##### Table of Contents



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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number
    000-50763
  Blue Nile, Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

91-1963165(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)   705 Fifth
    Avenue South, Suite 900
    Seattle, Washington 98104 (Address
    of principal executive offices) (Zip Code)
   (206) 336-6700
     Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $.001 Par Value

The NASDAQ Stock Market LLC   None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
   Large
    accelerated filer o
    Accelerated
    filer þ
    Non-accelerated
    filer o  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




---



##### 



BLUE
    NILE, INC.
  ANNUAL
    REPORT ON
    FORM 10-K
    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
  PagePART IItem 1.


Business


3Item 1A.


Risk
    Factors


7Item 1B.


Unresolved Staff
    Comments


19Item 2.


Properties


19Item 3.


Legal
    Proceedings


19Item 4.


Submission of
    Matters to a Vote of Security Holders


19PART IIItem 5.


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


19Item 6.


Selected
    Consolidated Financial Data


23Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


24Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


31Item 8.


Financial
    Statements and Supplementary Data


32Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


56Item 9A.


Controls and
    Procedures


56Item 9B.


Other
    Information


58PART IIIItem 10.


Directors and
    Executive Officers and Corporate Governance


58Item 11.


Executive
    Compensation


58Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


58Item 13.


Certain
    Relationships and Related Transactions, and Director
    Independence


58Item 14.


Principal
    Accountant Fees and Services


59PART IVItem 15.


Exhibits and
    Financial Statement Schedules


59SIGNATURES


60EXHIBIT
    INDEX


62EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   2




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##### Table of Contents



PART I  Item 1.
    Business  This Annual Report on
    Form 10-K
    contains forward-looking statements that involve many risks and
    uncertainties. These statements relate to future events and our
    future performance that are based on current expectations,
    estimates, forecasts and projections about the industries in
    which we operate and the beliefs and assumptions of our
    management as of the date of this filing. In some cases, you can
    identify forward-looking statements by terms such as
    would, could, may,
    will, should, expect,
    intend, plan, anticipate,
    believe, estimate, predict,
    potential, targets, seek, or
    continue, the negative of these terms or other
    variations of such terms. In addition, any statements that refer
    to projections of our future financial performance, our
    anticipated growth and trends in our business and other
    characterizations of future events or circumstances, are
    forward-looking statements. These statements are only
    predictions based upon assumptions made that are believed to be
    reasonable at the time, and are subject to risk and
    uncertainties. Therefore, actual events or results may differ
    materially and adversely from those expressed in any
    forward-looking statement. In evaluating these statements, you
    should specifically consider the risks described under the
    caption Item 1A  Risk Factors and
    elsewhere in this report. These factors, and other factors, may
    cause our actual results to differ materially from any
    forward-looking statements. Except as required by law, we
    undertake no obligation to publicly update or revise any
    forward-looking statements, whether as a result of new
    information, future events or otherwise.
  Overview
      mark-ups
   3




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Growth
    Strategies
    Increase
    Blue Nile Brand Awareness
    Focus
    on the Customer Experience
    Expand
    into International Markets
    Increase
    Supply Chain Efficiencies
    Improve
    Operational Efficiencies
    Expand
    Product Offerings
    Blue
    Niles Products Offerings and Supplier
    Relationships
   4




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Marketing
    Customer
    Service and Support
    Fulfillment
    Operations
    Technology
    and Systems
   5




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Seasonality
    Competition
    
    independent jewelry stores;
    retail jewelry store chains;
    other online retailers that sell jewelry;
    department stores, chain stores and mass retailers;
    online auction sites;
    catalog and television shopping retailers; and
    discount superstores and wholesale clubs.      Intellectual
    Property
   6




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Employees
    Available
    Information
  Form 10-K, Form 10-Q, Form 8-K 1-800-SEC-0330. Regulation S-K Form 8-K.
  Item 1A.
    Risk
    Factors    Our
    limited operating history makes it difficult for us to
    accurately forecast net sales and appropriately plan our
    expenses.
    We
    expect our quarterly financial results to fluctuate, which may
    lead to volatility in our stock price.
    
    demand for our products;
    the costs to acquire diamonds and precious metals;
    our ability to attract visitors to our websites and convert
    those visitors into customers;
    our ability to retain existing customers or encourage repeat
    purchases;
    our ability to manage our product mix and inventory;
    wholesale diamond prices; 7




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##### Table of Contents




    consumer tastes and preferences for diamonds and fine jewelry;
    our ability to manage our operations;
    the extent to which we provide for and pay taxes;
    stock-based compensation expense as a result of the nature,
    timing and amount of stock options granted, the underlying
    assumptions used in valuing these options, the estimated rate of
    stock option forfeitures and other factors;
    advertising and other marketing costs;
    our, or our competitors, pricing and marketing strategies;
    the introduction of competitive websites, products, price
    decreases or improvements;
    general economic conditions both domestically and
    internationally;
    conditions or trends in the diamond and fine jewelry industry;
    conditions or trends in the Internet and
    e-commerce
    industry;
    the success of our geographic and product line expansions; and
    costs of expanding or enhancing our technology or websites.    As a
    result of seasonal fluctuations in our net sales, our quarterly
    results may fluctuate and could be below
    expectations.
    Our
    failure to acquire quality diamonds and fine jewelry at
    commercially reasonable prices would result in higher costs and
    lower net sales and damage our competitive
    position.
   8




