote the photo contests to their own customers, which in turn introduces new users to Shutterfly.

       In addition, from time-to-time we create co-branded versions of our website. In general, these arrangements involve payment of a commission or revenue share to these companies for sales of our products and services generated through these websites.

Technology and Production Systems

       We use a combination of proprietary and third-party technology, including the following:

       Customer relationship management, or CRM, system. Our integrated CRM system is comprised of various sophisticated tools designed to convert first-time customers into repeat buyers with increasing average order sizes by expanding customer awareness, providing targeted, segmented offers to customers and encouraging cross- and up-selling. The system uses a variety of data, including website usage patterns, order size, order frequency, products purchased, seasonality factors, image upload and share usage, as well as customer satisfaction information. This data is continually updated and refreshed in a data warehouse, from which different customer segments are identified and modified on a continuing basis for targeted marketing communications.

       By using this deep customer intelligence and ongoing analysis, we are able to offer customers a more personalized website experience and to target them with specific website promotions, discounts, specialized e-mail and direct mail offers. Our promotion engine generates special offers that are account specific and applied automatically at checkout. This enables us to run multiple offers at any given time that are targeted to specific customer profiles.

       We are also able to dynamically assign visitors to test and control groups who are shown different versions of our service. This testing enables us to continuously optimize products, pricing, promotions and user interaction with our website. We are able to run multiple tests at once, which enables us to rapidly launch new products and services and enhances our financial results.

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       Website system. Our website powers our service and e-commerce functionality. We have designed our user interface to be simple, uncluttered and inviting. There are only five navigational “tabs” that correspond to the primary activities offered by the website — Add Pictures, View & Enhance, Share Online, Order Prints and Shutterfly Store, which includes personalized product creation.

       We have designed our website system to be highly available, secure and cost-effective. We can scale to increasing numbers of customers by adding relatively inexpensive industry-standard computers and servers. We have a strong commitment to our privacy policy, and we utilize technologies such as firewalls, encryption technology for secure transmission of personal information between customers’ computers and our website system and intrusion detection systems to ensure compliance with that policy.

       Image archive. We store our customers’ images in our image archive. Once a customer uploads a photo to our website, it is copied to multiple redundant systems, including an off-site copy. At present, our image storage capacity is hundreds of terabytes. We continue to expand our storage capacity to meet increasing customer demand. Our innovative storage architecture provides extremely low storage costs, ensures the safe, secure archiving of customers’ images and delivers the speed and performance required to enable customers to access, enhance and edit their images in real-time.

       When we store and archive a customer’s image, we never alter the original image (for example, we do not reduce the data file size), which preserves the quality and integrity of the image. This also lets customers enhance the image using a duplicate, while giving them the ability to recall the original at any time.

       Render farm. Once a customer orders a photo or any photo-based product or photo-based merchandise, the render farm performs fully automated image processing on the image prior to production. The customer’s original uploaded image is retrieved from the image archive, and automatic algorithms enhance the color, contrast and sharpness of the image. The render farm also performs customer-requested edits such as crop, borders, customized back-printing and red-eye removal.

       To ensure that output is of consistent quality, we apply our proprietary ColorSure technology during this render stage. ColorSure creates an automated mapping of the image’s specific attributes to the printer’s specific print calibrations and attributes, at which time the rendered image is scheduled for production. For example, this allows a photo that is printed on a 4x6 print to look the same as a photo printed on an enlargement or in a photo book, even if they are ordered at separate times.

       Production system. We operate our own production facility in Hayward, California, which we believe is one of the largest all-digital labs in the world. Our automated production system controls our bar code-driven production processes, including order management and pick, pack and ship operations. Using complex algorithms, the production system analyzes tens of thousands of orders daily and automates the workflow into our high-volume silver halide photofinishing machines and our state-of-the-art digital offset presses.

Competition

       The market for digital photography products and services is large, evolving and intensely competitive, and we expect competition to increase in the future. We face intense competition from a wide range of companies, including the following:

•  Online digital photography services companies such as Kodak EasyShare Gallery (formerly known as Ofoto), Snapfish, which is a service of Hewlett-Packard, Sony’s ImageStation and others;

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•  “Big Box” retailers such as Wal-Mart, Costco and others that are seeking to offer low cost digital photography solutions, such as in-store fulfillment and self-service kiosks for printing, and that may, among other strategies, offer their customers heavily discounted in-store solutions that compete directly with our offerings;

•  Drug stores such as Walgreens, CVS and others that offer in-store pick-up from Internet orders;

•  Regional photography companies such as Wolf Camera and Ritz Camera that have established brands and customer bases in existing photography markets;

•  Internet portals and search engines such as Yahoo!, AOL, Google and CNET that offer broad-reaching digital photography and related solutions to their large user bases;

•  Home printing solution providers such as Hewlett-Packard, Epson and Canon, that are seeking to expand their printer and ink businesses by gaining market share in the emerging digital photography marketplace; and

•  Photo-related software companies such as Adobe, Apple, Microsoft, Corel and others.

       We believe the primary competitive factors in attracting and retaining customers are:

•  brand recognition and trust;

•  quality of products and services;

•  breadth of products and services;

•  user affinity and loyalty;

•  customer service;

•  ease of use;

•  convenience; and

•  price.

We believe that we compete favorably with respect to these factors, and that none of our competitors offers a comparable value proposition, trusted brand or singular focus.

       The level of competition in our industry is likely to increase as current competitors improve their offerings and as new participants enter the market or as industry consolidation develops. Many of our existing competitors, as well as potential new competitors, have significantly longer operating histories, larger and broader customer bases, greater brand recognition and greater financial, research and development and distribution resources. Our larger, more established and better capitalized competitors may acquire, invest in or partner with traditional and online competitors. In addition, the numerous choices for digital photography services can cause confusion for consumers, and may cause them to choose to use one of our competitors, many of whom may have greater name recognition than we do. Furthermore, some of our competitors who are seeking to establish an online presence may be able to devote substantially more resources to website and systems development. We may also face competition from new entrants that are well funded and that may choose to prioritize growing their market share and brand awareness instead of profitability. Competitors and new entrants in the digital photography products and services industries may also seek to develop new products, technologies or capabilities that could render obsolete or less competitive many of the products, services and content that we offer. We may be unable to compete successfully against current and future competitors, and competitive pressures could harm our business and prospects.

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Intellectual Property

       Protecting our intellectual property rights is part of our strategy for continued growth and competitive differentiation. We seek to protect our proprietary rights through a combination of patent, copyright, trade secret and trademark law, as well as contractual restrictions, such as confidentiality agreements and proprietary rights agreements. We enter into confidentiality and proprietary rights agreements with our employees, consultants and business partners, and control access to and distribution of our proprietary information.

       As of May 31, 2006, we had 12 issued patents and more than 30 patent applications pending in the United States. We intend to pursue corresponding patent coverage in additional countries to the extent we believe such coverage is appropriate and cost efficient. However, we cannot be certain that any of our pending applications will be granted. In addition, third parties could bring infringement, invalidity, co-inventorship or similar claims with respect to any of our currently issued patents or any patents that may be issued to us in the future. Our issued patents and patent applications relate generally to the user interface for our website, our computer network infrastructure and software, personalized photo-related products and automated workflow and digital printing.

       Our primary brand is “Shutterfly,” and we hold registrations for the Shutterfly service mark in our major markets of the United States and Canada, as well as in the European Community, Mexico, Japan, Australia and New Zealand, as well as “Shutterfly.com” registrations in the United States, Mexico, Australia and New Zealand, and “Shutterfly Express” and “Postcards by Shutterfly” service mark registrations in the United States. An additional application for the Shutterfly mark is pending in Brazil. In addition, we hold a registration for the “VividPics” service mark in the United States and Mexico, and have pending applications for additional marks, including “Shutterfly Studio” and “Shutterfly Collections.”

       We are the registrant of the Internet domain name for our website, Shutterfly.com. Domain names generally are regulated by Internet regulatory bodies and are controlled also by trademark and other related laws. If we lose the ability to use our Shutterfly mark in a particular country or our domain name, we could 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. In addition, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights could change in ways that block or interfere with our ability to use relevant domains or our current brand. Also, we might not be able to prevent third parties from registering or retaining domain names that interfere with our consumer communications or infringe or otherwise decrease the value of our trademarks and other proprietary rights. Regulatory bodies also could establish additional top-level or country-code domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not be able to acquire or maintain the domain names that utilize the name Shutterfly in all of the countries in which we currently or intend to conduct business.

Government Regulation

       The legal environment of the Internet is evolving rapidly in the United States and elsewhere. The manner in which existing laws and regulations will be applied to the Internet in general, and how they will relate to our business in particular, is unclear in many cases. For example, we often cannot be certain how existing laws will apply in the online context, including with respect to such topics as privacy, defamation, pricing, credit card fraud, advertising, taxation, sweepstakes, promotions, content regulation, quality of products and services and intellectual property ownership and infringement.

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       Numerous laws have been adopted at the national and state level in the United States that could have an impact on our business. These laws include the following:

•  The CAN-SPAM Act of 2003 and similar laws adopted by a number of states, which are intended to regulate unsolicited commercial e-mails, create criminal penalties for unmarked sexually-oriented material and e-mails containing fraudulent headers and control other abusive online marketing practices.

•  The Communications Decency Act, which gives statutory protection to online service providers who distribute third-party content.

•  The Digital Millennium Copyright Act, which is intended to reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights of others.

•  The Children’s Online Privacy Protection Act and the Prosecutorial Remedies and Other Tools to End Exploitation of Children Today Act of 2003, which are intended to restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the ability of online services to collect user information from minors. In addition, the Protection of Children From Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances.

•  The State of California has adopted statutes that require online services to report certain breaches of the security of personal data, and to report to California consumers when their personal data might be disclosed to direct marketers.

       To resolve some of the remaining legal uncertainty, we expect new laws and regulations to be adopted over time that will be directly applicable to the Internet and to our activities. Any existing or new legislation applicable to Shutterfly could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations, and could dampen the growth in the use of the Internet in general.

       We post on our website our privacy policies and practices concerning the use and disclosure of user data. Any failure by us to comply with our posted privacy policies, Federal Trade Commission requirements or other privacy-related laws and regulations could result in proceedings by governmental or regulatory bodies that could potentially harm our business, results of operations and financial condition. In this regard, there are a large number of legislative proposals before the United States Congress and various state legislative bodies regarding privacy issues related to our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could harm our business through a decrease in user registrations and revenues. These decreases could be caused by, among other possible provisions, the required use of disclaimers or other requirements before users can utilize our services.

       Due to the global nature of the Internet, it is possible that the governments of other states and foreign countries might attempt to regulate its transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments could harm our business, operating results and financial condition. We may be subject to legal liability for our online services. The law relating to the liability of providers of these online services for activities of their users is currently unsettled both within the United States and abroad. Claims may be threatened against us for aiding and abetting, defamation, negligence, copyright or trademark infringement, or other theories based on the nature and content of information to which we provide links or that may be posted online.

Employees

       As of March 31, 2006, we had 202 full time employees. Approximately 56 employees were engaged in engineering, 70 in photo lab operations, 31 in sales and marketing, 13 in customer

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service and 32 in general and administrative functions. In addition, we had one contract engineer working in the United States and three contract engineers working in Costa Rica. During the peak holiday season, we obtain contract workers on a temporary basis from third-party outsourcing firms. For example, during the fourth quarter of 2005, we used more than 475 of these temporary workers to assist in our production and fulfillment operations during high-demand periods. None of our employees is represented by a labor union or is covered by a collective bargaining agreement. We have never experienced any employment-related work stoppages and consider our employee relations to be good.

Facilities

       We maintain our corporate headquarters in Redwood City, California in a leased facility of approximately 48,384 square feet. The lease for this facility expires on May 31, 2010.

       We maintain our production and fulfillment operations in Hayward, California in leased facilities totalling approximately 71,708 square feet. The lease for the facility for approximately 25,206 square feet expires on September 30, 2007. We have an option to extend the lease for five years and a first right of refusal to lease any immediately adjacent contiguous space. The leases for the other 46,502 square feet expire on July 31, 2010.

       We believe that our existing facilities are adequate to meet our needs through the first half of 2007, although we expect to require additional production and fulfillment facilities to handle future growth. We believe that suitable additional space will be available in the future on commercially reasonably terms as needed.

Legal Proceedings

       In the ordinary course of our business, we are subject to periodic lawsuits, investigations and claims. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party is likely to harm our business, results of operations, cash flows or financial condition.

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MANAGEMENT

Executive Officers and Directors

       The following table sets forth certain information regarding our executive officers and directors, and their ages as of June 27, 2006.

Name	Age		Position
Jeffrey T. Housenbold		36	President, Chief Executive Officer and Director
Stephen E. Recht		54	Chief Financial Officer
Stanford S. Au		46	Senior Vice President, Technology
Douglas J. Galen		44	Senior Vice President, Business and Corporate Development
Jeannine M. Smith Thomas		45	Senior Vice President, Operations
Andrew F. Young		48	Chief Marketing Officer
John A. Kaelle		37	Vice President, Finance
James H. Clark(2)		62	Chairman of the Board
Patricia A. House(1)(2)		52	Director
Eric J. Keller(1)		54	Director
Nancy J. Schoendorf(2)(3)		51	Director
James N. White(1)(3)		44	Director

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

(3) Member of the Governance Committee.

       Jeffrey T. Housenbold has served as our President, Chief Executive Officer and a director since January 2005. Prior to joining Shutterfly, Mr. Housenbold served as Vice President of Business Development and Internet Marketing at eBay Inc., an online marketplace for the sale of goods and services, from January 2002 to January 2005. Previously, he was the Vice President & General Manager, Business-to-Consumer Group at eBay from June 2001 to January 2002, and served as Vice President, Mergers & Acquisitions of eBay from March 2001 to June 2001. Mr. Housenbold holds two Bachelor of Science degrees in Economics and Business Administration from Carnegie Mellon University and a Master of Business Administration degree from the Harvard Graduate School of Business Administration.

       Stephen E. Recht has served as our Chief Financial Officer since June 2004. Prior to joining Shutterfly, Mr. Recht served as Chief Operating Officer and Chief Financial Officer at SkyStream Networks, Inc., a provider of IP video delivery platforms, from August 2003 to June 2004. Previously, he was the Chief Financial Officer at Brience, Inc., a provider of mobile infrastructure software, from July 2001 to May 2002, and from May 2002 to July 2003, he served as its Chief Executive Officer. Mr. Recht was previously the Chief Financial Officer at Allegis, Inc., an application services provider for partner relationship management software, from April 2000 to May 2001. Mr. Recht was the Chief Financial Officer of NetGravity Inc., an Internet advertising provider that was acquired by DoubleClick Inc., from November 1996 to October 1999. Mr. Recht also served as a Director and Chair of the Audit Committee of the Board of Directors of Marimba, Inc., a provider of products and services for software change and configuration management, from August 2003 to July 2004. Mr. Recht holds a Bachelor of Arts degree in Economics from Stanford University and a Master of Business Administration degree from the Wharton School at the University of Pennsylvania.

       Stanford S. Au has served as our Senior Vice President, Technology since April 2006. Prior to joining Shutterfly, Mr. Au served as Vice President of Engineering at WebEx Communications, Inc., a provider of online meeting services, from October 2003 to November 2005. Previously, he was the Senior Vice President of Engineering at Virage, Inc., a provider of security and surveillance systems,

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from January 2002 to August 2003, and served as Vice President of Engineering and General Manager of the Internet Bill Presentment and Payment (IBPP) business at AOL Time Warner Inc., a media and communications company, from July 1997 to September 2001. Mr. Au holds a Bachelor of Science degree in Electrical Engineering and Computer Science from the University of California, Berkeley.

       Douglas J. Galen has served as our Senior Vice President, Business and Corporate Development since March 2005. Prior to joining Shutterfly, Mr. Galen served as President of Fourth Fleet Financial Inc., an auto finance company, from March 2004 to March 2005, as Vice President of New Ventures for eBay from April 2001 to March 2004, and Vice President of Sales and Business Development for E-LOAN, Inc., a provider of loans, lines of credit and credit card referrals, from June 1997 to December 2000. Mr. Galen serves on the board of directors of Positive Coaching Alliance. He holds a Master of Business Administration degree in Real Estate and Finance and a Bachelor of Arts degree in Economics from the University of California, Berkeley.

       Jeannine M. Smith Thomas has served as our Senior Vice President, Operations since October 2005. Ms. Smith Thomas has held the following positions within Shutterfly: Senior Software Engineer from September 1999 to August 2000, Director of Lab Automation Software from August 2000 to August 2001 and Chief Engineering Officer from August 2001 to March 2006. Ms. Smith Thomas became acting Senior Vice President of Operations in October 2005, which she assumed as a permanent role in January 2006. She relinquished her title of Chief Engineering Officer in April 2006 when Mr. Au was hired as Senior Vice President, Technology. Prior to joining Shutterfly, Ms. Smith Thomas held multiple positions at Silicon Graphics, Inc., a provider of workstations and servers for technical and entertainment communities, including principal engineer and engineering manager, from September 1991 to September 1998. She holds a Bachelor of Science degree in Electrical Engineering from Stanford University.

       Andrew F. Young has served as our Chief Marketing Officer since July 2001. Prior to joining Shutterfly, Mr. Young served as Vice President of Marketing at Vivaldi Networks, a retail-based technology company, from July 2000 to May 2001. Previously, he was the Senior Vice President of Marketing in the Interactive Division at Mattel, Inc., a leading toy and game manufacturer, from January 1998 to January 2000, and served as Director of Marketing at Del Monte Foods Company, a manufacturer and distributor of canned fruit and vegetables, from May 1991 to December 1997. Mr. Young holds a Bachelor of Arts degree in Economics from the University of Virginia and a Master in Business Administration degree from the Wharton School at the University of Pennsylvania.

       John A. Kaelle has served as our Vice President, Finance since October 2004. Prior to joining Shutterfly, Mr. Kaelle was a Vice President in the Mergers and Acquisitions group at Thomas Weisel Partners LLC, an investment banking firm, from August 2000 to July 2004. Previously, he was the Assistant Controller at TriNet Corporate Realty Trust, Inc., a real estate investment trust, from April 1997 until July 1998. Mr. Kaelle holds a Bachelor of Arts degree in Economics from the University of Michigan, a Masters degree in Taxation from Golden Gate University and a Master of Business Administration degree in Finance from The Wharton School at the University of Pennsylvania. Mr. Kaelle is a certified public accountant in the State of California.

       James H. Clark has served on our board of directors since June 1999 and as our Chairman since June 1999. Mr. Clark is currently an independent investor. Mr. Clark is the founder of Netscape Communications Corporation, a provider of web browsers and other Internet client and server software products; Healtheon/ Web MD Corp., an online provider of health information services; Silicon Graphics, Inc., a provider of graphical computing workstations; and myCFO, Inc., a wealth advisory firm. He holds a Bachelor of Science degree and a Masters of Science in Physics from the University of New Orleans, and a Ph.D. in Computer Science from the University of Utah.

       Patricia A. House has served on our board of directors since January 2006. Ms. House is a co-founder of Siebel Systems, Inc., a provider of enterprise applications and a wholly owned subsidiary

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of Oracle Corporation. From January 2001 to February 2006, Ms. House served as Siebel Systems, Inc.’s Vice Chairman, Co-Founder and Vice President of Strategic Planning. From February 1996 to January 2001, she served as its Co-Founder and Executive Vice President and from July 1993 to February 1996 as its Co-Founder and Senior Vice President of Marketing. Ms. House holds a Bachelor of Arts degree in Education from Western Michigan University. She currently serves on the board of directors of BDNA Corporation, a provider of business software, and Levi Strauss & Co., a jeans and casual wear manufacturer.

       Eric J. Keller has served on our board of directors since March 2006. Mr. Keller has been the Chief Executive Officer of Movaris, Inc., a financial software company, since March 2004. From September 2003 to February 2004 and from September 2001 to December 2001, Mr. Keller served as a consultant to various technology companies. From January 2002 to September 2002, Mr. Keller served as interim Chief Financial Officer to Cardica, Inc., a medical device company. From October 2002 to August 2003, he served as President and Chief Executive Officer of Endovasix, Inc., a medical device company. From February 2000 to July 2001, Mr. Keller served as Chief Financial Officer of Corio, Inc., an enterprise application service provider. Mr. Keller holds a Bachelor of Science degree in Industrial Relations from Cornell University and a Master of Business Administration degree from the University of California, Berkeley.

       Nancy J. Schoendorf has served on our board of directors since February 2004. Ms. Schoendorf has been a managing partner with Mohr, Davidow Ventures, a venture capital firm, since June 1993. Previously, she served as director of systems software development at Sun Microsystems, Inc., a provider of network computing products and services, from 1988 to 1989, as an officer and Vice President of Research and Development and Product Development at Software Publishing Corporation, an international supplier of business productivity software, from 1985 to 1988, and as an engineering section manager at Hewlett-Packard Company, a global technology company, from 1976 to 1985. Ms. Schoendorf holds a Bachelor of Science degree in Computer Science and Mathematics from Iowa State University and a Master of Business Administration degree from the University of Santa Clara. She currently serves on the board of directors of Agile Software Corporation, a provider of product lifecycle management solutions, as well as several privately held companies.

       James N. White has served on our board of directors since November 2005. Mr. White has been a managing director at Sutter Hill Ventures, a venture capital firm, since October 2000. Mr. White previously held senior executive positions at Macromedia, Inc., a software developer; Silicon Graphics, Inc., a provider of graphical computing workstations; and Hewlett-Packard Company. Mr. White serves on the board of directors of numerous privately held companies. Mr. White holds a Bachelor of Science degree in Industrial Engineering from Northwestern University and a Master of Business Administration degree from the Harvard Graduate School of Business Administration.

Board of Directors Composition

       The authorized number of directors under our restated bylaws that will become effective immediately following the completion of this offering is seven; however, our board of directors currently consists of six members. Each director serves until our next annual meeting or until his or her successor is duly elected and qualified. Upon the completion of this offering, our common stock will be quoted on the Nasdaq National Market. The rules of The Nasdaq Stock Market require that a majority of the members of our board of directors be independent within specified periods following the completion of this offering. We believe that five of our directors are independent as required by the rules of The Nasdaq Stock Market: James H. Clark, Patricia A. House, Eric J. Keller, Nancy J. Schoendorf and James N. White.

       Mr. Clark, Ms. Schoendorf and Mr. White are affiliated with three of our principal stockholders, Monaco Partners, Mohr, Davidow Ventures and Sutter Hill Ventures, respectively, and were

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appointed to our board of directors under the provisions of a voting agreement between us and certain of our stockholders. Upon the completion of this offering, these board representation rights will terminate and no stockholders will have any contractual rights with respect to board representation.

       Immediately following the completion of this offering, we will file our restated certificate of incorporation. The restated certificate of incorporation will divide our board of directors into three classes, each with staggered three-year terms:

•  Class I directors, whose initial term will expire at the annual meeting of stockholders expected to be held in 2007;

•  Class II directors, whose initial term will expire at the annual meeting of stockholders expected to be held in 2008; and

•  Class III directors, whose initial term will expire at the annual meeting of stockholders expected to be held in 2009.

       At each annual meeting of stockholders after the initial classification, the successors to directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following election. Upon the completion of this offering, the Class I directors will consist of                     and                     ; the Class II directors will consist of                     and                     ; and the Class III directors will consist of                     and                     . As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms.

       In addition, we intend to amend our bylaws upon the completion of this offering to provide that only the board of directors may fill vacancies on the board of directors until the next annual meeting of stockholders. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.

       This classification of the board of directors and the provisions described above may have the effect of delaying or preventing changes in our control or management. See “Description of Capital Stock — Anti-Takeover Provisions — Restated Certificate of Incorporation and Restated Bylaw Provisions.”

Board Committees

       Our board of directors has established an audit committee, a compensation committee and a governance committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignations or until otherwise determined by the board of directors.

       Audit Committee. Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee is directly responsible for: the selection, compensation, retention and oversight of our independent registered public accounting firm; evaluating our independent registered public accounting firm’s continuing independence; approving the fees and other significant compensation to be paid to our independent registered public accounting firm; reviewing and discussing with management and our independent registered public accounting firm the results of the quarterly and annual financial statements; approving the retention of our independent registered public accounting firm to perform any proposed permissible non-audit services; reviewing and discussing with management and our independent registered public accounting firm our selection, application and disclosure of our critical accounting policies; discussing with our independent registered public accounting firm both privately and with management the adequacy of our accounting and financial reporting processes and systems of internal control; reviewing any significant deficiencies and material weaknesses in the design or operation over

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internal control over financial reporting; and annually reviewing and evaluating the composition and performance of the audit committee, including compliance of the audit committee with its charter.

       The current members of our audit committee are Eric J. Keller, who is the chair of the audit committee, James N. White and Patricia A. House. We believe that each member of our audit committee meets the requirements for independence and financial literacy under the applicable rules and regulations of the SEC and The Nasdaq Stock Market. Mr. Keller is our audit committee financial expert, as defined under applicable SEC rules. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and The Nasdaq Stock Market.

       Compensation Committee. Our compensation committee evaluates and approves policy relating to compensation and benefits of our officers and employees. Among other matters, the compensation committee is responsible for reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer and other executive officers; evaluating the performance of these officers in light of those goals and objectives and setting the compensation of these officers based on such evaluations; administering the issuance of stock options and other awards under our stock plans; annually reviewing and making recommendations to the board of directors with respect to all cash and equity-based incentive compensation plans and arrangements; and annually reviewing and evaluating the composition and performance of the compensation committee, including compliance of the compensation committee with its charter.

       The current members of our compensation committee are Patricia A. House, who is the chair of the compensation committee, James H. Clark and Nancy J. Schoendorf. We believe that each member of our compensation committee is an “independent director” under the applicable rules and regulations of The Nasdaq Stock Market, a “non-employee director” within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, and an “outside director,” as that term is defined under Section 162(m) of the Internal Revenue Code of 1986.

       Governance Committee. The governance committee is responsible for making recommendations to the board of directors regarding candidates for directorship and the size, structure and composition of our board of directors and committees of the board of directors. Among other things, the governance committee is responsible for identifying, evaluating and nominating candidates for appointment or election as members of our board of directors; developing, recommending and evaluating a code of conduct and ethics; recommending that our board of directors establish special committees as may be desirable from time to time; recommending policies and procedures for stockholder nomination of directors and annually reviewing and evaluating the composition and performance of the governance committee, including compliance of the governance committee with its charter.

       The current members of the governance committee are James N. White, who is the chair of the governance committee, and Nancy J. Schoendorf. We believe that the members of our governance committee are “independent directors” under the applicable rules and regulations of The Nasdaq Stock Market.

Compensation Committee Interlocks and Insider Participation

       None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers serves or in the past has served as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving on our board of directors or our compensation committee.

Director Compensation

       On January 20, 2006, we granted Patricia A. House an option to purchase 50,000 shares of our common stock with an exercise price of $10.00 per share and on May 9, 2006 we granted

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Eric J. Keller an option to purchase 50,000 shares of our common stock with an exercise price of $10.39 per share, in each case pursuant to the terms and conditions of our 1999 Stock Plan.

       Each independent director who is not affiliated with one of our major stockholders receives an initial stock option grant of 50,000 shares of our common stock upon joining our board of directors. The shares subject to the option vest monthly over a three-year period from the date of grant.

       Upon each anniversary of an independent, non-major stockholder affiliated director’s start date, the director will receive an additional stock option grant of 10,000 shares of our common stock that will vest monthly over a three-year period from the date of grant.

       In addition, if the chairman of the audit committee is an independent, non-major stockholder affiliated director, each year such director will receive a stock option grant of 8,333 shares of our common stock that will vest monthly over a 12-month period from the date of grant.

Executive Compensation

       The following table presents compensation information for the year ended 2005 paid to or accrued for each individual who served as our Chief Executive Officer at any time in 2005 and each of our four other most highly compensated executive officers whose aggregate salary and bonus was more than $100,000. We refer to these officers collectively as our named executive officers.

Summary Compensation Table

							Long-Term
							Compensation
			Annual
			Compensation
							Securities
							Underlying
Name and Principal Position	Year		Salary		Bonus		Options
Jeffrey T. Housenbold, President and Chief Executive Officer(1)		2005	$	263,542	$	137,500		1,038,146
Stephen E. Recht, Chief Financial Officer		2005	$	235,000	$	35,250		23,200
Jeannine M. Smith Thomas, Senior Vice President, Operations		2005	$	210,000	$	25,200		11,600
Andrew F. Young, Chief Marketing Officer		2005	$	220,000	$	17,600		11,600
Douglas J. Galen, Senior Vice President, Business and Corporate Development(2)		2005	$	169,615	$	25,000		200,000

(1)	Mr. Housenbold joined us in January 2005. Mr. Housenbold’s annualized base salary for 2005 was $275,000.
(2)	Mr. Galen joined us in March 2005. Mr. Galen’s annualized base salary for 2005 was $225,000.

Option Grants in 2005

       The following table presents the stock option grants during 2005 to the named executive officers.

       These options vest over four years, with 25% vesting after one year and an additional 1/48th of the total number of shares vesting each month thereafter. Options expire ten years from the date of grant. Options were granted at an exercise price equal to the fair market value of our common stock as determined by our board as of the date of grant. In 2005, we granted to our employees options to purchase a total of 2,372,207 shares of our common stock.

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       Potential realizable values are computed by:

•  multiplying the number of shares of common stock subject to a given option by the assumed initial public offering price of $           per share;

•  assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rates shown in the table for the entire ten-year term of the option; and

•  subtracting from that result the aggregate option exercise price.

       The 5% and 10% assumed annual rates of stock price appreciation are hypothetical rates required to be presented by the rules of the SEC and do not represent our estimate or projection of future common stock prices.

Individual Grants

										Potential Realizable
										Value at Assumed
			Percent of							Annual Rates of
	Number of		Total							Stock Price
	Securities		Options							Appreciation for
	Underlying		Granted to			Exercise				Option Term
	Options		Employees			Price		Expiration
Name	Granted		in 2005			Per Share		Date		5%	10%
Jeffrey T. Housenbold		1,038,146		43.8	%	$	5.00		1/16/2015
Stephen E. Recht		23,200		1.0			5.50		8/17/2015
Jeannine M. Smith Thomas		11,600		0.5			5.50		8/17/2015
Andrew F. Young		11,600		0.5			5.50		8/17/2015
Douglas J. Galen		200,000		8.4			5.00		3/15/2015

       In May 2006, we granted Jeffrey T. Housenbold, Stephen E. Recht, Jeannine M. Smith Thomas, Andrew F. Young and Douglas J. Galen options to purchase 250,000, 47,800, 40,000, 40,000 and 50,000 shares of our common stock, respectively, each at an exercise price of $10.39 per share and each pursuant to the terms and conditions of our 1999 Stock Plan. Each of these options vest as to 25% of the shares subject to the option on the first anniversary of the date of grant and as to an additional 1/48th of the total number of shares subject to the option at the end of each full month thereafter. Each of these options may be exercised in full prior to vesting.

Aggregated Option Exercises in 2005 and Option Values as of December 31, 2005

       The following table presents the number of shares of our common stock subject to options exercised in 2005, and the number of shares of our common stock subject to exercisable and unexercisable stock options held as of December 31, 2005 by the named executive officers. There was no public trading for our stock as of December 31, 2005. Accordingly, these values have been calculated on the basis of the assumed initial public offering price of $           per share, less the applicable exercise price per share, multiplied by the number of shares issued or issuable, as the case may be, on the exercise of the option. All options were granted under our 1999 Stock Plan. These options generally vest as to 25% of the shares subject to the option on the first anniversary of the date of grant and as to an additional 1/48th of the total number of shares subject to the option at the end of each full month thereafter. They may be exercised in full prior to vesting.

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	Number of Securities				Value of Unexercised
	Underlying Unexercised				In-the-Money Options
	Options at December 31, 2005				at December 31, 2005
Name	Exercisable		Unexercisable		Exercisable	Unexercisable
Jeffrey T. Housenbold		1,038,146		—	$	$	—
Stephen E. Recht		153,200		—			—
Jeannine M. Smith Thomas		149,600		—			—
Andrew F. Young		181,600		—			—
Douglas J. Galen		200,000		—			—

Employment Contracts, Termination of Employment and Change-in-Control Arrangements

       We have entered into employment, termination and change-in-control arrangements with the following executive officers, which are summarized below:

       Jeffrey T. Housenbold. Mr. Housenbold’s employment offer letter provides for an annual salary of $275,000, with an annual bonus of up to 50% of his annual base salary. His employment with us is at will, such that we have the right to terminate his employment at any time with or without cause.

       Mr. Housenbold’s offer letter provides that if within 12 months following a change of control of Shutterfly we terminate his employment without cause or if Mr. Housenbold terminates his employment for good reason (including an adverse change in title, responsibility or authority, a relocation of employment location more than 60 miles from our current headquarters or a material reduction in base salary), Mr. Housenbold will receive as severance 15 months’ salary plus 125% of the maximum target bonus for the year in which the termination occurred, and all unvested shares of our common stock subject to options granted to Mr. Housenbold will fully vest.

       We have also agreed that in the event we terminate Mr. Housenbold’s employment without cause or if Mr. Housenbold terminates his employment for good reason, Mr. Housenbold will receive 12 months salary plus the maximum target bonus for the year in which the termination occurred as severance, and 12 months of unvested shares of our common stock subject to options granted to Mr. Housenbold will fully vest. Our obligation to make any severance payments is expressly conditioned upon Mr. Housenbold’s execution and delivery of a general release and waiver of all claims.

       In the event that a portion of the severance and other benefits provided to Mr. Housenbold under the offer letter or any other agreement, benefit, plan or policy of Shutterfly are subject to a specified federal excise tax in connection with a change of control, such severance and other benefits shall be reduced on a pre-tax basis if necessary to provide Mr. Housenbold with a greater amount of severance and other benefits on an after-tax basis.

       For purposes of Mr. Housenbold’s employment offer letter, a change of control includes: (1) an acquisition of 50% or more of our outstanding voting stock by any person or entity; (2) a merger or consolidation of Shutterfly after which our then-current stockholders own less than a majority of the voting power of the surviving entity; (3) a sale of all or substantially all of our assets; or (4) a liquidation or dissolution of Shutterfly.

       Stephen E. Recht. Mr. Recht’s employment offer letter provides for an annual salary of $235,000, with a quarterly bonus of up to 25% of his annual base salary earned during that quarter. His employment with us is at will, such that we have the right to terminate his employment any time with or without cause.

       Mr. Recht’s offer letter provides that in the event of a change of control, merger or acquisition of Shutterfly, and in connection with the change of control, merger or acquisition, Mr. Recht is no longer our Chief Financial Officer, Mr. Recht will receive six months’ salary as severance, and 12 months of unvested shares of our common stock subject to options granted to Mr. Recht will fully

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vest. However, in the event of a change of control, merger or acquisition of Shutterfly where Mr. Recht continues to report to Shutterfly, Mr. Recht will not receive such severance and acceleration.

       We have also agreed that in the event we terminate Mr. Recht’s employment without cause, he will receive 12 months’ salary as severance and 12 months of unvested shares of our common stock subject to options granted to Mr. Recht will fully vest. Our obligation to make any severance payments is expressly conditioned upon Mr. Recht’s execution and delivery of a general release and waiver of all claims.

       For purposes of Mr. Recht’s employment offer letter, a change of control includes: (1) a merger or consolidation of Shutterfly after which our then-current stockholders own less than a majority of the voting power of the surviving entity or (2) a sale or transfer of all or substantially all of our assets.

       Jeannine M. Smith Thomas. Ms. Smith Thomas’ employment offer letter provides for a monthly salary of $14,099, with a quarterly bonus of up to $5,000. Ms. Smith Thomas’ current salary is $210,000. Her employment with us is at will, such that we have the right to terminate her employment any time with or without cause.

       Ms. Smith Thomas’ offer letter provides that in the event of a change of control, merger or acquisition of Shutterfly and within 12 months following the change of control, merger or acquisition, we terminate her employment without cause or if Ms. Smith Thomas terminates her employment for good reason (including an adverse change in title, responsibility or authority, a relocation of employment location more than 35 miles from our current headquarters or a material reduction in base salary), all unvested shares of our common stock subject to options granted to Ms. Smith Thomas will fully vest.

       For purposes of Ms. Smith Thomas’ employment offer letter, a change of control includes: (1) a merger or consolidation of Shutterfly after which our then-current stockholders own less than a majority of the voting power of the surviving entity or (2) a sale or transfer of all or substantially all of our assets.

       Andrew F. Young. Mr. Young’s employment offer letter provides for a monthly salary of $16,667.67, with a quarterly bonus of up to $5,000. Mr. Young’s current salary is $220,000. His employment with us is at will, such that we have the right to terminate his employment any time with or without cause.

       Mr. Young’s offer letter provides that if we terminate his employment without cause, Mr. Young will receive six months’ salary as severance. Our obligation to make any severance payment is expressly conditioned upon Mr. Young’s execution and delivery of a general release and waiver of all claims.

       Douglas J. Galen. Mr. Galen’s employment offer letter provides for an annual salary of $225,000, with a bonus to be determined by our compensation committee. His employment with us is at will, such that we have the right to terminate his employment any time with or without cause.

       Mr. Galen’s offer letter provides that in the event of a change of control, merger or acquisition of Shutterfly and in connection with the change of control, merger or acquisition, (1) Mr. Galen is no longer our Senior Vice President of Business Development, (2) Mr. Galen’s role is materially diminished or (3) our corporate office are relocated from our current headquarters and Mr. Galen chooses not to relocate, Mr. Galen will receive six months’ salary as severance and 12 months of unvested shares of our common stock subject to options granted to Mr. Galen will fully vest. However, in the event of a change of control, merger or acquisition of Shutterfly where Mr. Galen continues to report to the board of directors of Shutterfly, Mr. Galen will not receive such severance and acceleration.

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       We have also agreed that in the event we terminate Mr. Galen’s employment without cause, Mr. Galen will receive six months salary as severance and six months of unvested shares of our common stock subject to options granted to Mr. Galen will fully vest. Our obligation to make any severance payments is expressly conditioned upon Mr. Galen’s execution and delivery of a general release and waiver of all claims.

       For purposes of Mr. Galen’s employment offer letter, a change of control includes: (1) a merger or consolidation of Shutterfly after which our then-current stockholders own less than a majority of the voting power of the surviving entity or (2) a sale or transfer of all or substantially all of our assets.

       Stanford S. Au. Mr. Au’s employment offer letter provides for an annual salary of $235,000, with a hiring bonus of $15,000. If Mr. Au is terminated prior to one complete year of service, Mr. Au will be responsible for reimbursing to us the prorated portion of his hire bonus. His employment with us is at will, such that we have the right to terminate his employment any time with or without cause.

       Mr. Au’s offer letter provides that in the event of a change of control, merger or acquisition of Shutterfly and in connection with the change of control, merger or acquisition, (1) Mr. Au is no longer our Senior Vice President of Technology, (2) experiences a mutual diminishment in responsibility or authority or (3) a relocation of employment location more than 50 miles from our current headquarters and Mr. Au chooses not to relocate, Mr. Au will receive six months salary as severance and 12 months of unvested shares of our common stock subject to options granted to Mr. Au will fully vest. However, in the event of a change of control, merger or acquisition of Shutterfly where Mr. Au continues to report to Shutterfly, Mr. Au will not receive such severance and acceleration.

       For purposes of Mr. Au’s employment offer letter, a change of control includes: (1) a merger or consolidation of Shutterfly after which our then-current stockholders own less than a majority of the voting power of the surviving entity or (2) a sale or transfer of all or substantially all of our assets.

Employee Benefit Plans

1999 Stock Plan

       Our board of directors adopted, and our stockholders approved, our 1999 Stock Plan in September 1999. We reserved a pool of shares of our common stock for issuance to employees and other service providers pursuant to awards granted under our 1999 Stock Plan, as amended, and under other awards granted outside of the 1999 Stock Plan. Awards can be either stock options or purchase rights. With respect to stock options, our 1999 Stock Plan provides for the grant of both incentive stock options that qualify for favorable tax treatment under Section 422 of the Internal Revenue Code for their recipients and nonqualified stock options. Incentive stock options may be granted only to our employees or employees of any of our subsidiaries. Nonqualified stock options may be granted to our employees, officers, directors, consultants, independent contractors and advisors and those of any of our subsidiaries. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of the fair market value of our common stock on the date of grant. The maximum permitted term of options granted under our 1999 Stock Plan is ten years. In the event of a change in control, the 1999 Stock Plan provides that options held by current employees, directors and consultants that are not assumed will immediately vest in full prior to such change in control and all options shall expire on the consummation of the change in control.

       As of March 31, 2006, options to purchase 3,198,994 shares of our common stock granted from the 1999 Stock Plan remained outstanding and 1,755,738 shares of our common stock remained available for issuance upon the exercise of awards that may be granted from the 1999 Stock Plan. The options outstanding as of March 31, 2006 had a weighted average exercise price of

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approximately $4.41 per share. Our 2006 Equity Incentive Plan will be effective upon the completion of this offering. As a result, no awards will be granted from the 1999 Stock Plan after the date of this prospectus and the 1999 Stock Plan will terminate. However, any outstanding options granted from the 1999 Stock Plan will remain outstanding, subject to the terms of our 1999 Stock Plan and stock option agreements, until the options are exercised or until they terminate or expire by their terms. Options granted from the 1999 Stock Plan are subject to terms similar to those described below with respect to options granted under our 2006 Equity Incentive Plan.

       If we are party to a merger or consolidation, then, as part of the agreed terms of such transaction, outstanding stock options may be continued (if we are a surviving corporation), assumed or substituted by the surviving corporation, or cancelled without payment to their holders.

2006 Equity Incentive Plan

       Our 2006 Equity Incentive Plan will become effective on the date of this prospectus and will serve as the successor to our 1999 Stock Plan. We have reserved 1,358,352 shares of our common stock to be issued under our 2006 Equity Incentive Plan. In addition, shares under our 1999 Stock Plan not issued or subject to outstanding grants on the date of this prospectus, and any shares issued under the 1999 Stock Plan that are forfeited or repurchased by us or that are issuable upon exercise of options that expire or become unexercisable for any reason without having been exercised in full, will be available for grant and issuance under our 2006 Equity Incentive Plan. The number of shares available for grant and issuance under the 2006 Equity Incentive Plan will be increased on January 1 of each of 2008 through 2010 by an amount equal to the lesser of (1) 4.62% of our shares outstanding on the immediately preceding December 31 and (2) a lesser number of shares as may be determined by our board of directors in its discretion. In addition, shares will again be available for grant and issuance under our 2006 Equity Incentive Plan that are subject to:

•  issuance upon exercise of an option granted under our 2006 Equity Incentive Plan and that cease to be subject to the option for any reason other than exercise of the option;

•  an award granted under our 2006 Equity Incentive Plan and that are subsequently forfeited or repurchased by us at the original issue price; or

•  an award granted under our 2006 Equity Incentive Plan that otherwise terminates without shares being issued.

       Our 2006 Equity Incentive Plan will terminate after ten years from the date our board of directors approves the plan, unless it is terminated earlier by our board of directors. The plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, restricted stock units and stock bonuses. No person is eligible to receive more than                      shares in any calendar year under the plan other than a new employee of ours or a new employee of any parent or subsidiary of ours, who will be eligible to receive no more than                      shares under the plan in the calendar year in which the employee commences employment.

       Our 2006 Equity Incentive Plan will be administered by our compensation committee, all of the members of which are non-employee directors under applicable federal securities laws and outside directors as defined under applicable federal tax laws. The compensation committee will have the authority to construe and interpret the plan, grant awards and make all other determinations necessary or advisable for the administration of the plan.

       Our 2006 Equity Incentive Plan provides for the grant of incentive stock options that qualify under Section 422 of the Internal Revenue Code and may be granted only to our employees or employees of any parent or subsidiary of ours. No more than 7,000,000 shares will be issued pursuant to the grant of incentive stock options. All awards other than incentive stock options may be granted to our employees, officers, directors, consultants, independent contractors and advisors or any parent or subsidiary of ours, provided the consultants, independent contractors and advisors render services not in connection with the offer and sale of securities in a capital-raising transaction.

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The exercise price of stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of that value. The exercise price of nonqualified stock options will be determined by our compensation committee at the time of grant.

       Our compensation committee may provide for options to be exercised only as they vest or to be immediately exercisable with the shares issued subject to our right of repurchase that lapses as the shares vest. In general, options will vest over a four-year period. The maximum term of options granted under our 2006 Equity Incentive Plan is ten years.

       A restricted stock award is an offer by us to sell shares of our common stock subject to restrictions. The price of a restricted stock award will be determined by the compensation committee. Unless otherwise determined by the compensation committee at the time of award, vesting ceases on the date the participant no longer provides services to us and unvested shares are forfeited to us.

       Stock bonuses are granted as additional compensation for performance, and therefore, are not issued in exchange for cash.

       Stock appreciation rights provide for a payment, or payments, in cash or shares of common stock, to the holder based upon the difference between the fair market value of our common stock on the date of exercise over the stated exercise price up to a maximum amount of cash or number of shares. Stock appreciation rights may vest based on time or achievement of performance conditions.

       Restricted stock units represent the right to receive shares of our common stock at a specified date in the future, subject to forfeiture of such right due to termination of employment or failure to achieve certain performance conditions. If the restricted stock unit has not been forfeited, then on the date specified in the restricted stock unit agreement, we will deliver to the holder of the restricted stock unit whole shares of our common stock, cash or a combination of our common stock and cash.

       Awards granted under our 2006 Equity Incentive Plan may not be transferred in any manner other than by will or by the laws of descent and distribution or as determined by our compensation committee. Unless otherwise restricted by our compensation committee, awards that are nonqualified stock options may be exercised during the lifetime of the optionee only by the optionee, the optionee’s guardian or legal representative or a family member of the optionee who has acquired the option by a permitted transfer. Awards that are incentive stock options may be exercised during the lifetime of the optionee only by the optionee or the optionee’s guardian or legal representative. Options granted under our 2006 Equity Incentive Plan generally may be exercised for a period of three months after the termination of the optionee’s service to us or any parent or subsidiary of ours. Options will generally terminate immediately upon termination of employment for cause.

       The purchase price for restricted stock will be determined by our compensation committee. Stock bonuses may be issued for past services or may be awarded upon the completion of services or performance goals.

       If we are dissolved or liquidated or have a change in control transaction, the vesting of all outstanding awards may be assumed or substituted by the successor company. Outstanding awards that are not assumed or substituted will expire upon the dissolution, liquidation or closing of a change in control transaction. In the discretion of our compensation committee, the vesting of these awards may be accelerated upon the occurrence of one of these transactions.

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401(k) Plan

       We sponsor a retirement plan intended to qualify for favorable tax treatment under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended, or the Code. Employees who have attained at least 21 years of age are generally eligible to participate in the plan on their first pay period. Participants may make pre-tax contributions to the plan from their eligible earnings up to the statutorily prescribed annual limit on pre-tax contributions under the Code. Participants 50 years of age or older may contribute additional amounts based on the statutory limits for catch-up contributions. We currently make no company contributions on behalf of participants to the plan, but can do so in the discretion of our board of directors. Pre-tax contributions by participants to the plan and the income earned on such contributions are generally not taxable to participants until withdrawn. Participant contributions are held in trust as required by law. Each participant’s retirement benefit under the plan is determined solely on the basis of contributions made on such participant’s behalf and earnings thereon. No minimum benefit is provided under the plan.

Indemnification of Directors and Executive Officers and Limitation of Liability

       Our restated certificate of incorporation that will become effective immediately following the completion of this offering includes a provision that eliminates the personal liability of our directors for monetary damages resulting from breach of fiduciary duty as directors, except for liability:

•  for any breach of the director’s duty of loyalty to us or our stockholders;

•  for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

•  under section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or

•  for any transaction from which the director derived an improper personal benefit.

       Our restated bylaws that will become effective immediately following the completion of this offering provide that:

•  we must indemnify our directors and executive officers to the fullest extent permitted by Delaware law, subject to very limited exceptions;

•  we may indemnify our other employees and agents as permitted by Delaware law;

•  we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to very limited exceptions; and

•  the rights conferred in the bylaws are not exclusive.

       Prior to the completion of this offering, we intend to enter into indemnity agreements with each of our current directors and executive officers to provide additional contractual assurances regarding the scope of the indemnification provided for in our restated certificate of incorporation and restated bylaws and to provide additional procedural protections. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. Presently, there is no pending litigation or proceeding involving any of our directors, executive officers or employees for which indemnification is sought.

       We have liability insurance for our directors and officers, including coverage for public securities matters.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

       In addition to the compensation arrangements, including the employment, termination and change-in-control arrangements and indemnification arrangements, discussed above under “Management,” and the registration rights described below under “Description of Capital Stock — Registration Rights,” the following is a description of transactions since January 1, 2003 to which we have been a party, in which the amount involved in the transaction exceeds $60,000, and in which any of our directors, executive officers or holders of more than 5% of our capital stock had or will have a direct or indirect material interest.

Loan Guarantee; Warrant to Purchase Our Series D Preferred Stock and Sale of Our Series E Preferred Stock

       In May 2002, Monaco Partners, L.P. agreed to guarantee our payment obligations under a loan and security agreement between us and Silicon Valley Bank, or SVB. Monaco, which is controlled by James H. Clark, our Chairman, beneficially owned 28.2% of our common stock as of May 31, 2006. Other entities controlled by Mr. Clark beneficially owned 12.0% of our common stock as of that date.

       The guarantee agreement gave Monaco a right to purchase our payment obligations (consisting of unpaid principal, accrued interest, and certain fees and expenses) under the loan and security agreement from SVB and assume all of SVB’s rights under that agreement. In exchange for this guarantee, we issued Monaco a warrant to purchase 60,252 shares of our Series D preferred stock at a price of $0.10 per share and gave Monaco a right to convert any amounts paid by Monaco to SVB pursuant to the guarantee agreement into shares of our capital stock. Monaco exercised the Series D preferred stock warrant in May 2002.

       In February 2003, Monaco exercised its purchase right pursuant to the guarantee agreement and paid SVB approximately $546,000 in full satisfaction of our payment obligations to SVB, and assumed all of SVB’s rights under the loan and security agreement, including rights to receive payment from us. We made monthly payments to Monaco against this amount beginning in March 2003. In July 2003, Monaco converted the approximately $439,000 then due from us to it into 717,545 shares of our Series E preferred stock.

Secured Loan Agreement; Sale of Warrants to Purchase Our Series D and Series E Preferred Stock

       In February 2003, we entered into a secured loan agreement with Monaco under which we borrowed a total of $2.5 million at an annual interest rate of 5% above the prime rate, with a maximum annual interest rate of 12%. We made interest payments to Monaco totaling $31,000 and $83,000 in 2003 and 2004, respectively. In December 2004, we paid Monaco the full amount due to it under the secured loan agreement. In connection with the loan agreement, we issued to Monaco warrants to purchase 137,500 shares of our Series D preferred stock and 112,500 shares of our Series E preferred stock, each at an exercise price of $0.615 per share. Monaco exercised these warrants in full in December 2004.

Acquisition of Memory Matrix, Inc.

       In June 2005, we acquired Memory Matrix, Inc., a Nevada corporation, in exchange for 229,994 shares of our common stock. Monaco Partners, L.P. controlled 14.1% of Memory Matrix at that time. In addition, Mr. Clark was a member of the board of directors of Memory Matrix immediately prior to the acquisition.

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Sale of Our Series F Preferred Stock

       In November 2005, we sold 1,353,730 shares of our Series F preferred stock to Sutter Hill Ventures and affiliated persons and entities at a purchase price of $14.774 per share. Sutter Hill beneficially owned 9.1% of our common stock as of May 31, 2006. In connection with Sutter Hill’s investment in our Series F preferred stock, we also entered into a voting agreement giving Sutter Hill the right to elect one member of our board of directors, which right expires upon the completion of this offering.

Purchases of Our Common Stock by Sutter Hill from Third Parties

       From December 2005 through May 2006, Sutter Hill and affiliated persons and entities purchased an aggregate of 260,000 shares of our common stock from three of our former officers at a weighted average price of $10.19 per share. In connection with Sutter Hill’s purchase of our Series F preferred stock in our Series F financing in November 2005, we agreed to assign to Sutter Hill our right of first refusal with respect to transfers of our capital stock for a period of six months following the closing of such financing.

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PRINCIPAL STOCKHOLDERS

       The following table presents information as to the beneficial ownership of our common stock as of May 31, 2006, and as adjusted to reflect the sale of the common stock in this offering by:

•  each stockholder known by us to be the beneficial owner of more than 5% of our common stock;

•  each of our directors;

•  each of our named executive officers; and

•  all of our directors and executive officers as a group.

       Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of May 31, 2006 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

       Percentage ownership of our common stock in the table before the offering is based on 17,819,372 shares of our common stock outstanding on May 31, 2006, which includes the automatic conversion of all outstanding shares of our preferred stock into 13,801,716 shares of common stock in connection with the completion of this offering. Percentage ownership of our common stock in the table after the offering also assumes the sale of                      shares of common stock in this offering by us. Unless otherwise indicated, the address of each of the individuals and entities named below is c/o Shutterfly, Inc., 2800 Bridge Parkway, Suite 101, Redwood City, California 94065.

			Percentage of Outstanding Shares
			Beneficially Owned
	Number of Shares
Name of Beneficial Owner	Beneficially Owned		Before Offering			After Offering
5% Stockholders:
Entities affiliated with James H. Clark(1)		7,167,692		40.2	%
Mohr, Davidow Ventures(2)		4,088,510		22.9
Sutter Hill Ventures and affiliated persons and entities(3)		1,613,730		9.1
Directors and Executive Officers:
James H. Clark(1)		7,167,692		40.2
Nancy J. Schoendorf(2)		4,088,510		22.9
James N. White(4)		1,206,212		6.8
Patricia A. House(5)		50,000		*
Eric J. Keller(6)		50,000		*
Jeffrey T. Housenbold(7)		1,288,146		6.7
Stephen E. Recht(8)		301,000		1.7
Douglas J. Galen(9)		250,000		1.4
Jeannine M. Smith Thomas(10)		449,453		2.5
Andrew F. Young(11)		377,883		2.1
All 12 directors and executive officers as a group(12)		15,526,396		76.4	%

    * Represents beneficial ownership of less than one percent of the outstanding shares of common stock.

  (1)  Consists of 5,018,610 shares held by Monaco Partners, L.P., 1,947,082 shares held by JHC Investments, LLC, 17,000 shares held by JHC Investments 2000, LLC, 125,000 shares held by Woodside Ventures Limited Partnership, 50,000 shares held by Atherton Properties Partnership, L.P. and 10,000 shares held by Mountain Wood Properties, LLC, and excludes 40,816 shares subject to a warrant held by Monaco Partners,

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L.P. that expires upon the completion of this offering. Mr. Clark has sole voting and investment power over the shares held by Monaco Partners, L.P., JHC Investments LLC, JHC Investments 2000, LLC and Woodside Ventures Limited Partnership. Two of Mr. Clark’s adult children and one of their spouses have voting and investment power over the shares held by Atherton Properties Partnership, L.P. and Mountain Wood Properties, LLC. The address of Mr. Clark is 1700 Seaport Blvd., 4th Floor, Redwood City, CA 94063 and the address of the entities listed above is 777 East William Street #201, Carson City, NV 89701.

(2)	Consists of 2,419,867 shares held by Mohr, Davidow Ventures V, L.P., 1,516,168 shares held by Mohr, Davidow Ventures V-L, L.P, and 152,475 shares held by Mohr, Davidow Ventures V, L.P. as nominee for MDV Entrepreneurs’ Network Fund II (A), L.P. and MDV Entrepreneurs’ Network Fund II (B), L.P. Ms. Schoendorf is a managing member of the general partners of the foregoing entities and shares voting and investment power with respect to the shares held by these entities with Jon Feiber, the other managing member of the general partners. Ms. Schoendorf disclaims beneficial ownership of these shares except to the extent of her individual pecuniary interest in these entities. The address of Mohr, Davidow Ventures and Ms. Schoendorf is 3000 Sand Hill Road, Building 3, Suite 290, Menlo Park, CA 94025.
(3)	Consists of (a) 1,204,205 shares held by Sutter Hill Ventures, A California Limited Partnership (“SHV”), (b) 1,684 shares held by SHV Profit Sharing Plan for the benefit of James N. White, one of our directors and a managing director of the general partner of SHV, (c) 323 shares held by James N. White and Patricia A. O’Brien as Trustees of The White Family Trust U/A/D 4/3/97, (d) 397,165 shares held by eight other managing directors of the general partner of SHV and by family trusts, family partnerships or other entities associated with these individuals and (e) 10,353 shares held by other individuals affiliated with Sutter Hill and by entities associated with them. Mr. White shares voting and investment power with respect to the shares held by SHV with David L. Anderson, G. Leonard Baker, Jr., Tench Coxe, Gregory P. Sands, James C. Gaither, William H. Younger, Jr., Jeffrey W. Bird and David E. Sweet, each of whom is a managing director of the general partner of SHV. Messrs. White, Anderson, Baker, Coxe, Sands, Gaither, Younger, Bird and Sweet disclaim beneficial ownership of these shares except to the extent of their individual pecuniary interest in SHV. Mr. White has sole voting and investment power with respect to the shares held by SHV Profit Sharing Plan for the benefit of James N. White and has shared voting and investment power with respect to the shares held by The White Family Trust, and disclaims beneficial ownership of the shares held by The White Family Trust except to the extent of his individual pecuniary interest in such trust. Mr. White and SHV do not have voting or investment power with respect to the shares referenced under part (d) and (e) of this note. The address of SHV and Mr. White is 755 Page Mill Road, Suite A-200, Palo Alto, CA 94304-1005.
(4)	Includes 1,204,205 shares held by SHV, 1,684 shares held by SHV Profit Sharing Plan for the benefit of James N. White and 323 shares held by James N. White and Patricia A. O’Brien as Trustees of The White Family Trust U/A/D 4/3/97. Mr. White has shared voting and investment power as described in footnote (3) with respect to the shares held by SHV, sole voting and investment power with respect to the shares held by SHV Profit Sharing Plan for the benefit of James N. White and shared voting and investment power with respect to the shares held by The White Family Trust. Mr. White disclaims beneficial ownership of shares held by SHV and The White Family Trust except to the extent of his individual pecuniary interest in SHV and The White Family Trust. The address of SHV and Mr. White is 755 Page Mill Road, Suite A-200, Palo Alto, CA 94304-1005.

(5)	Includes 50,000 shares subject to options that are exercisable within 60 days of May 31, 2006.
(6)	Includes 50,000 shares subject to options that are exercisable within 60 days of May 31, 2006.
(7)	Includes 1,288,146 shares subject to options that are exercisable within 60 days of May 31, 2006.

(8)	Includes 201,000 shares subject to options that are exercisable within 60 days of May 31, 2006.
(9)	Includes 250,000 shares subject to options that are exercisable within 60 days of May 31, 2006.

(10)	Includes 189,600 shares subject to options that are exercisable within 60 days of May 31, 2006 and 72,000 shares held in a trust for the benefit of Ms. Smith Thomas’ minor children.
(11)	Includes 221,600 shares subject to options that are exercisable within 60 days of May 31, 2006.
(12)	Includes 2,507,846 shares subject to options that are exercisable within 60 days of May 31, 2006 and excludes 40,816 shares subject to a warrant held by Monaco Partners, L.P. that expires upon the completion of this offering.

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DESCRIPTION OF CAPITAL STOCK

       Upon the completion of this offering, our authorized capital stock, after giving effect to the conversion of all outstanding preferred stock into common stock and the filing of our restated certificate of incorporation that will become effective immediately following the completion of this offering, will consist of 100,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000 shares of undesignated preferred stock, $0.0001 par value per share. The following description summarizes the most important terms of our capital stock. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description you should refer to our restated certificate of incorporation and restated bylaws, which are exhibits to the registration statement of which this prospectus forms a part, and to the provisions of applicable Delaware law.

Common Stock

       As of March 31, 2006, there were 17,820,533 shares of our common stock outstanding held by 279 shareholders of record. This amount assumes the conversion of all outstanding shares of our preferred stock into 13,801,716 shares of our common stock, which will occur immediately upon the completion of this offering. After this offering, there will be                      shares of our common stock outstanding, or                      shares if the underwriters exercise their overallotment option.

       Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our common stock are entitled to receive dividends out of funds legally available at the times and in the amounts that our board of directors may determine.

       Voting Rights. Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our restated certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election.

       No Preemptive or Similar Rights. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption.

       Right to Receive Liquidation Distributions. Upon the liquidation, dissolution or winding-up of Shutterfly, the assets legally available for distribution to our stockholders will be distributable ratably among the holders of our common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding shares of preferred stock and payment of other claims of creditors.

       Fully Paid and Nonassessable. All of our outstanding shares of common stock are, and the shares of common stock to be issued pursuant to this offering will be, fully paid and nonassessable.

Preferred Stock

       As of March 31, 2006, there were 13,801,716 shares of our preferred stock outstanding. Upon the completion of this offering, all outstanding shares of preferred stock will be converted into 13,801,716 shares of common stock. Immediately following the completion of this offering, we will file our restated certificate of incorporation, which will delete all references to the prior series of preferred stock, and will authorize 5,000,000 shares of undesignated preferred stock.

       Following this offering, our board of directors will be authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions in each case without further action by our stockholders. Our board of directors can also increase or decrease the number of shares of any series of preferred stock, but not below the number of shares of that

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series then outstanding, unless approved by the affirmative vote of the holders of a majority of our capital stock entitled to vote, or such other vote as may be required by the certificate of designation establishing the series. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could discourage, delay or prevent a change in control of Shutterfly. We have no current plan to issue any shares of preferred stock.

Warrants

       As of March 31, 2006, we had issued and outstanding warrants to purchase 75,229 shares of our Series A preferred stock, 74,897 shares of our Series B preferred stock, 4,245 shares of our Series C preferred stock and 2,809 shares of our Series D preferred stock. Following the completion of this offering, any warrants that remain outstanding will be exercisable for shares of our common stock.

       Of the warrants listed above, a warrant to purchase 40,816 shares of our Series B preferred stock expires immediately prior to the completion of this offering. The expiration dates of the other warrants are: (a) with respect to the Series A warrant, on the date we undergo a merger or consolidation meeting certain conditions or the later of three years following this offering or September 8, 2006, (b) with respect to a second Series B warrant, the date we undergo a merger or consolidation meeting certain conditions or the later of three years following this offering or March 8, 2007, (c) with respect to a third Series B warrant, the earlier of January 1, 2011 or the date we undergo a change of control or sell or transfer all or substantially all of our assets, (d) with respect to the Series C warrant, on the date we undergo a merger or consolidation meeting certain conditions or the earlier of three years following this offering or August 24, 2007 and (e) with respect to the Series D warrant, September 11, 2008.

Registration Rights

       Pursuant to the terms of our fifth amended and restated investors’ rights agreement, immediately following this offering, the holders of approximately 13,732,545 shares of our common stock outstanding as of March 31, 2006 or subject to warrants outstanding as of March 31, 2006, including shares of common stock beneficially owned by holders of 5% or more of our common stock, will be entitled to rights with respect to the registration of these shares under the Securities Act, as described below.

       Demand Registration Rights. At any time beginning six months after the completion of this offering, the holders of at least 40% of the shares having registration rights can request that we file a registration statement covering registrable securities with an anticipated aggregate offering price of at least $7.5 million. We will only be required to file three registration statements upon exercise of these demand registration rights. We may postpone the filing of a registration statement for up to 120 days once in a 12-month period if we determine that the filing would be seriously detrimental to us and our stockholders.

       Piggyback Registration Rights. If we register any of our securities for public sale, holders of shares having registration rights will have the right to include their shares in the registration statement. However, this right does not apply to a registration relating to any of our employee benefit plans or a corporate reorganization or acquisition. The managing underwriter of any underwritten offering will have the right, in its sole discretion, to limit, due to marketing reasons, the number of shares registered by these holders, in which case the number of shares to be registered will be apportioned pro rata among these holders, according to the total amount of securities entitled to be included by each holder, or in a manner mutually agreed upon by the holders. However, the number of shares to be registered by these holders cannot be reduced below 35% of the total shares

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covered by the registration statement unless no other stockholder’s shares are included in the registration statement.

       Form S-3 Registration Rights. The holders of at least 10% of the shares with registration rights can request that we register their shares on Form S-3 if we are eligible to file a registration statement on Form S-3 and if the aggregate price to the public of the shares offered is at least $1.0 million. The stockholders may only require us to file two registration statements on Form S-3 in a 12-month period. We may postpone the filing of a registration statement on Form S-3 for up to 90 days once in a 12-month period if we determine that the filing would be seriously detrimental to us and our stockholders.

       Expenses of Registration Rights. We will pay all expenses, other than underwriting discounts and commissions, incurred in connection with the registrations described above. However, we will not pay for any expenses of any demand or Form S-3 registration if the request is subsequently withdrawn by a majority of the holders requesting that we file such registration statement, subject to limited exceptions.

       Expiration of Registration Rights. The registration rights described above will expire, with respect to any particular holder of such rights when, after this offering is completed, the holder owns registrable securities constituting 2% or less of our outstanding voting stock and can sell all of its registrable securities in any three-month period under Rule 144 of the Securities Act. The registration rights described above will expire with respect to all holders five years after this offering is completed.

Anti-Takeover Provisions

       The provisions of Delaware law, our restated certificate of incorporation and our bylaws may have the effect of delaying, deferring or discouraging another person from acquiring control of Shutterfly.

       Delaware Law. We are governed by the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved by the board or directors or the stockholders in a prescribed manner or meets other conditions. A “business combination” includes mergers, asset sales or other transactions resulting in a financial benefit to the stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s outstanding voting stock. These provisions may have the effect of delaying, deferring or preventing a change in our control.

       Restated Certificate of Incorporation and Restated Bylaw Provisions. Our restated certificate of incorporation and our restated bylaws include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management team, including the following:

•  Board of directors vacancies. Our restated certificate of incorporation and restated bylaws authorize only our board of directors to fill vacant directorships occurring on the board until the next annual meeting of stockholders. In addition, the number of directors constituting our board of directors may be fixed exclusively by resolution of our board of directors. These provisions prevent a stockholder from increasing the size of our board of directors and gaining control of our board of directors by filling the resulting vacancies with its own nominees.

•  Classified board. Our restated certificate of incorporation and restated bylaws provide that our board is classified into three classes of directors. The existence of a classified board

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	could delay a successful tender offeror from obtaining majority control of our board, and the prospect of such delay may deter a potential offeror.
•	Stockholder action; special meeting of stockholders. Our restated certificate of incorporation provides that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. Stockholders will not be permitted to cumulate their votes for the election of directors. Our restated bylaws further provide that special meetings of our stockholders may be called only by a majority of our board of directors, the chairman of our board of directors, our chief executive officer or our president.
•	Advance notice requirements for stockholder proposals and director nominations. Our restated bylaws provide advance notice procedures for stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders. Our bylaws also specify certain requirements as to the form and content of a stockholder’s notice. These provisions may preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders.
•	Issuance of undesignated preferred stock. After the filing of our restated certificate of incorporation, our board of directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of undesignated preferred stock with rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, designated from time to time by the board of directors. The existence of authorized but unissued shares of preferred stock enables our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.

Nasdaq National Market Listing

       We have applied for quotation of our common stock on the Nasdaq National Market under the symbol “SFLY.”

Transfer Agent and Registrar

       The transfer agent and registrar for our common stock is Mellon Investor Services.

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SHARES ELIGIBLE FOR FUTURE SALE

       Prior to this offering, there has been no public market for our common stock, and we cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding warrants or options, in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.

       Upon the completion of this offering, based on the number of shares outstanding as of March 31, 2006, we will have                      shares of common stock outstanding. Of these outstanding shares, all of the                     shares sold in this offering will be freely tradable, except that any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in compliance with the limitations described below.

       The remaining                      outstanding shares of our common stock will be deemed restricted securities as defined under Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act, which rules are summarized below. In addition, all of our stockholders, except for the two stockholders specifically noted below under the heading “Lock-Up Agreements,” have entered into market stand-off agreements with us or lock-up agreements with the underwriters under which they agreed, subject to specific exceptions, not to sell any of their stock for at least 180 days following the date of this prospectus. Subject to the provisions of Rule 144 or Rule 701, shares will be available for sale in the public market as follows:

•  Beginning on the effective date of the registration statement, the                      shares sold in this offering will be immediately available for sale in the public market.

•  After 45 days following the effective date of the registration statement,                      additional shares will become eligible for sale in the public market, all of which                      shares will be freely tradable under Rule 144(k).

•  After 90 days following the effective date of the registration statement,                      additional shares will become eligible for sale in the public market, all of which                      shares will be freely tradable under Rule 144(k).

•  After 180 days following the effective date of the registration statement, the remaining                     shares will become eligible for sale in the public market, of which                      shares will be freely tradable under Rule 144(k) and                      shares will be held by affiliates and subject to the volume and other restrictions of Rule 144, as described below.

Lock-Up Agreements

       All of our directors and officers and all of our security holders are subject to lock-up agreements or market standoff provisions that prohibit them from offering for sale, selling, contracting to sell, granting any option for the sale of, transferring or otherwise disposing of or hedging any shares of our common stock, options or warrants to acquire shares of our common stock or any security or instrument related to such common stock, option or warrant for a period of at least 180 days following the date of this prospectus without the prior written consent of Goldman, Sachs & Co., except for two stockholders, Dan Baum and Eva Manolis, two of our founders, who held a total of 391,700 shares as of May 31, 2006, who may sell their shares of our common stock without such prior written consent as follows pursuant to individual agreements with us: up to 1/3rd of such shares starting 45 days after the date of this prospectus; up to 2/3rd of such shares starting 90 days after the date of this prospectus; and all of such shares starting 180 days after the date of this prospectus.

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Rule 144

       In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person, or group of persons whose shares are required to be aggregated, including affiliates of Shutterfly, who has beneficially owned shares for at least one year, is entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock, or the average weekly trading volume in our common stock during the four calendar weeks preceding the date on which notice of the sale is filed. In addition, a person who is not deemed to have been an affiliate at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell those shares under Rule 144(k) without regard to the requirements described above. When a person acquires shares from one of our affiliates, that person’s holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate. However, any such shares that are eligible for sale under Rule 144 are subject to the lock-up agreements described above and will only become eligible for sale upon the expiration or waiver of those agreements.

Rule 701

       In general, under Rule 701 of the Securities Act, an employee, officer, director, consultant or advisor who purchased shares from us in connection with a compensatory stock or option plan or other written agreement in compliance with Rule 701 is eligible, 90 days after the issuer becomes subject to the reporting requirements of the Exchange Act, to resell those shares in reliance on Rule 144, but without compliance with certain restrictions, including the holding period contained in Rule 144. However, the shares issued pursuant to Rule 701 are subject to the lock-up agreements described above and will only become eligible for sale upon the expiration or waiver of those agreements.

Registration of Shares Issued Pursuant to Benefits Plans

       We intend to file a registration statement under the Securities Act as promptly as possible after the effective date of this offering to register shares to be issued pursuant to our employee benefit plans. As a result, any options or rights exercised under our 1999 Stock Plan, our 2006 Equity Incentive Plan or any other benefit plan after the effectiveness of the registration statement will also be freely tradable in the public market, subject to the market stand-off and lock-up agreements discussed above. However, such shares held by affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144. As of March 31, 2006, there were outstanding options under our benefit plans for the purchase of 3,198,994 shares of common stock, with a weighted average exercise price of approximately $4.41.

Registration Rights

       Pursuant to the terms of our fifth amended and restated investors’ rights agreement, holders of approximately 13,732,545 shares of common stock outstanding as of March 31, 2006 or subject to warrants outstanding as of March 31, 2006 have registration rights with respect to those shares of common stock. For a discussion of these rights please see “Description of Capital Stock — Registration Rights.” After such shares are registered, they will be freely tradable without restriction under the Securities Act.

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UNDERWRITING

       Shutterfly and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., J.P. Morgan Securities Inc., Piper Jaffray & Co. and Jefferies & Company, Inc. are the representatives of the underwriters.

Underwriters		Number of Shares
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
Piper Jaffray & Co.
Jefferies & Company, Inc.
	Total

       The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.

       If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional                      shares from Shutterfly to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

       The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by Shutterfly. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase                      additional shares.

	No Exercise	Full Exercise
Per Share	$	$
Total	$	$

       Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $           per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms.

       Shutterfly and its officers, directors and holders of substantially all of its common stock (or securities convertible into or exercisable for its common stock) have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of its common stock or securities convertible into or exchangeable for shares of its common stock during the period from the date of this prospectus continuing through the date 180 days after the public offering date set forth in this prospectus, except with the prior written consent of Goldman, Sachs & Co., on behalf of the representatives. This agreement does not apply to any existing employee benefit plans. See “Shares Eligible for Future Sale — Lock-Up Agreements” for a discussion of certain transfer restrictions.

       The 180-day restricted period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the 180-day restricted period Shutterfly issues an earnings release or announces material news or a material event; or (2) prior to the expiration of the 180-day restricted period, Shutterfly announces that it will release earnings results during the 15-day period following the last day of the 180-day period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance

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of the earnings release of the announcement of the material news or material event, unless Goldman, Sachs & Co. waives, in writing, such extension.

       Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated among Shutterfly and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be Shutterfly’s historical performance, estimates of Shutterfly’s business potential and earnings prospects, an assessment of Shutterfly’s management and the consideration of the above factors in relation to market valuation of companies in related businesses.

       An application has been made for quotation of Shutterfly’s common stock on the Nasdaq National Market under the symbol “SFLY.”

       In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares from Shutterfly in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option granted to them. “Naked” short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the completion of the offering.

       The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

       Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of the shares, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise.

       Each of the underwriters has represented and agreed that:

       (a) it has not made or will not make an offer of shares to the public in the United Kingdom within the meaning of section 102B of the Financial Services and Markets Act 2000 (as amended) (“FSMA”) except to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by us of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority (“FSA”);

       (b) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets

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Act 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not apply to Shutterfly; and

       (c) it has complied with, and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.

       In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:

       (a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

       (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

       (c) in any other circumstances which do not require the publication by Shutterfly of a prospectus pursuant to Article 3 of the Prospectus Directive.

       For the purposes of this provision, the expression an “offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

       The shares may not be offered or sold by means of any document other (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

       This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore

91

(the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

       Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.

       The securities have not been and will not be registered under the Securities and Exchange Law of Japan (the “Securities and Exchange Law”) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

       A prospectus in electronic format may be made available on Internet sites or through other online services maintained by one or more of the underwriters or by their affiliates. In those cases, prospective investors may view the preliminary prospectus and the final prospectus online and, depending upon the particular underwriter, prospective investors may be allowed to place orders online. The underwriters may agree with Shutterfly to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representatives on the same basis as other allocations. In addition, one or more of the underwriters participating in this offering may distribute prospectuses electronically.

       Other than the prospectus in electronic format, information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by Shutterfly or any underwriter in its capacity as underwriter and should not be relied on by investors.

       The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.

       Shutterfly estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $                    .

       Shutterfly has agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933.

92

LEGAL MATTERS

       Fenwick & West LLP, Mountain View, California will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. Certain legal matters in connection with this offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, Palo Alto, California.

EXPERTS

       Our consolidated financial statements as of December 31, 2004 and 2005, and for each of the three years in the period ended December 31, 2005, included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

       We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some items of which are contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The exhibits to the registration statement should be referenced for the complete contents of these contracts and documents. A copy of the registration statement, including the exhibits filed as a part of the registration statement, may be inspected without charge at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the SEC upon the payment of fees prescribed by it. You may call the SEC at 1-800-SEC-0330 for more information on the operation of the public reference facilities. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with it.

       As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act and, in accordance with this law, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referred to above.

93

SHUTTERFLY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)		F-5
Consolidated Statements of Cash Flows		F-7
Notes to Consolidated Financial Statements		F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Shutterfly, Inc.

       In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of redeemable convertible preferred stock and stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Shutterfly, Inc. and its subsidiary (the “Company”) at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

       As discussed in Note 3 to the consolidated financial statements, the Company adopted FASB Staff Position 150-5 (“FSP 150-5”), Issuer’s Accounting under FASB Statement No. 150 for Free-standing Warrants and Other Instruments on Shares that are Redeemable, during the year ended December 31, 2005.

/s/ PricewaterhouseCoopers LLP

San Jose, California

June 27, 2006

F-2

SHUTTERFLY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

					December 31,									Pro forma
											March 31,			March 31,
					2004			2005			2006			2006
											(Unaudited — Note 2)
ASSETS
Current assets:
	Cash and cash equivalents				$	13,781		$	39,153		$	26,067
	Accounts receivable, net of allowance of $-, $21 and $14 (unaudited) at December 31, 2004, 2005 and March 31, 2006					402			949			669
	Inventories					824			1,077			675
	Deferred tax asset, current portion					—			1,408			1,381
	Prepaid expenses and other current assets					1,151			1,558			1,942
				Total current assets		16,158			44,145			30,734
Property and equipment, net						11,723			20,761			20,371
Intangible assets, net						1,621			1,618			1,530
Deferred tax asset, net of current portion						—			22,655			23,556
Other assets						363			373			480
				Total assets	$	29,865		$	89,552		$	76,671
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable				$	3,583		$	3,871		$	1,329
	Accrued liabilities					6,402			11,520			3,322
	Deferred revenue					3,995			4,564			4,383
	Current portion of capital lease obligations					1,488			1,503			1,912
				Total current liabilities		15,468			21,458			10,946
Other liabilities						1,434			523			554
Capital lease obligations, less current portion						2,709			3,646			2,608
Preferred stock warrant liability						—			1,535			1,413			—
				Total liabilities		19,611			27,162			15,521
Commitments and contingencies (Note 6)
Redeemable convertible preferred stock, $0.0001 par value; 14,635 shares authorized at December 31, 2004, 15,454 shares authorized at December 31, 2005 and March 31, 2006 (unaudited), respectively; 12,448 shares issued and outstanding at December 31, 2004, 13,802 shares issued and outstanding at December 31, 2005 and March 31, 2006 (unaudited), respectively; (liquidation preference: $131,367 at December 31, 2005 and March 31, 2006 (unaudited)); no shares issued and outstanding pro forma (unaudited)						69,822			89,652			89,652			—
Stockholders’ equity (deficit)
	Common stock, $0.0001 par value; 35,365 shares authorized at December 31, 2004, 38,251 shares authorized at December 31, 2005 and at March 31, 2006 (unaudited); 2,827, 3,790 and 3,864 shares issued and outstanding at December 31, 2004 and 2005, and at March 31, 2006 (unaudited), respectively; 17,666 shares issued and outstanding pro forma (unaudited)					—			—			—			2
	Additional paid-in capital					7,505			10,501			10,568			101,631
	Deferred stock-based compensation					(2,003	)		(1,625	)		(1,264	)		(1,264	)
	Accumulated deficit					(65,070	)		(36,138	)		(37,806	)		(37,806	)
		Total stockholders’ equity (deficit)				(59,568	)		(27,262	)		(28,502	)	$	62,563
			Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)		$	29,865		$	89,552		$	76,671

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

F-3

SHUTTERFLY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

														Three Months Ended
					Year Ended December 31,									March 31,
					2003			2004			2005			2005			2006
														(Unaudited — Note 2)
Revenues, net					$	31,395		$	54,499		$	83,902		$	13,156		$	16,883
Cost of revenues(1)						14,310			24,878			36,941			6,446			8,749
				Gross profit		17,085			29,621			46,961			6,710			8,134
Operating expenses(1):
	Technology and development					4,970			7,433			13,152			2,311			3,983
	Sales and marketing					3,991			7,705			15,252			2,275			3,693
	General and administrative					5,629			10,126			13,657			2,818			3,397
						14,590			25,264			42,061			7,404			11,073
Income (loss) from operations						2,495			4,357			4,900			(694	)		(2,939	)
Interest expense						(392	)		(471	)		(367	)		(54	)		(78	)
Other income (expense), net						9			81			(103	)		65			475
Income (loss) before income taxes and cumulative effect of change in accounting principle						2,112			3,967			4,430			(683	)		(2,542	)
Benefit (provision) for income taxes						(68	)		(258	)		24,060			—			874
Net income (loss) before cumulative effect of change in accounting principle						2,044			3,709			28,490			(683	)		(1,668	)
Cumulative effect of change in accounting principle						—			—			442			—			—
Net income (loss)					$	2,044		$	3,709		$	28,932		$	(683	)	$	(1,668	)
Net income (loss) allocable to common stockholders					$	—		$	—		$	4,720		$	(683	)	$	(1,668	)
Net income (loss) per share — basic and diluted:
		Before cumulative effect of change in accounting principle									$	1.31		$	(0.23	)
		Cumulative effect of change in accounting principle										0.14			—
			Net income (loss) per share — basic		$	—		$	—		$	1.45		$	(0.23	)	$	(0.44	)
			Net income (loss) per share — diluted		$	—		$	—		$	1.02		$	(0.23	)	$	(0.44	)
Weighted average shares outstanding used in calculating net income (loss) per common share:
		Basic				1,574			2,231			3,255			2,918			3,805
		Diluted				1,574			2,231			4,609			2,918			3,805
Pro forma net income (loss) per share — basic (unaudited)											$	1.82					$	(0.09	)
Pro forma net income (loss) per share — diluted (unaudited)											$	1.68					$	(0.09	)
Pro forma weighted average shares outstanding used in calculating net income (loss) per share (unaudited):
		Basic										15,888						17,607
		Diluted										17,242						17,607
(1) Stock-based compensation is allocated as follows (Notes 2 and 9):
Cost of revenues					$	3		$	21		$	28		$	8		$	11
Technology and development						32			263			826			92			143
Sales and marketing						11			117			239			44			87
General and administrative						124			1,790			2,217			517			170

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

F-4

SHUTTERFLY, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

	Redeemable Convertible
	Preferred Stock				Common Stock				Additional		Deferred						Total
									Paid-In		Stock-Based			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Compensation			Deficit			Deficit
Balances, December 31, 2002		11,480	$	69,230		1,538	$	—	$	3,070	$	—		$	(70,823	)	$	(67,753	)
Issuance of preferred stock warrants in connection with a loan from a related party		—		—		—		—		115		—			—			115
Issuance of Series E convertible preferred stock upon conversion of loans, net of issuance cost of $1		718		438		—		—		—		—			—			—
Deferred stock-based compensation, net of cancellations		—		—		—		—		564		(564	)		—			—
Amortization of deferred stock-based compensation, net of cancellations		—		—		—		—		—		166			—			166
Issuance of common stock upon exercise of options, net of repurchases		—		—		364		—		91		—			—			91
Issuance of stock options to consultants in exchange for services		—		—		—		—		4		—			—			4
Net income		—		—		—		—		—		—			2,044			2,044
Balances, December 31, 2003		12,198		69,668		1,902		—		3,844		(398	)		(68,779	)		(65,333	)
Issuance of common stock upon exercise of options, net of repurchases		—		—		925		—		217		—			—			217
Issuance of convertible preferred stock upon exercise of warrants		250		154		—		—		—		—			—			—
Deferred stock-based compensation, net of cancellations		—		—		—		—		3,444		(3,444	)		—			—
Amortization of deferred stock-based compensation, net of cancellations		—		—		—		—		—		858			—			858
Stock-based compensation expense in connection with option modifications		—		—		—		—		—		981			—			981
Net income		—		—		—		—		—		—			3,709			3,709
Balances, December 31, 2004		12,448	$	69,822		2,827	$	—	$	7,505	$	(2,003	)	$	(65,070	)	$	(59,568	)

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

F-5

SHUTTERFLY, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

	Redeemable
	Convertible Preferred
	Stock				Common Stock				Additional			Deferred Stock-						Total
									Paid-In			Based			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital			Compensation			Deficit			Deficit
Balances, December 31, 2004		12,448	$	69,822		2,827	$	—	$	7,505		$	(2,003	)	$	(65,070	)	$	(59,568	)
Issuance of common stock upon exercise of options, net of repurchases		—		—		750		—		205			—			—			205
Issuance of Series F preferred stock, net of issuance cost of $131		1,354		19,830		—		—		—			—			—			—
Stock-based compensation expense in connection with option modifications		—		—		—		—		—			1,100			—			1,100
Shares issued in connection with a settlement agreement with a former employee				—		65		—		352			—			—			352
Vested shares issued upon acquisition		—		—		109		—		656			—			—			656
Restricted shares issued upon acquisition		—		—		—		—		671			(671	)		—			—
Vesting of restricted shares		—		—		39		—		—			500			—			500
Deferred stock- based compensation, net of cancellations		—		—		—		—		2,261			(2,261	)		—			—
Tax benefit of stock options		—		—		—		—		365			—			—			365
Amortization of deferred stock-based compensation, net of cancellations		—		—		—		—		—			1,710			—			1,710
Reclassification of preferred stock warrants to liability		—		—		—		—		(1,514	)		—			—			(1,514	)
Net income		—		—		—		—		—			—			28,932			28,932
Balances, December 31, 2005		13,802		89,652		3,790		—		10,501			(1,625	)		(36,138	)		(27,262	)
Issuance of common stock upon exercise of options, net of repurchases (unaudited)		—		—		56		—		17			—			—			17
Vesting of restricted shares (unaudited)		—		—		18		—		—			86			—			86
Employees stock-based compensation expense recognized under SFAS No. 123R, net of estimated forfeiture (unaudited)		—		—		—		—		50			—			—			50
Amortization of deferred stock-based compensation, net of cancellations (unaudited)		—		—		—		—		—			275			—			275
Net loss (unaudited)		—		—		—		—		—			—			(1,668	)		(1,668	)
Balances, March 31, 2006 (unaudited)		13,802	$	89,652		3,864	$	—	$	10,568		$	(1,264	)	$	(37,806	)	$	(28,502	)

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

F-6

SHUTTERFLY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

													Three Months Ended
				Year Ended December 31,									March 31,
				2003			2004			2005			2005			2006
													(Unaudited — Note 2)
Cash flows from operating activities:
Net income (loss)				$	2,044		$	3,709		$	28,932		$	(683	)	$	(1,668	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
	Depreciation and amortization				2,761			3,769			6,246			1,280			2,176
	Amortization of intangible assets				—			379			276			31			88
	Amortization of deferred stock-based compensation, net of cancellations				169			2,191			3,310			662			411
	Amortization of preferred stock warrants				31			83			—			—			—
	Change in carrying value of preferred stock warrant liability				—			—			21			—			(122	)
	Loss on disposal of property and equipment				14			26			207			(6	)		—
	Deferred income taxes				—			—			(23,833	)		—			(875	)
	Changes in operating assets and liabilities
		Inventories			(21	)		(397	)		(253	)		333			403
		Accounts receivable, net			(24	)		100			(547	)		(426	)		280
		Prepaid expenses and other current assets			(331	)		(536	)		(398	)		600			(383	)
		Other assets			(11	)		36			(40	)		—			(106	)
		Accounts payable			1,016			828			(434	)		(3,048	)		(2,565	)
		Accrued and other liabilities			1,468			1,731			4,550			(1,802	)		(8,152	)
		Deferred revenue			1,997			1,148			569			242			(181	)
			Net cash provided by (used in) operating activities		9,113			13,067			18,606			(2,817	)		(10,694	)
Cash flows from investing activities
Purchases of property and equipment					(3,674	)		(7,400	)		(10,858	)		(1,201	)		(1,764	)
Cash acquired from acquisition of business					—			—			239			—			—
Proceeds from sale of property and equipment					—			14			6			6			—
			Net cash used in investing activities		(3,674	)		(7,386	)		(10,613	)		(1,195	)		(1,764	)
Cash flows from financing activities
Principal payments of capital lease obligations					(1,041	)		(540	)		(2,379	)		(617	)		(634	)
Proceeds from loan from a related party					2,500			—			—			—			—
Repayment of loan from a related party					—			(2,500	)		—			—			—
Proceeds from term loan					—			—			2,571			—			—
Repayment of term loan					—			—			(2,571	)		—			—
Principal payment of note payable obligation					—			—			(192	)		—			—
Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs					—			154			19,830			—			—
Proceeds from issuance of common stock upon exercise of stock options					116			316			134			2			8
Repurchases of common stock					(2	)		—			(14	)		(10	)		(2	)
			Net cash provided by (used in) financing activities		1,573			(2,570	)		17,379			(625	)		(628	)
Net increase (decrease) in cash and cash equivalents					7,012			3,111			25,372			(4,637	)		(13,086	)
Cash and cash equivalents, beginning of period					3,658			10,670			13,781			13,781			39,153
Cash and cash equivalents, end of period				$	10,670		$	13,781		$	39,153		$	9,144		$	26,067
Supplemental disclosures of cash flow information
Cash paid during the period for interest				$	339		$	490		$	410		$	54		$	57
Cash paid during the period for income taxes					—			152			70			70			—
Supplemental schedule of non-cash investing and financing activities
Additions to property and equipment acquired under capital lease obligations and notes payable					624			2,992			3,516			—			—
Net non-cash assets acquired upon acquisition					—			—			451			—			—
Vested shares issued upon acquisition					—			—			656			—			—
Restricted shares issued upon acquisition					—			—			724			—			—
Reclassification of preferred stock warrants to liability					—			—			1,514			—			—
Issuance of preferred stock upon conversion of loan					439			—			—			—			—
Issuance of preferred stock warrants					115			—			—			—			—
Deferred stock-based compensation, net of cancellations					564			2,299			1,225			772			—
Deferred stock-based compensation in connection with option modifications					—			1,145			1,100			65			—
Tax benefit of stock options recorded in additional paid-in capital					—			—			365			—			—

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

F-7

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Note 1 — Formation and Business of the Company

       Shutterfly, Inc., (the “Company”) was incorporated in the state of Delaware in 1999 and began its services in December 1999. The Company is an Internet-based social expression and personal publishing service that enables customers to share, print and preserve their memories by leveraging a technology based platform and manufacturing processes. The Company provides customers a full range of products and services to organize and archive digital images; share pictures; order prints and create an assortment of personalized items such as cards, calendars and photo books. The Company is headquartered in Redwood City, California.

Note 2 — Summary of Significant Accounting Policies

Principles of Consolidation

       The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary acquired in 2005 (see Note 5). All intercompany transactions and balances have been eliminated.

Unaudited Interim Financial Information

       The accompanying consolidated balance sheet as of March 31, 2006, the consolidated statements of operations and of cash flows for the three months ended March 31, 2005 and 2006 and the consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three months ended March 31, 2006 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations and cash flows for the three months ended March 31, 2005 and 2006. The financial data and other information disclosed in these notes to the financial statements related to the three-month periods are unaudited. The results of the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006 or for any other interim period or for any other future year.

Pro Forma Statement of Stockholders’ Equity (Deficit) (Unaudited)

       Upon the consummation of the initial public offering contemplated herein, all of the outstanding shares of redeemable convertible preferred stock automatically convert into common stock. The March 31, 2006 unaudited pro forma balance sheet data have been prepared assuming the conversion of the redeemable convertible preferred stock outstanding into 13,802 shares of common stock and the reclassification of redeemable convertible preferred stock warrants from liabilities to stockholders’ equity (deficit).

Use of Estimates

       The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and

F-8

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

expenses during the reporting period. Significant items subject to such estimates and assumptions include intangible assets valuation, deferred tax asset valuation allowance, and the valuation of equity instruments. Actual results could differ from those estimates.

Cash and Cash Equivalents

       The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents include various money market accounts, which are readily convertible to cash and are stated at cost, which approximates market. Cash equivalents amounted to $11,092 and $22,122 at December 31, 2004 and 2005, respectively, and $22,382 (unaudited) at March 31, 2006.

Fair Value of Financial Instruments

       The carrying amount of certain of the Company’s financial instruments, including cash, cash equivalents, accounts receivable and accounts payable, are carried at cost, which approximates their fair value because of their short-term maturities. Based on borrowing rates available to the Company for loans with similar terms, the carrying value of borrowings, including capital lease obligations, approximates fair value.

Concentration of Credit Risk

       Financial instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. Most of the Company’s cash and cash equivalents as of December 31, 2005 were deposited with financial institutions in the United States and Company policy restricts the amount of credit exposure to any one issuer and to any one type of investment. Deposits held with financial institutions may exceed federally insured limits.

       The Company’s accounts receivable are derived primarily from sales to customers located in the United States who make payments through credit cards. Credit card receivables settle relatively quickly. The Company maintains allowances for potential credit losses on customer accounts when deemed necessary. To date, such losses have not been material and have been within management’s expectations.

       As of December 31, 2004, one customer from the Company’s photo processing fulfillment service accounted for 66% of its net accounts receivable. As of December 31, 2005 and March 31, 2006, another customer from the Company’s photo processing fulfillment service accounted for 18% and 21% (unaudited), respectively, of its net accounts receivable.

Inventories

       Inventories are stated at the lower of cost on a first-in, first-out basis or market value. The value of inventories is reduced by estimates for excess and obsolete inventories. The estimate for excess and obsolete inventories is based upon management’s review of utilization of inventories in light of projected sales, current market conditions and market trends. Inventories are primarily raw materials and consist primarily of photo finishing supplies.

Property and Equipment

       Property and equipment, including equipment under capital leases, are stated at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using

F-9

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

the straight-line method over the estimated lives of the assets, generally three to five years. Amortization of equipment acquired under capital lease obligations is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the related assets, generally three to four years. Leasehold improvements are amortized over their estimated useful lives, or the lease term if shorter, generally three to five years. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses. Major additions and improvements are capitalized, while replacements, maintenance and repairs that do not extend the life of the asset are charged to expense as incurred.

Website Development Costs

       The Company capitalizes eligible costs associated with software developed or obtained for internal use in accordance with AICPA Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and EITF 00-02, Accounting for Web Site Development Costs. Accordingly, the Company expenses all costs that relate to the planning and post implementation phases. Costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life. The Company has capitalized website development costs incurred in the application development phase and unamortized cost is included in property and equipment and totaled approximately $649 and $2,187 at December 31, 2004 and 2005, respectively, and $2,173 (unaudited) at March 31, 2006. Capitalized costs are amortized over the useful life, which is generally three years. Amortization of capitalized cost totaled approximately $151, $204 and $404, for the years ended December 31, 2003, 2004 and 2005, respectively, and $75 (unaudited) and $149 (unaudited) for the three months ended March 31, 2005 and 2006, respectively. Costs associated with minor enhancements and maintenance for the Company’s website are expensed as incurred.

Long-Lived Assets

       The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). Recoverability is measured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the asset using a discount rate determined by management to be commensurate with the risk inherent to the Company’s current business model.

Intangible Assets

       The Company accounts for intangible assets in accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). Goodwill and intangibles with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Intangible assets with finite useful lives are amortized using the straight-line method over their useful lives and are reviewed for impairment in accordance with SFAS No. 144.

       In May 2005, the Company entered into a settlement and license agreement (the “Agreement”) to resolve litigation brought by a third party with respect to alleged infringement of certain processes

F-10

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

under U.S. patents. Under the terms of the Agreement, the Company agreed to pay a total of $2,000, $1,000 of which was paid in 2005, and the remaining $1,000 was paid in January 2006. The Agreement provides the Company with a license to the third party’s patents, including a non- exclusive, fully paid-up, royalty-free, worldwide license to the patents underlying the litigation. In conjunction with the agreement, the third party and the Company agreed to a mutual release of claims. The Company recorded the total value of the settlement as an intangible asset. The intangible asset is amortized ratably over its estimated life of 15 years as a cost of revenue.

       Intangible assets related to acquired workforce are being amortized on a straight-line basis over the estimated useful life of one year (Note 5).

Freestanding Preferred Stock Warrants

       Freestanding warrants and other similar instruments related to shares that are redeemable are accounted for in accordance with SFAS No. 150. Under SFAS No. 150, the freestanding warrants that are related to the Company’s convertible preferred stock are classified as liabilities on the consolidated balance sheet. The warrants will be subject to re-measurement at each balance sheet date and any change in fair value will be recognized as a component of other income (expense), net. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants or the completion of a liquidation event, including the completion of an initial public offering, at which time all preferred stock warrants will be converted into warrants to purchase common stock and, accordingly, the liability will be reclassified as common stock and additional paid-in-capital.

Revenue Recognition

       The Company generally recognizes revenue from product sales upon shipment when persuasive evidence of an arrangement exists, the selling price is fixed or determinable and collection of resulting receivables is reasonably assured. Revenues from amounts billed to customers, including prepaid orders, are deferred until shipment of fulfilled orders.

       The Company provides its customers with a 100% satisfaction guarantee whereby products can be returned within a 30-day period for a reprint or refund. The Company maintains an allowance for estimated future returns based on historical data. The provision for estimated returns is included in accrued liabilities. During the years ended December 31, 2003, 2004 and 2005, returns totaled less than 1% of net revenues and have been within management’s expectations.

       The Company periodically provides incentive offers to its customers in exchange for setting up an account and to encourage purchases. Such offers include free products and percentage discounts on current purchases. Discounts, when accepted by customers, are treated as a reduction to the purchase price of the related transaction and are presented in net revenues. Production costs related to free products are included in cost of revenues upon redemption.

       Shipping charged to customers is recognized as revenue.

Cost of Revenues

       Cost of revenues consist primarily of direct materials, the majority of which consists of paper, payroll and related expenses for direct labor, shipping charges, packaging supplies, distribution and fulfillment activities, rent for production facilities, depreciation of production equipment and third-party costs for photo-based merchandise. Cost of revenues also includes payroll and related expenses for

F-11

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

personnel engaged in customer service. In addition, cost of revenues includes any third-party software or patents licensed, as well as the amortization of capitalized website development costs.

Technology and Development Expense

       Technology and development expense consists primarily of payroll and related expenses for the development and ongoing maintenance of the Company’s website, infrastructure and software. These expenses include depreciation of the computer and network hardware used to run the Company’s website and store the customer data that the Company maintains, as well as amortization of purchased software. Technology and development expense also includes colocation and bandwidth costs. Technology and development costs are charged to operations as incurred.

Advertising Costs

       Advertising costs are expensed as incurred. Such costs are included in selling and marketing expenses and totaled approximately $1,068, $2,361 and $4,878 during the years ended December 31, 2003, 2004 and 2005, respectively, and $755 (unaudited) and $915 (unaudited) for the three months ended March 31, 2005 and 2006, respectively.

Stock-Based Compensation

       Prior to January 1, 2006, the Company accounted for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations, and followed the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the exercise price. Employee stock-based compensation determined under APB No. 25 is recognized using the multiple option method prescribed by the Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN 28”), over the option vesting period.

       The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123, Emerging Issues Task Force Abstract No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF 96-18”), and FIN 28.

F-12

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

       Under the disclosure requirements of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure (“SFAS No. 148”), the following table presents the effect on net income (loss) if the Company had applied the fair value recognition provision of SFAS No. 123:

		Year Ended December 31,									Three Months
											Ended March 31,
		2003			2004			2005			2005
											(Unaudited)
Net income (loss) — as reported		$	2,044		$	3,709		$	28,932		$	(683	)
Add: Stock-based compensation recognized under APB 25			169			1,839			3,310			661
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effect			(191	)		(1,847	)		(4,072	)		(1,029	)
Net income (loss) — pro forma		$	2,022		$	3,701		$	28,170		$	(1,051	)
Basic net income (loss) per share
	As reported	$	—		$	—		$	1.45		$	(0.23	)
	Pro forma	$	—		$	—		$	1.40		$	(0.36	)
Diluted net income (loss) per share
	As reported	$	—		$	—		$	1.02		$	(0.23	)
	Pro forma	$	—		$	—		$	0.99		$	(0.36	)

       For disclosure purposes under SFAS No. 123, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	Year Ended December 31,
	2003			2004			2005
Expected dividends		0	%		0	%		0	%
Risk-free interest rate		2.6	%		3.1	%		4.4	%
Volatility		0	%		0	%		0	%
Expected life		4  years			4  years			4  years

       The weighted average grant date fair value per share of options granted during the years ended December 31, 2003, 2004 and 2005 was $0.51, $3.48 and $1.43, respectively.

       Effective January 1, 2006, the Company adopted the fair value provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS No. 123R”), which supersedes its previous accounting under APB 25. SFAS No. 123R requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company adopted SFAS No. 123R using the prospective transition method, which requires that for nonpublic entities that used the minimum value method for either pro forma or financial statement recognition purposes, SFAS No. 123R shall be applied to option grants after the required effective date. For options granted prior to the SFAS No. 123R effective date, which the requisite service period has not been performed as of January 1, 2006, the Company will continue to recognize compensation expense on the remaining unvested awards under the intrinsic-value method of APB 25. In addition,

F-13

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

the Company will continue amortizing those awards valued prior to January 1, 2006 utilizing an accelerated amortization schedule while all option grants valued after January 1, 2006 will be expensed on a straight-line basis.

Income Taxes

       The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Net Income (Loss) Per Share

       Basic net income (loss) per share attributed to common shares is computed by dividing the net income (loss) attributable to common shares for the period by the weighted average number of common shares outstanding during the period as reduced by the weighted average unvested common shares subject to repurchase by the Company. Net income (loss) available to common stockholders is calculated using the two class method as the net income (loss) less preferred stock dividends for the period and amounts allocated to preferred stock to reflect the rights of the preferred stock to receive dividends in preference to common stock.

       Diluted net income (loss) per share attributed to common shares is computed by dividing the net income (loss) attributable to common shares for the period by the weighted average number of common and potential common shares outstanding during the period, if the effect of each class of potential common shares is dilutive. Potential common shares include restricted common stock, common stock subject to repurchase rights, and incremental shares of common stock issuable upon the exercise of stock options and warrants and upon conversion of preferred stock.

F-14

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

											Three Months
		Year Ended December 31,									Ended March 31,
		2003			2004			2005			2005			2006
											(Unaudited —
											Note 2)
Historical net income (loss) per share:
Numerator
	Net income (loss)	$	2,044		$	3,709		$	28,932		$	(683	)	$	(1,668	)
	Income allocable to preferred stockholders		(2,044	)		(3,709	)		(24,212	)		—			—
	Net income (loss) allocable to common stockholders	$	—		$	—		$	4,720		$	(683	)	$	(1,668	)
Denominator
	Weighted-average common shares outstanding		1,628			2,904			3,619			3,436			3,996
	Less: Weighted-average unvested common shares subject to repurchase		(54	)		(673	)		(364	)		(518	)		(191	)
Denominator for basic net income (loss) per share			1,574			2,231			3,255			2,918			3,805
	Dilutive effect of stock options		—			—			1,307			—			—
	Dilutive effect of outstanding preferred stock warrants		—			—			47			—			—
Denominator for diluted net income (loss) per share			1,574			2,231			4,609			2,918			3,805
Basic net income (loss) per share		$	—		$	—		$	1.45		$	(0.23	)	$	(0.44	)
Diluted net income (loss) per share		$	—		$	—		$	1.02		$	(0.23	)	$	(0.44	)
Pro forma net income (loss) per share (unaudited):
Numerator
	Net income (loss)							$	28,932					$	(1,668	)
Denominator
	Shares used above								3,255						3,805
	Pro forma adjustments to reflect assumed weighted average effect of conversion of preferred stock								12,633						13,802
Denominator for pro forma basic net income (loss) per share									15,888						17,607
	Pro forma adjustments to reflect assumed weighted average effect of conversion of common stock options								1,307						—
	Pro forma adjustments to reflect assumed net exercise of outstanding warrants								47						—
Denominator for pro forma diluted net income (loss) per share									17,242						17,607
Basic net income (loss) per share								$	1.82					$	(0.09	)
Diluted net income (loss) per share								$	1.68					$	(0.09	)

       The following weighted-average outstanding options, common stock subject to repurchase and convertible preferred stock warrants were excluded from the computation of diluted net loss per

F-15

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

common share for the periods presented because including them would have had an antidilutive effect:

							Three Months
	Year Ended December 31,						Ended March 31,
	2003		2004		2005		2005		2006
							(Unaudited —
							Note 2)
Options to purchase common stock and common stock subject to repurchase		1,440		955		—		1,114		1,587
Convertible preferred stock (as converted basis)		11,756		12,199		12,633		12,448		13,802
Convertible preferred stock warrants (as converted basis)		—		25		—		40		57

Comprehensive Income

       SFAS No. 130, Reporting Comprehensive Income, requires an enterprise to report, by major components and as a single total, the change in net assets during the period from non-owner sources. For the years ended December 31, 2003, 2004 and 2005, and the three months ended March 31, 2005 and 2006, there was no difference between the Company’s comprehensive income (loss) and net income (loss).

Segment Reporting

       The Company operates in one industry segment — digital photofinishing services. The Company operates in one geographic area, being the United States of America.

       FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment.

Recent Accounting Pronouncements

       In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. SFAS No. 151 was adopted as of January 1, 2006, and did not have a material effect on the Company’s financial position, results of operations, or liquidity.

       In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces Accounting Principles Board Opinion, or APB, No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements (“SFAS No. 154”). This statement requires retrospective application, unless impracticable, for changes in accounting

F-16

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

principles in the absence of transition requirements specific to newly adopted accounting principles. The provisions of SFAS No. 154 will be effective for the Company beginning on September 1, 2006. The Company is currently evaluating the impact, if any, of this statement on the Company’s financial position and results of operations.

       In November 2005, the FASB issued FSP SFAS 115-1 and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1 and 124-1”), which clarifies when an investment is considered impaired, whether the impairment is other than temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain related disclosures. FSP 115-1 and 124-1 will be effective for all reporting periods beginning after December 15, 2005. The Company does not believe that adopting or applying either standard will have a material impact on our financial statements.

Note 3 — Change in Accounting Policy

       On June 29, 2005, the FASB issued Staff Position 150-5, Issuer’s Accounting under FASB Statement No. 150 (“SFAS 150”) for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable (“FSP 150-5”). FSP 150-5 affirms that such warrants are subject to the requirements in SFAS 150, regardless of the timing of the redemption feature or the redemption price. Therefore, under SFAS 150, the freestanding warrants that are related to the Company’s convertible preferred stock are liabilities that should be recorded at fair value. The Company previously accounted for freestanding warrants for the purchase of convertible preferred stock under EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF 96-18”).

       The Company adopted FSP 150-5 and accounted for the cumulative effect of the change in accounting principle as of July 1, 2005. For the year ended December 31, 2005, the impact of the change in accounting principle was to increase net income by $442, or $0.14 per share. There was $464 of additional expense recorded in other income (expense), net to reflect the increase in fair value between July 1, 2005 and December 31, 2005. In the three months ended March 31, 2006, the Company recorded $122 (unaudited) of additional income reflected as other income (expense), net to reflect the decrease in fair value between January 1, 2006 and March 31, 2006.

       The pro forma effect of the adoption SFAS No. 150 on the Company’s results of operations for 2003, 2004 and 2005, if applied retroactively, assuming SFAS No. 150 had been adopted in those years, has not been disclosed, as these amounts would not be materially different from the reported amounts.

F-17

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

Note 4 — Balance Sheet Components

Property and Equipment

	December 31,
							March 31,
	2004			2005			2006
							(Unaudited)
Computer and other equipment	$	16,694		$	25,658		$	26,914
Software		4,063			7,524			7,955
Leasehold improvements		2,105			3,189			3,285
Furniture and fixtures		404			990			994
		23,266			37,361			39,148
Less: Accumulated depreciation and amortization		(11,543	)		(16,600	)		(18,777	)
Net property and equipment	$	11,723		$	20,761		$	20,371

       Property and equipment includes $5,598 and $7,050 of equipment and software under capital leases at December 31, 2004 and 2005, respectively, and $7,050 (unaudited) at March 31, 2006. Accumulated depreciation of assets under capital leases totaled $2,320 and $2,703 at December 31, 2004 and 2005, respectively, and $3,103 (unaudited) at March 31, 2006.

       Depreciation and amortization expense for the years ended December 31, 2003, 2004 and 2005 was $2,761, $3,769 and $6,246, respectively, and for the three months ended March 31, 2005 and 2006 was $1,280 (unaudited) and $2,176 (unaudited), respectively.

Intangible Assets

				Accumulated
		Gross		Amortization			Net
As of December 31, 2004
	Purchased technology	$	2,000	$	(379	)	$	1,621
As of December 31, 2005
	Purchased technology	$	2,030	$	(505	)	$	1,525
	Acquired workforce		279		(186	)		93
		$	2,309	$	(691	)	$	1,618
As of March 31, 2006 (unaudited)
	Purchased technology	$	2,030	$	(538	)	$	1,492
	Acquired workforce		279		(241	)		38
		$	2,309	$	(779	)	$	1,530

       Amortization of existing intangibles is estimated to be approximately $158 per year through 2015.

F-18

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

Accrued Liabilities

	December 31,
					March 31,
	2004		2005		2006
Accrued marketing expenses	$	1,138	$	1,318	$	901
Accrued compensation		583		977		854
Accrued purchases		680		3,845		119
Accrued taxes		484		221		—
Current portion of accrued license fee		1,000		1,000		—
Accrued legal and accounting fees		640		445		606
Accrued consultant expenses		294		1,059		334
Accrued lab expenses		589		1,316		255
Accrued colocation services		42		223		120
Accrued other		952		1,116		133
	$	6,402	$	11,520	$	3,322

Other Liabilities

	December 31,
					March 31,
	2004		2005		2006
Long-term portion of accrued license fee	$	1,000	$	—	$	—
Deferred rent		434		523		554
	$	1,434	$	523	$	554

Note 5 — Acquisition

       On June 1, 2005, the Company acquired 100% of Memory Matrix, Inc., (“Memory Matrix”) a Nevada corporation, in exchange for 109 shares of common stock. The acquisition was effected using a “reverse triangular” merger in which a wholly owned Shutterfly subsidiary was merged with and into Memory Matrix, resulting in Memory Matrix becoming a wholly owned subsidiary of Shutterfly. Memory Matrix was considered to be a “developmental stage” enterprise and did not meet the definition of a “business” under SFAS No. 141, Business Combinations, for business combination purposes. In accordance with SFAS No. 141, the acquisition of Memory Matrix was accounted for as an acquisition of assets.

       As additional consideration for the acquisition, the Company also issued 121 shares of common stock to the employees of Memory Matrix, subject to vesting and repurchase rights over a period of 18 months. $671 of deferred stock-based compensation was recorded based on the intrinsic value of the shares at the time of the acquisition. The Company recognized $500 and $86 (unaudited) of stock-based compensation expense for the year ended December 31, 2005 and the three months ended March 31, 2006, respectively, relating to the vesting of the restricted shares.

       The total purchase price was $690, based on an estimated per share fair value of $6.00 on the date of the transaction, and was allocated to various tangible and intangible assets, which consisted of $239 of cash, $9 of prepaids, $35 of fixed assets, $279 of acquired workforce, $564 of core technology, related deferred tax liability of $336 and assumed liabilities of $100. In addition, we recorded a deferred tax asset on the date of acquisition of $201, which was offset in full by a valuation allowance. In the fourth quarter of 2005, the valuation allowance was released, which reduced non-current intangibles accordingly.

F-19

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

       The acquired workforce intangible asset is being amortized on a straight-line basis over one year. The net core technology asset will be amortized on a straight-line basis over the asset’s life, which is estimated as three years, when placed into service.

Note 6 — Commitments and Contingencies

Leases

       The Company leases office and production space under various noncancelable operating leases that expire no later than July 2010. Rent expense was $918, $1,131 and $1,181, for the years ended December 31, 2003, 2004 and 2005, respectively, and $262 (unaudited) and $311 (unaudited) for the three months ended March 31, 2005 and 2006, respectively.

       Rent expense is recorded on a straight-line basis over the lease term. When a lease provides for fixed escalations of the minimum rental payments, the difference between the straight-line rent charged to expense, and the amount payable under the lease is recognized as deferred rent.

       During 2002, the Company accrued $209 for lease costs pertaining to the estimated future obligations for noncancelable lease payments for excess office facilities that were vacated. The Company estimated minimum sublease income in determining the lease loss reserve. In 2003, the Company reversed $89 of previously accrued building lease costs due to a change in the intended use of its production facility. The lease for the vacated office facilities expired in August 2004.

       The Company leases certain equipment, software and colocation services under non-cancellable capital leases, operating leases or long-term agreements that expire at various dates through the year 2010. The leased equipment is subject to a security interest. The total outstanding obligation under capital leases at December 31, 2005 and March 31, 2006 was $5,149 and $4,520 (unaudited), respectively.

       At December 31, 2005, the total future minimum payments under non-cancelable scheduled rentals are as follows:

	Purchase		Operating		Capital
	Obligations		Leases		Leases
Year Ending
2006	$	1,820	$	1,132	$	1,669
2007		—		1,303		2,110
2008		—		1,349		1,364
2009		—		1,396		483
2010 and thereafter		—		817		—
Total minimum lease payments	$	1,820	$	5,997		5,626
Less: Amount representing interest						(477	)
Present value of future minimum lease payments						5,149
Less: Current portion						(1,503	)
Noncurrent portion of capital lease obligations					$	3,646

       Purchase obligations consist of non-cancellable marketing agreements and colocation services.

       In October 2001, the Company entered into an agreement with a leasing company to establish a line of credit which enabled the Company to finance up to $1,000 in equipment purchases under capital leases (the “Lease Line”).

F-20

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

       Under the Lease Line, the Company was required to maintain certain financial and non-financial covenants. In May 2002, a stockholder of the Company provided the lessor with a guarantee and compliance with the covenants was waived by the lessor. The guarantee included a call option that the guarantor was able to exercise at any time during the lease term. The exercise of the option would have resulted in payment of all due amounts to the lessor at the time of exercise and transferring of all rights and obligations under the lease line to the guarantor. In connection with the guarantee, the Company entered into a warrant purchase agreement with the stockholder and issued warrants to purchase 60 shares of Series D convertible preferred stock (See Note 8). The agreement included, among other things, a right of the stockholder to convert any outstanding amount of the assumed loan, given that the call option included in the guarantee agreement was exercised, into shares of convertible preferred stock at a conversion rate of $0.6123 per share.

       In February 2003, the Company’s stockholder exercised its call option. In July 2003, the stockholder converted the then outstanding assumed loan in the amount of $439 into 718 shares of Series E convertible preferred stock.

Indemnifications

       In the normal course of business, the Company enters into contracts and agreements that contain a variety of representation and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves future claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.

       In accordance with its bylaws, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such a capacity. There have been no claims to date and the Company has a director and officer insurance policy that enables it to recover a portion of any amounts paid for future claims.

Contingencies

       From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

Note 7 — Loan Payable

       In February 2003, the Company received a $2,500 loan from a stockholder to finance working capital. The loan was repayable commencing March 2004, based on a 36-month repayment schedule. Any remaining outstanding balance was due and immediately payable at the end of February 2006. The loan bore an annual interest rate of 5% above the Prime Rate, as published in the Wall Street Journal, and not to exceed 12%. The Prime Rate was adjusted on a monthly basis. The Company granted the lender a continuing security interest in all of its assets. The loan agreement provided for certain financial and non-financial covenants, the breach of which could have resulted in an increase in the interest rate or the loan being immediately callable.

       In connection with this loan, the Company issued warrants to purchase 138 and 113 shares of Series D and E convertible preferred stock, respectively. The warrants each had an exercise price of

F-21

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

$0.615 per share. The fair value of the warrants was estimated at an aggregate of $115 using the Black-Scholes valuation model with the following assumptions: expected volatility of 70%, risk free interest rate of 4.24%, expected life of 10 years and no dividends. The fair value of the warrants was recorded as a discount to the loan and was amortized to interest expense using the effective interest rate method over the loan term. The Company repaid the entire amount of the loan during 2004. A total of $31 and $83 was recognized as interest expense during the periods ended December 31, 2003 and 2004, respectively. The warrants were fully exercised in 2004.

       In August 2005, the Company entered into a $7,000 term loan agreement with Silicon Valley Bank to finance equipment purchases. The loan was repayable commencing September 2005, based on a 36-month repayment schedule. Any remaining outstanding balance was due and immediately payable at the beginning of August 2008. The loan bore an annual interest rate on the outstanding principal amount from the date when made until paid in full at a rate per annum equal to the Prime Rate plus the Applicable Term Margin. The Applicable Term Margin was based on the Cash Flow Leverage Ratio, and ranged from 0.50% to 1.0%. The loan agreement provided for certain financial and non-financial covenants, the breach of which could have resulted in an increased interest rate or the loan being immediately callable.

       The Company borrowed $2,571 on this loan in August 2005, and repaid the full balance in November 2005. A total of $125 was recognized as interest expense during the period ended December 31, 2005.

Note 8 — Redeemable Convertible Preferred Stock

       Under the Company’s Certificate of Incorporation, as amended, the Company is authorized to issue 15,453 shares of preferred stock, which have been designated as Series A convertible preferred stock, Series B convertible preferred stock, Series C convertible preferred stock, Series D convertible preferred stock, Series E convertible preferred stock and Series F convertible preferred stock, respectively.

       Redeemable convertible preferred stock at December 31, 2005 consists of the following:

							Proceeds
	Shares						Net of
					Liquidation		Issuance
Series	Authorized		Outstanding		Amount		Costs
A		3,461		3,329	$	8,906	$	8,889
B		1,143		1,031		25,264		25,243
C		928		876		23,222		23,202
D		3,083		3,080		43,856		9,999
E		4,132		4,132		10,119		2,489
F		2,707		1,354		20,000		19,830
		15,454		13,802	$	131,367	$	89,652

       The holders of convertible preferred stock have the rights and preferences as follows:

Dividends

       The holders of shares of Series A, Series B, Series C, Series D, Series E and Series F convertible preferred stock are entitled to receive dividends, out of any assets legally available, prior to and in preference to any declaration or payment of any dividend on the common stock of the

F-22

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

Company, at the rate of $0.214, $1.96, $2.12, $0.285, $0.049 and $1.182 (as adjusted for any stock dividends, stock splits or recapitalization), respectively, per share per annum. Additionally, the holders of shares of Series A, Series B, Series C, Series D, Series E, and Series F convertible preferred stock are entitled to participate in any additional dividends on a per share as-if-converted basis with shares of common stock. Such dividends are payable when, as and if declared by the Company’s Board of Directors (“the Board”), and are not cumulative. As of December 31, 2005, no dividends had been declared.

Liquidation

       In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series E and Series F convertible preferred stock are entitled to receive, prior and in preference to any distribution of any assets of the Company to the holders of common stock, Series A, Series B, Series C and Series D convertible preferred stock by reason of their ownership, an amount per share equal to (A) in the case of the Series E convertible preferred stock: $0.6123 plus an amount equal to 300% of the Series E issue price (as adjusted for any stock dividends, stock splits or recapitalizations), plus any declared, but unpaid dividends on such shares, and (B) in the case of the Series F convertible preferred stock: $14.774, plus any declared, but unpaid dividends on such shares. After the payment to the holders of the Series F and Series E convertible preferred stock, the holders of Series D convertible preferred stock are entitled to receive, prior and in preference to any distribution of any assets of the Company to the holders of common stock, Series A, Series B and Series C convertible preferred stock by reason of their ownership, an amount per share equal to $3.56 plus an amount equal to 300% of the issue price (as adjusted for any stock dividends, stock splits or recapitalizations), plus any declared, but unpaid dividends on such shares. After the payment to the holders of Series F, Series E and Series D convertible preferred stock, the holders of Series A, Series B and Series C convertible preferred stock are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock by reason of their ownership, an amount per share equal to $2.675, $24.50 and $26.50 for each outstanding share of Series A, Series B, and Series C convertible preferred stock (as adjusted for any stock dividends, stock splits or recapitalizations), respectively, plus any declared, but unpaid dividends on such shares.

       After payment has been made to the holders of Series A, Series B, Series C, Series D, Series E and Series F convertible preferred stock, any remaining assets and funds are to be distributed among the holders of common stock ratably based on the number of shares of common stock held by each stockholder.

       A merger, reorganization or sale of all or substantially all of the assets of the Company in which the stockholders of the Company immediately prior to the transaction possess less than 50% of the voting power of the surviving entity (or its parent) immediately after the transaction shall be deemed to be a liquidation, dissolution or winding up.

Voting Rights

       The holder of each share of Series A, Series B, Series C, Series D, Series E and Series F convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which each share of the Series A, Series B, Series C, Series D, Series E and Series F convertible preferred stock could be converted on the record date for the vote or consent of stockholders, except as otherwise required by law, and has voting rights and powers equal to the voting rights and powers of common stock.

F-23

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

Conversion

       Each share of Series A, Series B, Series C, Series D, Series E and Series F convertible preferred stock, at the option of the holder, is convertible into the number of fully paid and nonassessable shares of common stock which results from dividing the per share conversion price in effect for the convertible preferred stock at the time of conversion by the per share conversion value of such shares. The initial per share conversion price of Series A, Series B, Series C, Series D, Series E and Series F convertible preferred stock is $2.675, $24.50, $26.50, $3.56, $0.6123 and $14.774, respectively.

       Conversion is automatic at its then effective conversion rate (i) immediately upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of common stock in which (a) the public offering price equals or exceeds $20 per share (as adjusted for any stock dividends, stock splits or recapitalizations) and (b) the aggregate proceeds raised equal or exceed $25 million, or (ii) at the election of the holders of a majority of the outstanding preferred stock voting together as a single class on an as-converted basis. The price at which shares of the Company’s redeemable convertible preferred stock convert into common stock upon completion of an underwritten public offering was subsequently modified in June 2006 from $20 to $12 per share (see Note 13).

Warrants for Convertible Preferred Stock

       In connection with various financings and other commercial arrangements, the Company has issued warrants to purchase shares of its convertible preferred stock. Amortization expense relating to warrants for the years ended December 31, 2003 and 2004 was $31 and $83, respectively.

       As of December 31, 2005, outstanding preferred stock warrants consisted of:

						Number
						of Shares		Fair Value
			Convertible			Outstanding		at
			Preferred	Exercise		Underlying		December 31,
Issue Date	Term		Stock	Price		Warrant		2005
September 1999		7	Series A	$	2.68		37	$	283
September 1999		7	Series A	$	2.68		38		286
March 2000		7	Series B	$	24.50		4		17
June 2000		10	Series B	$	24.50		41		400
August 2000		7	Series C	$	26.50		4		22
January 2001		10	Series B	$	3.56		30		494
September 2001		7	Series D	$	3.60		3		32
							157	$	1,535

       As discussed in Note 3, in 2005 we reclassified the freestanding preferred stock warrants as a liability and began adjusting the warrants to fair value at each reporting period.

Note 9 — Common Stock

       The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 38,250,757 shares of $0.0001 par value per share common stock.

F-24

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

       The Company had reserved shares of common stock for the following:

	As of
	December 31,
	2005
Stock option plans		7,226
Conversion of Series A convertible preferred stock		3,461
Conversion of Series B convertible preferred stock		1,143
Conversion of Series C convertible preferred stock		928
Conversion of Series D convertible preferred stock		3,083
Conversion of Series E convertible preferred stock		4,132
Conversion of Series F convertible preferred stock		2,707
		22,680

Incentive Stock Plan

       In September 1999, the Company adopted the 1999 Stock Plan (the “Plan”). Under the Plan, the Company may issue shares of common stock and options to purchase common stock to employees, directors and consultants. Options granted under the Plan may be incentive stock options or non-qualified stock options. Incentive stock options (“ISO”) may be granted only to Company employees, which includes officers and directors of the Company. Non-qualified stock options (“NSO”) and stock purchase rights may be granted to employees and consultants. Options under the Plan may be granted at prices not less than 85% of the deemed fair value of the shares on the date of the grant as determined by the Board, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the deemed fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% stockholder shall not be less than 110% of the deemed fair value of the shares on the date of grant. The Board determines the period over which options become exercisable. The term of the options is no longer than five years for ISOs for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten years for all other options. Options granted to date generally vest over four years.

F-25

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

Stock Option Activity

       A summary of the status of the Company’s stock option plans at March 31, 2006 and changes during the period then ended is presented in the table below (share numbers and aggregate intrinsic value in thousands):

	Shares						Weighted		Weighted
	Available			Number of			Average		Average		Aggregate
	for			Options			Exercise		Contractual		Intrinsic
	Grant			Outstanding			Price		Term (Years)		Value
Balances, December 31, 2002		436			2,259		$	0.40
Granted		(1,131	)		1,131			0.64
Exercised					(405	)		0.11
Forfeited, cancelled or expired		850			(848	)		0.42
Balances, December 31, 2003		155			2,137			0.31
Additional authorized		1,000			—
Granted		(687	)		687			0.30
Exercised					(1,448	)		0.22
Forfeited, cancelled or expired		42			(40	)		0.50
Balances, December 31, 2004		510			1,336			0.40
Additional authorized		2,720			—
Granted		(2,372	)		2,372			5.12
Exercised					(315	)		0.35
Forfeited, cancelled or expired		501			(375	)		2.89
Balances, December 31, 2005		1,359			3,018			3.91
Additional authorized (unaudited)		596			—			—
Granted (unaudited)		(255	)		255			10.00
Exercised (unaudited)					(25	)		0.35
Forfeited, cancelled or expired (unaudited)		56			(49	)		4.69
Balances, March 31, 2006 (unaudited)		1,756			3,199		$	4.41		8.58	$	19,139
Options vested and expected to vest at March 31, 2006 (unaudited)					2,985		$	4.33		8.55	$	18,076
Options vested at March 31, 2006 (unaudited)					866		$	2.47		7.47	$	6,866

       In October 2001, the Company granted an NSO option to purchase 139 shares of common stock to a Board member outside of the Plan. The Board member exercised this option in December 2003.

       During the three months ended March 31, 2006, the Company granted stock options to purchase an aggregate of 255 shares of common stock with an estimated weighted-average grant-date fair value of $4.43. The total fair value of options that vested during the three months ended March 31, 2006 was $50 (unaudited) The total intrinsic value of options exercised during the three months ended March 31, 2006 was $249 (unaudited). Net cash proceeds from the exercise of stock options were $9 (unaudited) for the three months ended March 31, 2006. As permitted by SFAS No. 123R, we have deferred the recognition of our excess tax benefit.

F-26

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

       The following table summarizes information about stock options outstanding, vested and exercisable at December 31, 2005:

										Options Vested and
				Options Outstanding						Exercisable
						Weighted Avg.
				Shares Underlying		Remaining
Range of Exercise				Outstanding Options		Contractual		Weighted Avg.		As of		Weighted Avg.
Prices				as of 12/31/05		Term		Ex Price		12/31/05		Ex Price
$	0.10	$	0.10		84		7.18	$	0.10		68	$	0.10
$	0.30	$	0.30		463		8.34	$	0.30		136	$	0.30
$	0.50	$	0.50		269		5.79	$	0.50		268	$	0.50
$	3.50	$	3.50		14		4.28	$	3.50		14	$	3.50
$	5.00	$	5.00		1,344		9.08	$	5.00		3	$	5.00
$	5.50	$	5.50		823		9.51	$	5.50		—	$	0.00
$	10.00	$	10.00		21		9.93	$	10.00		—	$	0.00
$	0.10	$	10.00		3,018		8.72	$	3.91		489	$	0.50

       As of December 31, 2004, options to purchase 645 shares were vested and exercisable with a weighted average exercise price of $0.48.

Early Exercise of Employee Options

       Stock options granted under the Company’s stock option plan provide employee option holders the right to elect to exercise unvested options in exchange for restricted common stock. Unvested shares, which amounted to 698 and 138 at December 31, 2004 and 2005, respectively, and 100 (unaudited) at March 31, 2006, were subject to a repurchase right held by the Company at the original issuance price in the event the optionees’ employment is terminated either voluntarily or involuntarily. For exercises of employee options, this right lapses 25% on the first anniversary of the vesting start date and in 36 equal monthly amounts thereafter. These repurchase terms are considered to be a forfeiture provision and do not result in variable accounting. In accordance with EITF No. 00-23, Issues Related to the Accounting for Stock Compensation under APB No. 25, the shares purchased by the employees pursuant to the early exercise of stock options are not deemed to be outstanding until those shares vest. In addition, cash received from employees for exercise of unvested options is treated as a refundable deposit shown as a liability in the Company’s financial statements. For the periods ended December 31, 2004 and 2005, and March 31, 2006, cash received for early exercise of options totaled to $123 , $38, and $27 (unaudited), respectively. Amounts so recorded are transferred into common stock and additional paid-in capital as the shares vest.

       The activity of nonvested shares for the three months ended March 31, 2006 as a result of early exercise of options granted to employees is as follows:

Nonvested shares	Shares
Balance as of December 31, 2005		138
Early exercise of options (unaudited)		3
Vested (unaudited)		(41	)
Balance as of March 31, 2006 (unaudited)		100

F-27

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

Non-Employee Stock Options

       During 2003, the Company granted options to purchase 10 shares of common stock, at an exercise price of $0.10 per share to consultants in consideration for their services rendered to the Company. The Company recognizes stock-based compensation expense associated with these options as they vest and estimates their fair value based on the Black-Scholes option pricing model and its applicable assumptions at each reporting period. Accordingly, in 2003 the Company recorded stock-based compensation expense totaling $4. The following assumptions were utilized: expected dividend yield of 0%; risk-free interest rate ranging from 2.45% to 2.66%; expected volatility of 70%; and remaining contractual life of 10 years.

Stock-based Compensation Associated with Awards to Employees

       All options granted were intended to be exercisable at a price per share not less than fair market value of the shares of the Company’s stock underlying those options on their respective dates of grant. The Board determined these fair market values in good faith based on the best information available to the Board and Company’s management at the time of the grant. Although the Company believes these determinations accurately reflect the historical value of the Company’s common stock, management has retroactively revised the valuation of its common stock for the purpose of calculating stock-based compensation expense. Accordingly, in the periods ending December 31, 2003, 2004 and 2005 for such stock and options issued to employees, the Company has recorded deferred stock-based compensation of $564, $2,299 and $1,225, respectively, net of cancellations, of which the Company amortized $166, $858, $1,547 and $275 (unaudited) of stock-based compensation in the years ended December 31, 2003, 2004 and 2005, and the three months ended March 31, 2006, respectively.

       Information on employee stock options granted in 2005 and the three months ended March 31, 2006 is summarized as follows:

	Number of
	Options		Exercise		Fair Value Estimate		Intrinsic Value per
	Granted		Price		per Common Share		Option Share
January 17, 2005		1,038,146	$	5.00	$	5.56	$	0.56
February 3, 2005		34,750		5.00		5.61		0.61
March 16, 2005		273,000		5.00		5.75		0.75
May 3, 2005		357,100		5.50		5.90		0.40
June 23, 2005		263,950		5.50		6.14		0.64
August 18, 2005		294,511		5.50		6.48		0.98
September 28, 2005		58,250		5.50		8.17		2.67
October 6, 2005		23,200		5.50		8.62		3.12
October 20, 2005		7,250		5.50		9.43		3.93
December 5, 2005		22,050		10.00		10.09		0.09
January 20, 2006		230,250		10.00		10.19		0.19
February 1, 2006		25,000		10.00		10.29		0.29

       At December 31, 2005, the Company had deferred stock-based compensation under APB 25, as shown in the consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) of $1,625 of which $1,105 is expected to be amortized in 2006, $393 in 2007, $117 in 2008 and $10 in 2009.

F-28

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

       On July 28, 2004, the Company entered into a transition agreement with one of its executive officers whereby vesting of previously granted options was accelerated resulting in a new measurement date at the date of modification. This executive officer resigned as an executive officer effective December 31, 2004 and resigned as an employee of the Company effective January 31, 2005. A total of 316 shares would have been forfeited under the original option terms resulting in total compensation expense of $1,145. The total compensation expense was measured as the sum of (a) the intrinsic value at the original measurement date and (2) the intrinsic value of the modified award that exceeds the lesser of the intrinsic value of this original award at the original measurement date or (3) immediately prior to its modification. A total of $981 and $164 was recognized in the years ended December 31, 2004 and 2005, respectively.

       On August 13, 2004 the Company entered into a transition agreement with one of its executive officers. Upon termination, the agreement provided for acceleration of 25% of the officer’s unvested options. The agreement also provided for an extension of the time to exercise any vested options, from 90 days to 270 days from the date of the officer’s termination. In February 2005, this executive officer resigned and 17 shares that would have been forfeited under the original option terms were accelerated, resulting in total stock-based compensation expense of $65. In November 2005, this executive officer exercised options for 293 shares. As expense recognition for the additional 276 shares was contingent on whether this executive officer took the benefit of the vesting extension, additional stock-based compensation expense was not recognized until the November exercise when $1,036 was recorded. Stock-based compensation expense for the February and November 2005 charges was measured as the sum of (a) the intrinsic value at the original measurement date and (b) the intrinsic value of the modified award that exceeds the lesser of (1) the intrinsic value of the original award at the measurement date or (2) immediately prior to its modification.

       In March 2005, the Company entered into a settlement agreement with a former employee, whereby the Company allowed the former employee to retain 65 shares of common stock and repurchased 29 shares of common stock at its original purchase price. These shares were previously deemed repurchased by the Company. In connection with this settlement, the Company recorded $352 as stock-based compensation as of December 31, 2004, computed at the fair value of the common stock at the date of settlement.

Adoption of SFAS No. 123R (Unaudited)

       The Company adopted SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, the Company estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model using the assumptions noted in the following table. Expected volatility is based on the historical and implied volatility of a peer group of publicly traded entities. The expected term of options gave consideration to historical exercises, post vest cancellations and the options contractual term. The risk-free rate for the expected term of the option is based on the U.S. Treasury

F-29

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

Constant Maturity rate as of March 31, 2006. The assumptions used to value options granted during the three months ended March 31, 2006 were as follows:

	Three Months
	Ended
	March 31, 2006
	(Unaudited)
Dividend yield		—
Annual risk free rate of return		4.83	%
Expected volatility		46.48	%
Expected term (years)		4.17

       Employee stock-based compensation expense recognized in the three months ended March 31, 2006 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

       As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s net loss for the three months ended March 31, 2006, was higher by $32 (unaudited), net of tax effect, than if the Company had continued to account for stock-based compensation under APB 25. Basic and diluted net loss per share for the three months ended March 31, 2006 would have been lower by $(0.01) (unaudited), than if the Company had not adopted SFAS No. 123R. At March 31, 2006, the Company had $2,026 (unaudited) of total unrecognized compensation expense under SFAS 123R, net of estimated forfeitures, related to stock option plans that will be recognized over a weighted-average period of 1.44 years.

Note 10 — Income Taxes

       The following table reflects the components of the provision for income taxes of the Company:

			December 31,
			2003	2004	2005
Federal:
	Current		$67	$194	$	(187	)
	Deferred		—	—		(20,230	)
		Total	$67	$194	$	(20,417	)
State:
	Current		$1	$64	$	(40	)
	Deferred		—	—		(3,603	)
		Total	$1	$64	$	(3,643	)
Total income tax expense (benefit):
	Current		$68	$258	$	(227	)
	Deferred		—	—		(23,833	)
		Total	$68	$258	$	(24,060	)

F-30

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

       The Company’s actual tax expense (benefit) differed from the statutory federal income tax rate of 34%, as shown in the following schedule:

	Year Ended December 31,
	2003			2004			2005
Income tax expense at statutory rate		34.0%			34.0%			34.0%
State income taxes		5.8%			5.8%			5.8%
Stock-based compensation		3.7%			7.4%			10.7%
Non-qualified deductions		—			—			(13.1	)%
Change in valuation allowance		(36.0	)%		(38.0	)%		(527.7	)%
Other		(4.3	)%		(2.7	)%		(3.5	)%
		3.2%			6.5%			(493.8	)%

       Historically, the Company has recorded a valuation allowance on deferred tax assets, the majority of which relate to net operating loss carryforwards generated before it achieved profitability. During the fourth quarter of 2005, the Company concluded that it was more likely than not that the tax benefit associated with these deferred tax assets would be realized, resulting in a net tax benefit of $24,060 resulting primarily from the release of the deferred tax valuation allowance. The valuation allowance increased by $620 and decreased by $3,050 and $25,008 during the years ended December 31, 2003, 2004 and 2005, respectively.

       At December 31, 2005, the Company had approximately $57,000 and $53,000 of federal and state net operating loss carryforwards, respectively, to reduce future regular taxable income. These carryforwards will expire at various dates beginning in the year 2020 for federal and 2008 for state purposes, if not utilized.

       The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in the case of an “ownership change” of a corporation or separate return loss year limitations. Any ownership changes, as defined, may restrict utilization of carryforwards.

       The Company also has federal and state research and development credit carryforwards of approximately $500 and $400 for federal and state income tax purposes, respectively, at December 31, 2005. The research and development credits may be carried forward over a period of 20 years for federal tax purposes, and indefinitely for California tax purposes.

       The components of the net deferred tax assets as of December 31, 2005 are:

				December 31,
				2004			2005
Deferred tax assets
	Net operating loss carryforwards			$	25,137		$	22,646
	Reserves and other tax benefits				412			1,408
	Tax credits				614			823
		Deferred tax assets			26,163			24,877
Deferred tax liabilities
	Depreciation and amortization				(1,155	)		(632	)
	Other deferred tax liabilities				—			(182	)
		Deferred tax liabilities			(1,155	)		(814	)
Valuation allowance					(25,008	)		—
			Net deferred tax assets	$	—		$	24,063

F-31

SHUTTERFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts) — (Continued)

Note 11 — Employee Benefit Plan

       In 2000 the Company established a 401(k) plan under the provisions of which eligible employees may contribute an amount up to 15% of their compensation on a pre-tax basis. The Company matches employees’ contributions at the discretion of the Board. To date, no matching contributions have been made by the Company.

Note 12 — Related Party Transactions

       During the years ended December 31, 2003 and 2004, the Company entered into several transactions with one of its stockholders. The transactions involved issuance of warrants and conversion of certain loans into Series E Convertible preferred stock (see Note 7) and entering into a debt financing agreement (see Note 6). During the years ended December 31, 2003 and 2004, the Company recorded $189 and $206 of interest expense related to these loans.

       On June 1, 2005, the Company acquired Memory Matrix (see Note 5). Monaco Partners, L.P., a beneficial owner of the Company’s capital stock, owned 14.1% of Memory Matrix immediately prior to the closing of the acquisition. James H. Clark, who is a director and stockholder of the Company, controls Monaco Partners, L.P. Mr. Clark was a member of the board of directors of Memory Matrix immediately prior to the acquisition.

Note 13 — Subsequent Events

       On March 16, 2006, the Board increased the number of shares of the Company’s common stock that are reserved and available for issuance under the Company’s 1999 Stock Plan by 596 shares.

       In January 2006, the Company signed a non-cancellable service agreement with a third-party data center for colocation services. The agreement has $4,300 of non-cancelable scheduled rentals over a three-year period ending in 2009.

       In June, 2006, based on a reassessment of the value of its common stock during 2005, the Company offered to the employees who were granted options from January 2005 to October 2005 the ability to amend the terms of their options to increase the exercise prices in order to help them avoid potential adverse personal income tax consequences. Employees who were given the ability to amend the terms of their options have until June 29, 2006 to make the election.

       On June 20, 2006, the Board approved the 2006 Equity Incentive Plan. A total of 1,358 shares of common stock were reserved for future issuance under the plan, which will become effective upon the completion of the Company’s planned initial public offering.

       From April 1, 2006 through June 20, 2006, the Company granted 1,620 options to purchase       shares of common stock to new and existing employees at a weighted average exercise price of $10.49 per share.

       The Company’s Restated Certificate of Incorporation was amended effective June 20, 2006 to reduce the price at which shares of the Company’s redeemable convertible preferred stock convert into common stock upon completion of an underwritten public offering from $20 to $12 per share.

       On June 20, 2006, the Board approved the filing of a registration statement with the Securities and Exchange Commission for an initial public offering of the Company’s common stock.

F-32

      No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

TABLE OF CONTENTS

	Page
Prospectus Summary		1
Risk Factors		8
Special Note Regarding Forward-Looking Statements		27
Use of Proceeds		28
Dividend Policy		28
Capitalization		29
Dilution		31
Selected Consolidated Financial Data		33
Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Business		52
Management		66
Certain Relationships and Related Party Transactions		79
Principal Stockholders		81
Description of Capital Stock		83
Shares Eligible for Future Sale		87
Underwriting		89
Legal Matters		93
Experts		93
Where You Can Find Additional Information		93
Index to Financial Statements		F-1
EXHIBIT 3.01
EXHIBIT 3.02
EXHIBIT 3.03
EXHIBIT 3.04
EXHIBIT 3.05
EXHIBIT 4.02
EXHIBIT 10.01
EXHIBIT 10.02
EXHIBIT 10.08
Exhibit 10.09
EXHIBIT 10.10
EXHIBIT 10.11
EXHIBIT 10.12
Exhibit 10.13
Exhibit 10.14
EXHIBIT 21.01
EXHIBIT 23.02

      Through and including                     , 2006 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Shares

Shutterfly, Inc.

Common Stock

Goldman, Sachs & Co.

JPMorgan

Piper Jaffray

Jefferies & Company

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. Other Expenses of Issuance and Distribution.

       The following table sets forth the costs and expenses to be paid by Shutterfly in connection with the sale of the shares of common stock being registered hereby. All amounts are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee.

SEC registration fee	$	9,844
NASD filing fee		9,700
Nasdaq National Market listing fee		100,000
Printing and engraving		*
Legal fees and expenses		*
Accounting fees and expenses		*
Blue sky fees and expenses		*
Transfer agent and registrar fees and expenses		*
Miscellaneous		*
Total	$	*

*  To be filed by amendment.

ITEM 14. Indemnification of Directors and Officers.

       Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the Delaware General Corporation Law are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933.

       As permitted by the Delaware General Corporation Law, the Registrant’s restated certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability:

•  for any breach of the director’s duty of loyalty to the Registrant or its stockholders,

•  for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law,

•  under section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases), or

•  for any transaction from which the director derived an improper personal benefit.

       As permitted by the Delaware General Corporation Law, the Registrant’s restated bylaws provide that:

•  the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions,

•  the Registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law,

•  the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions, and

•  the rights conferred in the bylaws are not exclusive.

II-1

       Prior to the completion of the offering, the Registrant intends to enter into indemnification agreements with each of its current directors and officers to provide such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant’s restated certificate of incorporation and restated bylaws and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Registrant regarding which indemnification is sought. Reference is also made to Section 9 of the Underwriting Agreement, which provides for the indemnification of officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provision in the Registrant’s restated certificate of incorporation, restated bylaws and the indemnification agreements entered into or to be entered into between the Registrant and each of its directors and officers may be sufficiently broad to permit indemnification of the Registrant’s directors and officers for liabilities arising under the Securities Act.

       The Registrant has directors’ and officers’ liability insurance for securities matters.

       Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:

Exhibit Document	Number
Form of Underwriting Agreement		1.01
Form of Restated Certificate of Incorporation of the Registrant		3.03
Form of Restated Bylaws of the Registrant		3.05
Fifth Amended and Restated Investors’ Rights Agreement dated November 11, 2005		4.02
Form of Indemnity Agreement		10.01

ITEM 15. Recent Sales of Unregistered Securities.

       Since March 31, 2003, we have issued and sold the following securities:

       1. On July 31, 2003, we issued 717,545 shares of our Series E Preferred Stock to Monaco Partners, L.P. upon Monaco’s exercise of its right to convert approximately $439,000 in debt from us, which debt was incurred as a result of Monaco’s payment of certain amounts originally owed by us to Silicon Valley Bank, as further described in the section entitled “Certain Relationships and Related Party Transactions.”

       2. On December 30, 2004, Monaco Partners, L.P. exercised warrants to purchase 112,500 shares of our Series D preferred stock and 137,500 shares of our Series E preferred stock. These warrants were issued in connection with a loan made by Monaco to the Company in February 2003. The Company paid the balance due on this loan in full in December 2004.

       3. From March 31, 2003 through May 31, 2006, we issued options to purchase an aggregate of 5,164,382 shares of our common stock under our 1999 Stock Plan.

       4. On November 11, 2005, we issued 1,353,730 shares of our Series F preferred stock to Sutter Hill Ventures at a price of $14.774 per share.

       5. On June 1, 2005, we issued 229,994 shares of our common stock to the shareholders of Memory Matrix, Inc., in connection with our acquisition of Memory Matrix.

       6. From March 31, 2003 through May 31, 2006, we issued 2,307,665 shares of our common stock to our employees, directors, consultants and other service providers upon exercise of options granted by us, with exercise prices ranging from $0.10 to $5.50 per share.

       Unless otherwise stated, the sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated under Sections 3(b) and 4(2) of the Securities Act or Rule 701

II-2

promulgated under Section 3(b) and Section 28 of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the share certificates issued in such transactions. All recipients had adequate access, through their relationships with us, to information about Registrant.

ITEM 16. Exhibits and Financial Statement Schedules.

       (a) Exhibits.

EXHIBIT INDEX

Exhibit
Number			Exhibit Title
	1	.01*	Form of Underwriting Agreement.
	3	.01	Restated Certificate of Incorporation of the Registrant.
	3	.02	Amendment to Restated Certificate of Incorporation of the Registrant.
	3	.03	Form of Restated Certificate of Incorporation of the Registrant, to be effective immediately following the completion of this offering.
	3	.04	Bylaws of the Registrant.
	3	.05	Form of Amended and Restated Bylaws of the Registrant, to be effective immediately following completion of this offering.
	4	.01*	Form of Registrant’s common stock certificate.
	4	.02	Fifth Amended and Restated Investors’ Rights Agreement, dated as of November 11, 2005, by and among the Registrant and certain investors of the Registrant.
	5	.01*	Opinion of Fenwick & West LLP regarding the legality of the securities being registered.
	10	.01	Form of Indemnity Agreement.
	10	.02	1999 Stock Plan and forms of stock option agreement and stock option exercise agreement.
	10	.03*	2006 Equity Incentive Plan and forms of stock option agreement, restricted stock agreement, restricted stock unit agreement, stock appreciation right agreement, stock bonus agreement, stock option exercise agreement and stock appreciation right exercise agreement.
	10	.04*	Lease Agreement, as amended, dated July 5, 1999, by and between the Registrant and Westport Joint Venture, as amended to date.
	10	.05*	Agreement of Lease, dated as of August 1, 2005, by and between the Registrant and DCT-CA 2004 RN Portfolio L, LP, as amended to date.
	10	.06*	Lease, dated as of March 7, 2000, by and between the Registrant and 3168 Corporate Place Associates, LLC, as amended to date.
	10	.07*	Lease, dated as of April 6, 2000, by and between the Registrant and 3168 Corporate Place Associates, LLC, as amended to date.
	10	.08	Offer letter dated January 5, 2005 for Jeffrey T. Housenbold.
	10	.09	Offer letter dated June 23, 2004 for Stephen E. Recht.
	10	.10	Offer letter dated July 22, 2001 for Jeannine M. Smith Thomas.
	10	.11	Offer letter dated July 12, 2001 for Andrew F. Young.
	10	.12	Offer letter dated March 25, 2005 for Douglas J. Galen.
	10	.13	Offer letter dated April 3, 2006 for Stanford S. Au.
	10	.14†	Supply agreement, dated as of September 15, 2005, by and between the Registrant and Fuji Photo Film U.S.A., Inc.
	21	.01	Subsidiaries of the Registrant.
	23	.01*	Consent of Fenwick & West LLP (included in Exhibit 5.01).

II-3

Exhibit
Number			Exhibit Title
	23	.02	Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
	24	.01	Powers of Attorney (included on page II-6).

*  To be filed by amendment.

†  Confidential treatment requested for portions of this agreement.

       (b) Financial Statement Schedules.

       Below is Schedule II — Valuation and Qualifying Accounts. All other financial statement schedules are omitted because they are not applicable or the information is included in the financial statements or related notes.

Report of Independent Registered Public Accounting Firm

on

Financial Statement Schedule

To the Board of Directors and Stockholders

of Shutterfly, Inc.:

       Our audits of the consolidated financial statements referred to in our report dated June 27, 2006 appearing in the registration statement on Form S-1 of Shutterfly, Inc. also included an audit of the financial statement schedule listed in Schedule II of this registration statement on Form S-1. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

San Jose, California

June 27, 2006

Schedule II

Valuation and Qualifying Accounts

				Additions
		Balance at											Balance at
		beginning		Charged to costs			Charged to						end of
		of period		and expenses			other accounts			Deductions			period
Deferred tax valuation allowance
	Year ended December 31, 2003	$	27,438	$	620	(1)	$	—		$	—		$	28,058
	Year ended December 31, 2004		28,058		—			—			(3,050	) (2)		25,008
	Year ended December 31, 2005		25,008		—			(230	)(3)		(24,778	) (4)		—

(1)	Increase in the valuation allowance is due to an increase in deferred tax assets
(2)	Decrease in the valuation allowance is due to a decrease in deferred tax assets
(3)	Reflects amounts related to items with no income statement effect
(4)	Decrease in the valuation allowance is due to the reversal of the valuation allowance in the fourth quarter of 2005.

II-4

ITEM 17. Undertakings.

       The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

       Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to provisions described in Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

       The undersigned Registrant hereby undertakes that:

       (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

       (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-5

SIGNATURES

       Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Redwood City, State of California, on June 28, 2006.

SHUTTERFLY, INC.

By:  /s/ Stephen E. Recht

Stephen E. Recht

Chief Financial Officer

POWER OF ATTORNEY

       KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Jeffrey T. Housenbold and Stephen E. Recht, and each of them, his or her true and lawful attorneys-in-fact and agents with full power of substitution, 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 post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact 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 and about the premises, 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 his, her or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof.

       Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

Name	Title	Date
Principal Executive Officer:
/s/ Jeffrey T. Housenbold Jeffrey T. Housenbold	President, Chief Executive Officer and Director	June 28, 2006
Principal Financial Officer and Principal Accounting Officer:
/s/ Stephen E. Recht Stephen E. Recht	Chief Financial Officer	June 28, 2006

II-6

Name	Title	Date
Additional Directors:
/s/ James H. Clark James H. Clark	Chairman of the Board	June 28, 2006
/s/ Nancy J. Schoendorf Nancy J. Schoendorf	Director	June 28, 2006
/s/ James N. White James N. White	Director	June 28, 2006
/s/ Eric J. Keller Eric J. Keller	Director	June 28, 2006
/s/ Patricia A. House Patricia A. House	Director	June 28, 2006

II-7

EXHIBIT INDEX

Exhibit
Number			Exhibit Title
	1	.01*	Form of Underwriting Agreement.
	3	.01	Restated Certificate of Incorporation of the Registrant.
	3	.02	Amendment to Restated Certificate of Incorporation of the Registrant.
	3	.03	Form of Restated Certificate of Incorporation of the Registrant, to be effective immediately following the completion of this offering.
	3	.04	Bylaws of the Registrant.
	3	.05	Form of Amended and Restated Bylaws of the Registrant, to be effective immediately following completion of this offering.
	4	.01*	Form of Registrant’s common stock certificate.
	4	.02	Fifth Amended and Restated Investors’ Rights Agreement, dated as of November 11, 2005, by and among the Registrant and certain investors of the Registrant.
	5	.01*	Opinion of Fenwick & West LLP regarding the legality of the securities being registered.
	10	.01	Form of Indemnity Agreement.
	10	.02	1999 Stock Plan and forms of stock option agreement and stock option exercise agreement.
	10	.03*	2006 Equity Incentive Plan and forms of stock option agreement, restricted stock agreement, restricted stock unit agreement, stock appreciation right agreement, stock bonus agreement, stock option exercise agreement and stock appreciation right exercise agreement.
	10	.04*	Lease Agreement, as amended, dated July 5, 1999, by and between the Registrant and Westport Joint Venture, as amended to date.
	10	.05*	Agreement of Lease, dated as of August 1, 2005, by and between the Registrant and DCT-CA 2004 RN Portfolio L, LP, as amended to date.
	10	.06*	Lease, dated as of March 7, 2000, by and between the Registrant and 3168 Corporate Place Associates, LLC, as amended to date.
	10	.07*	Lease, dated as of April 6, 2000, by and between the Registrant and 3168 Corporate Place Associates, LLC, as amended to date.
	10	.08	Offer letter dated January 5, 2005 for Jeffrey T. Housenbold.
	10	.09	Offer letter dated June 23, 2004 for Stephen E. Recht.
	10	.10	Offer letter dated July 22, 2001 for Jeannine M. Smith Thomas.
	10	.11	Offer letter dated July 12, 2001 for Andrew F. Young.
	10	.12	Offer letter dated March 25, 2005 for Douglas J. Galen.
	10	.13	Offer letter dated April 3, 2006 for Stanford S. Au.
	10	.14†	Supply agreement, dated as of September 15, 2005, by and between the Registrant and Fuji Photo Film U.S.A., Inc.
	21	.01	Subsidiaries of the Registrant.
	23	.01*	Consent of Fenwick & West LLP (included in Exhibit 5.01).
	23	.02	Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
	24	.01	Powers of Attorney (included on page II-6).

*  To be filed by amendment.

†  Confidential treatment requested for portions of this agreement.

EX-3.01

Exhibit 3.01

RESTATED CERTIFICATE OF INCORPORATION

OF

SHUTTERFLY, INC.

     Shutterfly, Inc., a Delaware corporation, hereby certifies that:

     1. The name of the corporation is Shutterfly, Inc. The corporation filed its original Certificate of Incorporation with the Secretary of State on April 23, 1999 under the name “Shortco, Inc.”

     2. This Restated Certificate of Incorporation of the corporation attached hereto as Exhibit “1”, which is incorporated herein by this reference, and which restates, integrates and further amends the provisions of the Certificate of Incorporation of this corporation as previously amended or supplemented, has been duly adopted by the corporation’s Board of Directors and the stockholders in accordance with Sections 242 and 245 of the Delaware General Corporation Law, with the approval of the corporation’s stockholders having been given by written consent without a meeting in accordance with Section 228 of the Delaware General Corporation Law.

     IN WITNESS WHEREOF, said corporation has caused this Restated Certificate of Incorporation to be signed by its duly authorized officer and the foregoing facts stated herein are true and correct.

Dated: November 10, 2005	SHUTTERFLY, INC.
	By:	/s/ Stephen E. Recht
		Stephen E. Recht
		Chief Financial Officer

Exhibit “1"

RESTATED CERTIFICATE OF INCORPORATION

OF

SHUTTERFLY, INC.

ARTICLE I

     The name of this corporation is Shutterfly, Inc.

ARTICLE II

     The address of the corporation’s registered office in the State of Delaware is 3500 South Dupont Highway, City of Dover, County of Kent, DE 19901. The name of the corporation’s registered agent at such address is Incorporating Services, Ltd.

ARTICLE III

     The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

ARTICLE IV

     A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares that this corporation is authorized to issue is fifty-three million seven hundred three thousand eight hundred thirty-three (53,703,833) shares. The total number of shares of Common Stock authorized to be issued is thirty-eight million two hundred fifty thousand seven hundred fifty-seven (38,250,757), par value $0.0001 per share. The total number of shares of Preferred Stock authorized to be issued is fifteen million four hundred fifty-three thousand seventy-six (15,453,076), each with a par value of $0.0001 per share, of which three million four hundred sixty thousand six hundred forty-nine (3,460,649) shares are designated as Series A Preferred Stock (the “Series A Preferred Stock”), one million one hundred forty-two thousand eight hundred six (1,142,806) shares are designated as Series B Preferred Stock (the “Series B Preferred Stock”), nine hundred twenty-eight thousand two hundred three (928,203) shares are designated as Series C Preferred Stock (the “Series C Preferred Stock”), three million eighty-two thousand five hundred ninety-seven (3,082,597) shares are designated as Series D Preferred Stock (the “Series D Preferred Stock”), four million one hundred thirty-one thousand three hundred sixty-one (4,131,361) shares are designated as Series E Preferred Stock (the “Series E Preferred Stock”) and two million seven hundred seven thousand four hundred sixty (2,707,460) shares are designated as Series F Preferred Stock (the “Series F Preferred Stock”). The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall hereinafter be referred to collectively as the “Preferred Stock.”

     B. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares of Common Stock then outstanding) by the affirmative vote of the holders of a majority of the stock of this corporation entitled to vote (voting together as a single class on an as-if-converted basis).

     C. Rights, Preferences and Restrictions of Preferred Stock. The rights, preferences, privileges, and restrictions granted to and imposed on the Preferred Stock are as set forth below in this Article IV(B).

          1. Dividend Provisions.

          (a) The holders of shares of Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Common Stock of this corporation, (i) in the case of the Series A Preferred Stock, at the rate of $0.2140 per share per annum (as adjusted for any subsequent stock splits, stock dividends, recapitalizations or the like), (ii) in the case of the Series B Preferred Stock, at the rate of $1.96 per share per annum (as adjusted for any subsequent stock splits, stock dividends, recapitalizations or the like), (iii) in the case of the Series C Preferred Stock, at the rate of $2.12 per share per annum (as adjusted for any subsequent stock splits, stock dividends, recapitalizations or the like), (iv) in the case of the Series D Preferred Stock, at the rate of $0.285 per share per annum (as adjusted for any subsequent stock splits, stock dividends, recapitalizations or the like), (v) in the case of the Series E Preferred Stock, at the rate of $0.049 per share per annum (as adjusted for any subsequent stock splits, stock dividends, recapitalizations or the like), and (vi) in the case of the Series F Preferred Stock, at the rate of $1.182 per share per annum (as adjusted for any subsequent stock splits, stock dividends, recapitalizations or the like), payable when, as, and if declared by the Board of Directors. Such dividends shall not be cumulative. The holders of the outstanding Preferred Stock can waive any dividend preference that such holders shall be entitled to receive under this Section 1 upon the affirmative vote or written consent of the holders of at least a majority of the shares of Preferred Stock then outstanding.

          (b) So long as any shares of Preferred Stock are outstanding, this corporation shall not pay or declare any dividend, whether in cash or property, or make any other distribution on the Common Stock, or purchase, redeem or otherwise acquire for value any shares of Common Stock until all dividends as set forth in Section 1(a) above on the Preferred Stock shall have been paid or declared an set apart, except for:

               (i) acquisitions of Common Stock by this corporation pursuant to agreements which permit this corporation to repurchase such shares at cost (or the lesser of cost or fair market value) upon termination of services to this corporation;

               (ii) acquisitions of Common Stock in exercise of this corporation’s right of first refusal to repurchase such shares; or

               (iii) distributions to holders of Common Stock in accordance with Sections 2.

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          (c) In the event dividends are paid on any share of Common Stock, this corporation shall pay an additional dividend on all outstanding shares of Preferred Stock in a per share amount equal (on an as-if-converted to Common Stock basis) to the amount paid or set aside for each share of Common Stock.

          (d) The provisions of Sections 1(b) and 1(c) shall not apply to a dividend payable solely in Common Stock to which the provisions of Section 4(f) hereof are applicable, or any repurchase of any outstanding securities of this corporation that is approved by the Board of Directors and Preferred Stock as may be required by this Certificate of Incorporation.

          2. Liquidation Preference.

          (a) In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, the holders of Series E Preferred Stock and Series F Preferred Stock then outstanding shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or any other class or series of stock ranking on liquidation junior to the Series E Preferred Stock and Series F Preferred Stock by reason of their ownership thereof, an amount per share equal to (A) in the case of Series E Preferred Stock: (i) $0.6123 for each outstanding share of Series E Preferred Stock (the “Original Series E Issue Price”), plus (ii) an amount equal to 300% of the Original Series E Issue Price, plus (iii) declared but unpaid dividends on such share (each of (i) and (iii) subject to adjustment of such fixed dollar amounts for any subsequent stock splits, stock dividends, combinations, recapitalizations or the like); and (B) in the case of Series F Preferred Stock: (i) $14.774 for each outstanding share of Series F Preferred Stock (the “Original Series F Issue Price”), plus (ii) declared but unpaid dividends on such share (each of (i) and (ii) subject to adjustment of such fixed dollar amounts for any subsequent stock splits, stock dividends, combinations, recapitalizations or the like). If upon the occurrence of such event, the assets and funds available to be distributed among the holders of the Series E Preferred Stock and Series F Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of this corporation legally available for distribution shall be distributed pro rata among the holders of the Series E Preferred Stock and Series F Preferred Stock in proportion to the amounts such holders would be entitled to receive under this subsection (a) if the full aforesaid preferential amounts under this subsection (a) were paid.

          (b) After the payment of all preferential amounts required to be paid to the holders of Series E Preferred Stock and Series F Preferred Stock, in the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, the holders of Series D Preferred Stock then outstanding shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or any other class or series of stock ranking on liquidation junior to the Series D Preferred Stock by reason of their ownership thereof, an amount per share equal to (i) $3.56 for each outstanding share of Series D Preferred Stock (the “Original Series D Issue Price”), plus (ii) an amount equal to 300% of the Original Series D Issue Price, plus (iii) declared but unpaid dividends on such share (each of (i) and (iii) subject to adjustment of such fixed dollar amounts for any subsequent stock splits,

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stock dividends, combinations, recapitalizations or the like). If upon the occurrence of such event, the assets and funds available to be distributed among the holders of the Series D Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of this corporation legally available for distribution shall be distributed pro rata among the holders of the Series D Preferred Stock.

          (c) After the payment of all preferential amounts required to be paid to the holders of Series F Preferred Stock and Series E Preferred Stock and Series D Preferred Stock, in the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, the holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock then outstanding shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Common Stock by reason of their ownership thereof, (i) in the case of the Series A Preferred Stock, an amount per share equal to $2.675 for each outstanding share of Series A Preferred Stock (the “Original Series A Issue Price”), plus declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any subsequent stock splits, stock dividends, combinations, recapitalizations or the like), (ii) in the case of the Series B Preferred Stock, an amount per share equal to $24.50 for each outstanding share of Series B Preferred Stock (the “Original Series B Issue Price”), plus declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any subsequent stock splits, stock dividends, combinations, recapitalizations or the like) and (iii) in the case of the Series C Preferred Stock, an amount per share equal to $26.50 for each outstanding share of Series C Preferred Stock (the “Original Series C Issue Price”), plus declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any subsequent stock splits, stock dividends, combinations, recapitalizations or the like). If upon the occurrence of such event, the assets and funds available to be distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of this corporation legally available for distribution shall be distributed pro rata among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock in the proportion that the number of shares of such stock owned by each such holder bears to the total number of shares of Preferred Stock of this corporation then outstanding.

          (d) Upon completion of the distribution required by subsections (a), (b) and (c) of this Section 2, all of the remaining assets of this corporation available for distribution to stockholders shall be distributed among the holders of Common Stock pro rata based on the number of shares of Common Stock held by each.

          (e) (i) For purposes of this Section 2, a liquidation, dissolution or winding up of this corporation shall be deemed to be occasioned by, or to include (A) the acquisition of this corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the transfer of fifty percent (50%) or more of the outstanding voting power of this corporation; (B) any transaction or series of related transactions to which this corporation is a party in which in excess of fifty percent (50%) of this corporation’s voting power is transferred, provided that any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by this corporation or any successor or indebtedness of this corporation is cancelled or converted or a combination thereof shall not be deemed a liquidation,

4

dissolution or winding up of this corporation (collectively, subsection (A) and (B) shall be referred to as an “Acquisition”); or (C) a sale of all or substantially all of the assets of this corporation (an “Asset Transfer”).

          (ii) In the event that this corporation is a party to an Acquisition or Asset Transfer, then each holder of Preferred Stock shall be entitled to receive, for each share of Preferred Stock then held, out of the proceeds of such Acquisition or Asset Transfer, the greater of the amount of cash, securities or other property to which such holder would be entitled to receive in a liquidation, dissolution or winding up of this corporation pursuant to (i) Sections 2(a), (b) and (c) 3(b) above or (ii) the amount of cash, securities or other property to which such holder would be entitled to receive in a liquidation, dissolution or winding up of this corporation with respect to such shares if such shares had been converted to Common Stock immediately prior to such Acquisition or Asset Transfer.

          (iii) In any of such events, if the consideration received by this corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows:

               (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below:

                    (1) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the thirty (30) day period ending three (3) days prior to the closing;

                    (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and

                    (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by this corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock.

               (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder’s status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by this corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock.

          (iv) In the event the requirements of this subsection 2(e) are not complied with, this corporation shall forthwith either:

               (A) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with; or

5

               (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(e)(v) hereof.

          (v) This corporation shall give each holder of record of Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders’ meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and this corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after this corporation has given the first notice provided for herein or sooner than ten (10) days after this corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock.

          3. Redemption. The Preferred Stock is not redeemable at the option of the holder.

          4. Conversion. The holders of the Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

          (a) Right to Convert. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price for such series by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Series A Issue Price, the initial Conversion Price per share for shares of Series B Preferred Stock shall be the Original Series B Issue Price, the initial Conversion Price per share for shares of Series C Preferred Stock shall be the Original Series C Issue Price, the initial Conversion Price per share for shares of Series D Preferred Stock shall be the Original Series D Issue Price, the initial Conversion Price per share for shares of Series E Preferred Stock shall be the Original Series E Issue Price and the initial Conversion Price per share for shares of Series F Preferred Stock shall be the Original Series F Issue Price (each an “Original Issue Price,” as applicable); provided, however, that the Conversion Price for each series of Preferred Stock shall be subject to adjustment as set forth in this subsection 4.

          (b) Automatic Conversion. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Preferred Stock immediately upon the earlier of (i) this corporation’s sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form SB-2 (or any successor form) under the Securities Act of 1933, as amended, (the “Securities Act”), the public offering price of which is not less than $20.00 per

6

share (as adjusted for any stock splits, stock dividends, recapitalizations or the like) and $25,000,000 in the aggregate or (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Preferred Stock.

          (c) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he or she shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. Notwithstanding the foregoing, upon the occurrence of either of the events specified in Section 4(b) above, the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to this corporation or its transfer agent; provided, however, that this corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to this corporation or its transfer agent as provided above, or the holder notifies this corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to this corporation to indemnify this corporation from any loss incurred by it in connection with such certificates. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid and shall promptly pay (i) in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock’s fair market value determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of Preferred Stock being converted and (ii) in cash (at the Common Stock’s fair market value determined by the Board of Directors as of the date of conversion) the value of any fractional share of Common Stock otherwise issuable to any holder of Preferred Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the persons entitled to receive the Common Stock upon conversion of the Preferred Stock shall not be deemed to have converted Preferred Stock until immediately prior to the closing of such sale of securities.

          (d) Conversion Price Adjustments of Preferred Stock. The Conversion Price of each series of Preferred Stock shall be subject to adjustment from time to time as follows:

               (i) In the event this corporation should at any time or from time to time after the date of filing of this Restated Certificate of Incorporation fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution

7

payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referral, to as “Common Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof) and without a corresponding subdivision or dividend or other distribution of the Preferred Stock, then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of each series of Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents.

               (ii) If the number of shares of Common Stock outstanding at any time after the date of filing of this Restated Certificate of Incorporation is decreased by a combination of the outstanding shares of Common Stock without a corresponding combination of the Preferred Stock, then, following the record date of such combination, the Conversion Price for each series of Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares.

          (e) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(d)(i), then, in each such case for the purpose of this subsection 4(e), the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of this corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution.

          (f) Recapitalizations, Reclassification, Merger, Consolidation, Etc. If at any time or from time to time the Common Stock issuable upon the conversion of the Preferred Stock is changed into the same or a different number of shares of any class or classes of stock whether by recapitalization, reclassification, merger, consolidation or otherwise (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of the corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization, reclassification, merger, consolidation or otherwise. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Preferred Stock after the recapitalization, reclassification, merger, consolidation or otherwise to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of each series of Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.

8

          (g) Sale of Shares Below Series F Preferred Stock Conversion Price.

               (i) If at any time or from time to time on or after the date that the first share of Series F Preferred Stock is first issued (the “Original Issue Date”), this corporation issues or sells, or is deemed by the express provisions of this Section 4(g) to have issued or sold, Additional Shares of Common Stock (as defined below), other than as provided in or pursuant to Section 4(d), 4(e) or 4(f) above, for an Effective Price (as defined below) less than the then effective Conversion Price of the Series F Preferred Stock (a “Qualifying Dilutive Issuance”), then and in each such case, the then existing Conversion Price of the Series F Preferred Stock shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying the Conversion Price of the Series F Preferred Stock in effect immediately prior to such issuance or sale by a fraction equal to:

                    (A) the numerator of which shall be (A) the number of shares of Common Stock deemed outstanding (as determined below) immediately prior to such issue or sale, plus (B) the number of shares of Common Stock which the Aggregate Consideration (as defined below) received or deemed received by this corporation for the total number of Additional Shares of Common Stock so issued would purchase at such then-existing Conversion Price of the Series F Preferred Stock, and

                    (B) the denominator of which shall be the number of shares of Common Stock deemed outstanding (as determined below) immediately prior to such issue or sale plus the total number of Additional Shares of Common Stock so issued.

     For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (A) the number of shares of Common Stock outstanding, (B) the number of shares of Common Stock into which the then outstanding shares of Preferred Stock could be converted if fully converted on the day immediately preceding the given date, and (C) the number of shares of Common Stock which are issuable upon the exercise or conversion of all other rights, options and convertible securities outstanding on the day immediately preceding the given date.

          (ii) No adjustment shall be made to the Series F Preferred Stock Conversion Price in an amount less than one cent per share. Any adjustment required by this Section 4(g) shall be rounded to the nearest one cent $0.01 per share. Any adjustment otherwise required by this Section 4(g) that is not required to be made due to the preceding two sentences shall be included in any subsequent adjustment to the Series F Preferred Stock Conversion Price.

          (iii) For the purpose of making any adjustment required under this Section 4(g), the aggregate consideration received by this corporation for any issue or sale of securities (the “Aggregate Consideration”) shall be defined as: (A) to the extent it consists of cash, be computed at the gross amount of cash received by this corporation before deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by this corporation in connection with such issue or sale and without deduction of any expenses payable by this corporation, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors, and (C) if Additional Shares of Common Stock, Convertible Securities (as defined below) or rights or

9

options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of this corporation for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options.

          (iv) For the purpose of the adjustment required under this Section 4(g), if this corporation issues or sells (x) Preferred Stock or other stock, options, warrants, purchase rights or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as “Convertible Securities”) or (y) rights or options for the purchase of Additional Shares of Common Stock or Convertible Securities and if the Effective Price of such Additional Shares of Common Stock is less than the Conversion Price for the Series F Preferred Stock, in each case this corporation shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by this corporation for the issuance of such rights or options or Convertible Securities plus:

               (A) in the case of such rights or options, the minimum amounts of consideration, if any, payable to this corporation upon the exercise of such rights or options; and

               (B) in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to this corporation upon the conversion thereof (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities); provided that if the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, this corporation shall be deemed to have received the minimum amounts of consideration without reference to such clauses.

               (C) If the minimum amount of consideration payable to this corporation upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided further, that if the minimum amount of consideration payable to this corporation upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to this corporation upon the exercise or conversion of such rights, options or Convertible Securities.

               (D) No further adjustment of the Conversion Price for the Series F Preferred Stock, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock or the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Price for the Series F Preferred Stock as adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Conversion Price for the Series F Preferred Stock which

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would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by this corporation upon such exercise, plus the consideration, if any, actually received by this corporation for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by this corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities, provided that such readjustment shall not apply to prior conversions of Series F Preferred Stock.

          (v) For the purpose of making any adjustment to the Conversion Price of the Series F Preferred Stock required under this Section 4(g), “Additional Shares of Common Stock” shall mean all shares of Common Stock issued by this corporation or deemed to be issued pursuant to this Section 4(g) (including shares of Common Stock subsequently reacquired or retired by this corporation), other than:

               (A) shares of Common Stock issued upon conversion of the Preferred Stock;

               (B) shares of Common Stock or Convertible Securities issued after the Original Issue Date to employees, officers or directors of, or consultants or advisors to this corporation or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors;

               (C) shares of Common Stock issued pursuant to the exercise of Convertible Securities outstanding as of the Original Issue Date;

               (D) shares of Common Stock or Convertible Securities issued pursuant to a merger, consolidation, acquisition, strategic alliance or similar business combination approved by the Board of Directors;

               (E) shares of Common Stock or Convertible Securities issued pursuant to any equipment loan or leasing arrangement, real property leasing arrangement or debt financing from a bank or similar financial institution approved by the Board of Directors;

               (F) shares of Common Stock or Convertible Securities issued pursuant to any OEM, technology license, marketing, or strategic partnership agreements approved by the Board of Directors; or

               (G) shares of Common Stock issued or issuable in a public offering prior to or in connection with which outstanding shares of Preferred Stock will be converted to Common Stock.

          References to Common Stock in the subsections of this clause (v) above shall mean all shares of Common Stock issued by this corporation or deemed to be issued pursuant to this Section 4(g). The “Effective Price” of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued

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or sold, or deemed to have been issued or sold by this corporation under this Section 4(g), into the Aggregate Consideration received, or deemed to have been received by this corporation for such issue under this Section 4(g), for such Additional Shares of Common Stock. In the event that the number of shares of Additional Shares of Common Stock or the Effective Price cannot be ascertained at the time of issuance, such Additional Shares of Common Stock shall be deemed issued immediately upon the occurrence of the first event that makes such number of shares or the Effective Price, as applicable, ascertainable.

          (vi) In the event that this corporation issues or sells, or is deemed to have issued or sold, Additional shares of Common Stock in a Qualifying Dilutive Issuance (the “First Dilutive Issuance”), then in the event that this corporation issues or sells, or is deemed to have issued or sold, Additional Shares of Common Stock in a Qualifying Dilutive Issuance other than the First Dilutive Issuance as a part of the same transaction or series of related transactions as the First Dilutive Issuance (a “Subsequent Dilutive Issuance”), then and in each such case upon a Subsequent Dilutive Issuance the Conversion Price of the Series F Preferred Stock shall be reduced to the Conversion Price that would have been in effect had the First Dilutive Issuance and each Subsequent Dilutive Issuance all occurred on the closing date of the First Dilutive Issuance.

               (h) Special Conversion Price Adjustment for Series F Preferred Stock. If after the date the first share of Series F Preferred Stock is first issued (the “Purchase Date”), it is determined by the Board of Directors that on the Purchase Date and prior to the issuance of any shares of Series F Preferred Stock there were outstanding (calculated as provided in this Section 4(h)) more than an aggregate of 20,982,241 shares of the Corporation’s Common Stock, then the Conversion Price then in effect with respect to the Series F Preferred Stock shall be reduced to an amount equal to the product of (A) the Original Series F Issue Price and (B) the quotient obtained by dividing (x) 20,982,241 by (y) the actual number of shares of the corporation’s Common Stock determined by the Board of Directors to be outstanding as of the Purchase Date and prior to the issuance of any shares of Series F Preferred Stock. For purposes of this Section 4(h) the number of shares of Common Stock of the corporation that shall be considered outstanding shall equal the sum of all shares of Common Stock (on an as converted basis) (i) issued and outstanding, (ii) subject to granted and outstanding options under the corporation’s stock options or other incentive plans or reserved for issuance under the Corporation’s stock options or other incentive plans (but not yet subject to granted and outstanding options), and (iii) issuable upon exercise or conversion of exercisable or convertible securities outstanding on such date, whether or not such exercisable securities were vested and exercisable on such date. In no event shall the Conversion Price for the Series F Preferred Stock be increased pursuant to the operation of this paragraph. For the avoidance of doubt, any knowledge of any holder of Series F Preferred Stock (whether from disclosure schedules or otherwise) regarding any capitalization dispute or other sets of facts shall not be considered in any manner in the operation of the foregoing paragraph. The provisions of this Section 4(h) may be waived, in whole or in part, and either retrospectively or prospectively, upon the written consent of holders of at least a majority of the then-outstanding shares of Series F Preferred Stock.

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          (i) No Fractional Shares and Certificate as to Adjustments.

               (i) No fractional shares shall be issued upon the conversion of any share or shares of the Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion.

               (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of any series of Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for each series of Preferred Stock held by such holder at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of a share of each such series of Preferred Stock.

          (j) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right.

          (k) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Restated Certificate of Incorporation.

          (l) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation.

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          5. Voting Rights.

          (a) General Voting Rights. The holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders’ meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward).

          (b) Voting for the Election of Directors. As long as at least a majority of the shares of Series A Preferred Stock originally issued remain outstanding, the holders of such shares of Series A Preferred Stock shall be entitled to elect two (2) directors of this corporation at each annual election of directors or pursuant to each consent of this corporation’s stockholders for the election of directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. As long as at least a majority of the shares of Series F Preferred Stock originally issued remain outstanding, the holders of such shares of Series F Preferred Stock shall be entitled to elect one (1) director of this corporation at each annual election of directors or pursuant to each consent of this corporation’s stockholders for the election of directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. The holders of outstanding Common Stock shall be entitled to elect one (1) director of this corporation at each annual election of directors or pursuant to each consent of this corporation’s stockholders for the election of directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. The holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Common Stock (voting together as a single class and not as separate series, and on an as-converted basis) shall be entitled to elect any remaining directors of this corporation. In the case of any vacancy (other than a vacancy caused by removal) in the office of a director occurring among the directors elected by the holders of a class or series of stock pursuant to this Section 5(b), the remaining directors so elected by that class or series may by affirmative vote of a majority thereof (or the remaining director so elected if there be but one, or if there are no such directors remaining, by the affirmative vote of the holders of a majority of the shares of that class or series), elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. Any director who shall have been elected by the holders of a class or series of stock or by any directors so elected as provided in the immediately preceding sentence hereof may be removed during the aforesaid term of office, either with or without cause, by, and only by, the affirmative vote of the holders of the majority of the shares of the class or series of stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the holders of that class or series of stock represented at the meeting or pursuant to written consent.

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          6. Protective Provisions.

          (a) So long as at least a majority of the shares of Preferred Stock originally issued remain outstanding, this corporation shall not (whether by merger, recapitalization or otherwise) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Preferred Stock:

               (i) sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which the stockholders of the corporation would hold less than fifty percent (50%) of the voting equity securities of the surviving corporation immediately following such merger or consolidation;

               (ii) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Preferred Stock with respect to dividends, liquidation, redemption or voting;

               (iii) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for this corporation or any subsidiary pursuant to agreements under which this corporation has the option to repurchase such shares upon the occurrence of certain events, such as the termination of employment;

               (iv) enter into any transaction or series of transactions deemed to be a liquidation, dissolution or winding-up of the corporation;

               (v) change the authorized number of directors of this corporation; or

               (vi) pay any dividend or other distribution (other than as may be permitted under Section 1 above) on the shares of Common Stock or Preferred Stock; or

               (vii) amend, alter, or repeal of any provision of the Certificate of Incorporation of this corporation (including any filing of a Certificate of Designation), that alters or changes the voting or other powers, preferences, or other special rights, privileges or restrictions of the Preferred Stock;

          (b) As long as any of the shares of Series A Preferred Stock originally issued remain outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock (voting together as a single class and not as separate series and on an as-converted basis):

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               (i) alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely the shares; or

               (ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock.

          (c) As long as any of the shares of Series B Preferred Stock originally issued remain outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock (voting together as a single class and not as separate series and on an as-converted basis):

               (i) alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock so as to affect adversely the shares; or

               (ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series B Preferred Stock.

          (d) As long as any of the shares of Series C Preferred Stock originally issued remain outstanding, this corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series C Preferred Stock (voting together as a single class and not as separate series and on an as-converted basis):

               (i) alter or change the rights, preferences or privileges of the shares of Series C Preferred Stock so as to affect adversely the shares; or

               (ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series C Preferred Stock.

          (e) As long as any of the shares of Series D Preferred Stock originally issued remain outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series D Preferred Stock (voting together as a single class and not as separate series and on an as-converted basis):

               (i) alter or change the rights, preferences or privileges of the shares of Series D Preferred Stock so as to affect adversely the shares; or

               (ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series D Preferred Stock.

          (f) As long as any of the shares of Series E Preferred Stock originally issued remain outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series E Preferred Stock (voting together as a single class and not as separate series and on an as-converted basis):

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               (i) alter or change the rights, preferences or privileges of the shares of Series E Preferred Stock so as to affect adversely the shares; or

               (ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series E Preferred Stock.

          (g) As long as any of the shares of Series F Preferred Stock originally issued remain outstanding, this corporation shall not (whether by merger, recapitalization or otherwise) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series F Preferred Stock (voting together as a single class and not as separate series and on an as-converted basis):

               (i) alter or change the rights, preferences or privileges of the shares of Series F Preferred Stock so as to affect adversely the shares; or

               (ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series F Preferred Stock.

          7. Status of Converted Stock. In the event any shares of Preferred Stock shall be converted into Common Stock pursuant to Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by this corporation. The Restated Certificate of Incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in this corporation’s authorized capital stock.

     D. Common Stock. The rights, preferences, privileges and restrictions granted to and imposed on the Common Stock are as set forth below in this Article IV(C).

          1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of this corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors.

          2. Liquidation Rights. Upon the liquidation, dissolution or winding up of this corporation, the assets of this corporation shall be distributed as provided in Section 2 of Article IV(B) hereof.

          3. Voting Rights. The holder of each share of Common Stock shall have the right to one vote for each such share, and shall be entitled to notice of any stockholders’ meeting in accordance with the bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law.

ARTICLE V

     Except as otherwise provided in this Restated Certificate of Incorporation, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of this corporation.

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ARTICLE VI

     The number of directors of this corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders.

ARTICLE VII

     Elections of directors need not be by written ballot unless the Bylaws of this corporation shall so provide.

ARTICLE VIII

     Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of this corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of this corporation.

ARTICLE IX

     A director of this corporation shall, to the fullest extent permitted by the General Corporation Law as it now exists or as it may hereafter be amended, not be personally liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to this corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the General Corporation Law is amended, after approval by the stockholders of this Article, to authorize corporation action further eliminating or limiting the personal liability of directors, then the liability of a director of this corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law, as so amended.

     Any amendment, repeal or modification of this Article IX, or the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article IX, by the stockholders of this corporation shall not apply to or adversely affect any right or protection of a director of this corporation existing at the time of such amendment, repeal, modification or adoption.

ARTICLE X

     To the fullest extent permitted by applicable law, this corporation is authorized to provide indemnification of (and advancement of expenses to) agents of this corporation (and any other persons to which General Corporation Law permits this corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law, subject only to limits created by applicable General Corporation Law (statutory or non-statutory), with respect to actions for breach of duty to this corporation, its stockholders, and others.

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     Any amendment, repeal or modification of the foregoing provisions of this Article XI shall not adversely affect any right or protection of a director, officer, agent, or other person existing at the time of, or increase the liability of any director of this corporation with respect to any acts or omissions of such director, officer or agent occurring prior to, such amendment, repeal or modification.

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EX-3.02

Exhibit 3.02

CERTIFICATE OF AMENDMENT

OF

RESTATED CERTIFICATE OF INCORPORATION

OF

SHUTTERFLY, INC.

     Shutterfly, Inc., a Delaware corporation, does hereby certify that the following amendment to the corporation’s Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law, with the approval of such amendment by the corporation’s stockholders having been given by written consent without a meeting in accordance with Sections 228(d) and 242 of the Delaware General Corporation Law:

     Section 4(b) of Article IV of the Restated Certificate of Incorporation is amended to read in its entirety as follows:

“(b) Automatic Conversion. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Preferred Stock immediately upon the earlier of (i) this corporation’s sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form SB-2 (or any successor form) under the Securities Act of 1933, as amended, (the “Securities Act”), the public offering price of which is not less than $12.00 per share (as adjusted for any stock splits, stock dividends, recapitalizations or the like) and $25,000,000 in the aggregate or (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Preferred Stock.”

     IN WITNESS WHEREOF, said corporation has caused this Certificate of Amendment to be signed by its duly authorized officer this 20^th day of June 2006, and the foregoing facts stated herein are true and correct.

Shutterfly, Inc.
By:	/s/ Stephen E. Recht
	Stephen E Recht,
	Chief Financial Officer

EX-3.03

Exhibit 3.03

SHUTTERFLY, INC.
RESTATED CERTIFICATE OF INCORPORATION

     Shutterfly, Inc., a corporation organized and existing under and by virtue of the Delaware General Corporation Law, hereby certifies as follows:

     The name of the corporation is Shutterfly, Inc. The corporation filed its original Certificate of Incorporation with the Secretary of State on April 23, 1999, under the name “Shortco, Inc.”

     This Restated Certificate of Incorporation of the corporation attached hereto as Exhibit A, which is incorporated herein by this reference, and which restates, integrates and further amends the provisions of the Certificate of Incorporation of this corporation as previously amended or supplemented, has been duly adopted by the corporation’s Board of Directors, by a majority of the outstanding stock of the corporation and by a majority of the outstanding stock of each class or series of stock of the corporation entitled to vote thereon as a class in accordance with Sections 242 and 245 of the Delaware General Corporation Law, with the approval of the corporation’s stockholders having been given by written consent without a meeting in accordance with Section 228 of the Delaware General Corporation Law.

     IN WITNESS WHEREOF, said corporation has caused this Restated Certificate of Incorporation to be signed by its duly authorized officer under the seal of the corporation this ___day of                                         , 2006.

SHUTTERFLY, INC.
By:
	Stephen E. Recht
	Secretary and Chief Financial Officer

RESTATED
CERTIFICATE OF INCORPORATION
OF
SHUTTERFLY, INC.

ARTICLE I

     The name of the corporation is Shutterfly, Inc.

ARTICLE II

     The address of the corporation’s registered office in the State of Delaware is 3500 South Dupont Highway in the City of Dover, County of Kent. The name of its registered agent at such address is Incorporating Services, Ltd.

ARTICLE III

     The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

ARTICLE IV

     The total number of shares of all classes of stock which the corporation has authority to issue is 105,000,000 shares, consisting of two classes: 100,000,000 shares of Common Stock, $0.0001 par value per share, and 5,000,000 shares of Preferred Stock, $0.0001 par value per share.

     The Board of Directors is authorized, subject to any limitations prescribed by the law of the State of Delaware, to provide for the issuance of the shares of Preferred Stock in one or more series, and, by filing a Certificate of Designation pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding). The number of authorized shares of Preferred Stock may also be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the corporation entitled to vote, unless a vote of any other holders is required pursuant to a certificate or certificates establishing a series of Preferred Stock.

     Except as otherwise expressly provided in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this Article IV, any new series of Preferred Stock may be designated, fixed and determined as provided herein by the Board of Directors without approval of the holders of Common Stock or the holders of Preferred Stock, or any series thereof, and any such new series may have powers, preferences and rights, including, without limitation, voting rights, dividend rights, liquidation rights, redemption rights and conversion rights, senior to, junior to or pari passu with the rights of the Common Stock, the Preferred Stock, or any future class or series of Preferred Stock or Common Stock.

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     Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the corporation for their vote; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any Certificate of Designations relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation (including any Certificate of Designations relating to any series of Preferred Stock).

ARTICLE V

     The Board of Directors of the corporation shall have the power to adopt, amend or repeal the Bylaws of the corporation. Subject to the rights of the holders of any series of Preferred Stock, no director may be removed except for cause by the holders of a majority of the voting power of the shares then entitled to vote at an election of directors.

ARTICLE VI

     For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that:

     (A) The conduct of the affairs of the corporation shall be managed under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the Bylaws of the corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the corporation. The number of directors shall be fixed from time to time exclusively by resolution of the Board of Directors.

     (B) Notwithstanding the foregoing provision of this Article VI, each director shall hold office until such director’s successor is elected and qualified, or until such director’s earlier death, resignation or removal. No decrease in the authorized number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

     (C) Subject to the rights of the holders of any series of Preferred Stock, any vacancy occurring in the Board of Directors for any cause, and any newly created directorship resulting from any increase in the authorized number of directors, shall, unless (i) the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders or (ii) as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which the director has been assigned expires or until such director’s successor shall have been duly elected and qualified. No decrease in the authorized number of directors shall shorten the term of any incumbent director.

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     (D) Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided, with respect to the time for which they severally hold office, into three classes designated as Class I, Class II and Class III, respectively. The term of office of the Class I directors shall expire at the corporation’s first annual meeting of stockholders following the closing of the corporation’s initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock to the public (the “Initial Public Offering”), the term of office of the Class II directors shall expire at the corporation’s second annual meeting of stockholders following the closing of the Initial Public Offering, and the term of office of the Class III directors shall expire at the corporation’s third annual meeting of stockholders following the closing of the Initial Public Offering. At each annual meeting of stockholders following the closing of the Initial Public Offering, directors elected to succeed those directors of the class whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified, or until such director’s earlier death, resignation or removal.

     (F) Election of directors need not be by written ballot unless the Bylaws of the corporation shall so provide.

     (G) No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws of the corporation, and no action shall be taken by the stockholders by written consent.

     (H) Advance notice of stockholder nominations for the election of directors of the corporation and of business to be brought by stockholders before any meeting of stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. Business transacted at special meetings of stockholders shall be confined to the purpose or purposes stated in the notice of meeting.

ARTICLE VII

     To the fullest extent permitted by law, no director of the corporation shall be personally liable for monetary damages for breach of fiduciary duty as a director. Without limiting the effect of the preceding sentence, if the Delaware General Corporation Law (“GCL”) is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the GCL, as so amended.

     Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article VII, shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director of the corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision.

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EX-3.04

Exhibit 3.04

BYLAWS OF

SHUTTERFLY, INC.

(A DELAWARE CORPORATION)

ARTICLE I	OFFICES	1
ARTICLE II	MEETINGS OF STOCKHOLDERS	1
ARTICLE III	DIRECTORS	3
ARTICLE IV	NOTICES	5
ARTICLE V	OFFICERS	5
ARTICLE VI	CERTIFICATE OF STOCK	8
ARTICLE VII	GENERAL PROVISIONS DIVIDENDS	9
ARTICLE VIII	AMENDMENTS	11
ARTICLE IX	RIGHT OF FIRST REFUSAL	11
ARTICLE X	LOANS TO OFFICERS	14

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BYLAWS
OF
SHUTTERFLY, INC.

ARTICLE I
OFFICES

     1.1 The registered office shall be in the City of Dover, County of Kent, State of Delaware.

     1.2 The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE II
MEETINGS OF STOCKHOLDERS

     2.1 All meetings of the stockholders for the election of directors shall be held in the City of Menlo Park, State of California, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.

     2.2 Annual meetings of stockholders, commencing with the year 1999, shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting.

     2.3 Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not fewer than ten (10) nor more than sixty (60) days before the date of the meeting.

     2.4 The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

     2.5 Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the

president and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning at least fifty percent (50%) in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting.

     2.6 Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting.

     2.7 Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

     2.8 The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

     2.9 When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question.

     2.10 Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period.

     2.11 Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking

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of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

ARTICLE III
DIRECTORS

     3.1 The number of directors that shall constitute the whole Board of Directors shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting of the stockholders, except as provided in Section 3.2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders.

     3.2 Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board of Directors (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office.

     3.3 The business of the corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders.

MEETINGS OF THE BOARD OF DIRECTORS

     3.4 The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware.

     3.5 The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors.

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     3.6 Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors.

     3.7 Special meetings of the Board of Directors may be called by the president on two (2) days’ notice to each director by mail or forty-eight (48) hours notice to each director either personally or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two (2) directors unless the Board of Directors consists of only one director, in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director.

     3.8 At all meetings of the Board of Directors a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

     3.9 Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee.

     3.10 Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

COMMITTEES OF DIRECTORS

     3.11 The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.

     In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

     Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the

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corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the General Corporation Law of Delaware to be submitted to stockholders for approval or (ii) adopting, amending or repealing any provision of these bylaws.

     3.12 Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

COMPENSATION OF DIRECTORS

     3.13 Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

REMOVAL OF DIRECTORS

     3.14 Unless otherwise restricted by the certificate of incorporation or these bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors.

ARTICLE IV
NOTICES

     4.1 Whenever, under the provisions of the statutes or of the certificate of incorporation or of these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram.

     4.2 Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE V
OFFICERS

     5.1 The officers of the corporation shall be chosen by the Board of Directors and shall be a president, treasurer and a secretary. The Board of Directors may elect from among

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its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more vice-presidents, assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide.

     5.2 The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president, a treasurer, and a secretary and may choose vice-presidents.

     5.3 The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.

     5.4 The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors.

     5.5 The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors.

THE CHAIRMAN OF THE BOARD

     5.6 The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board of Directors and as may be provided by law.

     5.7 In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board of Directors and as may be provided by law.

THE PRESIDENT AND VICE-PRESIDENTS

     5.8 The president shall be the chief executive officer of the corporation; and in the absence of the Chairman and Vice Chairman of the Board he shall preside at all meetings of the stockholders and the Board of Directors; he shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect.

     5.9 He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation.

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     5.10 In the absence of the president or in the event of his inability or refusal to act, the vice-president, if any, (or in the event there be more than one vice-president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

THE SECRETARY AND ASSISTANT SECRETARY

     5.11 The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature.

     5.12 The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

THE TREASURER AND ASSISTANT TREASURERS

     5.13 The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors.

     5.14 He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation.

     5.15 If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal

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from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation.

     5.16 The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

ARTICLE VI
CERTIFICATE OF STOCK

     6.1 Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation.

     Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified.

     If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

     6.2 Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

LOST CERTIFICATES

     6.3 The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to

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have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

TRANSFER OF STOCK

     6.4 Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

FIXING RECORD DATE

     6.5 In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholder or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

REGISTERED STOCKHOLDERS

     6.6 The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS

     7.1 Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at

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any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation.

     7.2 Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.

CHECKS

     7.3 All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

FISCAL YEAR

     7.4 The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

SEAL

     7.5 The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words “Corporate Seal, Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

INDEMNIFICATION

     7.6 The corporation shall, to the fullest extent authorized under the laws of the State of Delaware, as those laws may be amended and supplemented from time to time, indemnify any director made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of being a director of the corporation or a predecessor corporation or, at the corporation’s request, a director or officer of another corporation; provided, however, that the corporation shall indemnify any such agent in connection with a proceeding initiated by such agent only if such proceeding was authorized by the Board of Directors of the corporation. The indemnification provided for in this Section 7.6 shall: (i) not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement or vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, (ii) continue as to a person who has ceased to be a director, and (iii) inure to the benefit of the heirs, executors and administrators of such a person. The corporation’s obligation to provide indemnification under this Section 7.6 shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the corporation or any other person.

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     Expenses incurred by a director of the corporation in defending a civil or criminal action, suit or proceeding by reason of the fact that he is or was a director of the corporation (or was serving at the corporation’s request as a director or officer of another corporation) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized by relevant sections of the General Corporation Law of Delaware. Notwithstanding the foregoing, the corporation shall not be required to advance such expenses to an agent who is a party to an action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors of the corporation that alleges willful misappropriation of corporate assets by such agent, disclosure of confidential information in violation of such agent’s fiduciary or contractual obligations to the corporation or any other willful and deliberate breach in bad faith of such agent’s duty to the corporation or its stockholders.

     The foregoing provisions of this Section 7.6 shall be deemed to be a contract between the corporation and each director who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts.

     The Board of Directors in its discretion shall have power on behalf of the corporation to indemnify any person, other than a director, made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was an officer or employee of the corporation.

     To assure indemnification under this Section 7.6 of all directors, officers and employees who are determined by the corporation or otherwise to be or to have been “fiduciaries” of any employee benefit plan of the corporation that may exist from time to time, Section 145 of the General Corporation Law of Delaware shall, for the purposes of this Section 7.6, be interpreted as follows: an “other enterprise” shall be deemed to include such an employee benefit plan, including without limitation, any plan of the corporation that is governed by the Act of Congress entitled “Employee Retirement Income Security Act of 1974,” as amended from time to time; the corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed “fines.”

ARTICLE VIII
AMENDMENTS

     8.1 These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the certificate of incorporation at any regular meeting of the stockholders

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or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal bylaws is conferred upon the Board of Directors by the certificate or incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws.

ARTICLE IX
RIGHT OF FIRST REFUSAL

     9.1 No stockholder shall sell, assign, pledge, or in any manner transfer any of the shares of Common Stock of the corporation (except for Common Stock issued upon conversion of shares of Preferred Stock of the corporation) or any right or interest therein, whether voluntarily or by operation of law, or by gift or otherwise, except by a transfer which meets the requirements hereinafter set forth in this bylaw:

          (a) If the stockholder desires to sell or otherwise transfer any of his shares of Common Stock, then the stockholder shall first give written notice thereof to the corporation. The notice shall name the proposed transferee and state the number of shares to be transferred, the proposed consideration, and all other terms and conditions of the proposed transfer.

          (b) For fifteen (15) days following receipt of such notice, the corporation shall have the option to purchase all or any lesser part of the shares specified in the notice at the price and upon the terms set forth in such notice. In the event the corporation elects to purchase all the shares, it shall give written notice to the selling stockholder of its election and settlement for said shares shall be made as provided below in paragraph (c).

          (c) In the event the corporation elects to acquire any of the shares of the selling stockholder as specified in said selling stockholder’s notice, the Secretary of the corporation shall so notify the selling stockholder and settlement thereof shall be made in cash within thirty (30) days after the Secretary of the corporation receives said selling stockholder’s notice; provided that if the terms of payment set forth in said selling stockholder’s notice were other than cash against delivery, the corporation shall pay for said shares on the same terms and conditions set forth in said selling stockholder’s notice.

          (d) In the event the corporation does not elect to acquire all of the shares specified in the selling stockholder’s notice, said selling stockholder may, within the sixty (60) day period following the expiration of the option rights granted to the corporation herein, sell elsewhere the shares specified in said selling stockholder’s notice which were not acquired by the corporation, in accordance with the provisions of paragraph (d) of this bylaw, provided that said sale shall not be on terms and conditions more favorable to the purchaser than those contained in the bona fide offer set forth in said selling stockholder’s notice. All shares so sold by said selling stockholder shall continue to be subject to the provisions of this bylaw in the same manner as before said transfer.

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          (e) Anything to the contrary contained herein notwithstanding, the following transactions shall be exempt from the provisions of this bylaw:

               (1) A stockholder’s transfer of any or all shares held either during such stockholder’s lifetime or on death by will or intestacy to such stockholder’s immediate family or to any custodian or trustee for the account of such stockholder or such stockholder’s immediate family. “Immediate family” as used herein shall mean spouse, parent of spouse, brother or sister of spouse (of child of either), lineal descendant, father, mother, brother, or sister of the stockholder making such transfer.

               (2) A stockholder’s bona fide pledge or mortgage of any shares with a commercial lending institution, provided that any subsequent transfer of said shares by said institution shall be conducted in the manner set forth in this bylaw.

               (3) A stockholder’s transfer of any or all of such stockholder’s shares to the corporation or to any other stockholder of the corporation.

               (4) A stockholder’s transfer of any or all of such stockholder’s shares to a person who, at the time of such transfer, is an officer or director of the corporation.

               (5) A corporate stockholder’s transfer of any or all of its shares pursuant to and in accordance with the terms of any merger, consolidation, reclassification of shares or capital reorganization of the corporate stockholder, or pursuant to a sale of all or substantially all of the stock or assets of a corporate stockholder.

               (6) A corporate stockholder’s transfer of any or all of its shares to any or all of its stockholders.

               (7) A transfer by a stockholder which is a limited or general partnership to any or all of its partners or former partners.

     In any such case, the transferee, assignee, or other recipient shall receive and hold such stock subject to the provisions of this bylaw, and there shall be no further transfer of such stock except in accord with this bylaw.

          (f) The provisions of this Bylaw may be waived with respect to any transfer either by the corporation, upon duly authorized action of the Board of Directors, or by the stockholders, upon the express written consent of the owners of a majority of the voting power of the corporation (excluding the votes represented by those shares to be transferred by the transferring stockholder). This bylaw may be amended or repealed either by a duly authorized action of the Board of Directors or by the stockholders, upon the express written consent of the owners of a majority of the voting power of the corporation.

          (g) Any sale or transfer, or purported sale or transfer, of securities of the corporation shall be null and void unless the terms, conditions, and provisions of this bylaw are strictly observed and followed.

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          (h) The foregoing right of first shall terminate on either of the following dates, whichever shall first occur:

               (1) On January 1, 2009; or

               (2) Upon the date of the corporation’s Initial Public Offering.

          (i) The certificates representing shares of Common Stock of the corporation shall bear on their face the following legend so long as the foregoing right of first refusal remains in effect:

“THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE CORPORATION.”

ARTICLE X
LOANS TO OFFICERS

     The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.

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EX-3.05

Exhibit 3.05

RESTATED BYLAWS

OF

SHUTTERFLY, INC.

(a Delaware corporation)
As Adopted                      __, 2006

TABLE OF CONTENTS

			Page
ARTICLE I		STOCKHOLDERS		1
	Section 1.1.	Annual Meetings		1
	Section 1.2.	Special Meetings		1
	Section 1.3.	Notice of Meetings		1
	Section 1.4.	Adjournments		1
	Section 1.5.	Quorum		2
	Section 1.6.	Organization		2
	Section 1.7.	Voting; Proxies		2
	Section 1.8.	Fixing Date for Determination of Stockholders of Record		2
	Section 1.9.	List of Stockholders Entitled to Vote		3
	Section 1.10.	Inspectors of Elections		3
	Section 1.11.	Notice of Stockholder Business; Nominations		4
ARTICLE II		BOARD OF DIRECTORS		6
	Section 2.1.	Number; Qualifications		6
	Section 2.2.	Election; Resignation; Removal; Vacancies		7
	Section 2.3.	Regular Meetings		7
	Section 2.4.	Special Meetings		7
	Section 2.5.	Remote Meetings Permitted		8
	Section 2.6.	Quorum; Vote Required for Action		8
	Section 2.7.	Organization		8
	Section 2.8.	Written Action by Directors		8
	Section 2.9.	Powers		8
	Section 2.10.	Compensation of Directors		8
ARTICLE III		COMMITTEES		9
	Section 3.1.	Committees		9
	Section 3.2.	Committee Rules		9
ARTICLE IV		OFFICERS		9
	Section 4.1.	Generally		9
	Section 4.2.	Chief Executive Officer		9
	Section 4.3.	Chairperson of the Board		10

 -i- 

TABLE OF CONTENTS
(continued)

			Page
	Section 4.4.	President		10
	Section 4.5.	Vice President		10
	Section 4.6.	Chief Financial Officer		10
	Section 4.7.	Treasurer		11
	Section 4.8.	Secretary		11
	Section 4.9.	Delegation of Authority		11
	Section 4.10.	Removal		11
ARTICLE V		STOCK		11
	Section 5.1.	Certificates		11
	Section 5.2.	Lost, Stolen or Destroyed Stock Certificates;
		Issuance of New Certificates		11
	Section 5.3.	Other Regulations		11
ARTICLE VI		INDEMNIFICATION		12
	Section 6.1.	Indemnification of Officers and Directors		12
	Section 6.2.	Advance of Expenses		12
	Section 6.3.	Non-Exclusivity of Rights		12
	Section 6.4.	Indemnification Contracts		13
	Section 6.5.	Effect of Amendment		13
ARTICLE VII		NOTICES		13
	Section 7.1.	Notice		13
	Section 7.2.	Waiver of Notice		14
ARTICLE VIII		INTERESTED DIRECTORS		14
	Section 8.1.	Interested Directors; Quorum		14
ARTICLE IX		MISCELLANEOUS		15
	Section 9.1.	Fiscal Year		15
	Section 9.2.	Seal		15
	Section 9.3.	Form of Records		15
	Section 9.4.	Reliance Upon Books and Records		15
	Section 9.5.	Certificate of Incorporation Governs		15
	Section 9.6.	Severability		15

 -ii- 

TABLE OF CONTENTS
(continued)

			Page
ARTICLE X		AMENDMENT		15
	Section 10.1.	Amendments		15
CERTIFICATION OF RESTATED BYLAWS

 -iii- 

RESTATED BYLAWS

OF

SHUTTERFLY, INC.

(a Delaware corporation)
As Adopted [                     __, 2006]

ARTICLE I
STOCKHOLDERS

     Section 1.1. Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date and time as the Board of Directors shall each year fix. The meeting may be held either at a place, within or without the State of Delaware, or by means of remote communication as the Board of Directors in its sole discretion may determine. Any other proper business may be transacted at the annual meeting.

     Section 1.2. Special Meetings. Special meetings of stockholders for any purpose or purposes may be called at any time by the Board of Directors, and shall be called upon the request of the Chairperson of the Board of Directors, the Chief Executive Officer, the President, or by a majority of the members of the Board of Directors. Special meetings may not be called by any other person or persons.

     Section 1.3. Notice of Meetings. Notice of all meetings of stockholders shall be given in writing or by electronic transmission in the manner provided by law (including, without limitation, as set forth in Section 7.1(b) of these Bylaws) stating the date, time and place, if any, of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Certificate of Incorporation of the Corporation, such notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting.

     Section 1.4. Adjournments. The chairperson shall have the power to adjourn the meeting to another time, date and place (if any). Any meeting of stockholders may adjourn from time to time, and notice need not be given of any such adjourned meeting if the time, date and place (if any) thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, then a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. The Board of Directors may postpone or reschedule any previously scheduled special or annual meeting of stockholders, in which case notice shall be provided to the stockholders of the new date, time and place, if any, of the meeting as provided in Section 1.3 above.

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     Section 1.5. Quorum. At each meeting of stockholders the holders of a majority of the shares of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business, unless otherwise required by applicable law. If a quorum shall fail to attend any meeting, the chairperson of the meeting or the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting may adjourn the meeting. Shares of the Corporation’s stock belonging to the Corporation (or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation are held, directly or indirectly, by the Corporation) shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation or any other corporation to vote any shares of the Corporation’s stock held by it in a fiduciary capacity and to count such shares for purposes of determining a quorum.

     Section 1.6. Organization. Meetings of stockholders shall be presided over by such person as the Board of Directors may designate, or, in the absence of such a person, the Chairperson of the Board of Directors, or, in the absence of such person, the President of the Corporation, or, in the absence of such person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting. Such person shall be chairperson of the meeting and, subject to Section 1.11 hereof, shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her to be in order. The Secretary of the Corporation shall act as secretary of the meeting, but in such person’s absence the chairperson of the meeting may appoint any person to act as secretary of the meeting.

     Section 1.7. Voting; Proxies. Unless otherwise provided by law or the Certificate of Incorporation of the Corporation, and subject to the provisions of Section 1.8 of these Bylaws, each stockholder shall be entitled to one (1) vote for each share of stock held by such stockholder. Each stockholder entitled to vote at a meeting of stockholders, or to take corporate action by written consent without a meeting, may authorize another person or persons to act for such stockholder by proxy. Such a proxy may be prepared, transmitted and delivered in any manner permitted by applicable law. Elections of directors and other voting at meetings of stockholders need not be by written ballot unless demand is so made by any stockholder at the meeting before voting begins or the Chair of the meeting so elects. If a vote is to be taken by written ballot, then each such ballot shall state the name of the stockholder or proxy voting and such other information as the chairperson of the meeting deems appropriate and, if authorized by the Board of Directors, the ballot may be submitted by electronic transmission in the manner provided by law. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Unless otherwise provided by applicable law, the Certificate of Incorporation of the Corporation or these Bylaws, every matter other than the election of directors shall be decided by the affirmative vote of the holders of a majority of the shares of stock entitled to vote thereon that are present in person or represented by proxy at the meeting and are voted for or against the matter.

     Section 1.8. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other

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distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed by the Board of Directors, then the record date shall be as provided by applicable law. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

     Section 1.9. List of Stockholders Entitled to Vote. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either on a reasonably accessible electronic network as permitted by law (provided that the information required to gain access to the list is provided with the notice of the meeting) or during ordinary business hours at the principal place of business of the Corporation. If the meeting is held at a place, the list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present at the meeting. If the meeting is held solely by means of remote communication, then the list shall be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access the list shall be provided with the notice of the meeting.

Section 1.10. Inspectors of Elections.

          (a) Applicability. Unless otherwise provided in the Certificate of Incorporation of the Corporation or required by the Delaware General Corporation Law, the following provisions of this Section 1.10 shall apply only if and when the Corporation has a class of voting stock that is: (i) listed on a national securities exchange; (ii) authorized for quotation on an automated interdealer quotation system of a registered national securities association; or (iii) held of record by more than 2,000 stockholders; in all other cases, observance of the provisions of this Section 1.10 shall be optional, and at the discretion of the Corporation.

          (b) Appointment. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting.

          (c) Inspector’s Oath. Each inspector of election, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability.

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          (d) Duties of Inspectors. At a meeting of stockholders, the inspectors of election shall (i) ascertain the number of shares outstanding and the voting power of each share, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors.

          (e) Opening and Closing of Polls. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced by the chairperson of the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise.

          (f) Determinations. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in connection with proxies in accordance with Section 212(c)(2) of the Delaware General Corporation Law, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification of their determinations pursuant to this Section 1.10 shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors’ belief that such information is accurate and reliable.

     Section 1.11. Notice of Stockholder Business; Nominations.

          (a) Annual Meeting of Stockholders.

               (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders shall be made at an annual meeting of stockholders (A) pursuant to the Corporation’s notice of such meeting, (B) by or at the direction of the Board of Directors or (C) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 1.11, who is entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 1.11.

               (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of subparagraph (a)(i) of this Section 1.11, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder’s notice must be delivered to the Secretary at the principal

4

executive offices of the Corporation not later than the close of business on the seventy-fifth (75th) day nor earlier than the close of business on the one hundred and fifth (105th) day prior to the first anniversary of the preceding year’s annual meeting (except in the case of the 2007 annual meeting, for which such notice shall be timely if delivered in the same time period as if such meeting were a special meeting governed by subparagraph (b) of this Section 1.11); provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred and fifth (105th) day prior to such annual meeting and not later than the close of business on the later of the seventy-fifth (75th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. Such stockholder’s notice shall set forth: (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, and (2) the class and number of shares of the Corporation that are owned beneficially and held of record by such stockholder and such beneficial owner.

               (iii) Notwithstanding anything in the second sentence of subparagraph (a)(ii) of this Section 1.11 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased board of directors at least seventy-five (75) days prior to the first anniversary of the preceding year’s annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy-five (75) days prior to such annual meeting), a stockholder’s notice required by this Section 1.11 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation.

          (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of such meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of such meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record

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at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.11. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by subparagraph (a)(ii) of this Section 1.11 shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the one hundred fifth (105th) day prior to such special meeting and not later than the close of business on the later of the seventy-fifth (75th) day prior to such special meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting.

          (c) General.

               (i) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.11 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.11. Except as otherwise provided by law or these Bylaws, the chairperson of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.11 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded.

               (ii) For purposes of this Section 1.11, the term “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to section 13, 14 or 15(d) of the Exchange Act.

               (iii) Notwithstanding the foregoing provisions of this Section 1.11, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.11 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

ARTICLE II
BOARD OF DIRECTORS

     Section 2.1. Number; Qualifications. The Board of Directors shall consist of one or more members. The initial number of directors shall be seven (7), and thereafter shall be fixed from time to time by resolution of the Board of Directors. No decrease in the authorized number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Directors need not be stockholders of the Corporation.

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     Section 2.2. Election; Resignation; Removal; Vacancies. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the Corporation’s initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock to the public (the “Initial Public Offering”), the directors shall be divided, with respect to the time for which they severally hold office, into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors, with the number of directors in each class to be divided as equally as reasonably possible. The initial term of office of the Class I directors shall expire at the Corporation’s first annual meeting of stockholders following the closing of the Initial Public Offering, the initial term of office of the Class II directors shall expire at the Corporation’s second annual meeting of stockholders following the closing of the Initial Public Offering, and the initial term of office of the Class III directors shall expire at the corporation’s third annual meeting of stockholders following the closing of the Initial Public Offering. At each annual meeting of stockholders commencing with the first annual meeting of stockholders following the closing of the Initial Public Offering, directors elected to succeed those directors of the class whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Prior to the closing of the Initial Public Offering, each director shall hold office until the next annual meeting of stockholders and until such director’s successor is elected and qualified, or until such director’s earlier death, resignation or removal. Any director may resign at any time upon notice to the Corporation given in writing or by electronic transmission. Subject to the rights of the holders of any series of Preferred Stock, no director may be removed except for cause by the holders of a majority of the shares then entitled to vote at an election of directors. Subject to the rights of the holders of any series of Preferred Stock, any vacancy occurring in the Board of Directors for any cause, and any newly created directorship resulting from any increase in the authorized number of directors, shall, unless as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he is a member and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation, and any newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided from time to time by resolution adopted by the Board of Directors.

     Section 2.3. Regular Meetings. Regular meetings of the Board of Directors may be held at such places, within or without the State of Delaware, and at such times as the Board of Directors may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board of Directors.

     Section 2.4. Special Meetings. Special meetings of the Board of Directors may be called by the Chairperson of the Board of Directors, the President or a majority of the members

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of the Board of Directors then in office and may be held at any time, date or place, within or without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally, in writing or by electronic transmission (including electronic mail), by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand delivery, telegram, telex, mailgram, facsimile, electronic mail or other means of electronic transmission. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting.

     Section 2.5. Remote Meetings Permitted. Members of the Board of Directors, or any committee of the Board, may participate in a meeting of the Board or such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to conference telephone or other communications equipment shall constitute presence in person at such meeting.

     Section 2.6. Quorum; Vote Required for Action. At all meetings of the Board of Directors a majority of the total number of authorized directors shall constitute a quorum for the transaction of business. Except as otherwise provided herein or in the Certificate of Incorporation of the Corporation, or required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

     Section 2.7. Organization. Meetings of the Board of Directors shall be presided over by the Chairperson of the Board of Directors, or in such person’s absence by the President, or in such person’s absence by a chairperson chosen at the meeting. The Secretary shall act as secretary of the meeting, but in such person’s absence the chairperson of the meeting may appoint any person to act as secretary of the meeting.

     Section 2.8. Written Action by Directors. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee, respectively. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

     Section 2.9. Powers. The Board of Directors may, except as otherwise required by law or the Certificate of Incorporation of the Corporation, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation.

     Section 2.10. Compensation of Directors. Directors, as such, may receive, pursuant to a resolution of the Board of Directors, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board of Directors.

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ARTICLE III
COMMITTEES

     Section 3.1. Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting of such committee who are not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation.

     Section 3.2. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws.

ARTICLE IV
OFFICERS

     Section 4.1. Generally. The officers of the Corporation shall consist of a Chief Executive Officer and/or a President, one or more Vice Presidents, a Secretary, a Treasurer and such other officers, including a Chairperson of the Board of Directors and/or Chief Financial Officer, as may from time to time be appointed by the Board of Directors. All officers shall be elected by the Board of Directors. Each officer shall hold office until such person’s successor is elected and qualified or until such person’s earlier resignation or removal. Any number of offices may be held by the same person. Any officer may resign at any time upon written notice to the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board of Directors.

     Section 4.2. Chief Executive Officer. Subject to the control of the Board of Directors and such supervisory powers, if any, as may be given by the Board of Directors, the powers and duties of the Chief Executive Officer of the Corporation are:

          (a) To act as the general manager and, subject to the control of the Board of Directors, to have general supervision, direction and control of the business and affairs of the Corporation;

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          (b) To preside at all meetings of the stockholders;

          (c) To call meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as he or she shall deem proper; and

          (d) To affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Corporation; to sign certificates for shares of stock of the Corporation; and, subject to the direction of the Board of Directors, to have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation.

The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall designate another officer to be the Chief Executive Officer. If there is no President, and the Board of Directors has not designated any other officer to be the Chief Executive Officer, then the Chairperson of the Board of Directors shall be the Chief Executive Officer.

     Section 4.3. Chairperson of the Board. The Chairperson of the Board of Directors shall have the power to preside at all meetings of the Board of Directors and shall have such other powers and duties as provided in these Bylaws and as the Board of Directors may from time to time prescribe.

     Section 4.4. President. The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall have designated another officer as the Chief Executive Officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, and subject to the supervisory powers of the Chief Executive Officer (if the Chief Executive Officer is an officer other than the President), and subject to such supervisory powers and authority as may be given by the Board of Directors to the Chairperson of the Board of Directors, and/or to any other officer, the President shall have the responsibility for the general management the control of the business and affairs of the Corporation and the general supervision and direction of all of the officers, employees and agents of the Corporation (other than the Chief Executive Officer, if the Chief Executive Officer is an officer other than the President) and shall perform all duties and have all powers that are commonly incident to the office of President or that are delegated to the President by the Board of Directors.

     Section 4.5. Vice President. Each Vice President shall have all such powers and duties as are commonly incident to the office of Vice President, or that are delegated to him or her by the Board of Directors or the Chief Executive Officer. A Vice President may be designated by the Board to perform the duties and exercise the powers of the Chief Executive Officer in the event of the Chief Executive Officer’s absence or disability.

     Section 4.6. Chief Financial Officer. The Chief Financial Officer shall be the Treasurer of the Corporation unless the Board of Directors shall have designated another officer as the Treasurer of the Corporation. Subject to the direction of the Board of Directors and the

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Chief Executive Officer, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of Chief Financial Officer.

     Section 4.7. Treasurer. The Treasurer shall have custody of all monies and securities of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions. The Treasurer shall also perform such other duties and have such other powers as are commonly incident to the office of Treasurer, or as the Board of Directors or the Chief Executive Officer may from time to time prescribe.

     Section 4.8. Secretary. The Secretary shall issue or cause to be issued all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders and the Board of Directors. The Secretary shall have charge of the corporate minute books and similar records and shall perform such other duties and have such other powers as are commonly incident to the office of Secretary, or as the Board of Directors or the Chief Executive Officer may from time to time prescribe.

     Section 4.9. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.

     Section 4.10. Removal. Any officer of the Corporation shall serve at the pleasure of the Board of Directors and may be removed at any time, with or without cause, by the Board of Directors. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation.

ARTICLE V
STOCK

     Section 5.1. Certificates. Every holder of stock shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairperson or Vice-Chairperson of the Board of Directors, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. Any or all of the signatures on the certificate may be a facsimile.

     Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it, against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.

     Section 5.3. Other Regulations. The issue, transfer, conversion and registration of stock certificates shall be governed by such other regulations as the Board of Directors may establish.

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ARTICLE VI
INDEMNIFICATION

     Section 6.1. Indemnification of Officers and Directors. Each person who was or is made a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that such person (or a person of whom such person is the legal representative), is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the Delaware General Corporation Law, against all expenses, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, provided such person acted in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. Such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of such person’s heirs, executors and administrators. Notwithstanding the foregoing, the Corporation shall indemnify any such person seeking indemnity in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation, or if such indemnification is authorized by an agreement approved by the Board of Directors.

     Section 6.2. Advance of Expenses. The Corporation shall pay all expenses (including attorneys’ fees) incurred by such a director or officer in defending any such Proceeding as they are incurred in advance of its final disposition; provided, however, that if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by such a director or officer in advance of the final disposition of such Proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Article VI or otherwise; and provided, further, that the Corporation shall not be required to advance any expenses to a person against whom the Corporation directly brings a claim, in a Proceeding, alleging that such person has breached such person’s duty of loyalty to the Corporation, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction.

     Section 6.3. Non-Exclusivity of Rights. The rights conferred on any person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation of the Corporation, Bylaw, agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI.

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     Section 6.4. Indemnification Contracts. The Board of Directors is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification rights to such person. Such rights may be greater than those provided in this Article VI.

     Section 6.5. Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VI shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification.

ARTICLE VII
NOTICES

Section 7.1. Notice.

          (a) Except as otherwise specifically provided in these Bylaws (including, without limitation, Section 7.1(b) below) or required by law, all notices required to be given pursuant to these Bylaws shall be in writing and may in every instance be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the mail, postage prepaid, or by sending such notice by prepaid telegram, telex, overnight express courier, mailgram or facsimile, electronic mail or other means of electronic transmission. Any such notice shall be addressed to the person to whom notice is to be given at such person’s address as it appears on the records of the Corporation. The notice shall be deemed given (i) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person, (ii) in the case of delivery by mail, upon deposit in the mail, (iii) in the case of delivery by overnight express courier, when dispatched, and (iv) in the case of delivery via telegram, telex, mailgram, facsimile, electronic mail or other means of electronic transmission, when dispatched. Notice given pursuant to this Section 7.1(a) shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the person has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the person has consented to receive notice; (iii) if by any other form of electronic transmission, when directed to the person.

          (b) Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the Delaware General Corporation Law, the Certificate of Incorporation of the Corporation, or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (i) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given pursuant to this Section 7.1(b) shall be deemed given: (i) if by facsimile

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telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder.

          (c) An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Corporation that the notice has been given in writing or by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

     Section 7.2. Waiver of Notice. Whenever notice is required to be given under any provision of these Bylaws, a written waiver of notice, signed by the person entitled to notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any waiver of notice.

ARTICLE VIII
INTERESTED DIRECTORS

     Section 8.1. Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if: (i) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (ii) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.

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ARTICLE IX
MISCELLANEOUS

     Section 9.1. Fiscal Year. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors.

     Section 9.2. Seal. The Board of Directors may provide for a corporate seal, which shall have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board of Directors.

     Section 9.3. Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on or by means of, or be in the form of, diskettes or any other information storage device or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to any provision of the Delaware General Corporation Law.

     Section 9.4. Reliance Upon Books and Records. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall, in the performance of such person’s duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation’s officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.

     Section 9.5. Certificate of Incorporation Governs. In the event of any conflict between the provisions of the Certificate of Incorporation of the Corporation and Bylaws, the provisions of the Certificate of Incorporation of the Corporation shall govern.

     Section 9.6. Severability. If any provision of these Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the Certificate of Incorporation of the Corporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation of the Corporation, that are not themselves invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation of the Corporation) shall remain in full force and effect.

ARTICLE X
AMENDMENT

     Section 10.1. Amendments. Stockholders of the Corporation holding a majority of the Corporation’s outstanding voting stock then entitled to vote at an election of directors shall have the power to adopt, amend or repeal Bylaws. To the extent provided in the Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation shall also have the power to adopt, amend or repeal Bylaws of the Corporation.

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CERTIFICATION OF RESTATED BYLAWS

OF

SHUTTERFLY, INC.

(a Delaware corporation)

KNOW ALL BY THESE PRESENTS:

     I, Steven Recht, certify that I am Secretary of Shutterfly, Inc., a Delaware corporation (the "Company”), that I am duly authorized to make and deliver this certification, that the attached Restated Bylaws are a true and correct copy of the Restated Bylaws of the Company in effect as of the date of this certificate.

Dated: [                     ___, 2006]
	Stephen E. Recht, Secretary

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EX-4.02

Exhibit 4.02

FIFTH AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT

     THIS FIFTH AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT is made as of November 11, 2005, by and among Shutterfly, Inc., a Delaware corporation (the “Company”), and the investors listed on Schedule A hereto, each of which is herein referred to as an “Investor.”

RECITALS

     WHEREAS, certain of the Investors (the “Prior Investors”) possess registration and other rights granted pursuant to that certain Fourth Amended and Restated Investors’ Rights Agreement, dated October 11, 2002, by and between the Company and the persons listed on the Schedule of Investors attached thereto (the “Prior Agreement”);

     WHEREAS, certain of the Investors (the “Series F Investors”) are parties to the Series F Preferred Stock Purchase Agreement of even date herewith as such agreement may be amended from time to time (the “Series F Agreement”) among the Company and the persons listed on the Schedule of Investors attached thereto, pursuant to which the Series F Investors are purchasing shares of Series F Preferred Stock of the Company (the “Financing”); and

     WHEREAS, in order to induce the Company to approve the issuance of the Series F Preferred Stock and to induce the Series F Investors to invest funds in the Company pursuant to the Series F Agreement, the Prior Investors, representing a majority of the Holders of Registrable Securities (as defined hereinafter) outstanding prior to the issuance of the Series F Preferred Stock, hereby agree to waive their rights under the Prior Agreement including (without limitation) any Right of First Offer with respect to the sale and issuance of Series F Preferred Stock, and the Investors and the Company hereby agree that this Agreement shall govern the rights of the Investors to cause the Company to register shares of Common Stock issued or issuable to them and certain other matters as set forth herein;

     NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

     1. Registration Rights. The Company covenants and agrees as follows:

          1.1 Definitions. For purposes of this Section 1:

               (a) The term “Act” means the Securities Act of 1933, as amended.

               (b) The term “Form S-3” means such form under the Act as in effect on the date hereof and as may be amended from time to time, or any similar successor registration form under the Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.

               (c) The term “Holder” means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof.

               (d) The term “Initial Offering” means the Company’s first firm commitment underwritten public offering of its Common Stock under the Act.

               (e) The term “1934 Act” means the Securities Exchange Act of 1934, as amended.

               (f) The term “register,” “registered,” and “registration” refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act and applicable rules and regulations thereunder, and the declaration or ordering of effectiveness of such registration statement or document.

               (g) The term “Registrable Securities” means (i) the Common Stock issuable or issued upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock held by the Holders and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security that is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in (i) above, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 1 are not assigned in accordance with Section 1.11 hereof.

               (h) The number of shares of “Registrable Securities” outstanding shall be determined by the number of shares of Common Stock outstanding that are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are, Registrable Securities.

               (i) The term “SEC” shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Act.

          1.2 Request for Registration.

               (a) Subject to the conditions of this Section 1.2, if the Company shall receive at any time after the earlier of (i) three (3) years after the date of this Agreement or (ii) six (6) months after the effective date of the Initial Offering, a written request from any Holder or Holders who in the aggregate hold forty percent (40%) or more of the Registrable Securities then outstanding (the “Initiating Holders”) that the Company file a registration statement under the Act covering the registration of Registrable Securities with an anticipated aggregate offering price of at least $7,500,000, then the Company shall, within twenty (20) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 1.2, use its best efforts to effect, as soon as practicable, the registration under the Act (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Act) and as would permit or facilitate the sale and distribution of all Registrable Securities that the Holders request to be registered in a written request received by the Company within twenty (20) days of the mailing of the Company’s notice pursuant to this Section 1.2(a).

               (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall

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include such information in the written notice referred to in Section 1.2(a). In such event the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Company that marketing factors require a limitation of the number of securities underwritten (including Registrable Securities), then the Company shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders); provided, however, that the number of shares of Registrable Securities to be included in such underwriting and registration shall not be reduced unless all other securities of the Company are first entirely excluded from the underwriting and registration. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration.

               (c) The Company shall not be required to effect a registration pursuant to this Section 1.2:

                    (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless the Company is already subject to service in such jurisdiction and except as may be required under the Act; or

                    (ii) after the Company has effected three (3) registrations pursuant to this Section 1.2, and such registrations have been declared or ordered effective; or

                    (iii) during the period starting with the date sixty (60) days prior to the Company’s good faith estimate of the date of the filing of, and ending on a date one hundred eighty (180) days following the effective date of, a Company-initiated registration subject to Section 1.3 below (other than a registration relating solely to the sale of securities to participants in a Company stock plan, a registration relating to a corporate reorganization or other transaction under Rule 145 of the Act, or a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), provided that the Company is actively employing in good faith its best efforts to cause such registration statement to become effective; or

                    (iv) if the Initiating Holders propose to dispose of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made under Section 1.4 hereof; or

                    (v) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the Company’s Chief Executive Officer or Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its

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stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders, provided that such right to delay a request shall be exercised by the Company not more than once in any twelve (12)-month period.

          1.3 Company Registration.

               (a) If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities (other than a registration relating solely to the sale of securities to participants in a Company stock plan, a registration relating to a corporate reorganization or other transaction under Rule 145 of the Act, or a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 1.3(c), use its best efforts to cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. Such written request by each Holder may specify all or a part of that Holder’s Registrable Securities.

               (b) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The expenses of such withdrawn registration shall be borne by the Company in accordance with Section 1.7 hereof.

               (c) Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company’s capital stock, the Company shall not be required under this Section 1.3 to include any of the Holders’ securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters) and enter into an underwriting agreement in customary form with an underwriter or underwriters selected by the Company, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of Registrable Securities, that the underwriters determine in their sole discretion will not jeopardize the success of the offering (the Registrable Securities so included to be apportioned pro rata among the selling Holders according to the total amount of securities entitled to be included therein owned by each selling Holder or in such other proportions as shall mutually be agreed to by such selling Holders), but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below thirty-five percent (35%) of the total amount of securities included in such offering, unless such offering is the Initial Offering of the Company’s securities, in which case the selling Holders may be excluded if the underwriters make the determination described

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above and no other stockholder’s securities are included, or (ii) notwithstanding (i) above, any shares being sold by a Holder exercising a demand registration right granted in Section 1.2 be excluded from such offering. In no event will shares of any other selling stockholder be included in such registration that would reduce the number of shares which may be included by Holders without the written consent of Holders of not less than a majority of the Registrable Securities proposed to be sold in the offering. For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder that is a Holder of Registrable Securities and that is a partnership or corporation, the partners, retired partners and stockholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to such “selling Holder” shall be based upon the aggregate amount of Registrable Securities owned by all such related entities and individuals.

          1.4 Form S-3 Registration. In case the Company shall receive from any Holder or Holders who in the aggregate hold at least ten percent (10%) of the Registrable Securities then outstanding a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company shall:

               (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and

               (b) use its best efforts to effect, as soon as practicable, such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holders’ Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company, provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this section 1.4:

                    (i) if Form S-3 is not available for such offering by the Holders; provided, however, that after its Initial Offering the Company shall use its best efforts to qualify for registration on Form S-3 in accordance with Section 1.10 below;

                    (ii) if the Holders, together with the holders, of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters’ discounts or commissions) of less than $1,000,000;

                    (iii) if the Company shall furnish to the Holders a certificate signed by the Chief Executive Officer or Chairman of the Board of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 1.4; provided, however, that the Company shall not utilize this right more than once in any twelve month period;

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                    (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders pursuant to this Section 1.4; or

                    (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance.

               (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as requests for registration effected pursuant to Sections 1.2.

          1.5 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

               (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the Registration Statement has been completed; provided, however, that such 120-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of the Company or an underwriter;

               (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement;

               (c) furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them;

               (d) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions;

               (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering;

               (f) notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered

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under the Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing;

               (g) cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange or market on which similar securities issued by the Company are then listed; and

               (h) provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration.

          1.6 Information from Holder. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder’s Registrable Securities.

          1.7 Expenses of Registration. All expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 1.2, 1.3 and 1.4, including (without limitation) all registration, filing and qualification fees, printers’ and accounting fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one special counsel for the selling Holders, shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 or Section 1.4 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be requested in the withdrawn registration); provided, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses.

          1.8 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1.

          1.9 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 1:

               (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, members or officers, directors and stockholders of each Holder, legal counsel and accountants for each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act (each an “Indemnified Party” and collectively the “Indemnified Parties”), against any expenses, losses, claims, damages or liabilities (joint or

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several) (or actions, proceedings, or settlements in respect thereof) to which they may become subject under the Act, the 1934 Act or any state securities laws, insofar as such losses, claims, damages, or liabilities (or actions, proceedings, or settlements in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “Violation”): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission therein of a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities laws or any rule or regulation promulgated under the Act, the 1934 Act or any state securities laws; and the Company will reimburse each such Indemnified Party for any legal or other expenses reasonably incurred by them in connection with investigating or defending or settling any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Indemnified Party; provided further, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Holder or underwriter, or any person controlling such Holder or underwriter, from whom the person asserting any such losses, claims, damages or liabilities purchased shares in the offering, if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Holder or underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the shares to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability.

               (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, legal counsel and accountants for the Company, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any expenses, losses, claims, damages or liabilities (joint or several) (or actions, proceedings, or settlements in respect thereof) to which any of the foregoing persons may become subject, under the Act, the 1934 Act or any state securities laws, insofar as such expenses, losses, claims, damages or liabilities (or actions, proceedings, or settlements in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any person intended to be indemnified pursuant to this subsection 1.9(b), for any legal or other expenses reasonably incurred by such person in connection with investigating or defending or settling any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be

8

unreasonably withheld), provided that in no event shall any indemnity under this subsection 1.9(b) exceed the net proceeds from the offering received by such Holder.

               (c) Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.9.

               (d) If the indemnification provided for in this Section 1.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the net proceeds from the offering received by such Holder.

               (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control; provided, however, that the failure of the underwriting agreement to address a provision addressed in this Agreement shall not be such a conflict.

               (f) The obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise.

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          1.10 Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to:

               (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times after ninety (90) days after the effective date of the Initial Offering;

               (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and

               (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration or pursuant to such form.

          1.11 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities that (i) is a subsidiary, affiliate, parent, partner, limited partner, retired partner, member or retired member or stockholder of a Holder, (ii) is a Holder’s family member or trust for the benefit of an individual Holder, or (iii) acquires at least 50,000 shares of the original purchaser’s Registrable Securities (or, if the transferring holder owns less 50,000 shares, all of the transferring holder’s securities), subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations, provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including without limitation the provisions of Section 1.12 below; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act.

          1.12 “Market Stand-Off’ Agreement. In connection with the Company’s Initial Offering and if requested by the Company or managing underwriter of such offering, each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Company’s Initial Offering and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days) (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by

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the Holder or are thereafter acquired except shares acquired in the public resale market), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise; provided, however, that all executive officers, directors and five-percent (5%) security holders of the Company enter into similar agreements. The underwriters in connection with the Company’s Initial Offering are intended third party beneficiaries of this Section 1.12 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto.

          In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period.

          1.13 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Section 1 after the earlier of (i) five (5) years following the consummation of the Initial Offering or (ii) as to any Holder, at such time as (A) all Registrable Securities held by such Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) can be sold in any three (3)-month period without registration in compliance with Rule 144 of the Act, (B) the Company has completed its Initial Offering, and (C) such Holder holds Registrable Securities constituting less than two percent (2%) of the outstanding voting stock of the Company.

          1.14 Limitation on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the holders of a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are more favorable than the registration rights granted to the Holders hereunder.

     2. Covenants of the Company.

          2.1 Delivery of Financial Statements. The Company shall deliver to each Investor that holds at least (i) 200,000 shares of Series A Preferred Stock or Series B Preferred Stock; (ii) at least 25,000 shares of Series C Preferred Stock; or (iii) 200,000 shares of Series F Preferred Stock (or the Common Stock issued upon conversion thereof and each as adjusted for any future stock split, stock dividend, recapitalization or the like):

               (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholder’s equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles (“GAAP”), and audited and certified by independent public accountants of nationally recognized standing selected by the Company;

               (b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited income statement, statement of cash flows for such fiscal quarter and an unaudited

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balance sheet as of the end of such fiscal quarter prepared in accordance with GAAP consistently applied (except as noted therein), with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made;

               (c) within thirty (30) days of the end of each month, an unaudited income statement and statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail prepared in accordance with GAAP consistently applied (except as noted therein), with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made;

               (d) as soon as practicable, but in any event at least thirty (30) days prior to the end of each fiscal year, a budget for the next fiscal year, prepared on a monthly basis, including balance sheets, income statements and statements of cash flows for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; and

               (e) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Investor or any assignee of the Investor may from time to time request, provided, however, that the Company shall not be obligated under this subsection (f) or any other subsection of Section 2.1 to provide information that the Board of Directors of the Company deems in good faith to be a trade secret or similar confidential information.

          2.2 Inspection. The Company shall permit each Investor that holds at least (i) 200,000 shares of Series A Preferred Stock or Series B Preferred Stock; (ii) at least 25,000 shares of Series C Preferred Stock; or (iii) 200,000 shares of Series F Preferred Stock (or the Common Stock issued upon conversion thereof and each as adjusted for any future stock split, stock dividend, recapitalization or the like), at such Investor’s expense, to visit and inspect the Company’s properties, to examine its books of account and records and to discuss the Company’s affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Investor, provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information that it reasonably considers to be a trade secret or similar confidential information.

          2.3 True Books and Records. The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with GAAP consistently applied (except as noted therein), and will set aside on its books all such proper accruals and reserves as shall be required under GAAP consistently applied.

          2.4 Reservation of Common Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Preferred Stock, all Common Stock issuable from time to time upon such conversion.

          2.5 Proprietary Information and Inventions Agreement. The Company shall require all employees and consultants to execute and deliver a Proprietary Information and Inventions Agreement substantially in a form approved by the Company’s counsel or Board of Directors.

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          2.6 Certain Right of First Refusal Matters. For a period of six (6) months from the date of this Agreement, in the event the Company elects not to exercise any right of first refusal or right of first offer the Company may have on a proposed transfer of any of the Company’s outstanding capital stock pursuant to the Company’s charter documents, by contract or otherwise, the Company shall, to the extent it may do so, assign such right of first refusal or right of first offer to Sutter Hill Ventures or its affiliates. For a period of six (6) months from the date of this Agreement, in the event that the Company becomes aware that any preferred stockholder proposes to sell any of its shares of preferred stock during such period, the Company will use its good faith commercial efforts to cause such stockholder to offer Sutter Hill Ventures or its affiliates a right of first offer in respect of such shares that such preferred stockholder proposes to sell.

          2.7 Directors’ Liability and Indemnification. The Company’s Certificate of Incorporation and Bylaws shall provide (a) for elimination of the liability of director to the maximum extent permitted by law and (b) for indemnification of directors for acts on behalf of the Company to the maximum extent permitted by law.

          2.8 Termination of Information Covenant. The covenants set forth in Sections 2.1, 2.2, 2.4, 2.5 and 2.6 shall terminate as to Investors and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated.

          2.9 Right of First Offer. Subject to the terms and conditions specified in this paragraph 2.9, the Company hereby grants to each Major Investor (as hereinafter defined) a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.4, a Major Investor shall mean any Investor or transferee that holds (i) at least 200,000 shares of Series A Preferred Stock or Series B Preferred Stock; (ii) at least 25,000 shares of Series C Preferred Stock; (iii) at least 280,899 shares of Series D Preferred Stock; or (iv) 200,000 shares of Series F Preferred Stock (or the Common Stock issued upon conversion thereof and each as adjusted for any future stock split, stock dividend, recapitalization or the like). For purposes of this Section 2.4, Investor includes any general partners and affiliates of an Investor. An Investor shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate.

          Each time the Company proposes to offer any shares of, or securities convertible into or exchangeable or exercisable for any shares of, any class of its capital stock (“Shares”), the Company shall first make an offering of such Shares to each Major Investor in accordance with the following provisions.

               (a) The Company shall deliver a notice in accordance with Section 3.5 (“Notice”) to the Major Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms upon which it proposes to offer such Shares.

               (b) By written notification received by the Company, within twenty (20) calendar days after receipt of the Notice, each Major Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares that

13

equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock and any other securities of the Company then held, by such Major Investor bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion of all convertible securities). The Company shall promptly, in writing, inform each Major Investor which purchases all the shares available to it (a “Fully-Exercising Investor”) of any other Major Investor’s failure to do likewise. During the ten (10) day period commencing after the receipt of such information, each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares not subscribed for by the Major Investors which is equal to the proportion that the number of shares of common stock issued and held, or issuable upon conversion of the Preferred Stock and any other securities of the Company then held, by such Fully-Exercising Investor bears to the total number of shares of common stock issued and held, or issuable upon the conversion of the Preferred Stock then held, by all Fully-Exercising Investors who wish to purchase some of the unsubscribed shares.

               (c) If all Shares that Major Investors are entitled to obtain pursuant to subsection 2.4(b) are not elected to be obtained as provided in subsection 2.9(b) hereof, the Company may, during the sixty (60) day period following the expiration of the period provided in subsection 2.4(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within sixty (60) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Major Investors in accordance herewith.

               (d) The right of first offer in this paragraph 2.4 shall not be applicable to (i) the issuance or sale of shares of capital stock to employees, consultants, service providers, officers or directors of the Company pursuant to stock purchase or stock option plans or agreements approved by the Board (including options granted and outstanding prior to the Financing) (or such higher number of shares approved by the Board, including at least one representative of the Investors); (ii) the issuance of securities pursuant to a bona fide, firmly underwritten public offering of shares of Common Stock resulting in proceeds to the Company of at least $20,000,000 in the aggregate; (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities outstanding as of the date of this Agreement; (iv) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise approved by the Board of Directors of the Company; (v) the issuance of securities to financial institutions or lessors in connection with commercial credit arrangements, equipment financing or similar transactions, in each case where the primary purpose of such transaction is not equity financing approved by the Board of Directors of the Company; (vi) the issuance of securities pursuant to currently outstanding options, warrants, notes, or other rights to acquire securities of the Company; (vii) stock splits, stock dividends or like transactions; (viii) shares of Common Stock or convertible securities issued pursuant to any OEM, technology license, marketing, or strategic partnership agreements approved by the Board of Directors; or (ix) the issuance and sale of Series F Preferred Stock pursuant to the Series F Agreement (and the common stock issuable upon conversion of the Series F Preferred Stock).

14

          2.10 Termination of Certain Covenants. The covenants set forth in Section 2.9 shall terminate and be of no further force or effect upon the earlier of (i) the consummation of the sale of securities pursuant to a bona fide, firmly underwritten public offering of shares of Common Stock, or (ii) the acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the transfer of fifty percent (50%) or more of the outstanding voting power of the Company.

          2.11 Vesting Schedule for Employee Stock. Unless otherwise approved by the Board, all stock and option grants to employees of the Company shall vest with respect to 25% of the shares after 12 months of service, and the balance in equal monthly installments over the next 36 months of service.

     3. Miscellaneous.

          3.1 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

          3.2 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California.

          3.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

          3.4 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

          3.5 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon delivery by confirmed facsimile transmission, nationally recognized overnight courier service, or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on Schedule A hereof, or at such other address as such party may designate by seven (7) days’ advance written notice to the other parties.

          3.6 Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

15

          3.7 Entire Agreement: Amendments and Waivers. This Agreement (including the Exhibits hereto, if any) constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities, each future holder of all such Registrable Securities, and the Company.

          3.8 New Investors. Notwithstanding anything herein to the contrary, if pursuant to Section 2.2 of the Series F Agreement, additional parties may purchase shares of Series F Stock as “New Investors” thereunder, then each such New Investor shall become a party to this Agreement as an “Investor” hereunder, without the need any consent, approval or signature of any Investor when such New Investor has both: (a) purchased shares of Series F Stock under the Series F Agreement and paid the Company all consideration payable for such shares and (b) executed one or more counterpart signature pages to this Agreement as an “Investor,” with the Company’s consent. Immediately after a New Investor becomes a party hereto in accordance with the provisions of this Section 3.8, Schedule A to this Agreement will be amended to list such New Investor as an “Investor” hereunder.

          3.9 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

          3.10 Aggregation of Stock. All shares of Registrable Securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

          3.11 Prior Agreement. The Prior Agreement is hereby superseded in its entirety and shall be of no further force or effect.

          3.12 Waiver of Right of First Offer. On behalf of such Investor and all other Investors, each existing Investor executing this Agreement hereby waives any right of notice or right of first offer with respect to the sale of the Series F Preferred Stock (and the common stock issuable upon conversion thereof pursuant to the terms of the Series F Agreement) to which such existing Investor and all other Investors may be entitled pursuant to Section 2.4 of the Prior Agreement. Such waiver shall be binding upon all parties to the Prior Agreement.

[Signature Pages Follow]

16

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

COMPANY
SHUTTERFLY, INC.
By:	/s/ Stephen E. Recht
	Stephen E. Recht
	Chief Financial Officer
Address:	2800 Bridge Parkway, Suite 101
	Redwood City, CA 94065

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
Sutter Hill Ventures, a California Limited Partnership
By:	/s/ Jim White
Its:
	Managing Director of the General Partner

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
David L. Anderson, Trustee of The Anderson Living Trust U/A/D 1/22/98
By:	/s/ David L. Anderson
	David L. Anderson, Trustee
Anvest, L.P.
By:	/s/ David L. Anderson
	David L. Anderson, General Partner

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
G. Leonard Baker, Jr. and Mary Anne Baker, Co-Trustees of The Baker Revocable Trust U/A/D 2/3/03
By:	/s/ G. Leonard Baker, Jr.
	G. Leonard Baker, Jr., Trustee
Saunders Holdings, L.P.
By:	/s/ G. Leonard Baker, Jr.
	G. Leonard Baker, Jr., General Partner

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
William H. Younger, Jr. and Lauren L. Younger, Co-Trustees of The Younger Living Trust U/A/D 1/20/95
By:	/s/ William H. Younger, Jr.
	William H. Younger, Jr., Trustee

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
Tench Coxe and Simone Otus Coxe, Co-Trustees of The Coxe Revocable Trust U/A/D 4/23/98
By:	/s/ Tench Coxe
	Tench Coxe, Trustee
Tench Coxe, Trustee of The Tamerlane Charitable Remainder Unitrust
By:	/s/ Tench Coxe
	Tench Coxe, Trustee

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:

/s/ James C. Gaither

James C. Gaither

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
Jeffrey W. Bird and Christina R. Bird as Trustees of Jeffrey W. and Christina R. Bird Trust Agreement Dated 10/31/00
By:	/s/ Jeffrey W. Bird
	Jeffrey W. Bird, Trustee

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
David E. Sweet and Robin T. Sweet as Trustees of The David and Robin Sweet Living Trust Dated 7/6/04
By:	/s/ David E. Sweet
	David E. Sweet, Trustee

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:

/s/ Lynne M. Brown

Lynne M. Brown

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:

/s/ Patricia Tom

Patricia Tom

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
Robert Yin and Lily Yin as Trustees of Yin Family Trust Dated March 1, 1997
By:	/s/ Robert Yin
	Robert Yin, Trustee

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO Sherryl W. Hossack
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO David L. Anderson
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO William H. Younger, Jr.
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO Tench Coxe
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO James N. White
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO Jeffrey W. Bird
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO David E. Sweet (Rollover)
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO Lynne M. Brown
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO Lynne M. Brown (Rollover)
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer
Wells Fargo Bank, N.A. FBO SHV Profit Sharing Plan FBO Patricia Tom (Post)
By:	/s/ Vicki Bandel
Its:	Asst. V.P. & Trust Officer

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:
Monaco Partners L.P., a Nevada Limited Partnership		Woodside Ventures Limited Partnership
By:	/s/ Harvey Armstrong	By:	/s/ Harvey Armstrong
Name:	Harvey Armstrong	Name:	Harvey Armstrong
Title:	Sec. of G.P.	Title:	Sec. of G.P.
JHC Investments, LLC		Atherton Properties Partnership, L.P.
By:	/s/ Harvey Armstrong	By:	/s/ Harvey Armstrong
Name:	Harvey Armstrong	Name:	Harvey Armstrong
Title:	Secretary	Title:	Sec. of G.P.
JHC Investments 2000, LLC		Mountain Wood Properties, LLC
By:	/s/ Harvey Armstrong	By:	/s/ Harvey Armstrong
Name:	Harvey Armstrong	Name:	Harvey Armstrong
Title:	Secretary	Title:	Manager

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS Mohr, Davidow Ventures V, L.P. By:  Fifth MDV Partners, L.L.C., General Partner
By:	/s/ Nancy Schoendorf
	Nancy Schoendorf, Member
Mohr, Davidow Ventures V-L, L.P. By:  Fifth MDV Partners, L.L.C., General Partner
By:	/s/ Nancy Schoendorf
	Nancy Schoendorf, Member
Mohr, Davidow Ventures V, L.P.    as nominee for MDV Entrepreneurs’ Network Fund II (A), L.P. and MDV Entrepreneurs’ Network Fund II (B), L.P. By:  Fifth MDV Partners, L.L.C., General Partner
By:	/s/ Nancy Schoendorf
	Nancy Schoendorf, Member

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

INVESTORS:   T&G Partners Limited Partnership
By:	/s/ TJG
Name:
Title:

[Signature Page to Shutterfly, Inc. Fifth Amended and Restated Investors’ Rights Agreement]

Schedule A

Schedule of Investors

Sutter Hill Ventures, a California Limited Partnership

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

David L. Anderson, Trustee of

The Anderson Living Trust U/A/D 1/22/98

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

David L. Anderson, General Partner

Anvest, L.P.

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

G. Leonard Baker, Jr. and Mary Anne Baker, Co-Trustees of

The Baker Revocable Trust U/A/D 2/3/03

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

G. Leonard Baker, Jr., General Partner

Saunders Holdings, L.P.

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

William H. Younger, Jr. and Lauren L. Younger, Co-Trustees of

The Younger Living Trust U/A/D 1/20/95

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

Schedule A (continued)

Schedule of Investors

Tench Coxe and Simone Otus Coxe, Co-Trustees of

The Coxe Revocable Trust U/A/D 4/23/98

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

Tench Coxe, Trustee

The Tamerlane Charitable Remainder Unitrust

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

James C. Gaither

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

Jeffrey W. Bird and Christina R. Bird as Trustees of

Jeffrey W. and Christina R. Bird Trust Agreement Dated 10/31/00

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

David E. Sweet and Robin T. Sweet as Trustees of

The David and Robin Sweet Living Trust Dated 7/6/04

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

Lynne M. Brown

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

A-2

Schedule A (continued)

Schedule of Investors

Patricia Tom

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

Robert Yin and Lily Yin as Trustees of

Yin Family Trust Dated March 1, 1997

c/o Sutter Hill Ventures

Attn: Jim White

755 Page Mill Road, Suite A-200

Palo Alto, CA 94304-1005

Fax (650) 858-1854

SHV Profit Sharing Plan FBO Sherryl W. Hossack

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

SHV Profit Sharing Plan FBO David L. Anderson

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

SHV Profit Sharing Plan FBO William H. Younger, Jr.

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

SHV Profit Sharing Plan FBO Tench Coxe

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

A-3

Schedule A (continued)

Schedule of Investors

SHV Profit Sharing Plan FBO James N. White

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

SHV Profit Sharing Plan FBO Jeffrey W. Bird

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

SHV Profit Sharing Plan FBO David E Sweet (Rollover)

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

SHV Profit Sharing Plan FBO Lynne M. Brown

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

SHV Profit Sharing Plan FBO Lynne M. Brown (Rollover)

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

SHV Profit Sharing Plan FBO Patricia Tom (Post)

c/o Wells Fargo Bank, N.A., Trustee

Attention: Vicki Bandel

420 Montgomery Street, 2nd Floor

San Francisco, CA 94104

Fax (415) 956-9362

Monaco Partners L.P., a Nevada Limited Partnership

1700 Seaport Blvd., 4th Floor

Redwood City, CA 94087

Fax (650) 210-5010

A-4

Schedule A (continued)

Schedule of Investors

JHC Investments, LLC

1700 Seaport Blvd., 4^th Floor

Redwood City, CA 94087

Fax (650) 210-5010

JHC Investments 2000, LLC

1700 Seaport Blvd., 4th Floor

Redwood City, CA 94087

Fax (650) 210-5010

Woodside Ventures Limited Partnership

1700 Seaport Blvd., 4^th Floor

Redwood City, CA 94087

Fax (650) 210-5010

Atherton Properties Partnership, L.P.

1700 Seaport Blvd., 4^th Floor

Redwood City, CA 94087

Fax (650) 210-5010

Mountain Wood Properties, LLC

1700 Seaport Blvd., 4^th Floor

Redwood City, CA 94087

Fax (650) 854-7365

Mohr, Davidow V-L, L.P.

2775 Sand Hill Rd., Suite 240

Menlo Park, CA 94025

Fax (650) 854-7365

Mohr, Davidow V, L.P.

2775 Sand Hill Rd., Suite 240

Menlo Park, CA 94025

Fax (650) 854-7365

Mohr, Davidow Ventures V, L.P. as nominee for

MDV Entrepreneurs’ Network Fund II (A), L.P.

and MDV Entrepreneurs’ Network Fund II (B), L.P.

2775 Sand Hill Rd., Suite 240

Menlo Park, CA 94025

Fax: (650) 854-7365

T&G Partners Limited Partnership

52 Monte Vista Ave.

Atherton, CA 94027

A-5

Schedule A (continued)

Schedule of Investors

Adobe Ventures III, L.P.

H&Q Venture Associates, LLC

1 Bush Street

San Francisco, CA 94104

Adobe Ventures IV, L.P.

1 Bush Street

San Francisco, CA 94104

GV Shutterfly Investors, L.P.

1 Bush Street

San Francisco, CA 94104

TI Ventures III, L.P.

1 Bush Street

San Francisco, CA 94104

The Goldman Sachs Group, Inc.

85 Broad St., 10^th Floor

NY, NY 10009

Fax (212) 357-5505

The Charles Schwab Corporation

120 Kearny St., 30^th Fl.

San Francisco, CA 94018

Fax (415) 636-5273

TD Waterhouse Group, Inc.

100 Wall Street

New York, New York 10005

Fax (212) 908-7242

Michiel Lyppens

Van Eeghenstraat 80

1071 GK Amsterdam Holland

Harvey Armstrong

94 La Loma Drive

Menlo Park, CA 94025

Gina Kirkpatrick

PO Box 403844

Miami Beach, FL 33140

Alison Henderson

1314 East Las Olas Blvd.

Apt 1063

Fort Lauderdale, FL 33301

A-6

Schedule A (continued)

Schedule of Investors

Nigel Whitton

1314 East Las Olas Blvd.

Apt 1063

Fort Lauderdale, FL 33301

WS Investment Company, LLC

650 Page Mill Road

Palo Alto, California 94304-1050

WS Investment Company, 2000B

650 Page Mill Road

Palo Alto, California 94304-1050

G&H Partners

155 Constitution Drive

Menlo Park, CA 94025

Ram Shriram

21510 Saratoga Heights Drive

Saratoga, CA 95070

Steve Blank

216 Marmona Drive

Menlo Park, CA 94025

Big Basin Partners, L.P.

14585 Big Basin Way

Saratoga, CA 95070

Comdisco, Inc.

6111 North River Road

Rosemont, IL 60018

Claire Bienen

300 East 93^rd Street, Apt. 63B

New York, NY 10128

Danny Loh

34350 Eucalyptus Terrace

Fremont, CA 94555

Daniel Baum

685 San Mateo Drive

Menlo Park, CA 94025

A-7

EX-10.01

Exhibit 10.01

FORM OF INDEMNITY AGREEMENT

     This Indemnity Agreement (this “Agreement”), dated as of ___, 2006, is made by and between Shutterfly, Inc., a Delaware corporation (the “Company”), and [___], a director and/or officer of the Company (the “Indemnitee”).

RECITALS

     A.      The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors or officers of corporations unless they are protected by comprehensive liability insurance and/or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and because the exposure frequently bears no reasonable relationship to the compensation of such directors and officers;

     B.      Based on their experience as business managers, the Board of Directors of the Company (the “Board”) has concluded that, to retain and attract talented and experienced individuals to serve as officers and directors of the Company, and to encourage such individuals to take the business risks necessary for the success of the Company, it is necessary for the Company contractually to indemnify officers and directors and to assume for itself maximum liability for expenses and damages in connection with claims against such officers and directors in connection with their service to the Company;

     C.      Section 145 of the General Corporation Law of Delaware, under which the Company is organized (the “Law”) empowers the Company to indemnify by agreement its officers, directors, employees and agents, and persons who serve, at the request of the Company, as directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by the Law is not exclusive; and

     D.      The Company desires and has requested the Indemnitee to serve or continue to serve as a director or officer of the Company free from undue concern for claims for damages arising out of or related to such services to the Company.

     NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

     1.      Definitions.

1.1 Agent. For the purposes of this Agreement, “agent” of the Company means any person who is or was a director or officer of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interest of the Company or a subsidiary of the Company as a director or officer of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise or an affiliate of the Company; or was a director or officer of a foreign or domestic corporation which was a predecessor corporation of the Company, or was a director or officer of another enterprise or affiliate of the Company at the request of, for the convenience of, or to represent the interests of such predecessor corporation. The term “enterprise” includes any employee benefit plan of the Company, its subsidiaries, affiliates and predecessor corporations.

1.2 Expenses. For purposes of this Agreement, “expenses ” includes all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys’ fees and related disbursements and other out-of-pocket costs) actually and reasonably incurred by the Indemnitee in connection with the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification or advancement of expenses under this Agreement.

1.3 Proceeding. For the purposes of this Agreement, “proceeding” means any threatened, pending or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative or any other type whatsoever.

1.4 Subsidiary. For purposes of this Agreement, “subsidiary” means any corporation of which more than fifty percent (50%) of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more of its subsidiaries or by one or more of the Company’s subsidiaries.

     2.      Agreement to Serve. The Indemnitee agrees to serve and/or continue to serve as an agent of the Company, at the will of the Company (or under separate agreement, if such agreement exists), in the capacity the Indemnitee currently serves as an agent of the Company, faithfully and to the best of his ability, so long as he or she is duly appointed or elected and qualified in accordance with the applicable provisions of the charter documents of the Company or any subsidiary of the Company; provided, however, that the Indemnitee may at any time and for any reason resign from such position (subject to any contractual obligation that the Indemnitee may have assumed apart from this Agreement), and the Company or any subsidiary shall have no obligation under this Agreement to continue the Indemnitee in any such position.

     3.      Directors’ and Officers’ Insurance. The Company shall, to the extent that the Board determines it to be economically reasonable, maintain a policy of directors’ and officers’ liability insurance (“D&O Insurance”), on such terms and conditions as may be approved by the Board.

     4.      Mandatory Indemnification. Subject to Section 9 below, the Company shall indemnify the Indemnitee:

4.1 Third Party Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; and

4.2 Derivative Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Company to procure a judgment in

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its favor by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, against any amounts paid in settlement of any such proceeding and all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company; except that no indemnification under this subsection shall be made in respect of any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction due to willful misconduct of a culpable nature in the performance of his duty to the Company, unless and only to the extent that the Court of Chancery or the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the Court of Chancery or such other court shall deem proper.

4.3 Exception for Amounts Covered by Insurance. Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) to the extent such have been paid directly to the Indemnitee by D&O Insurance.

     5.      Partial Indemnification and Contribution.

5.1 Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) incurred by him or her in the investigation, defense, settlement or appeal of a proceeding but is not entitled, however, to indemnification for all of the total amount thereof, then the Company shall nevertheless indemnify the Indemnitee for such total amount except as to the portion thereof to which the Indemnitee is not entitled to indemnification.

5.2 Contribution. If the Indemnitee is not entitled to the indemnification provided in Section 4 for any reason other than the statutory limitations set forth in the Law, then in respect of any threatened, pending or completed proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such proceeding), the Company shall contribute to the amount of expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by the Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and the Indemnitee on the other hand from the transaction from which such proceeding arose and (ii) the relative fault of the Company on the one hand and of the Indemnitee on the other hand in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Indemnitee on the other hand shall be determined by reference to, among other things, the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this

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Section 5.2 were determined by pro rata allocation or any other method of allocation that does not take account of the foregoing equitable considerations.

     6.      Mandatory Advancement of Expenses.

6.1 Advancement. Subject to Section 9.1 below and except as prohibited by law, the Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company or by reason of anything done or not done by him in any such capacity. The Indemnitee hereby undertakes to promptly repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Company under the provisions of this Agreement, the Certificate of Incorporation or Bylaws of the Company, the Law or otherwise. The advances to be made hereunder shall be paid by the Company to the Indemnitee within thirty (30) days following delivery of a written request therefor by the Indemnitee to the Company.

6.2 Exception. Notwithstanding the foregoing provisions of this Section 6, the Company shall not be obligated to advance any expenses to the Indemnitee arising from a lawsuit filed directly by the Company against the Indemnitee if an absolute majority of the members of the Board reasonably determines in good faith, within thirty (30) days of the Indemnitee’s request to be advanced expenses, that the facts known to them at the time such determination is made demonstrate clearly and convincingly that the Indemnitee acted in bad faith. If such a determination is made, the Indemnitee may have such decision reviewed by another forum, in the manner set forth in Sections 8.3, 8.4 and 8.5 hereof, with all references therein to “indemnification” being deemed to refer to “advancement of expenses,” and the burden of proof shall be on the Company to demonstrate clearly and convincingly that, based on the facts known at the time, the Indemnitee acted in bad faith. The Company may not avail itself of this Section 6.2 as to a given lawsuit if, at any time after the occurrence of the activities or omissions that are the primary focus of the lawsuit, the Company has undergone a change in control. For this purpose, a change in control shall mean a given person or group of affiliated persons or groups increasing their beneficial ownership interest in the Company by at least twenty (20) percentage points without advance Board approval.

     7.      Notice and Other Indemnification Procedures.

7.1 Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof.

7.2 If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 7.1 hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all

4

amounts payable as a result of such proceeding in accordance with the terms of such D&O Insurance policies.

7.3 In the event the Company shall be obligated to advance the expenses for any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee (which approval shall not be unreasonably withheld), upon the delivery to the Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that: (a) the Indemnitee shall have the right to employ his or her own counsel in any such proceeding at the Indemnitee’s expense and (b) if (i) the employment of counsel by the Indemnitee has been previously authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of the Indemnitee’s counsel shall be at the expense of the Company.

     8.      Determination of Right to Indemnification.

8.1 To the extent the Indemnitee has been successful on the merits or otherwise in defense of any proceeding referred to in Section 4.1 or 4.2 of this Agreement or in the defense of any claim, issue or matter described therein, the Company shall indemnify the Indemnitee against expenses actually and reasonably incurred by him or her in connection with the investigation, defense or appeal of such proceeding, or such claim, issue or matter, as the case may be.

8.2 In the event that Section 8.1 is inapplicable, or does not apply to the entire proceeding, the Company shall nonetheless indemnify the Indemnitee unless the Company shall prove by clear and convincing evidence to a forum listed in Section 8.3 below that the Indemnitee has not met the applicable standard of conduct required to entitle the Indemnitee to such indemnification.

8.3 The Indemnitee shall be entitled to select the forum in which the validity of the Company’s claim under Section 8.2 hereof that the Indemnitee is not entitled to indemnification will be heard from among the following, except that the Indemnitee can select a forum consisting of the stockholders of the Company only with the approval of the Company:

(a) A quorum of the Board consisting of directors who are not parties to the proceeding for which indemnification is being sought;

(b) The stockholders of the Company;

(c) Legal counsel mutually agreed upon by the Indemnitee and the Board, which counsel shall make such determination in a written opinion;

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(d) A panel of three arbitrators, one of whom is selected by the Company, another of whom is selected by the Indemnitee and the last of whom is selected by the first two arbitrators so selected; or

(e) The Court of Chancery of Delaware.

8.4 As soon as practicable, and in no event later than thirty (30) days after the forum has been selected pursuant to Section 8.3 above, the Company shall, at its own expense, submit to the selected forum its claim that the Indemnitee is not entitled to indemnification, and the Company shall act in the utmost good faith to assure the Indemnitee a complete opportunity to defend against such claim.

8.5 If the forum selected in accordance with Section 8.3 hereof is not a court, then after the final decision of such forum is rendered, the Company or the Indemnitee shall have the right to apply to the Court of Chancery of Delaware, for the purpose of appealing the decision of such forum, provided that such right is executed within sixty (60) days after the final decision of such forum is rendered. If the forum selected in accordance with Section 8.3 hereof is a court, then the rights of the Company or the Indemnitee to appeal any decision of such court shall be governed by the applicable laws and rules governing appeals of the decision of such court.

8.6 Notwithstanding any other provision in this Agreement to the contrary, the Company shall indemnify the Indemnitee against all expenses incurred by the Indemnitee in connection with any hearing or proceeding under this Section 8 involving the Indemnitee and against all expenses incurred by the Indemnitee in connection with any other proceeding between the Company and the Indemnitee involving the interpretation or enforcement of the rights of the Indemnitee under this Agreement unless a court of competent jurisdiction finds that each of the material claims and/or defenses of the Indemnitee in any such proceeding was frivolous or not made in good faith.

     9.      Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

9.1 Claims Initiated by Indemnitee. To indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to proceedings specifically authorized by the Board or brought to establish or enforce a right to indemnification and/or advancement of expenses arising under this Agreement, the charter documents of the Company or any subsidiary or any statute or law or otherwise, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board finds it to be appropriate; or

9.2 Unauthorized Settlements. To indemnify the Indemnitee hereunder for any amounts paid in settlement of a proceeding unless the Company consents in advance in writing to such settlement, which consent shall not be unreasonably withheld; or

9.3 Securities Law Actions. To indemnify the Indemnitee on account of any suit in which judgment is rendered against the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of

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Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or

9.4 Unlawful Indemnification. To indemnify the Indemnitee if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. In this respect, the Company and the Indemnitee have been advised that the Securities and Exchange Commission takes the position that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication.

     10.      Non-Exclusivity. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provision of law, the Company’s Certificate of Incorporation or Bylaws, the vote of the Company’s stockholders or disinterested directors, other agreements or otherwise, both as to action in the Indemnitee’s official capacity and to action in another capacity while occupying his position as an agent of the Company, and the Indemnitee’s rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee.

     11.      General Provisions.

11.1 Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification and advancement of expenses to the Indemnitee to the fullest extent now or hereafter permitted by law, except as expressly limited herein.

11.2 Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, then: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 11.1 hereof.

11.3 Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver.

11.4 Subrogation. In the event of full payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all documents required and shall do all acts that may be necessary or desirable to secure such rights and to enable the Company effectively to bring suit to enforce such rights.

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11.5 Counterparts. This Agreement may be executed in one or more counterparts, which shall together constitute one agreement.

11.6 Successors and Assigns. The terms of this Agreement shall bind, and shall inure to the benefit of, the successors and assigns of the parties hereto.

11.7 Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given: (a) if delivered by hand and signed for by the party addressee; or (b) if mailed by certified or registered mail, with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement or as subsequently modified by written notice.

11.8 Governing Law. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware, without giving effect to that body of laws pertaining to conflict of laws.

11.9 Consent to Jurisdiction. The Company and the Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding that arises out of or relates to this Agreement.

11.10 Attorneys’ Fees. In the event Indemnitee is required to bring any action to enforce rights under this Agreement (including, without limitation, the expenses of any Proceeding described in Section 1.3) the Indemnitee shall be entitled to all reasonable fees and expenses in bringing and pursuing such action, unless a court of competent jurisdiction finds each of the material claims of the Indemnitee in any such action was frivolous and not made in good faith.

[Remainder of Page Left Blank]

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     IN WITNESS WHEREOF, the parties hereto have entered into this Indemnity Agreement effective as of the date first written above.

	COMPANY-SHUTTERFLY, INC.	INDEMNITEE:
By:
Name:
Title:
Address:		Address:

EX-10.02

Exhibit 10.02

Shutterfly, Inc.

1999 Stock Plan

Adopted on September 9, 1999
As Amended through March 16, 2006

SECTION 1. ESTABLISHMENT AND PURPOSE.	1
SECTION 2. ADMINISTRATION.	1
(a) Committees of the Board of Directors.	1
(b) Authority of the Board of Directors.	1
SECTION 3. ELIGIBILITY.	1
(a) General Rule.	1
(b) Ten-Percent Stockholders.	1
SECTION 4. STOCK SUBJECT TO PLAN.	2
(a) Basic Limitation.	2
(b) Additional Shares.	2
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES.	2
(a) Stock Purchase Agreement.	2
(b) Duration of Offers and Nontransferability of Rights.	2
(c) Purchase Price.	2
(d) Withholding Taxes.	2
(e) Restrictions on Transfer of Shares and Minimum Vesting.	3
(f) Accelerated Vesting	3
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.	3
(a) Stock Option Agreement.	3
(b) Number of Shares.	3
(c) Exercise Price.	3
(d) Withholding Taxes.	3
(e) Exercisability.	4
(f) Accelerated Exercisability	4
(g) Basic Term.	4
(h) Nontransferability.	4
(i) Termination of Service (Except by Death).	4
(j) Leaves of Absence.	5
(k) Death of Optionee.	5
(l) No Rights as a Stockholder.	5
(m) Modification, Extension and Assumption of Options.	5
(n) Restrictions on Transfer of Shares and Minimum Vesting.	5
(o) Accelerated Vesting	6

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SECTION 7. PAYMENT FOR SHARES.	6
(a) General Rule.	6
(b) Surrender of Stock.	6
(c) Services Rendered.	6
(d) Promissory Note.	6
(e) Exercise/Sale.	7
(f) Exercise/Pledge.	7
SECTION 8. ADJUSTMENT OF SHARES.	7
(a) General.	7
(b) Mergers and Consolidations.	7
(c) Reservation of Rights.	7
SECTION 9. SECURITIES LAWS REQUIREMENTS.	8
(a) General	8
(b) Financial Reports.	8
SECTION 10. NO RETENTION RIGHTS.	8
SECTION 11. DURATION AND AMENDMENTS.	8
(a) Term of the Plan.	8
(b) Right to Amend or Terminate the Plan.	8
(c) Effect of Amendment or Termination.	9
SECTION 12. DEFINITIONS.	9

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Shutterfly, Inc. 1999 Stock Plan

SECTION 1. ESTABLISHMENT AND PURPOSE.

     The purpose of the Plan is to offer selected individuals an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, by purchasing Shares of the Company’s Stock. The Plan provides both for the direct award or sale of Shares and for the grant of Options to purchase Shares. Options granted under the Plan may include Nonstatutory Options as well as ISOs intended to qualify under Section 422 of the Code.

     Capitalized terms are defined in Section 12.

SECTION 2. ADMINISTRATION.

     (a) Committees of the Board of Directors. The Plan may be administered by one or more Committees. Each Committee shall consist of one or more members of the Board of Directors who have been appointed by the Board of Directors. Each Committee shall have such authority and be responsible for such functions as the Board of Directors has assigned to it. If no Committee has been appointed, the entire Board of Directors shall administer the Plan. Any reference to the Board of Directors in the Plan shall be construed as a reference to the Committee (if any) to whom the Board of Directors has assigned a particular function.

     (b) Authority of the Board of Directors. Subject to the provisions of the Plan, the Board of Directors shall have full authority and discretion to take any actions it deems necessary or advisable for the administration of the Plan. All decisions, interpretations and other actions of the Board of Directors shall be final and binding on all Purchasers, all Optionees and all persons deriving their rights from a Purchaser or Optionee.

SECTION 3. ELIGIBILITY.

     (a) General Rule. Only Employees, Outside Directors and Consultants shall be eligible for the grant of Options or the direct award or sale of Shares. Only Employees shall be eligible for the grant of ISOs.

     (b) Ten-Percent Stockholders. An individual who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, its Parent or any of its Subsidiaries shall not be eligible for designation as an Optionee or Purchaser unless (i) the Exercise Price is at least 110% of the Fair Market Value of a Share on the date of grant, (ii) the Purchase Price (if any) is at least 100% of the Fair Market Value of a Share and (iii) in the case of an ISO, such ISO by its terms is not exercisable after the expiration of five years from the date of grant. For purposes of this Subsection (b), in determining stock ownership, the attribution rules of Section 424(d) of the Code shall be applied.

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SECTION 4. STOCK SUBJECT TO PLAN.

     (a) Basic Limitation. Shares offered under the Plan may be authorized but unissued Shares or treasury Shares. The aggregate number of Shares that may be issued under the Plan (upon exercise of Options or other rights to acquire Shares) shall not exceed 7,683,545 Shares, subject to adjustment pursuant to Section 8. The number of Shares that are subject to Options or other rights outstanding at any time under the Plan shall not exceed the number of Shares that then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan.

     (b) Additional Shares. In the event that any outstanding Option or other right for any reason expires or is canceled or otherwise terminated, the Shares allocable to the unexercised portion of such Option or other right shall again be available for the purposes of the Plan. In the event that Shares issued under the Plan are reacquired by the Company pursuant to any forfeiture provision, right of repurchase or right of first refusal, such Shares shall again be available for the purposes of the Plan, except that the aggregate number of Shares which may be issued upon the exercise of ISOs shall in no event exceed 7,683,545 Shares (subject to adjustment pursuant to Section 8).

SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES.

     (a) Stock Purchase Agreement. Each award or sale of Shares under the Plan (other than upon exercise of an Option) shall be evidenced by a Stock Purchase Agreement between the Purchaser and the Company. Such award or sale shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Board of Directors deems appropriate for inclusion in a Stock Purchase Agreement. The provisions of the various Stock Purchase Agreements entered into under the Plan need not be identical.

     (b) Duration of Offers and Nontransferability of Rights. Any right to acquire Shares under the Plan (other than an Option) shall automatically expire if not exercised by the Purchaser within 30 days after the grant of such right was communicated to the Purchaser by the Company. Such right shall not be transferable and shall be exercisable only by the Purchaser to whom such right was granted.

     (c) Purchase Price. The Purchase Price of Shares to be offered under the Plan shall not be less than 85% of the Fair Market Value of such Shares, and a higher percentage may be required by Section 3(b). Subject to the preceding sentence, the Purchase Price shall be determined by the Board of Directors at its sole discretion. The Purchase Price shall be payable in a form described in Section 7.

     (d) Withholding Taxes. As a condition to the purchase of Shares, the Purchaser shall make such arrangements as the Board of Directors may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such purchase.

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     (e) Restrictions on Transfer of Shares and Minimum Vesting. Any Shares awarded or sold under the Plan shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Board of Directors may determine. Such restrictions shall be set forth in the applicable Stock Purchase Agreement and shall apply in addition to any restrictions that may apply to holders of Shares generally. In the case of a Purchaser who is not an officer of the Company, an Outside Director or a Consultant, any right to repurchase the Purchaser’s Shares at the original Purchase Price (if any) upon termination of the Purchaser’s Service shall lapse at least as rapidly as 20% per year over the five-year period commencing on the date of the award or sale of the Shares. Any such right may be exercised only within 90 days after the termination of the Purchaser’s Service for cash or for cancellation of indebtedness incurred in purchasing the Shares.

     (f) Accelerated Vesting. Unless the applicable Stock Purchase Agreement provides otherwise, any right to repurchase a Purchaser’s Shares at the original Purchase Price (if any) upon termination of the Purchaser’s Service shall lapse and all of such Shares shall become vested if (i) the Company is subject to a Change in Control before the Purchaser’s Service terminates and (ii) the repurchase right is not assigned to the entity that employs the Purchaser immediately after the Change in Control or to its parent or subsidiary.

SECTION 6. TERMS AND CONDITIONS OF OPTIONS.

     (a) Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Board of Directors deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical.

     (b) Number of Shares. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 8. The Stock Option Agreement shall also specify whether the Option is an ISO or a Nonstatutory Option.

     (c) Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the Fair Market Value of a Share on the date of grant, and a higher percentage may be required by Section 3(b). The Exercise Price of a Nonstatutory Option shall not be less than 85% of the Fair Market Value of a Share on the date of grant, and a higher percentage may be required by Section 3(b). Subject to the preceding two sentences, the Exercise Price under any Option shall be determined by the Board of Directors at its sole discretion. The Exercise Price shall be payable in a form described in Section 7.

     (d) Withholding Taxes. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Board of Directors may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Board of Directors may require

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for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option.

     (e) Exercisability. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. In the case of an Optionee who is not an officer of the Company, an Outside Director or a Consultant, an Option shall become exercisable at least as rapidly as 20% per year over the five-year period commencing on the date of grant. Subject to the preceding sentence, the exercisability provisions of any Stock Option Agreement shall be determined by the Board of Directors at its sole discretion.

     (f) Accelerated Exercisability. Unless the applicable Stock Option Agreement provides otherwise, all of an Optionee’s Options shall become exercisable in full if (i) the Company is subject to a Change in Control before the Optionee’s Service terminates, (ii) such Options do not remain outstanding, (iii) such Options are not assumed by the surviving corporation or its parent and (iv) the surviving corporation or its parent does not substitute options with substantially the same terms for such Options.

     (g) Basic Term. The Stock Option Agreement shall specify the term of the Option. The term shall not exceed 10 years from the date of grant, and a shorter term may be required by Section 3(b). Subject to the preceding sentence, the Board of Directors at its sole discretion shall determine when an Option is to expire.

     (h) Nontransferability. No Option shall be transferable by the Optionee other than by beneficiary designation, will or the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by the Optionee or by the Optionee’s guardian or legal representative. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during the Optionee’s lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.

     (i) Termination of Service (Except by Death). If an Optionee’s Service terminates for any reason other than the Optionee’s death, then the Optionee’s Options shall expire on the earliest of the following occasions:

     (i) The expiration date determined pursuant to Subsection (g) above;

     (ii) The date three months after the termination of the Optionee’s Service for any reason other than Disability, or such later date as the Board of Directors may determine; or

     (iii) The date six months after the termination of the Optionee’s Service by reason of Disability, or such later date as the Board of Directors may determine.

The Optionee may exercise all or part of the Optionee’s Options at any time before the expiration of such Options under the preceding sentence, but only to the extent that such Options had become exercisable before the Optionee’s Service terminated (or became exercisable as a result of the termination) and the underlying Shares had vested before the Optionee’s Service terminated (or vested as a result of the termination). The balance of such Options shall lapse

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when the Optionee’s Service terminates. In the event that the Optionee dies after the termination of the Optionee’s Service but before the expiration of the Optionee’s Options, all or part of such Options may be exercised (prior to expiration) by the executors or administrators of the Optionee’s estate or by any person who has acquired such Options directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that such Options had become exercisable before the Optionee’s Service terminated (or became exercisable as a result of the termination) and the underlying Shares had vested before the Optionee’s Service terminated (or vested as a result of the termination).

     (j) Leaves of Absence. For purposes of Subsection (i) above, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence, if such leave was approved by the Company in writing and if continued crediting of Service for this purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company).

     (k) Death of Optionee. If an Optionee dies while the Optionee is in Service, then the Optionee’s Options shall expire on the earlier of the following dates:

     (i) The expiration date determined pursuant to Subsection (g) above; or

     (ii) The date 12 months after the Optionee’s death.

All or part of the Optionee’s Options may be exercised at any time before the expiration of such Options under the preceding sentence by the executors or administrators of the Optionee’s estate or by any person who has acquired such Options directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that such Options had become exercisable before the Optionee’s death or became exercisable as a result of the death. The balance of such Options shall lapse when the Optionee dies.

     (l) No Rights as a Stockholder. An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder with respect to any Shares covered by the Optionee’s Option until such person becomes entitled to receive such Shares by filing a notice of exercise and paying the Exercise Price pursuant to the terms of such Option.

     (m) Modification, Extension and Assumption of Options. Within the limitations of the Plan, the Board of Directors may modify, extend or assume outstanding Options or may accept the cancellation of outstanding Options (whether granted by the Company or another issuer) in return for the grant of new Options for the same or a different number of Shares and at the same or a different Exercise Price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair the Optionee’s rights or increase the Optionee’s obligations under such Option.

     (n) Restrictions on Transfer of Shares and Minimum Vesting. Any Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Board of Directors may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and

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shall apply in addition to any restrictions that may apply to holders of Shares generally. In the case of an Optionee who is not an officer of the Company, an Outside Director or a Consultant:

     (i) Any right to repurchase the Optionee’s Shares at the original Exercise Price upon termination of the Optionee’s Service shall lapse at least as rapidly as 20% per year over the five-year period commencing on the date of the option grant;

     (ii) Any such right may be exercised only for cash or for cancellation of indebtedness incurred in purchasing the Shares; and

     (iii) Any such right may be exercised only within 90 days after the later of (A) the termination of the Optionee’s Service or (B) the date of the option exercise.

     (o) Accelerated Vesting. Unless the applicable Stock Option Agreement provides otherwise, any right to repurchase an Optionee’s Shares at the original Exercise Price upon termination of the Optionee’s Service shall lapse and all of such Shares shall become vested if (i) the Company is subject to a Change in Control before the Optionee’s Service terminates and (ii) the repurchase right is not assigned to the entity that employs the Optionee immediately after the Change in Control or to its parent or subsidiary.

SECTION 7. PAYMENT FOR SHARES.

     (a) General Rule. The entire Purchase Price or Exercise Price of Shares issued under the Plan shall be payable in cash or cash equivalents at the time when such Shares are purchased, except as otherwise provided in this Section 7.

     (b) Surrender of Stock. To the extent that a Stock Option Agreement so provides, all or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, Shares that are already owned by the Optionee. Such Shares shall be surrendered to the Company in good form for transfer and shall be valued at their Fair Market Value on the date when the Option is exercised. The Optionee shall not surrender, or attest to the ownership of, Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes.

     (c) Services Rendered. At the discretion of the Board of Directors, Shares may be awarded under the Plan in consideration of services rendered to the Company, a Parent or a Subsidiary prior to the award.

     (d) Promissory Note. To the extent that a Stock Option Agreement or Stock Purchase Agreement so provides, all or a portion of the Exercise Price or Purchase Price (as the case may be) of Shares issued under the Plan may be paid with a full-recourse promissory note. However, the par value of the Shares, if newly issued, shall be paid in cash or cash equivalents. The Shares shall be pledged as security for payment of the principal amount of the promissory note and interest thereon. The interest rate payable under the terms of the promissory note shall

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not be less than the minimum rate (if any) required to avoid the imputation of additional interest under the Code. Subject to the foregoing, the Board of Directors (at its sole discretion) shall specify the term, interest rate, amortization requirements (if any) and other provisions of such note.

     (e) Exercise/Sale. To the extent that a Stock Option Agreement so provides, and if Stock is publicly traded, payment may be made all or in part by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes.

     (f) Exercise/Pledge. To the extent that a Stock Option Agreement so provides, and if Stock is publicly traded, payment may be made all or in part by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes.

SECTION 8. ADJUSTMENT OF SHARES.

     (a) General. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of an extraordinary dividend payable in a form other than Shares in an amount that has a material effect on the Fair Market Value of the Stock, a combination or consolidation of the outstanding Stock into a lesser number of Shares, a recapitalization, a spin-off, a reclassification or a similar occurrence, the Board of Directors shall make appropriate adjustments in one or more of (i) the number of Shares available for future grants under Section 4, (ii) the number of Shares covered by each outstanding Option or (iii) the Exercise Price under each outstanding Option.

     (b) Mergers and Consolidations. In the event that the Company is a party to a merger or consolidation, outstanding Options shall be subject to the agreement of merger or consolidation. Such agreement, without the Optionees’ consent, may provide for:

     (i) The continuation of such outstanding Options by the Company (if the Company is the surviving corporation);

     (ii) The assumption of the Plan and such outstanding Options by the surviving corporation or its parent;

     (iii) The substitution by the surviving corporation or its parent of options with substantially the same terms for such outstanding Options; or

     (iv) The cancellation of such outstanding Options without payment of any consideration.

     (c) Reservation of Rights. Except as provided in this Section 8, an Optionee or Purchaser shall have no rights by reason of (i) any subdivision or consolidation of shares of stock

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of any class, (ii) the payment of any dividend or (iii) any other increase or decrease in the number of shares of stock of any class. Any issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

SECTION 9. SECURITIES LAW REQUIREMENTS.

     (a) General. Shares shall not be issued under the Plan unless the issuance and delivery of such Shares comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities may then be traded.

     (b) Financial Reports. The Company each year shall furnish to Optionees, Purchasers and stockholders who have received Stock under the Plan its balance sheet and income statement, unless such Optionees, Purchasers or stockholders are key Employees whose duties with the Company assure them access to equivalent information. Such balance sheet and income statement need not be audited.

SECTION 10. NO RETENTION RIGHTS.

     Nothing in the Plan or in any right or Option granted under the Plan shall confer upon the Purchaser or Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Purchaser or Optionee) or of the Purchaser or Optionee, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without cause.

SECTION 11. DURATION AND AMENDMENTS.

     (a) Term of the Plan. The Plan, as set forth herein, shall become effective on the date of its adoption by the Board of Directors, subject to the approval of the Company’s stockholders. In the event that the stockholders fail to approve the Plan within 12 months after its adoption by the Board of Directors, any grants of Options or sales or awards of Shares that have already occurred shall be rescinded, and no additional grants, sales or awards shall be made thereafter under the Plan. The Plan shall terminate automatically 10 years after its adoption by the Board of Directors and may be terminated on any earlier date pursuant to Subsection (b) below.

     (b) Right to Amend or Terminate the Plan. The Board of Directors may amend, suspend or terminate the Plan at any time and for any reason; provided, however, that any amendment of the Plan which increases the number of Shares available for issuance under the

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Plan (except as provided in Section 8), or which materially changes the class of persons who are eligible for the grant of ISOs, shall be subject to the approval of the Company’s stockholders. Stockholder approval shall not be required for any other amendment of the Plan.

     (c) Effect of Amendment or Termination. No Shares shall be issued or sold under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan.

SECTION 12. DEFINITIONS.

     (a) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time.

     (b) “Change in Control” shall mean:

     (i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity; or

     (ii) The sale, transfer or other disposition of all or substantially all of the Company’s assets.

A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

     (c) “Code” shall mean the Internal Revenue Code of 1986, as amended.

     (d) “Committee” shall mean a committee of the Board of Directors, as described in Section 2(a).

     (e) “Company” shall mean Shutterfly, Inc., a Delaware corporation.

     (f) “Consultant” shall mean a person who performs bona fide services for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding Employees and Outside Directors.

     (g) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.

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     (h) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.

     (i) “Exercise Price” shall mean the amount for which one Share may be purchased upon exercise of an Option, as specified by the Board of Directors in the applicable Stock Option Agreement.

     (j) “Fair Market Value” shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons.

     (k) “ISO” shall mean an employee incentive stock option described in Section 422(b) of the Code.

     (l) “Nonstatutory Option” shall mean a stock option not described in Sections 422(b) or 423(b) of the Code.

     (m) “Option” shall mean an ISO or Nonstatutory Option granted under the Plan and entitling the holder to purchase Shares.

     (n) “Optionee” shall mean an individual who holds an Option.

     (o) “Outside Director” shall mean a member of the Board of Directors who is not an Employee.

     (p) “Parent” shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date.

     (q) “Plan” shall mean this Shutterfly, Inc. 1999 Stock Plan.

     (r) “Purchase Price” shall mean the consideration for which one Share may be acquired under the Plan (other than upon exercise of an Option), as specified by the Board of Directors.

     (s) “Purchaser” shall mean an individual to whom the Board of Directors has offered the right to acquire Shares under the Plan (other than upon exercise of an Option).

     (t) “Service” shall mean service as an Employee, Outside Director or Consultant.

     (u) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 (if applicable).

     (v) “Stock” shall mean the Common Stock of the Company, with a par value of $0.0001 per Share.

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     (w) “Stock Option Agreement” shall mean the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to the Optionee’s Option.

     (x) “Stock Purchase Agreement” shall mean the agreement between the Company and a Purchaser who acquires Shares under the Plan which contains the terms, conditions and restrictions pertaining to the acquisition of such Shares.

     (y) “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

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Shutterfly, Inc.
ID: 94-3330068
2800 Bridge Parkway #101
Redwood City, CA 94065
Notice of Stock Option Grant

[ Optionee name and address] Option Number:
Plan:
ID: 0000XXX
1999
000XXX

Effective [Grant Date], you have been granted a(n) [Incentive] [Nonstatutory] Stock Option to buy [#Shares] of shares of Shutterfly, Inc. (the “Company”) stock at $[PricePerShare] per share.

The total exercise price for the shares granted is $[TotalExercisePrice].

Company’s Right of Repurchase for the shares shall lapse in accordance with the Full Vest Date shown below:

Shares	Vest Type	Full Vest	Expiration
[#Shares] [#Shares]	On Vest Date Monthly	[FullVestDate] [FullVestDate]	[ExpirationDate] [Expiration Date]

By your signature and the Company’s signature below, you and the Company agree that the option is granted under and governed by the terms and conditions of the Company’s 1999 Stock Option Plan and the Option Agreement, both of which are attached to and made a part of this document.

Stephen E. Recht, CFO	Date
[Optionee name]	Date

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.

Shutterfly, Inc. 1999 Stock Plan:
Stock Option Agreement

SECTION 1. GRANT OF OPTION.

     (a) Option. On the terms and conditions set forth in the Notice of Stock Option Grant and this Agreement, the Company grants to the Optionee on the Date of Grant the option to purchase at the Exercise Price the number of Shares set forth in the Notice of Stock Option Grant. The Exercise Price is agreed to be at least 100% of the Fair Market Value per Share on the Date of Grant (110% of Fair Market Value if Section 3(b) of the Plan applies). This option is intended to be an ISO or a Nonstatutory Option, as provided in the Notice of Stock Option Grant.

     (b) Stock Plan and Defined Terms. This option is granted pursuant to the Plan, a copy of which the Optionee acknowledges having received. The provisions of the Plan are incorporated into this Agreement by this reference. Capitalized terms are defined in Section 14 of this Agreement.

SECTION 2. RIGHT TO EXERCISE.

      (a) Exercisability. Subject to Subsections (b) and (c) below and the other conditions set forth in this Agreement, all or part of this option may be exercised prior to its expiration at the time or times set forth in the Notice of Stock Option Grant. Shares purchased by exercising this option may be subject to the Right of Repurchase under Section 7.

      (b) $100,000 Limitation. If this option is designated as an ISO in the Notice of Stock Option Grant, then the Optionee’s right to exercise this option shall be deferred to the extent (and only to the extent) that this option otherwise would not be treated as an ISO by reason of the $100,000 annual limitation under Section 422(d) of the Code, except that:

      (i) The Optionee’s right to exercise this option shall in any event become exercisable at least as rapidly as 20% per year over the five-year period commencing on the Date of Grant, unless the Optionee is an officer of the Company, an Outside Director or a Consultant; and

      (ii) The Optionee’s right to exercise this option shall no longer be deferred if (A) the Company is subject to a Change in Control before the

Optionee’s Service terminates, (B) this option does not remain outstanding, (C) this option is not assumed by the surviving corporation or its parent and (D) the surviving corporation or its parent does not substitute an option with substantially the same terms for this option.

     (c) Stockholder Approval. Any other provision of this Agreement notwithstanding, no portion of this option shall be exercisable at any time prior to the approval of the Plan by the Company’s stockholders.

SECTION 3. NO TRANSFER OR ASSIGNMENT OF OPTION.

          Except as otherwise provided in this Agreement, this option and the rights and privileges conferred hereby shall not be sold, pledged or otherwise transferred (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment, levy or similar process.

SECTION 4. EXERCISE PROCEDURES.

     (a) Notice of Exercise. The Optionee or the Optionee’s representative may exercise this option by giving written notice to the Company pursuant to Section 13(c). The notice shall specify the election to exercise this option, the number of Shares for which it is being exercised and the form of payment. The notice shall be signed by the person exercising this option. In the event that this option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof (satisfactory to the Company) of the representative’s right to exercise this option. The Optionee or the Optionee’s representative shall deliver to the Company, at the time of giving the notice, payment in a form permissible under Section 5 for the full amount of the Purchase Price.

     (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued a certificate or certificates for the Shares as to which this option has been exercised, registered in the name of the person exercising this option (or in the names of such person and his or her spouse as community property or as joint tenants with right of survivorship). The Company shall cause such certificate or certificates to be deposited in escrow or delivered to or upon the order of the person exercising this option.

     (c) Withholding Taxes. In the event that the Company determines that it is required to withhold any tax as a result of the exercise of this option, the Optionee, as a condition to the exercise of this option, shall make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Optionee shall also make arrangements satisfactory to the Company to enable it to satisfy any withholding requirements that may arise in connection with the vesting or disposition of Shares purchased by exercising this option.

SECTION 5. PAYMENT FOR STOCK.

     (a) Cash. All or part of the Purchase Price may be paid in cash or cash equivalents.

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     (b) Surrender of Stock. All or any part of the Purchase Price may be paid by surrendering, or attesting to the ownership of, Shares that are already owned by the Optionee. Such Shares shall be surrendered to the Company in good form for transfer and shall be valued at their Fair Market Value on the date when this option is exercised. The Optionee shall not surrender, or attest to the ownership of, Shares in payment of the Purchase Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes.

     (c) Exercise/Sale. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company.

     (d) Exercise/Pledge. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company.

SECTION 6. TERM AND EXPIRATION.

     (a) Basic Term. This option shall in any event expire on the expiration date set forth in the Notice of Stock Option Grant, which date is 10 years after the Date of Grant (five years after the Date of Grant if this option is designated as an ISO in the Notice of Stock Option Grant and Section 3(b) of the Plan applies).

     (b) Termination of Service (Except by Death). If the Optionee’s Service terminates for any reason other than death, then this option shall expire on the earliest of the following occasions:

      (i) The expiration date determined pursuant to Subsection (a) above;

      (ii) The date three months after the termination of the Optionee’s Service for any reason other than Disability; or

      (iii) The date six months after the termination of the Optionee’s Service by reason of Disability.

The Optionee may exercise all or part of this option at any time before its expiration under the preceding sentence, but only to the extent that this option had become exercisable for vested shares before the Optionee’s Service terminated. When the Optionee’s Service terminates, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares. In the event that the Optionee dies after termination of Service but before the expiration of this option, all or part of this option may be exercised (prior to expiration) by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option had become exercisable before the Optionee’s Service terminated.

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     (c) Death of the Optionee. If the Optionee dies while in Service, then this option shall expire on the earlier of the following dates:

      (i) The expiration date determined pursuant to Subsection (a) above; or

      (ii) The date 12 months after the Optionee’s death.

All or part of this option may be exercised at any time before its expiration under the preceding sentence by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option had become exercisable before the Optionee’s death. When the Optionee dies, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares.

     (d) Leaves of Absence. For any purpose under this Agreement, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence, if such leave was approved by the Company in writing and if continued crediting of Service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company).

     (e) Notice Concerning ISO Treatment. If this option is designated as an ISO in the Notice of Stock Option Grant, it ceases to qualify for favorable tax treatment as an ISO to the extent it is exercised (i) more than three months after the date the Optionee ceases to be an Employee for any reason other than death or permanent and total disability (as defined in Section 22(e)(3) of the Code), (ii) more than 12 months after the date the Optionee ceases to be an Employee by reason of such permanent and total disability or (iii) after the Optionee has been on a leave of absence for more than 90 days, unless the Optionee’s reemployment rights are guaranteed by statute or by contract.

SECTION 7. RIGHT OF REPURCHASE.

     (a) Scope of Repurchase Right. Unless they have become vested in accordance with the Notice of Stock Option Grant and Subsection (c) below, the Shares acquired under this Agreement initially shall be Restricted Shares and shall be subject to a right (but not an obligation) of repurchase by the Company. The Optionee shall not transfer, assign, encumber or otherwise dispose of any Restricted Shares, except as provided in the following sentence. The Optionee may transfer Restricted Shares (i) by beneficiary designation, will or intestate succession or (ii) to the Optionee’s spouse, children or grandchildren or to a trust established by the Optionee for the benefit of the Optionee or the Optionee’s spouse, children or grandchildren, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Restricted Shares, then this Section 7 shall apply to the Transferee to the same extent as to the Optionee.

     (b) Condition Precedent to Exercise. The Right of Repurchase shall be exercisable with respect to any Restricted Shares only during the 60-day period next following the later of:

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      (i) The date when the Optionee’s Service terminates for any reason, with or without cause, including (without limitation) death or disability; or

      (ii) The date when such Restricted Shares were purchased by the Optionee, the executors or administrators of the Optionee’s estate or any person who has acquired this option directly from the Optionee by bequest, inheritance or beneficiary designation.

     (c) Lapse of Repurchase Right. The Right of Repurchase shall lapse with respect to the Shares subject to this option in accordance with the vesting schedule set forth in the Notice of Stock Option Grant. In addition, the Right of Repurchase shall lapse and all of the remaining Restricted Shares shall become vested if (i) the Company is subject to a Change in Control before the Optionee’s Service terminates and (ii) the Right of Repurchase is not assigned to the entity that employs the Optionee immediately after the Change in Control or to its parent or subsidiary.

     (d) Repurchase Cost. If the Company exercises the Right of Repurchase, it shall pay the Optionee an amount equal to the Exercise Price for each of the Restricted Shares being repurchased.

     (e) Exercise of Repurchase Right. The Right of Repurchase shall be exercisable only by written notice delivered to the Optionee prior to the expiration of the 60-day period specified in Subsection (b) above. The notice shall set forth the date on which the repurchase is to be effected. Such date shall not be more than 30 days after the date of the notice. The certificate(s) representing the Restricted Shares to be repurchased shall, prior to the close of business on the date specified for the repurchase, be delivered to the Company properly endorsed for transfer. The Company shall, concurrently with the receipt of such certificate(s), pay to the Optionee the purchase price determined according to Subsection (d) above. Payment shall be made in cash or cash equivalents or by canceling indebtedness to the Company incurred by the Optionee in the purchase of the Restricted Shares. The Right of Repurchase shall terminate with respect to any Restricted Shares for which it has not been timely exercised pursuant to this Subsection (e).

     (f) Additional Shares or Substituted Securities. In the event of the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities or other property (including money paid other than as an ordinary cash dividend) which are by reason of such transaction distributed with respect to any Restricted Shares or into which such Restricted Shares thereby become convertible shall immediately be subject to the Right of Repurchase. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number and/or class of the Restricted Shares. Appropriate adjustments shall also, after each such transaction, be made to the price per share to be paid upon the exercise of the Right of Repurchase in order to reflect any change in the Company’s outstanding securities effected without receipt of consideration therefor; provided, however, that the aggregate purchase price payable for the Restricted Shares shall remain the same.

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     (g) Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Restricted Shares to be repurchased in accordance with this Section 7, then after such time the person from whom such Restricted Shares are to be repurchased shall no longer have any rights as a holder of such Restricted Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Restricted Shares shall be deemed to have been repurchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement.

     (h) Escrow. Upon issuance, the certificates for Restricted Shares shall be deposited in escrow with the Company to be held in accordance with the provisions of this Agreement. Any new, substituted or additional securities or other property described in Subsection (f) above shall immediately be delivered to the Company to be held in escrow, but only to the extent the Shares are at the time Restricted Shares. All regular cash dividends on Restricted Shares (or other securities at the time held in escrow) shall be paid directly to the Optionee and shall not be held in escrow. Restricted Shares, together with any other assets or securities held in escrow hereunder, shall be (i) surrendered to the Company for repurchase and cancellation upon the Company’s exercise of its Right of Repurchase or Right of First Refusal or (ii) released to the Optionee upon the Optionee’s request to the extent the Shares are no longer Restricted Shares (but not more frequently than once every six months). In any event, all Shares which have vested (and any other vested assets and securities attributable thereto) shall be released within 60 days after the earlier of (i) the Optionee’s cessation of Service or (ii) the lapse of the Right of First Refusal.

SECTION 8. RIGHT OF FIRST REFUSAL.

     (a) Right of First Refusal. In the event that the Optionee proposes to sell, pledge or otherwise transfer to a third party any Shares acquired under this Agreement, or any interest in such Shares, the Company shall have the Right of First Refusal with respect to all (and not less than all) of such Shares. If the Optionee desires to transfer Shares acquired under this Agreement, the Optionee shall give a written Transfer Notice to the Company describing fully the proposed transfer, including the number of Shares proposed to be transferred, the proposed transfer price, the name and address of the proposed Transferee and proof satisfactory to the Company that the proposed sale or transfer will not violate any applicable federal or state securities laws. The Transfer Notice shall be signed both by the Optionee and by the proposed Transferee and must constitute a binding commitment of both parties to the transfer of the Shares. The Company shall have the right to purchase all, and not less than all, of the Shares on the terms of the proposal described in the Transfer Notice (subject, however, to any change in such terms permitted under Subsection (b) below) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Company. The Company’s rights under this Subsection (a) shall be freely assignable, in whole or in part.

     (b) Transfer of Shares. If the Company fails to exercise its Right of First Refusal within 30 days after the date when it received the Transfer Notice, the Optionee may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice, provided that any such sale is made in compliance with applicable federal and state

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securities laws and not in violation of any other contractual restrictions to which the Optionee is bound. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in Subsection (a) above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Shares on the terms set forth in the Transfer Notice within 60 days after the date when the Company received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Shares was to be made in a form other than cash or cash equivalents paid at the time of transfer, the Company shall have the option of paying for the Shares with cash or cash equivalents equal to the present value of the consideration described in the Transfer Notice.

     (c) Additional Shares or Substituted Securities. In the event of the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities or other property (including money paid other than as an ordinary cash dividend) which are by reason of such transaction distributed with respect to any Shares subject to this Section 8 or into which such Shares thereby become convertible shall immediately be subject to this Section 8. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number and/or class of the Shares subject to this Section 8.

     (d) Termination of Right of First Refusal. Any other provision of this Section 8 notwithstanding, in the event that the Stock is readily tradable on an established securities market when the Optionee desires to transfer Shares, the Company shall have no Right of First Refusal, and the Optionee shall have no obligation to comply with the procedures prescribed by Subsections (a) and (b) above.

     (e) Permitted Transfers. This Section 8 shall not apply to (i) a transfer by beneficiary designation, will or intestate succession or (ii) a transfer to the Optionee’s spouse, children or grandchildren or to a trust established by the Optionee for the benefit of the Optionee or the Optionee’s spouse, children or grandchildren, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Shares acquired under this Agreement, either under this Subsection (e) or after the Company has failed to exercise the Right of First Refusal, then this Section 8 shall apply to the Transferee to the same extent as to the Optionee.

     (f) Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Shares to be purchased in accordance with this Section 8, then after such time the person from whom such Shares are to be purchased shall no longer have any rights as a holder of such Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Shares shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement.

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SECTION 9. LEGALITY OF INITIAL ISSUANCE.

          No Shares shall be issued upon the exercise of this option unless and until the Company has determined that:

     (a) It and the Optionee have taken any actions required to register the Shares under the Securities Act or to perfect an exemption from the registration requirements thereof;

     (b) Any applicable listing requirement of any stock exchange or other securities market on which Stock is listed has been satisfied; and

     (c) Any other applicable provision of state or federal law has been satisfied.

SECTION 10. NO REGISTRATION RIGHTS.

          The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Agreement to comply with any law.

SECTION 11. RESTRICTIONS ON TRANSFER.

     (a) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.

     (b) Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company’s initial public offering, the Optionee shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Shares acquired under this Agreement without the prior written consent of the Company or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed 180 days. The Market Stand-Off shall in any event terminate two years after the date of the Company’s initial public offering. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares

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acquired under this Agreement until the end of the applicable stand-off period. The Company’s underwriters shall be beneficiaries of the agreement set forth in this Subsection (b). This Subsection (b) shall not apply to Shares registered in the public offering under the Securities Act, and the Optionee shall be subject to this Subsection (b) only if the directors and officers of the Company are subject to similar arrangements.

     (c) Investment Intent at Grant. The Optionee represents and agrees that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof.

     (d) Investment Intent at Exercise. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel.

     (e) Legends. All certificates evidencing Shares purchased under this Agreement shall bear the following legend:

“THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES AND CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.”

All certificates evidencing Shares purchased under this Agreement in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law):

“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”

     (f) Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Agreement is no longer

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required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend.

     (g) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 11 shall be conclusive and binding on the Optionee and all other persons.

SECTION 12. ADJUSTMENT OF SHARES.

          In the event of any transaction described in Section 8(a) of the Plan, the terms of this option (including, without limitation, the number and kind of Shares subject to this option and the Exercise Price) shall be adjusted as set forth in Section 8(a) of the Plan. In the event that the Company is a party to a merger or consolidation, this option shall be subject to the agreement of merger or consolidation, as provided in Section 8(b) of the Plan.

SECTION 13. MISCELLANEOUS PROVISIONS.

     (a) Rights as a Stockholder. Neither the Optionee nor the Optionee’s representative shall have any rights as a stockholder with respect to any Shares subject to this option until the Optionee or the Optionee’s representative becomes entitled to receive such Shares by filing a notice of exercise and paying the Purchase Price pursuant to Sections 4 and 5.

     (b) No Retention Rights. Nothing in this option or in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without cause.

     (c) Notice. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid. Notice shall be addressed to the Company at its principal executive office and to the Optionee at the address that he or she most recently provided to the Company.

     (d) Entire Agreement. The Notice of Stock Option Grant, this Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.

     (e) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State.

SECTION 14. DEFINITIONS.

     (a) “Agreement” shall mean this Stock Option Agreement.

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     (b) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time or, if a Committee has been appointed, such Committee.

     (c) “Change in Control” shall mean:

      (i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity; or

      (ii) The sale, transfer or other disposition of all or substantially all of the Company’s assets.

A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended.

     (e) “Committee” shall mean a committee of the Board of Directors, as described in Section 2 of the Plan.

     (f) “Company” shall mean Shutterfly, Inc., a Delaware corporation.

     (g) “Consultant” shall mean a person who performs bona fide services for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding Employees and Outside Directors.

     (h) “Date of Grant” shall mean the date specified in the Notice of Stock Option Grant, which date shall be the later of (i) the date on which the Board of Directors resolved to grant this option or (ii) the first day of the Optionee’s Service.

     (i) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.

     (j) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.

     (k) “Exercise Price” shall mean the amount for which one Share may be purchased upon exercise of this option, as specified in the Notice of Stock Option Grant.

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     (l) “Fair Market Value” shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons.

     (m) “ISO” shall mean an employee incentive stock option described in Section 422(b) of the Code.

     (n) “Nonstatutory Option” shall mean a stock option not described in Sections 422(b) or 423(b) of the Code.

     (o) “Notice of Stock Option Grant” shall mean the document so entitled to which this Agreement is attached.

     (p) “Optionee” shall mean the individual named in the Notice of Stock Option Grant.

     (q) “Outside Director” shall mean a member of the Board of Directors who is not an Employee.

     (r) “Parent” shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

     (s) “Plan” shall mean the Shutterfly, Inc. 1999 Stock Plan, as in effect on the Date of Grant.

     (t) “Purchase Price” shall mean the Exercise Price multiplied by the number of Shares with respect to which this option is being exercised.

     (u) “Restricted Share” shall mean a Share that is subject to the Right of Repurchase.

     (v) “Right of First Refusal” shall mean the Company’s right of first refusal described in Section 8.

     (w) “Right of Repurchase” shall mean the Company’s right of repurchase described in Section 7.

     (x) “Securities Act” shall mean the Securities Act of 1933, as amended.

     (y) “Service” shall mean service as an Employee, Outside Director or Consultant.

     (z) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 of the Plan (if applicable).

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     (aa) “Stock” shall mean the Common Stock of the Company, with a par value of $0.0001 per Share.

     (bb) “Subsidiary” shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

     (cc) “Transferee” shall mean any person to whom the Optionee has directly or indirectly transferred any Share acquired under this Agreement.

     (dd) “Transfer Notice” shall mean the notice of a proposed transfer of Shares described in Section 8.

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Shutterfly, Inc. 1999 Stock Plan

Notice of Stock Option Exercise

Optionee Information:

Name:	Social Security Number:	-	-
Address:	Employee Number:

Option Information:

Date of Grant:	,	Type of Option:	o	Nonstatutory (NSO) or
	Month              Day         Year		o	Incentive (ISO)

Exercise Price per share:	$
Total number of shares of Common Stock of Shutterfly, Inc. (the “Company”) covered by option:		shares

Exercise Information:

Number of shares of Common Stock of the Company for which option is being exercised now:                     . (These shares are referred to below as the “Purchased Shares.”)

Total Exercise Price for the Purchased Shares: $                     

Form of payment enclosed [check all that apply]:

o	Check for $                     , made payable to “Shutterfly, Inc.”	o	Certificate(s) for                      shares of Common Stock of the Company that I have owned for at least six months. (These shares will be valued as of the date this notice is received by the Company.)
		o	Attestation Form covering                      shares of Common Stock of the Company. (These shares will be valued as of the date this notice is received by the Company.)

Names in which the Purchased Shares should be registered [you must check one]:

o	In my name only
o	In the names of my spouse and myself as community property	My spouse’s name (if applicable):
o	In the names of my spouse and myself as joint tenants with the right of survivorship

The certificate for the Purchased Shares should be sent to the following address:

You must sign this Notice on the second page before submitting it to the Company.

Representations and Acknowledgments of the Optionee:

1.	I represent and warrant to the Company that I am acquiring and will hold the Purchased Shares for investment for my account only, and not with a view to, or for resale in connection with, any “distribution” of the Purchased Shares within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).
2.	I understand that the Purchased Shares have not been registered under the Securities Act by reason of a specific exemption therefrom and that the Purchased Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or I obtain an opinion of counsel (in form and substance satisfactory to the Company and its counsel) that registration is not required.
3.	I acknowledge that the Company is under no obligation to register the Purchased Shares.
4.	I am aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. These conditions include (without limitation) that certain current public information about the issuer is available, that the resale occurs only after the holding period required by Rule 144 has been satisfied, that the sale occurs through an unsolicited “broker’s transaction” and that the amount of securities being sold during any three-month period does not exceed specified limitations. I understand that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in the foreseeable future.
5.	I will not sell, transfer or otherwise dispose of the Purchased Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act.
6.	I acknowledge that I have received and had access to such information as I consider necessary or appropriate for deciding whether to invest in the Purchased Shares and that I had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Purchased Shares.
7.	I am aware that my investment in the Company is a speculative investment which has limited liquidity and is subject to the risk of complete loss. I am able, without impairing my financial condition, to hold the Purchased Shares for an indefinite period and to suffer a complete loss of my investment in the Purchased Shares.
8.	I acknowledge that the Purchased Shares remain subject to the Company’s right of first refusal and may remain subject to the Company’s right of repurchase at the exercise price, all in accordance with the applicable Notice of Stock Option Grant and Stock Option Agreement.
9.	I acknowledge that I am acquiring the Purchased Shares subject to all other terms of the Notice of Stock Option Grant and Stock Option Agreement.
10.	I acknowledge that I have received a copy of the Company’s memorandum regarding the federal income tax consequences of an option exercise and the tax election under section 83(b) of the Internal Revenue Code. In the event that I choose to make a section 83(b) election, I acknowledge that it is my responsibility—and not the Company’s responsibility—to file the election in a timely manner, even if I ask the Company or its agents to make the filing on my behalf. I acknowledge that the Company has encouraged me to consult my own adviser to determine the tax consequences of acquiring the Purchased Shares at this time.
11.	I agree to seek the consent of my spouse to the extent required by the Company to enforce the foregoing.

Signature: Date:

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EX-10.08

Exhibit 10.08

January 5, 2005

Dear Jeff:

     On behalf of the Board of Directors of Shutterfly, Inc. (the “Company”), I am pleased to offer you employment with the Company on the terms set forth in this letter agreement (the “Agreement”).

     1. Position. Commencing on January 17, 2005 (the “Commencement Date”), you will be employed by the Company full time as its President and Chief Executive Officer (“CEO”). You will be the highest ranking executive officer of the Company and will report only to the board of directors of the Company (the “Board”). In this role, you will have overall operating responsibility for the day-today management of the Company, including the authority to hire and/or fire any officer (after consultation with the Board) or any employee of the Company. You will also be appointed to the Board during the term of your employment as CEO. Beginning on the Commencement Date, you will be expected to devote your full working time and attention to the business of the Company, and you will not render services to any other business without the prior approval of the Board or, directly or indirectly, engage or participate in any business that is competitive in any manner with the business of the Company; provided, however that you may serve in any capacity with a civic, educational or charitable organization, or as a member of the board of directors or committees thereof of InQ Incorporated or any other company’s board or committee thereof that does not interfere with your duties to the Company. You will also be expected to comply with and be bound by the Company’s operating policies, procedures and practices that are from time to time in effect during the term of your employment.

     2. Compensation Benefits.

          (a) Salary. Your starting base annual salary will be Two-Hundred Seventy-Five Thousand Dollars ($275,000), payable in accordance with the Company’s normal payroll practices, with such payroll deductions and withholdings as are required by law. Your base salary will be reviewed annually by the Compensation Committee of the Board (the “Committee”).

          (b) Bonus. You will be eligible to receive an annual target bonus equal to up to fifty percent (50%) of your then annual base salary (the “Target Bonus”), as approved by the Committee, based upon your achievement of performance milestones and conditions established for you by the Committee after consultation with you. You will first be eligible to be paid such a bonus at the end of calendar 2005 for the full year.

          (c) Benefits. You will be eligible for normal vacation, health insurance, 401(k) and other benefits offered to Company executives.

     3. Stock Option. Upon the commencement of your employment, the Company will grant you an option under the Company’s 1999 Stock Plan to purchase One Million, Thirty-Eight Thousand, One Hundred and Forty-Six (1,038,146) shares of the Company’s Common Stock (the “Option”), which represents five and one half percent (5.5%) (your “Pro-Rata Percentage”) of the Fully Diluted Capitalization of the Company (as defined below), at an exercise price equal

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to the fair market value of the Company’s Common Stock on the date of the grant, as determined in good faith by the Board. The “Fully Diluted Capitalization of the Company” shall mean all outstanding securities of the Company (on an as converted or exercised basis) as of the Commencement Date, including all outstanding options and warrants and the unallocated reserved pool under the Company’s equity plans (including any increases thereto related to the Option) and including the Option. The Option will vest over four (4) years as follows: 25% of the total number of shares subject to the Option will vest on the twelve (12) month anniversary of the Commencement Date and thereafter 2.0833% of the total number of shares subject to the Option will vest at the end of each full month of continuous employment. Vesting will depend on your continued employment with the Company and will be subject to the terms of Section 6 of this Agreement and the terms and conditions of the 1999 Stock Plan and related Stock Option Agreement.

     The Option shall be granted as an incentive stock option to the maximum extent permitted under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) and, thereafter, shall be granted as a non-qualified stock option, and such options shall be issued under separate option notices and agreements designated as an incentive stock option or non-qualified stock option, as appropriate.

     In the event you terminate employment with the Company as a result of Involuntary Termination, Termination without Cause or Termination for Disability, each as defined below, you may exercise the vested portions of the Option during the twelve (12) month period commencing on the date of your termination of employment, provided, however, that in no event may the Option be exercised after its expiration date. In the event you terminate employment with the Company as the result of your death, the vested portions of the Option may be exercised during the twelve (12) month period commencing on the date of your death, provided, however, that in no event may the Option be exercised after its expiration date. In the event you terminate employment with the Company as a result of Voluntary Termination or Termination for Cause, you may exercise the vested portions of the Option during the period allowed under the 1999 Stock Plan.

     4. Employment and Termination. Your employment with the Company will be at-will and may be terminated by you or by the Company at any time for any reason as follows:

          (a) You may terminate your employment upon written notice to the Board for “Good Reason,” as defined below (an “Involuntary Termination”);

          (b) You may terminate your employment upon written notice to the Board at any time without Good Reason (“Voluntary Termination”);

          (c) The Company may terminate your employment upon written notice to you at any time following a determination that there is “Cause,” as defined below, for such termination (“Termination for Cause”);

          (d) The Company may terminate your employment upon written notice to you at any time without “Cause,” as defined below, for such termination (“Termination without Cause”);

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          (e) Your employment will automatically terminate upon your death or upon your disability as determined by the Board (“Termination for Death or Disability”); provided that “disability” shall mean your complete inability to perform your job responsibilities for a period of one hundred eighty (180) consecutive days or one hundred eighty (180) days in the aggregate in any twelve (12) month period.

     5. Definitions. As used in this Agreement, the following terms have the following meanings:

          (a) “Good Reason” means your resignation within three (3) months following (i) a change in your title of President and CEO or in your reporting to the Board, or a material reduction in your duties or responsibilities that is inconsistent with your position, provided, further, that Good Reason shall also include the circumstance where following a Change of Control, as defined below, you are not the President and CEO of a successor entity to the Company following a Change in Control (or otherwise your duties and responsibilities for such successor entity to the Company are materially reduced from those described in Section 1 herein as would be applied to the successor entity following a Change of Control); (ii) a requirement by the Company that you relocate your principal office to a facility more than 60 (sixty) miles from the Company’s current Redwood City, California headquarters; or (iii) a material reduction in your annual base salary (other than in connection with a general decrease in the salary of all executives of the Company), in any case, without your written consent.

          (b) “Cause” means your (i) gross negligence or willful misconduct in the performance of your duties after a notice is delivered to you which specifically identifies the manner in which the Company believes you have engaged in gross negligence or willful misconduct and you have been provided with a reasonable opportunity to cure any alleged gross negligence or willful misconduct in the performance of your duties; (ii) commission of any act of fraud or material dishonesty with respect to the Company; (iii) conviction of, or plea of guilty or “no contest” to, a felony or a crime of moral turpitude or dishonesty which demonstrably materially damages the Company; (iv) material breach of any proprietary information and inventions agreement with the Company, including the Invention Assignment and Confidentiality Agreement referred to in Section 7 below, or any other unauthorized use or disclosure of the Company’s confidential information or trade secrets; or (v) repeated failure to follow the lawful written or oral directions of the Board after receiving written notification of such failure from the Board and a reasonable opportunity to cure such failure which shall not be less than 40 days following such notice. No act or_. failure to act by you shall be considered “willful” if done or omitted by you in good faith with reasonable belief that your action or omission was in the best interests of the Company.

          (c) “Change in Control” means (i) any person or entity becoming the beneficial owner, directly or indirectly, of securities of the Company representing fifty (50%) percent of the total voting power of all its then outstanding voting securities; (ii) a merger or consolidation of the Company in which its voting securities immediately prior to the merger or consolidation do not represent, or are not converted into securities that represent, a majority of the voting power of all voting securities of the surviving entity immediately after the merger or consolidation; (iii) a sale of substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company.

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     6. Separation Benefits. Upon termination of your employment with the Company for any reason, you will receive payment for all unpaid salary and vacation accrued as of the date of your termination of employment, and your benefits will be continued under the Company’s then existing benefit plans and policies for so long as provided under the terms of such plans and policies and as required by applicable law. Under certain circumstances, and in all events conditioned upon your execution of a release and waiver of claims against the Company, its officers and directors and stockholders in a form acceptable to the Company, the form of which is attached hereto as Exhibit A, you will be entitled to receive severance benefits as set forth below in addition to those described above, but you will not be entitled to any other compensation, award or damages with respect to your employment or termination.

          (a) In the event of your Voluntary Termination, Termination for Cause or Termination for Death or Disability, you will not be entitled to any cash severance benefits or additional vesting of any Company equity-based awards, including Company stock options.

          (b) In the event of your Termination without Cause or your Involuntary Termination, you will be entitled to (i) a lump sum payment equivalent to your then-current base salary for a period of twelve (12) months and the maximum Target Bonus for the year in which the termination occurred; and (ii) accelerated vesting of that portion of the Option that would have vested over the next twelve (12) months immediately following such Involuntary Termination or Termination without Cause.

          (c) In the event of your Involuntary Termination or Termination without Cause within twelve (12) months following the closing of a Change in Control, in lieu of any payment under Section 6(b) above, you will be entitled to (i) a lump sum payment equivalent to your then-current base salary for a period of fifteen (15) months and the maximum Target Bonus for the year in which the termination occurred plus an additional one fourth (1/4) of the maximum Target Bonus for the year in which the termination occurred; and (ii) accelerated vesting of: (A) if such Change in Control closes within twelve (12) months of the Commencement Date, such portion of the Option so that, when added to your then vested portion of the Option as of the date of such Involuntary Termination or Termination without Cause, you will be vested in total in that number of shares as would have been vested as of the date twenty-four (24) months following the Commencement Date absent your termination; or (B) if such Change in Control closes more than twelve (12) months after the Commencement Date, any portion of the Option that is not vested immediately prior to such Involuntary Termination or Termination without Cause,

          (d) No payments due you hereunder shall be subject to mitigation or offset.

          (e) In the event of your Termination without Cause or Involuntary Termination, the Company will pay the premiums for your COBRA coverage (should you elect to convert your health coverage under COBRA) until the earlier of the following: (A) the 12-month anniversary of your last day of employment with the Company or (B) you become covered by another employer’s health plan.

     7. Confidential Information and Invention Assignment Agreement. On or prior to the Commencement Date, you will sign the Company’s standard form of Invention Assignment

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and Confidentiality Agreement, a form of which is attached hereto as Exhibit B. Nothing in this Agreement alters the terms and conditions of that Invention Assignment and Confidentiality Agreement.

     8. Arbitration. The parties agree that any dispute regarding the interpretation or enforcement of this Agreement shall be decided by confidential, final and binding arbitration conducted in Santa Clara County by Judicial Arbitration and Mediation Services (“JAMS”) under the then existing JAMS rules rather than by litigation in court, trial by jury, administrative proceeding or in any other forum. The prevailing party shall be entitled to receive from the other party its reasonable attorney’s fees and expenses, and all other actual costs and expenses, relating to such arbitration, and of enforcement of JAMS’ decision.

     9. Parachute Payments. In the event that the severance and other benefits provided to you pursuant to this Agreement and any other agreement, benefit, plan, or policy of the Company (i) constitute “parachute payments” within the meaning of Section 280G of the Code, and (ii) but for this Section 9, such severance and benefits would be subject to the excise tax imposed by Section 4999 of the Code, then your severance and other benefits under this Agreement and any other agreement, benefit, plan, or policy of the Company shall be payable either: (a) in full; or (b) as to such lesser amount which would result in no portion of such severance and other benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes (applying the then highest marginal tax rates) and the excise tax imposed by Section 4999, results in the receipt by you on an after-tax basis, of the greatest mount of severance and other benefits under this Agreement and any other agreement, benefit, plan, or policy of the Company.

     Unless you and the Company otherwise agree in writing, any determination required under this Section 9 shall be made in writing by independent public accountants agreed to by you and the Company (the “Accountants”), whose determination shall be conclusive and binding upon you and the Company for all purposes. For purposes of making the calculations required by this Section 9, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the applications of Sections 280G and 4999 of the Code. You and the Company shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 9. ‘The Company shall bear all costs the Accountants may reasonably incur in connection with calculations contemplated by this Section 9.

     Notwithstanding the foregoing, in the event that the severance and other benefits provided to you pursuant to this Agreement and any other agreement, benefit, plan, or policy of the Company constitute “parachute payments” within the meaning of Section 280G of the Code, and provided the Company is not then publicly traded, you may request that the Company seek to obtain the approval of such severance and other benefits by more than 75 percent of the voting power of all outstanding stock of the Company in accordance with Q&A — 7 of the Treasury Regulations under Section 280G of the Code. The Company shall bear all costs incurred in connection with soliciting the requested stockholder approval. If such stockholder approval is obtained then the reduction provisions of the first paragraph of this Section 9 shall not apply.

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     10. Indemnification Agreement. Upon your commencement of employment with the Company, the Company will enter into a mutually acceptable standard form of indemnification agreement for officers and directors, to indemnify you against certain liabilities you may incur as an officer or director of the Company.

     11. Nonsolicitation. During the term of your employment with the Company and for one year after the termination of your employment with the Company, you will not, on behalf of yourself or any third party, directly or indirectly, solicit or attempt to induce any employee of the Company to terminate his or her employment with the Company, except (i) that you may on your behalf (or on behalf of a third party) engage in a general solicitation for employment, provided that neither you nor such third party, at your direction, have targeted such recruitment efforts at the Company, (ii) that you may on your behalf (or on behalf of a third party) employ any person who either responds to such general solicitation or otherwise contacts you or such third party on his or her own initiative without solicitation or encouragement, directly or indirectly, by you or such third party, or (iii) following cessation of employment by an employee of the Company, without any solicitation or encouragement, directly or indirectly, by you or such third party.

     12. Reimbursement of Legal Expenses. The Company agrees to bear all expenses related to the drafting, negotiation and execution of this Agreement, including the reasonable fees and expenses of your counsel, Morrison & Foerster LLP, in an amount not to exceed $15,000, such limit determined on an after-tax basis so that all such fees and expenses plus your taxes associated with such payment are paid by the Company (applying the then highest marginal tax rates).

     13. D&O Insurance. You acknowledge that the Company currently does not maintain directors’ and officers’ liability insurance coverage. Within 90 days following the Commencement Date, it is acknowledged that you will recommend to the Board directors’ and officers’ liability insurance coverage for all of the Company’s directors and officers with a reputable insurance company or association in such customary amounts and in such customary form as would reasonably be expected for the Company and that the Board will in reasonable good faith evaluate such insurance for adoption by the Company at that time.

     14. Liquidation Bonus Plan. Promptly following the Commencement Date, the Board will adopt a bonus plan (the “Liquidation Bonus Plan”) and thereupon seek any requisite stockholder approvals for such plan. The Liquidation Bonus Plan will provide that in the event of a liquidation, dissolution, or winding up of the Company, including in connection with the events described in sub-section 2(e)(i) of Article IV of the Company’s restated certificate of incorporation filed August 27, 2004 (the “Restated Certificate^") (any of these events, a “Liquidation”), you will be entitled to receive as a bonus a portion (the “Bonus Portion’) of the proceeds of such Liquidation which are available fox distribution to the Company’s stockholders. The Bonus Portion will equal (i) your Current Vested Percentage (as defined below) multiplied by the aggregate amount of the proceeds of any such Liquidation which, before giving effect to the Liquidation Bonus Plan, are available for distribution to the Company’s stockholders, minus (ii) the sum of (A) the aggregate exercise price under the Option of the shares which represent the Current Vested Percentage, to the extent you have not already paid such exercise price to the Company, and (B) any amounts which you receive in connection with the Liquidation in respect of the shares of Common Stock subject to the Option. For

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purposes of this paragraph your “Current Vested Percentage” shall equal (x) a percentage determined by dividing the then actual number of your vested shares under the Option (including such number of shares that have become vested under the Option by virtue of Section 6) by the aggregate number of shares of the Company’s Common Stock subject to the Option (except that if a Liquidation occurs during the first twelve (12) months following the Commencement Date, such percentage described in this sub-section 14(x) shall in no event be less than 25%), multiplied by (y) your Pro-Rata Percentage. Any Bonus Portion, including as applicable portions thereof, shall be payable to you at such time(s) and in such form(s) of consideration, including as applicable in proportions thereof, as the proceeds of the Liquidation are paid to the Company’s stockholders in connection with the Liquidation. For purposes of calculating any Bonus Portion, the value of any non-cash proceeds of the Liquidation shall be determined in accordance with sub-section 2(e)(ii) of Article IV the Restated Certificate. The Liquidation Bonus Plan and any rights under this Section 14 shall terminate upon the Company’s closing of an initial public offering as defined in sub-section B.4.(b)(i) of Article IV of the Restated Certificate.

     15. Rights of First Offer. The Company agrees that, subject to obtaining requisite stockholder consents, you shall have rights of first offer with respect to future sales of Shares (as defined below) by the Company on substantially the terms and^. conditions of the rights of first offer held by “Major Investors” under Section 2.4 of the Company’s Fourth Amended and Restated Investor Rights Agreement, dated October 11, 2002 (the “Rights Agreement”) subject to the following: (i) for purposes of this Section 15, “Shares^" will be defined as set forth in Section 2.4 of the Rights Agreement; (ii) for purposes of calculating under Section 2.4(b) of the Rights Agreement the portion of the Shares you may elect to purchase, such portion will equal up to the proportion that the number of shares of Common Stock subject to the Option bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion of all convertible securities); and (iii) for clarity, in addition to the issuances carved out from the rights of first offer in Section 2.4(d) (i) through (viii) of the Rights Agreement, the rights of first offer held by you shall also not be applicable to any options or other stock grants made from the unallocated reserved pool under the Company’s equity plans, as such pool may from time-to-time be increased by the Board in its sole discretion. Promptly following the Commencement Date the Company shall in good faith seek all requisite stockholder approval to provide you with the rights described in this Section 15.

     16. Miscellaneous.

          (a) Absence of Conflicts. You represent that your performance of your duties under this Agreement will not breach any other agreement as to which you are a party.

          (b) Entire Agreement. This Agreement, including the attached exhibits, if any, represents the entire agreement between the parties concerning the subject matter of your employment by the Company.

          (c) Successors. This Agreement is binding on and may be enforced by the Company and its successors and assigns and is binding on and may be enforced by you and your heirs and legal representatives. Any successor to Company or substantially all of its business (whether by purchase, merger, consolidation or otherwise) will in advance assume in writing and be bound by all of the Company’s obligations under this Agreement.

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          (d) Notices. Notices hereunder must be in writing and will be deemed to have been given when personally delivered or two days after mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to you will be addressed to you at the home address which you have most recently communicated to Company in writing. Notices to Company will be addressed to its Chairman of the Board at Company’s corporate headquarters.

          (e) Waiver. No provision of this Agreement will be modified or waived except in writing signed by you and an officer of Company duly authorized by the Board. No waiver by either party of any breach of this agreement by the other party will be considered a waiver of any other breach of this Agreement.

          (f) Governing Law. This Agreement will be governed by the laws of the State of California without reference to conflict of laws provisions.

     17. Acceptance. This offer will remain open until January 7, 2005 and your start date will be January 17, 2005. If you decide to accept our offer, and I hope you will, please sign the enclosed copy of this letter in the space indicated and return it to me. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this Agreement and the attached documents, if any. Should you have anything else that you wish to discuss, please do not hesitate to call me.

     We look forward to the opportunity to welcome you to the Company.

	Best regards,
	/s/ Nancy Schoendorf
	Nancy Schoendorf
	Member of Board of Directors
	Shutterfly, Inc.
Accepted:
1/5/05
/s/ Jeff Housenbold
Jeff Housenbold

cc: Board of Directors, Shutterfly, Inc.

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EXHIBIT A

GENERAL RELEASE AGREEMENT

     Pursuant to the terms of the parties’ Letter Agreement (the “Agreement”) dated January ___, 2005, Jeff Housenbold (“Employee”) and Shutterfly, Inc. (“Company”) agree to the following General Release Agreement (“Release”).

     1. Waiver of Claims. In consideration for the Company’s payments and promises set forth in Section 2 of the Agreement, Employee agrees to hereby release and waive any and all claims he may have against the Company and its owners, agents, officers, shareholders, employees, directors, attorneys, subscribers, subsidiaries, affiliates, successors and assigns (collectively ^"Releasees”), whether known or not known, including, without limitation, claims under any employment laws, including, but not limited to, claims of unlawful discharge, breach of contract, breach of the covenant of good faith and fair dealing, fraud, violation of public policy, defamation, physical injury, emotional distress, claims for additional compensation or benefits arising out of his employment or separation of employment, claims under Title VII of the 1964 Civil Rights Act, as amended, the California Fair Employment and Housing Act and any other laws and/or regulations relating to employment or employment discrimination, including, without limitation, claims based on age or under the Age Discrimination in Employment Act or Older Workers Benefit Protection Act, and/or claims based upon disability or under the Americans with Disabilities Act. By signing below, Employee expressly waives any benefits of Section 1542 of the Civil Code of the State of California, which provides as follows:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR”

The Company and Employee agree that the waiver and release set forth in this section shall be and remain in effect as to the matters released. The waiver and release do not extend to any obligations of the Company created under the Agreement, nor do they affect in any way Employee’s rights to be indemnified by the Company pursuant td California Labor Code Section 2802 and California Corporations Code Section 317 for any acts or omissions by Employee during his employment with the Company.

     2. Return of Company Property. Employee hereby represents and warrants to the Company that he has returned all real or intangible property or data of the Company of any type whatsoever that has been in his possession or control, provided that, Employee may retain the two Company laptops and the Blackberry hardware device that the Company has previously provided to him, provided that on or before the Resignation Date Employee deletes all Company data and materials stored on the laptops and device and electronically transmit same to the Company.

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     3. Proprietary Information and Invention Assignment Agreement. Employee hereby acknowledges that he is bound by the Proprietary Information and Inventions Agreement signed by him and that as a result of his employment with the Company he had access to the Company’s Proprietary Information and will continue to have access to the Company’s Proprietary Information (as defined in the Proprietary Information and Inventions Assignment Agreement), and that he will continue to hold all Proprietary Information in strictest confidence and that he will not make use of such Proprietary Information on behalf of anyone.

     4. Legal and Equitable Remedies, The parties have the right to enforce the Agreement and/or the Release and any of the provisions by injunction, specific performance or other equitable relief without prejudice to any other rights or remedies the parties may have at law or in equity for breach of the Agreement

     5. Confidentiality. The contents, terms and conditions of the Agreement and/or Release must be kept confidential by Employee and may not be disclosed except to his immediate family, accountant or attorneys or pursuant to subpoena or court order. Any breach of this confidentiality provision will be deemed a material breach of the Agreement and the Release.

     6. No Admission of Liability. The Agreement and Release are not and shall not be construed or contended by Employee to be an admission or evidence of any wrongdoing or liability on the part of Releasees, their representatives, heirs, executors, attorneys, agents, partners, officers, shareholders, directors, employees, subsidiaries, affiliates, divisions, successors or assigns. The Agreement and the Release shall be afforded the maximum protection allowable under California Evidence Code Section 1152 and/or any other state or Federal provisions of similar effect.

     7. Entire Agreement. The Agreement and the Release constitute the entire agreement between Employee and the Releasees with respect to the subject matter hereof and supersede all prior negotiations and agreements, whether written or oral, relating to such subject matter other than the Employee Invention Agreement referred to above. Employee acknowledges that neither Releasees nor their agents or attorneys have made any promise, representation or warranty whatsoever, either express or implied, written or oral, which is not contained in the Agreement or the Release for the purpose of inducing him to execute the Release, and Employee acknowledges that he has executed this Release in reliance only upon such promises, representations and warranties as are contained herein.

     8. Arbitration. Employee and the Company agree to waive any rights to a trial before a judge or jury and agree to arbitrate before a neutral arbitrator any and all claims or disputes arising out of this letter agreement and any and all claims arising from or relating to Employee’s employment with the Company, including (but not limited to) claims against any current or former employee, director or agent of the Company claims of wrongful termination, retaliation, discrimination, harassment, breach of contract, breach of the covenant of good faith and fair dealing, defamation, invasion of privacy, fraud, misrepresentation, constructive discharge or failure to provide a leave of absence, claims regarding commission, stock options or bonuses, infliction of emotional distress or unfair business practices.

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The arbitrator’s decision must be Mitten and must include the findings of fact and law that support the decision. The arbitrator’s decision will be final and binding on both parties, except to the extent applicable law allows for judicial review of arbitration awards. The arbitrator may award any remedies that would otherwise be available to the parties if they were to bring the dispute in court. The arbitration will be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association; provided, however that the arbitrator must allow the discovery authorized by the California Arbitration Act or that the arbitrator deems necessary for Employee and the Company to vindicate their respective claims or defenses. The arbitration will take place in San Mateo County or, at Employee’s option, the county in which Employee primarily worked with the Company at the time when the arbitrable dispute or claim first arose.

Employee and the Company will share the costs of arbitration equally, except that the Company will bear the cost of the arbitrator’s fee and any other type of expense or costs that Employee would not be required to bear if he had brought the dispute or claim in court. Both the Company and Employee will be responsible for their own attorney’s fees, and the arbitrator may not award attorneys’ fees unless a statute or contract at issue specifically authorizes such an award,

This arbitration provision does not apply to the following: (a) workers’ compensation or unemployment insurance claims or (b) claims concerning the validity, infringement or enforceability of any trade secret, patent right, copyright or any other trade secret or intellectual property held or sought by either Employee or the Company (whether or not arising under the Proprietary Information and Inventions Assignment Agreement between Employee and the Company).

     9. Modification. It is expressly agreed that this Release may not be altered, amended, modified, or otherwise changed in any respect except by another written agreement that specifically refers to this Release, executed by authorized representatives of each of the parties.

     10. Review of Agreement and Effective Date of Release. The Company hereby advises Employee to consult with his own attorney concerning the terms of this Release. He understands that he may take up to twenty-one (21) days to consider this Release and, by signing below, affirms that he was advised to consult with an attorney prior to signing this Release. Employee also understands he may revoke this Release within seven (7) days of signing this document. This Release will be effective on the 8th day after Employee signs it.

	Shutterfly
	By:
	Its:
Accepted and agreed to by:
	Date:
Jeff Housenbold

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EXHIBIT B

PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

     The following confines an agreement between me (Jeff Housenbold), and Shutterfly, Inc., a Delaware corporation (the “Company”), which is a material part of the consideration for my employment by Company:

     1. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict with this Agreement or my employment with Company. I will not violate any agreement with or rights of any third party or, except as expressly authorized by Company in writing hereafter, use or disclose my own or any third party’s confidential information or intellectual property when acting within the scope of my employment or otherwise on behalf of Company. Further, I have not retained anything containing any confidential information of a prior employer or other third party, whether or not created by me.

     2. Company shall own all right, title and interest (including patent rights, copyrights, trade secret rights, mask work rights, sui generis database rights and all other intellectual and industrial property rights throughout the world) relating to any and all inventions (whether or not patentable), works of authorship, mask works, designs, know-how, ideas and information made or conceived or reduced to practice, in whole or in part, by me during the term of my employment with Company to and only to the fullest extent allowed by California Labor Code Section 2870 (which is attached as Appendix A) (collectively “Inventions”) and I will promptly disclose all Inventions to Company. I will also disclose anything I believe is excluded by Section 2870 so that the Company can make an independent assessment. I hereby make all assignments necessary to accomplish the foregoing. I shall further assist Company, at Company’s expense, to further evidence, record and perfect such assignments, and to perfect, obtain, maintain, enforce, and defend any rights specified to be so owned or assigned. I hereby irrevocably designate and appoint Company and its agents and attorneys-in-fact to act for and in my behalf to execute and file any document and to do all other lawfully permitted acts to further the purposes of the foregoing with the same legal force and effect as if executed by me. If anything created by me prior to my employment relates in any way to Company’s actual or proposed business, I have listed it on Appendix B. If I use or (except pursuant to this Section 2) disclose my own or any third party’s confidential information or intellectual property when acting within the scope of my employment or otherwise on behalf of Company, Company will have and I hereby grant Company a perpetual, irrevocable, worldwide royalty-free, non-exclusive, sublicensable right and license to exploit and exercise all such confidential information and intellectual property rights.

     3. To the extent allowed by law, paragraph 2 includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as “moral rights,” “artist’s rights,” “droit moral,” or the like (collectively “Moral Rights”). To the extent I retain any such Moral Rights under applicable law, I hereby ratify and consent to any action that may be taken with respect to such Moral Rights by or authorized by Company and agree not to assert any Moral Rights with respect thereto. I will confirm any such ratifications, consents and agreements from time to time as requested by Company.

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     4. I agree that all Inventions and all other business, technical and financial information (including, without limitation, the Company’s business plan, proposed products and services, proposed names, marks and other identifiers, and the identity of and information relating to customers or employees) I develop, learn or obtain during the term of my employment that relate to Company or the business or demonstrably anticipated business of Company or that are received by or for Company in confidence, constitute “Proprietary Information.” I will hold in confidence and not disclose or, except within the scope of my employment, use any Proprietary Information. However, I shall not be obligated under this paragraph with respect to information I can document is or becomes readily publicly available without restriction through no fault of mine. Upon termination of my employment, I will promptly return to Company all items containing or embodying Proprietary Information (including all copies), except that I may keep my personal copies of (i) my compensation records, (ii) materials distributed to shareholders generally and (iii) this Agreement. I also recognize and agree that I have no expectation of privacy with respect to Company’s telecommunications, networking or information processing systems (including, without limitation, stored computer files, email messages and voice messages) and that my activity and any files or messages on or using any of those systems may be monitored at any time without notice.

     5. I acknowledge and reaffirm my nonsolicitation obligations under Section 11 of the Agreement.

     6. I agree that during the term of my employment with Company (whether or not during business hours), I will not engage in any activity that is in any way competitive with the business or demonstrably anticipated business of Company, and I will not assist any other person or organization in competing or in preparing to compete with any business or demonstrably anticipated business of Company.

     7. I agree that this Agreement is not an employment contract for any particular term and that I have the right to resign and Company has the right to terminate my employment at will, at any time, for any or no reason, with or without cause. In addition, this Agreement does not purport to set forth all of the terns and conditions of my employment, and, as an employee of Company, I have obligations to Company which are not set forth in this Agreement. However, the terms of this Agreement govern over any inconsistent terms and can only be changed by a subsequent written agreement signed by the President of Company.

     8. I agree that my obligations under paragraphs 2, 3, 4 and 5 of this Agreement shall continue in effect after termination of my employment, regardless of the reason or reasons for termination, and whether such termination is voluntary or involuntary on my part, and that Company is entitled to communicate my obligations under this Agreement to any future employer or potential employer of mine. My obligations under paragraphs 2, 3 and 4 also shall be binding upon my heirs, executors, assigns, and administrators and shall inure to the benefit of Company, it subsidiaries, successors and assigns.

     9. Any dispute in the meaning, effect or validity of this Agreement shall be resolved in accordance with the laws of the State of California without regard to the conflict of laws provisions thereof. I further agree that if one or more provisions of this Agreement are held to be illegal or unenforceable under applicable California law, such illegal or unenforceable portion(s)

13

shall be limited or excluded from this Agreement to the minimum extent required so that this Agreement shall otherwise remain in full force and effect and enforceable in accordance with its terms. I also understand that any breach of this Agreement will cause irreparable harm to Company for which damages would not be an adequate remedy, and, therefore, Company will be entitled to injunctive relief with respect thereto in addition to any other remedies.

     I HAVE READ THIS AGREEMENT CAREFULLY AND I UNDERSTAND AND ACCEPT THE OBLIGATIONS WHICH IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES OR REPRESENTATIONS HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS AGREEMENT. I SIGN THIS AGREEMENT VOLUNTARILY AND FREELY, IN DUPLICATE, WITH THE UNDERSTANDING THAT ONE COUNTERPART WILL BE RETAINED BY COMPANY AND THE OTHER COUNTERPART WILL BE RETAINED BY ME.

, 2005	Employee
	Signature
	Jeff Housenbold

Accepted and agreed to:

SHUTTERFLY.COM, INC.

Signature

Name (Printed)

Title

14

APPENDIX A

     California Labor Code Section 2870. Application of provision providing that employee shall assign or offer to assign rights in invention to employer.

     (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

     (1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

     (2) Result from any work performed by the employee for his employer.

     (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.

A-1

APPENDIX B

PRIOR MATTER

A-2

EX-10.09

Exhibit 10.09

June 23, 2004

Dear Stephen,

On behalf of Shutterfly, Inc. (the “Company”), I am pleased to offer you the full-time position of Chief Financial Officer reporting to Dave Bagshaw, CEO. By signing this letter, you confirm to the Company that you have no contractual commitments or other legal obligations that would prohibit you from performing your duties for the Company.

Your base salary will be $235,000, annually, subject to all applicable deductions and withholding payable in accordance with the Company’s standard payroll policies.

Bonus:
You will be eligible to be considered for an incentive bonus with a total target amount of 25% per quarter. The bonus (if any) will be awarded based on your achievement of the following criteria established by the Company’s Chief Executive Officer and approved by the Company’s Board of Directors; 7.5% of base on achieving the base plan for revenue, 7.5% of base for achieving base plan for net income, the plan also awards 5% for achieving the revenue in the stretch plan and 5% for achieving net income. The first eligible bonus period will be September 2004. Each quarterly bonus (if any) will be paid after the Company’s books for that quarter have been closed and will be earned by you only if you are employed by the Company at the time of payment. The determinations of the Company’s Board of Directors with respect to your bonus will be final and binding.

Start Date:
Your start date with Shutterfly will be June 25, 2004.

Stock Options:
You will be granted an option to purchase 230,000 shares of the Company’s Common Stock, at an exercise price equal to the fair market value of the Common Stock on the date the Board grants your stock option or on your first date of employment with the Company, whichever is later. Your option will be subject to all of the terms, conditions and restrictions of the Company’s 1999 Stock Plan and the execution of a stock option agreement pursuant to such plan.

If the Company is subject to a Change in Control (as defined in the Plan), merger or acquisition, whereas, you will no longer be CFO of Shutterfly, Shutterfly will agree to pay you severance pay of 6 months following the termination of your employment and accelerate your vesting schedule by 12 months from that date. Your severance pay will be paid in accordance with the Company’s standard payroll procedures. However, to receive this severance pay you must have (a) signed a general release (in a form prescribed by the Company) and (b) returned all Company property. If the Company is subject to a Change in Control (as defined in the Plan), merger or acquisition, whereas, you continue to report to Shutterfly, the severance and accelerated vesting will not be offered.

Severance:
If the Company terminates your employment for any reason other than Cause (as defined in the next paragraph), then the Company will pay you severance pay for a period of 12 months and accelerate your vesting schedule by 12 months from that date following the termination of your

Page 1

employment. Your monthly severance pay will be paid at the rate of your monthly base salary in effect at the time of the termination of your employment and in accordance with the Company’s standard payroll procedures. However, to receive this severance pay you must have (a) signed a general release (in a form prescribed by the Company) and (b) returned all Company property.

For all purposes under this letter agreement, “Cause” means (a) any breach of this letter agreement, the Proprietary Information and Inventions Agreement between you and the Company, or any other written agreement between you and the Company; (b) any failure to comply with the Company’s written policies or rules, as they may be in effect from time to time during your employment; (c) commission, conviction of, or a plea of “guilty or no contest to, a felony under the laws of the United States or any State; (d) neglect of duties; or (e) misconduct.

All portions of this offer will be in effect as of the above stated start date once this letter is signed by both parties.

As a regular, full time employee of Shutterfly, you will be provided with the Company benefit package. The Company’s existing plans for group life, health and accident insurance may change from time to time.

Shutterfly is excited about having you join our team. We feel we are a great company and take pride in treating our employees with dignity and respect. As you well know, there are numerous laws that both the employee and employer must understand and accept. The next several paragraphs list the legal requirements associated with becoming a Shutterfly employee.

This offer of employment is contingent upon you completing, signing, and returning to us, this offer letter and the Employee Proprietary Information and Inventions Agreement. In addition, by accepting these terms of employment, you represent that you have not brought and will not bring with you to the Company, or utilize in the course of your employment by the Company, any confidential or proprietary information or materials of any prior employer.

For purposes of federal immigration law (Immigration Reform and Control Act of 1986) you are required to provide documentary evidence of your eligibility for employment in the United States. Please bring the appropriate documentation, as listed on the enclosed I-9 Form, with you to New Hire Orientation.

Further, your employment with Shutterfly is “at will” and may be terminated by either the employee or the Company at any time, for any reason, with or without cause and with or without notice. Nothing in this offer is to be construed as a contract of employment for any specific length of time.

Finally, by accepting this offer, you agree to be bound by an agreement to arbitrate set forth in this paragraph, which means that if a dispute arises between you and the Company during your employment or after, the dispute would be resolved by a neutral arbitrator, rather than through a lawsuit. The neutral arbitrator will be selected and the arbitration conducted pursuant to the Employment Dispute Resolution rules of the American Arbitration Association (AAA). This paragraph covers all disputes arising from your employment, including (1) claims for wages, benefits or compensation, (2) all torts and contract claims of any kind, including disputes concerning this paragraph, and (3) claims based on any federal or state law, including

Page 2

discrimination, harassment or retaliation. The only claims not covered by this paragraph are worker’s compensation and unemployment compensation claims. In addition, this paragraph does not preclude the Company from enforcing in court its rights under the Employee Proprietary Information and Inventions Agreement or any other agreement concerning intellectual property, proprietary or confidential information or inventions and any laws concerning these subjects. Except as provided in the previous two sentences, arbitration is the exclusive remedy for all disputes covered by this paragraph, including whether a particular dispute is covered by this paragraph, and is binding on both parties, which means that BOTH YOU AND THE COMPANY WAIVE ANY RIGHT TO A JURY TRIAL. If you would like to review a copy of the AAA Employment Dispute Resolution rules, please contact Connie Tedrow in the Human Resources Department.

Stephen, we are pleased to welcome you to Shutterfly. Please signify your acceptance of our offer by signing it below and returning this letter to Connie Tedrow, no later than June 30, 2004.

Very truly yours,

/s/ Dave Bagshaw

Dave Bagshaw
Chief Executive Officer

cc: Human Resources File

I accept Shutterfly’s offer of employment and agree to the terms in this letter and its attachments. I acknowledge that except for the Employee Proprietary Information and Inventions Agreement attached to the letter, this letter is the entire agreement related to my employment with Shutterfly and supersedes all prior or contemporaneous oral or written communication and representations. This agreement (offer of employment, attachments and Employee Proprietary Information and Inventions Agreement) can only be modified in writing, by signed agreement from the Chairman of the Board. I accept this offer voluntarily and not in reliance on any promises other than those contained in this letter and attachments.

/s/ Stephen E. Recht	Stephen E. Recht
Name, Signature	Name, Printed
6/24/04
Today’s Date
6/25/04
Start Date

Page 3

EX-10.10

Exhibit 10.10

July 22, 2001

Dear Jeannine,

On behalf of Shutterfly, Inc. (the “Company”), I am pleased to promote you to the full-time position of Vice President of Engineering reporting to the Company’s Chief Executive Officer. By signing this letter agreement, you confirm to the Company that you have accepted this promotion and it’s effective date of August 1, 2001.

Base Salary:
The Company has agreed to increase your base salary to the monthly rate of $14,099.00, subject to all applicable deductions and withholdings and payable in accordance with the Company’s standard payroll policies.

Bonus:
You will be eligible to be considered for an incentive bonus with a target amount of $5,000.00 per quarter. The bonus (if any) will be awarded based on your achievement of criteria established by the Company’s Chief Executive Officer and approved by the Company’s Board of Directors, including but not limited to the Company’s achievement of its financial target objectives. Thus, your total target bonus is a maximum of $20,000.00 per annum. The terms and conditions of your target bonus goals will be developed within 60 days of your start date. The first eligible bonus period will be September 2001. Each quarterly bonus (if any) will be paid after the Company’s books for that quarter have been closed and will be earned by you only if you are employed by the Company at the time of payment. The determinations of the Company’s CEO with respect to your bonus will be final and binding.

Stock Options:
Subject to the approval of the Company’s Board of Directors, you will be granted an option to purchase an additional 1,880,000 shares of the Company’s Common Stock, at an exercise price per share equal to the fair market value of the Common Stock per share on the date the Board of Directors grants your stock option. Your option will be subject to all of the terms, conditions and restrictions of the Company’s 1999 Stock Plan (the “Plan” and the execution of a stock option agreement pursuant to such plan. The option can be immediately exercisable, but the purchased shares will be subject to repurchase by the Company at the exercise price if your service terminates for any reason before you vest in the shares. You will vest in 25% of the option shares upon your completion of 12 months of service with the Company, and you will vest in 1/48 of the option shares upon your completion of each of the next 36 months of service, as described in the applicable stock option agreement

If the Company is subject to a Change in Control (as defined in the Plan), merger or acquisition, before your service with the Company terminates and you are subject to an Involuntary Termination within 12 months after that Change in Control, merger or acquisition then you will become fully vested in your option shares. “involuntary Termination” means either (a) that your service is terminated by the Company without Cause or (b) that you resign because the annual rate of your salary was reduced by the Company without your written consent, because the scope of your job responsibilities or authority was materially reduced without your written consent, or

1

because the Company has determined without your written consent to relocate your principal place of work by a distance of 35 miles or more.

Clause:
If within the first 12 months of this agreement, it is agreed by both yourself and the Chief Executive Officer, that this promotion is not in the best interest of the Company, the Company will reinstate you back to the role of Director of Engineering.

As stated in your previous offer letter, employment with the Company is for no specific period of time. Your employment with the Company will be “at will,” meaning that either you or the Company may terminate your employment at any time and for any reason, with or without Cause. Any contrary representations that may have been made to you are superseded by this offer. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation and benefits, as well as the Company’s personnel policies and procedures, may change from time to time, the “at will” nature of your employment may only be changed in an express written agreement signed by you and the Chief Executive Officer of the Company.

While you render services to the Company, you agree that you will not engage in any other employment, consulting or other business activity without the prior written consent of the Company. While you render services to the Company, you also will not assist any person or entity in competing with the Company, in preparing to compete with the Company or in hiring any employees or consultants of the Company.

All forms of compensation referred to in this letter agreement are subject to reduction to reflect applicable withholding and payroll taxes and other deductions required by law.

Finally, by accepting this offer, you and the Company agree to waive any rights to a trial before a judge or jury and agree to arbitrate before a neutral arbitrator any and all claims or disputes arising out of this letter agreement and any and all claims arising from or relating to your employment with the Company, including (but not limited to) claims against any current or former employee, director or agent of the Company, claims of wrongful termination, retaliation, discrimination, harassment, breach of contract, breach of the covenant of good faith and fair dealing, defamation, invasion of privacy, fraud, misrepresentation, constructive discharge or failure to provide a leave of absence, claims regarding commissions, stock options or bonuses, infliction of emotional distress or unfair business practices.

The arbitrator’s decision must be written and must include the findings of fact and law that support the decision. The arbitrator’s decision will be final and binding on both parties, except to the extent applicable law allows for judicial review of arbitration awards. The arbitrator may award any remedies that would otherwise be available to the parties if they were to bring the dispute in court. The arbitration will be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association; provided, however that the arbitrator must allow the discovery authorized by the California Arbitration Act or that the arbitrator deems necessary for you and the Company to vindicate your respective claims or defenses. The arbitration will take place in San Mateo County or, at your option, the

2

county in which you primarily worked with the Company at the time when the arbitrable dispute or claim first arose.

You and the Company will share the costs of arbitration equally, except that the Company will bear the cost of the arbitrator’s fee and any other type of expense or cost that you would not be required to bear if you were to bring the dispute or claim in court. Both the Company and you will be responsible for their own attorneys’ fees, and the arbitrator may not award attorneys’ fees unless a statute or contract at Issue specifically authorizes such an award.

This arbitration provision does not apply to the following: (a) workers’ compensation or unemployment insurance claims or (b) claims concerning the validity, infringement or enforceability of any trade secret, patent right, copyright or any other trade secret or intellectual property held or sought by either you or the Company (whether or not arising under the Employee Proprietary Information and Inventions Agreement between you and the Company).

If you would like to review a copy of the AAA Employment Dispute Resolution rules, please contact Connie Tedrow in the Human Resources Department.

Jeannine, we realize this is an important decision for you, we believe this position is an excellent opportunity and we are confident it will provide you with personal challenge and potential growth opportunities. Please signify your acceptance of our offer by signing below and returning this letter agreement to Connie Tedrow, no later than July 20, 2001.

Very truly yours,

/s/ Andy Wood
Andy Wood
CEO

cc: Human Resources File

3

I accept Shutterfly’s promotion and agree to the terms in this letter agreement and its attachments. I acknowledge this letter agreement is the entire agreement related to my employment with Shutterfly and supersedes all prior or contemporaneous oral or written communication and representations. This letter agreement (offer of employment, attachments and Employee Proprietary Information and inventions Agreement) can only be modified in writing, by signed agreement from the Chief Executive Officer. I accept this offer voluntarily and not in reliance on any promises other than those contained in this letter agreement and its attachments.

/s/ Jeannine Smith	Jeannine Smith
Name, Signature	Name Printed
7/22/01 Today’s Date
8/01/01
Start Date

4

EX-10.11

Exhibit 10.11

July 12, 2001

Dear Andrew,

On behalf of Shutterfly, Inc. (the “Company”), I am pleased to offer you the full-time position of Chief Marketing Officer reporting to the Company’s Chief Executive Officer. By signing this letter agreement, you confirm to the Company that you have no contractual commitments or other legal obligations that would prohibit you from performing your duties for the Company.

Base Salary:
The Company will pay you a starting base salary at the monthly rate of $16,666.67, subject to all applicable deductions and withholdings and payable in accordance with the Company’s standard payroll policies.

Bonus:
You will be eligible to be considered for an incentive bonus with a target amount of $5,000.00 per quarter. The bonus (if any) will be awarded based on your achievement of criteria established by the Company’s Chief Executive Officer and approved by the Company’s Board of Directors, including but not limited to the Company’s achievement of its financial target objectives. Thus, your total target bonus is a maximum of $20,000.00 per annum. The terms and conditions of your target bonus goals will be developed within 60 days of your start date. The first eligible bonus period will be September 2001. Each quarterly bonus (if any) will be paid after the Company’s books for that quarter have been closed and will be earned by you only if you are employed by the Company at the time of payment. The determinations of the Company’s CEO with respect to your bonus will be final and binding.

Vacation:
You will be immediately eligible for 4 weeks of vacation.

Severance:
If the Company terminates your employment for any reason other than Cause (as defined in the next paragraph), then the Company will pay you severance pay for a period of 6 months following the termination of your employment. Your monthly severance pay will be paid at the rate of your monthly base salary in effect at the time of the termination of your employment and in accordance with the Company’s standard payroll procedures. However, to receive this severance pay you must have (a) signed a general release (in a form prescribed by the Company) and (b) returned all Company property.

For all purposes under this letter agreement, “Cause” means (a) any breach of this letter agreement, the Proprietary information and Inventions Agreement between you and the Company, or any other written agreement between you and the Company; (b) any failure to comply with the Company’s written policies or rules, as they may be in effect from time to time during your employment; (c) commission, conviction of, or a plea of “guilty” or “no contest” to, a felony under the laws of the United States or any State; (d) neglect of duties; or (e) misconduct.

1

Stock Options:
Subject to the approval of the Company’s Board of Directors, you will be granted an option to purchase 2,000,000 shares of the Company’s Common Stock, at an exercise price per share equal to the fair market value of the Common Stock per share on the date the Board of Directors grants your stock option or on your first date of employment with the Company, whichever is later. Your option will be subject to all of the terms, conditions and restrictions of the Company’s 1999 Stock Plan (the “Plan”) and the execution of a stock option agreement pursuant to such plan. The option can be Immediately exercisable, but the purchased shares will be subject to repurchase by the Company at the exercise price if your service terminates for any reason before you vest in the shares. You will vest in 25% of the option shares upon your completion of 12 months of service with the Company, and you will vest in 1/48 of the option shares upon your completion of each of the next 36 months of service, as described in the applicable stock option agreement.

As a regular, full time employee of Shutterfly, you will be provided with the Company benefit package. The Company’s existing plans for group life, health and accident insurance may change from time to time.

Shutterfly is excited about having you join our team. We feel we are a great company and take pride in treating our employees with dignity and respect. As you well know, there are numerous laws that both the employee and employer must understand and accept. The next several paragraphs list the legal requirements associated with becoming a Shutterfly employee.

This offer of employment is contingent upon you completing, signing, and returning to us, this letter agreement and the Employee Proprietary Information and Inventions Agreement and Shutterfly’s Employment Application. In addition, by accepting these terms of employment, you represent that you have not brought and will not bring with you to the Company, or utilize in the course of your employment by the Company, any confidential or proprietary information or materials of any prior employer.

For purposes of federal immigration law (Immigration Reform and Control Act of 1986) you are required to provide documentary evidence of your eligibility for employment in the United States. Please bring the appropriate documentation, as listed on the enclosed I-9 Form, with you to New Hire Orientation.

Employment with the Company is for no specific period of time. Your employment with the Company will be “at will”, meaning that either you or the Company may terminate your employment at any time and for any reason, with or without Cause. Any contrary representations that may have been made to you are superseded by this offer. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation and benefits, as well as the Company’s personnel policies and procedures, may change from time to time, the “at will” nature of your employment may only be changed in an express written agreement signed by you and the Chief Executive Officer of the Company.

While you render services to the Company, you agree that you will not engage in any other employment, consulting or other business activity without the prior written consent of the Company. While you render services to the Company, you also will not assist any person or

2

entity in competing with the Company, in preparing to compete with the Company or in hiring any employees or consultants of the Company.

All forms of compensation referred to in this letter agreement are subject to reduction to reflect applicable withholding and payroll taxes and other deductions required by law.

Finally, by accepting this offer, you and the Company agree to waive any rights to a trial before a judge or jury and agree to arbitrate before a neutral arbitrator any and all claims or disputes arising out of this letter agreement and any and all claims arising from or relating to your employment with the Company, including (but not limited to) claims against any current or former employee, director or agent of the Company, claims of wrongful termination, retaliation, discrimination, harassment, breach of contract, breach of the covenant of good faith and fair dealing, defamation, invasion of privacy, fraud, misrepresentation, constructive discharge or failure to provide a leave of absence, claims regarding commissions, stock options or bonuses, infliction of emotional distress or unfair business practices.

The arbitrator’s decision must be written and must include the findings of fact and law that support the decision. The arbitrator’s decision will be final and binding on both parties, except to the extent applicable law allows for judicial review of arbitration awards. The arbitrator may award any remedies that would otherwise be available to the parties if they were to bring the dispute in court. The arbitration will be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association; provided, however that the arbitrator must allow the discovery authorized by the California Arbitration Act or that the arbitrator deems necessary for you and the Company to vindicate your respective claims or defenses. The arbitration will take place in San Mateo County or, at your option, the county in which you primarily worked with the Company at the time when the arbitrable dispute or claim first arose.

You and the Company will share the costs of arbitration equally, except that the Company will bear the cost of the arbitrator’s fee and any other type of expense or cost that you would not be required to bear if you were to bring the dispute or claim in court. Both the Company and you will be responsible for their own attorneys’ fees, and the arbitrator may not award attorneys’ fees unless a statute or contract at issue specifically authorizes such an award.

This arbitration provision does not apply to the following: (a) workers’ compensation or unemployment insurance claims or (b) claims concerning the validity, infringement or enforceability of any trade secret, patent right, copyright or any other trade secret or intellectual property held or sought by either you or the Company (whether or not arising under the Employee Proprietary Information and Inventions Agreement between you and the Company).

If you would like to review a copy of the AAA Employment Dispute Resolution rules, please contact Connie Tedrow in the Human Resources Department.

To schedule your New Hire Orientation, please call Connie Tedrow. Failure to attend Orientation may result in an unnecessary delay of your first paycheck as well as a delay in your employee benefit coverage.

3

Andrew, we are pleased to welcome you to Shutterfly. Realizing this is an important decision for you, we believe this position is an excellent opportunity and we are confident it will provide you with personal challenge and potential growth opportunities. We believe you will find Shutterfly an exciting and fulfilling place to work. Please signify your acceptance of our offer by signing below and returning this letter agreement to Connie Tedrow, no later than July 13, 2001.

Very truly yours,

/s/ Andy Wood
Andy Wood
CEO

cc: Human Resources File

4

I accept Shutterfly’s offer of employment and agree to the terms in this letter agreement and its attachments. I acknowledge that except for the Employee Proprietary Information and Inventions Agreement attached to the letter agreement, this letter agreement is the entire agreement related to my employment with Shutterfly and supersedes all prior or contemporaneous oral or written communication and representations. This letter agreement (offer of employment, attachments and Employee Proprietary Information and Inventions Agreement) can only be modified in writing, by signed agreement from the Chief Executive Officer. I accept this offer voluntarily and not in reliance on any promises other than those contained in this letter agreement and its attachments.

/s/ A.F. Young	/s/ Andrew F Young
Name, Signature	Name, Printed
7/17/01
Today’s Date
7/25/01
Start Date

5

EX-10.12

Exhibit 10.12

March 25, 2005

Dear Doug,

On behalf of Shutterfly, Inc. (the “Company”), I am pleased to offer you the full-time position of Senior Vice President Business & Corporate Development reporting to Jeff Housenbold, President & CEO. By signing this letter, you confirm to the Company that you have no contractual commitments or other legal obligations that would prohibit you from performing your duties for the Company.

Your base salary will be $225,000, annually, subject to all applicable deductions and withholding payable in accordance with the Company’s standard payroll policies. In addition, you will be eligible to be considered for an incentive bonus, which will be submitted to and reviewed and approved by the Company’s Compensation Committee. The bonus (if any) will be awarded based on your achievement of criteria established by the Company’s Compensation Committee, including but not limited to the Company’s achievement of its financial target objectives.

Stock Options:
You will be granted an option to purchase 200,000 shares of the Company’s Common Stock, at an exercise price equal to the fair market value of the Common Stock on the date the Board grants your stock option or on your first date of employment with the Company, whichever is later. Your option will be subject to all of the terms, conditions and restrictions of the Company’s 1999 Stock Plan and the execution of a stock option agreement pursuant to such plan.

If the Company is subject to a Change in Control (as defined in the Plan), merger or acquisition, whereas, (1) you will no longer be SVP Business & Corporate Development of Shutterfly, or (2) your role is materially diminished, or (3) the corporate office is moved and you choose not to relocate with the company, then Shutterfly will agree to pay you severance pay of 6 months following the termination of your employment and accelerate your vesting schedule by 12 months from that date. Your severance pay will be paid in accordance with the Company’s standard payroll procedures. However, to receive this severance pay you must have (a) signed a general release (in a form prescribed by the Company) and (b) returned all Company property. If the Company is subject to a Change in Control (as defined in the Plan), merger or acquisition, whereas, you continue to report to the Board of Shutterfly, the severance and accelerated vesting will not be offered.

Severance:
If the Company terminates your employment for any reason other than Cause (as defined in the next paragraph), then the Company will pay you severance pay for a period of 6 months and accelerate your vesting schedule by 6 months from that date following the termination of your employment. Your monthly severance pay will be paid at the rate of your monthly base salary in effect at the time of the termination of your employment and in accordance with the Company’s standard payroll procedures. However, to receive this severance pay you must have (a) signed a general release (in a form prescribed by the Company) and (b) returned all Company property.

1

For all purposes under this letter agreement, “Cause” means (a) any breach of this letter agreement, the Proprietary Information and Inventions Agreement between you and the Company, or any other written agreement between you and the Company; (b) any failure to comply with the Company’s written policies or rules, as they may be in effect from time to time during your employment; (c) commission, conviction of, or a plea of “guilty’ or “no contest” to, a felony under the laws of the United States or any State; (d) neglect of duties; or (e) misconduct.

All portions of this offer will be in effect as of the above stated start date once this letter is signed by both parties.

As a regular, full time employee of Shutterfly, you will be provided with the Company benefit package. The Company’s existing plans for group life, health and accident insurance may change from time to time.

Shutterfly is excited about having you join our team. We feel we are a great company and take pride in treating our employees with dignity and respect. As you well know, there are numerous laws that both the employee and employer must understand and accept. The next several paragraphs list the legal requirements associated with becoming a Shutterfly employee.

This offer of employment is contingent upon you completing, signing, and returning to us, this offer letter and the Employee Proprietary Information and Inventions Agreement. In addition, by accepting these terms of employment, you represent that you have not brought and will not bring with you to the Company, or utilize In the course of your employment by the Company, any confidential or proprietary information or materials of any prior employer.

For purposes of federal immigration law (Immigration Reform and Control Act of 1986) you are required to provide documentary evidence of your eligibility for employment in the United States. Please bring the appropriate documentation, as listed on the enclosed I-9 Form, with you to New Hire Orientation.

Further, your employment with Shutterfly is “at will” and may be terminated by either the employee or the Company at any time, for any reason, with or without cause and with or without notice. Nothing in this offer is to be construed as a contract of employment for any specific length of time.

Finally, by accepting this offer, you agree to be bound by an agreement to arbitrate set forth in this paragraph, which means that if a dispute arises between you and the Company during your employment or after, the dispute would be resolved by a neutral arbitrator, rather than through a lawsuit. The neutral arbitrator will be selected and the arbitration conducted pursuant to the Employment Dispute Resolution rules of the American Arbitration Association (AAA). This paragraph covers all disputes arising from your employment, including (1) claims for wages, benefits or compensation, (2) all torts and contract claims of any kind, including disputes concerning this paragraph, and (3) claims based on any federal or state law, including discrimination, harassment or retaliation. The only claims not covered by this paragraph are worker’s compensation and unemployment compensation claims. In addition, this paragraph does not preclude the Company from enforcing in court its rights under the Employee Proprietary Information and Inventions Agreement or any other agreement concerning

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intellectual property, proprietary or confidential information or inventions and any laws concerning these subjects. Except as provided in the previous two sentences, arbitration is the exclusive remedy for all disputes covered by this paragraph, including whether a particular dispute is covered by this paragraph, and is binding on both parties, which means that BOTH YOU AND THE COMPANY WAIVE ANY RIGHT TO A JURY TRIAL. If you would like to review a copy of the AAA Employment Dispute Resolution rules, please contact Connie Tedrow in the Human Resources Department.

Doug, we are pleased to welcome you to Shutterfly. Please signify your acceptance of our offer by signing it below and returning this letter to Connie Tedrow, no later than March 30, 2004.

Very truly yours,

/s/ Jeff Housenbold

Jeff Housenbold
Chief Executive Officer

cc: Human Resources File

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I accept Shutterfly’s offer of employment and agree to the terms in this letter and its attachments. I acknowledge that except for the Employee Proprietary Information and Inventions Agreement attached to the letter, this letter is the entire agreement related to my employment with Shutterfly and supersedes all prior or contemporaneous oral or written communication and representations. This agreement (offer of employment, attachments and Employee Proprietary Information and Inventions Agreement) can only be modified in writing, by signed agreement from the Chairman of the Board. I accept this offer voluntarily and not in reliance on any promises other than those contained in this letter and attachments.

/s/ Doug Galen	Doug Galen
Name, Signature	Name Printed
3-31-05
Today’s Date
3-31-05
Start Date

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EX-10.13

Exhibit 10.13

April 3, 2006

Dear Stanford:

Shutterfly, Inc. (the “Company”) is pleased to offer you the opportunity to join Shutterfly. You are being offered a position as SVP of Technology reporting to me. If you decide to join us, your annual base pay will be $235,000.00 less applicable taxes and withholdings. You will be paid semimonthly in accordance with the Company’s normal payroll procedure. Shutterfly may change your position, compensation, duties and work location from time to time, as it deems appropriate. Your start date is April 3, 2006.

Stock:
Subject to the approval of the Company’s Board of Directors, you will be granted an option to purchase 210,000 shares of the Company’s Common Stock, at an exercise price equal to the fair market value of the Common Stock on the date the Board grants your stock option or on your first date of employment with the Company, whichever is later. Your option will be subject to all of the terms, conditions and restrictions of the Company’s 1999 Stock Plan and the execution of a stock option agreement pursuant to such plan.

Hire in Bonus:
You will receive hire in bonus of $15,000 less applicable withholding after 90 days of employment. If you terminate prior to one (1) year of employment you will be responsible for reimbursing the company a prorated portion of the bonus.

Benefits:
As an employee, you will also be eligible to receive certain employee benefits including medical and dental coverage. The medical, dental and vision coverage begin on your date of hire as an employee. The Company reserves the right to revise or discontinue any or all of its benefit plans, at any time, in the Company’s sole discretion.

Holidays
Shutterfly observes eleven paid holidays per year. The holiday schedule may change at management’s discretion.

Change in Control:
If the Company is subject to a Change of Control (as defined in the Plan), merger or acquisition, whereas, (1) you will no longer be SVP of Technology of Shutterfly, or (2) your role is mutually diminished, or (3) the corporate office is moved 50 miles or more and you choose not to relocate with the company, then Shutterfly will agree to pay you severance of six (6) months following the termination of your employment and accelerate your vesting schedule by 12 months from that date. Your severance pay will be paid in accordance with the Company’s standard payroll procedures. However, to receive this severance you must (1) signed a general release (in a form prescribed by the Company) and (b) return all the Company property. If the Company is subject to a Change of Control (as defined in the Plan), merger or acquisition, you continue to report to the President, the severance and accelerated vesting will not be offered.

Introductory Period
Your first 90 days of work is known as an “Introductory Period”. This “getting acquainted”

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period gives your manager the opportunity to determine your ability to perform your job. It also provides you with the opportunity to determine if you are satisfied with the job and the Company. Shutterfly reserves the right to extend or cut short the duration of the Introductory Period when it determines appropriate to do so. However, either you or the company can terminate the employment relationship at any time during or after the Introductory Period, with or without cause or advance notice.

Employment Eligibility Verification
For purposes of federal immigration law, you will be required to provide to Shutterfly documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your first date of hire with Shutterfly, or our employment relationship with you may be terminated.

Employment at Will
If you choose to accept this offer, your employment with Shutterfly will be voluntarily entered into and will be for no specified period. As a result, you will be free to resign at any time, for any reason, as you deem appropriate. Shutterfly will have a similar right and may conclude its employment relationship with you at any time, with or without cause or advance notice.

Acceptance of Offer
To indicate your acceptance of this employment agreement, please sign and date in the space provided below and return it to Shutterfly, 2800 Bridge Parkway, Redwood City, CA 94065 attention Human Resources or via Fax to (650) 610 - 5280 no later than April 3, 2006 after which it will expire. A duplicate original is enclosed for your records. In addition to this letter, your offer of employment is conditioned upon your: (1) completion and signing of the Shutterfly employment application; (2) successful completion of a background and reference check and (3) signing of the Shutterfly Employee Invention Assignment and Confidentiality (and any other similar agreements relating to proprietary rights between you and the Company).

In the event of any dispute or claim relating to or arising out of your employment relationship with the Company, this agreement, or the termination of your employment with the Company for any reason (including, but not limited to, any claims of breach of contract, wrongful termination or age, sex, race, national origin, disability or other discrimination or harassment), all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by JAMS under JAMS Employment Arbitration Rules and Procedures then in effect, which are available online at JAMS’ website at www.jamsadr.org You and the Company hereby waive your respective rights to have any such disputes or claims tried before a judge or jury.

This letter agreement, the Shutterfly Employee Invention Assignment and Confidentiality Agreement, and stock option agreement constitute the entire agreement between you and the Company regarding the terms and conditions of your employment with Shutterfly and supersedes any prior representations or agreements, whether written or oral. This letter, along with any agreements herein, may not be modified or amended except by a written agreement signed by the Chief Executive Officer of the Company. If we do not hear from you by April 3, 2006, we will assume you have decided not to join Shutterfly.

We look forward to your positive response and welcoming you to the Shutterfly team.

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Sincerely,

/s/ Jeff Housenbold

Jeff Housenbold
President & CEO
Enclosures

Acceptance

I agree to and accept employment with Shutterfly on the terms and conditions set forth in this agreement. I Understand and agree that my employment with the Company is at-will.

Signature:	/s/ Stanford Au	Date:	4/3/06
	Stanford Au
Start Date: April 3, 2006

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EX-10.14

Exhibit 10.14

CONFIDENTIAL TREATMENT REQUESTED. CERTAIN PORTIONS OF THIS DOCUMENT HAVE
BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND, WHERE
APPLICABLE, HAVE BEEN MARKED WITH AN ASTERISK TO DENOTE WHERE OMISSIONS HAVE
BEEN MADE. THE CONFIDENTIAL MATERIAL HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.

SUPPLY AGREEMENT

          AGREEMENT, made as of September 15, 2005, between ShutterFly, Inc. (“Customer”) and Fuji Photo Film U.S.A., Inc. (“Fuji”).

W I T N E S S E T H:

          WHEREAS, Fuji distributes photographic products, including minilabs and digital equipment (“Equipment”), standard grade color paper (“Paper”) and processing chemistry (“Chemistry”); and

          WHEREAS, Customer desires to purchase and Fuji desires to provide all of Customer’s in-house requirements for Paper exclusively from Fuji, and to purchase Equipment and Chemistry on the terms set forth in this agreement solely for use in Customer’s retail web-based operations for the term hereof; and

          NOW, THEREFORE, Customer and Fuji hereby agree as follows:

     1. Term; Termination.

     1.1 This agreement shall be in effect for two (2) years, commencing September 15, 2005 (the “Term”).

     1.2 This agreement may be terminated prior to expiration of the Term as follows:

          (a) Upon any of the following events either party may give notice of termination, effective immediately: (i) the other party becomes insolvent or admits its inability to pay its debts generally as they come due; (ii) any sheriff, marshall, custodian, trustee or receiver is appointed by order of any court of competent jurisdiction to take charge of or sell any material portion of the other party’s property; (iii) a case is filed by the other party under the Bankruptcy Code or any other insolvency law; (iv) a case is filed against the other party without such party’s application or consent under the Bankruptcy Code or any other insolvency law and such case continues undismissed for 90 days; (v) the other party makes a general assignment for the benefit of creditors; or (vi) the other party is dissolved or liquidated or takes any corporate action for such purpose; or

          (b) Either party may terminate this agreement if the other shall commit a material breach of this agreement and such breach shall continue more than thirty (30) days after written notice of such breach is given to breaching party.

     2. Products; Pricing. Customer shall purchase from Fuji or its affiliates all of Customer’s in-house requirements for Paper (except where Paper is not reasonably compatible

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with Customer’s processor or if Fuji is not able to fulfill Customer’s requirements) consistent with the pricing terms below. Additionally, Customer may purchase Chemistry and may purchase or lease Equipment from ORIX USA Corporation (“ORIX”), at its option. Customer shall use Paper and Chemistry internally and shall not resell same. This Agreement [*]; accordingly, this Agreement [*] [*] Fuji paper.

     2.1 Customer shall purchase Paper [*] the applicable list price, and shall [*] and mailed to Customer’s billing address. The parties acknowledge that list price and [*] may change from time to time, but Customer’s [*] pricing will remain equivalent to the [*] pricing offered upon execution of this agreement.

          In exchange for Customer’s best efforts [*] on Customer’s [*], Customer shall [*] to Customer [*] and mailed to Customer’s billing address.

     2.2 [*]: (a) For optimized truckload lot size shipments of 4 inch x 1750 foot rolls of bulk Paper in production pallets of same surface from Fuji USA’s manufacturing facility to Customer’s, Redwood City, CA, there shall [*]. (b) For optimized truckload lot size shipments of full production pallets of same size and surface Paper (other than 4 inch x 1750 foot rolls) from Fuji USA’s manufacturing facility to Customer’s, Redwood City, CA, there shall [*].

          For shipments of Paper from Fuji USA’s distribution centers to Customer, there shall be no Shipping Allowance. Notwithstanding the foregoing, Paper orders of $1,000 or more shall include surface freight charges in the Billing Price. The Shipping Allowance, if earned, will be calculated on a quarterly basis and remitted to Customer within 30 days of calculation in the form of a credit issued to Customer.

     2.3 Customer shall purchase Chemistry from Fuji or its designated affiliate.

     2.4 In the case of any Equipment leased by Customer from ORIX pursuant to the Fuji/ORIX lease program, Fuji will take recourse on the Equipment leased pursuant to this agreement; however, Customer shall remain obligated to purchase Paper and Chemistry for use with such Equipment.

     2.5 Fuji shall offer Customer certain main body equipment (e.g., processors, printer-processors, scanner-printers) at [*] off then-current invoice prices.

     2.6 All payments shall be due net sixty (60) days from invoice. Freight will be prepaid by Fuji on shipments of $1,000 or more.

     3. Warranty. This agreement does not in any way expand or supersede any warranty of Fuji with respect to the quality or performance of any product, all of which warranties if any,

     [*] Confidential treatment requested

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are enclosed with such products or set forth in the terms of sale that apply to such products. ANY SUCH WARRANTY (IF ANY) IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED (INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE). FUJI SHALL NOT BE LIABLE FOR SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES.

     4. Arbitration. All disputes, controversies or differences which arise between the parties, out of or in relation to or in connection with this agreement, which cannot be amicably settled shall be finally settled by arbitration before an arbitrator pursuant to the rules of the American Arbitration Association. Arbitration shall be conducted in New York, New York. Arbitration may be commenced at any time by the party seeking resolution by giving written notice to the other party that such dispute has been referred to arbitration pursuant to the terms of this Section. The arbitrator shall be selected by the mutual agreement of the parties, but if the parties do not so agree within twenty (20) days after the date of the arbitration notice, the arbitrator shall be selected pursuant to the rules of the American Arbitration Association. Any award rendered by the arbitrator shall be conclusive and binding upon the parties. This provision for arbitration shall be specifically enforceable by the parties and the decision of the arbitrator in accordance herewith shall be final and binding and there shall be no right of appeal therefrom.

     5. General.

     5.1 Except as provided herein, neither party hereto may assign its rights or delegate its obligations hereunder without the prior consent of the other party. Any such purported assignment or delegation, in the absence of such consent, will be void and without effect.

     5.2 Neither party shall be responsible or liable in any way for failure or delay in carrying out the terms of this agreement resulting from any cause or circumstances beyond its reasonable control, including but not limited to, fire, flood, war, labor difficulties, interruption of transit, accident, explosion, civil commotion, and acts of any governmental authority. No such failure or delay shall terminate this agreement, and each party shall complete its obligations hereunder as promptly as reasonably practicable following cessation of the cause or circumstances of such failure or delay.

     5.3 The waiver, express or implied, by either party of any right hereunder will not constitute a waiver of any other right.

     5.4 All notices, consents or other communications between the parties permitted or contemplated by this agreement (other than purchase orders and similar routine operational communications) shall be by electronic facsimile, confirmed in writing as hereinafter provided, or in writing, which shall be valid and sufficient only if dispatched by a recognized overnight courier service (such as Federal Express) addressed as follows:

If to Fuji:	If to Customer:
Fuji Photo Film U.S.A., Inc.	ShutterFly, Inc.
200 Summit Lake Drive	2800 Bridge Parkway

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Valhalla, New York 10595	Redwood City, CA 94065
Attn:	Attn: Andy Wood
Fax:	Fax: -650-654-1299
With a copy to:
Fuji Photo Film U.S.A., Inc.
200 Summit Lake Drive
Valhalla, New York 10595
Attn: Legal Dept.
Fax: 914-789-8514

          Such communications shall be effective upon receipt, in the case of overnight courier service, and upon transmission by electronic facsimile if confirmed as set forth above.

     5.5 The validity, construction and performance of this agreement will be governed by and interpreted in accordance with the laws of the State of New York (excluding its rules of conflict of laws).

     5.6 This agreement supersedes all prior oral and written communications between the parties hereto concerning, and constitute their sole and exclusive understanding with respect to, the subject matter hereof. This agreement may not be amended except by a writing signed by both parties hereto.

          IN WITNESS WHEREOF, the parties, intending to be legally bound, have caused this agreement to be executed by their duly authorized representatives as of the date and year first above written.

FUJI PHOTO FILM U.S.A., INC.		SHUTTERFLY, INC.
By:	/s/ Hank Hayashi	By:	/s/ Doug Galen
Name:	HANK HAYASHI	Name:	Doug Galen
Title:	PRES. IMAGING GROUP	Title:	Senior Vice President — Business
			and Corporate Development

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EX-21.01

Exhibit 21.01

SUBSIDIARIES OF SHUTTERFLY, INC.

Memory Matrix, Inc., a Nevada corporation

EX-23.02

Exhibit 23.02

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the use in this Registration Statement on Form S-1 of our reports dated June 27, 2006 relating to the financial statements and financial statement schedule of Shutterfly Inc., which appear in such Registration Statement. We also consent to the references to us under the headings “Experts” and “Selected Consolidated Financial Data” in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

San Jose, California

June 27, 2006