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Our
    failure to meet customer expectations with respect to price
    would adversely affect our business and results of
    operations.
    Purchasers
    of diamonds and fine jewelry may not choose to shop online,
    which would prevent us from increasing net sales.
    
    concerns about buying luxury products such as diamonds and fine
    jewelry without a physical storefront,
    face-to-face
    interaction with sales personnel and the ability to physically
    handle and examine products;
    delivery time associated with Internet orders;
    product offerings that do not reflect consumer tastes and
    preferences;
    pricing that does not meet consumer expectations;
    concerns about the security of online transactions and the
    privacy of personal information;
    delayed shipments or shipments of incorrect or damaged products;
    inconvenience associated with returning or exchanging Internet
    purchased items; and
    usability, functions and features of our websites.  We may
    not succeed in continuing to establish the Blue Nile brand,
    which would prevent us from acquiring customers and increasing
    our net sales.
   9




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We
    face significant competition and may be unsuccessful in
    competing against current and future competitors.
    
    independent jewelry stores;
    retail jewelry store chains, such as Tiffany & Co. and
    Bailey Banks & Biddle;
    other online retailers that sell jewelry, such as Amazon.com;
    department stores, chain stores and mass retailers, such as
    Nordstrom and Neiman Marcus;
    online auction sites, such as eBay;
    catalog and television shopping retailers, such as Home Shopping
    Network and QVC; and
    discount superstores and wholesale clubs, such as Wal-Mart and
    Costco Wholesale.        In
    order to increase net sales and to sustain or increase
    profitability, we must attract customers in a cost-effective
    manner.
  e-commerce
 10




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We
    rely exclusively on the sale of diamonds and fine jewelry for
    our net sales, and demand for these products could
    decline.
             11




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We may
    be unsuccessful in further expanding our operations
    internationally.
      
    the need to develop new supplier and jeweler relationships;
    international regulatory requirements and tariffs;
    difficulties in staffing and managing foreign operations;
    longer payment cycles from credit card companies;
    greater difficulty in accounts receivable collection;
    our reliance on third-party carriers for product shipments to
    our customers;
    risk of theft of our products during shipment;
    potential adverse tax consequences;
    foreign currency exchange risk;
    lack of infrastructure to adequately conduct electronic commerce
    transactions or fulfillment operations;
    unclear foreign intellectual property protection laws;
    laws and regulations related to corporate governance and
    employee/employer relationships;
    price controls or other restrictions on foreign currency;
    difficulties in obtaining export and import licenses;
    increased payment risk and greater difficulty addressing credit
    card fraud;
    consumer and data protection laws;
    lower levels of adoption or use of the Internet; and
    geopolitical events, including war and terrorism.    We
    rely on our suppliers, third-party carriers and third-party
    jewelers as part of our fulfillment process, and these third
    parties may fail to adequately serve our
    customers.
   12




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If our
    fulfillment operations are interrupted for any significant
    period of time, our business and results of operations would be
    substantially harmed.
    We
    face the risk of theft of our products from inventory or during
    shipment.
    If the
    single facility where substantially all of our computer and
    communications hardware is located fails, our business, results
    of operations and financial condition would be
    harmed.
    Our
    failure to protect confidential information of our customers and
    our network against security breaches could damage our
    reputation and brand and substantially harm our business and
    results of operations.
   13




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##### Table of Contents



Our
    failure to effectively manage the growth in our operations may
    prevent us from successfully expanding our
    business.
    
    transaction-processing and fulfillment;
    inventory management;
    customer support;
    management of multiple supplier relationships;
    operational, financial and managerial controls;
    reporting procedures;
    recruitment, training, supervision, retention and management of
    our employees; and
    technology operations.    The
    success of our business may depend on our ability to
    successfully expand our product offerings.
    If we
    are unable to accurately manage our inventory of fine jewelry,
    our reputation and results of operations could
    suffer.
   14




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Repurchases
    of our common stock may not prove to be the best use of our cash
    resources.
    We
    have incurred significant operating losses in the past and may
    not be able to sustain profitability in the
    future.
    We
    rely on the services of our key personnel, any of whom would be
    difficult to replace.
    Failure
    to adequately protect or enforce our intellectual property
    rights could substantially harm our business and results of
    operations.
       15




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Assertions
    by third parties of infringement by us of their intellectual
    property rights could result in significant costs and
    substantially harm our business and results of
    operations.
    Increased
    product returns and the failure to accurately predict product
    returns could substantially harm our business and results of
    operations.
  30-day
  Interruptions
    to our systems that impair customer access to our websites would
    damage our reputation and brand and substantially harm our
    business and results of operations.
    Our
    failure to rapidly respond to technological change could result
    in our services or systems becoming obsolete and substantially
    harm our business and results of operations.
   16




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If use
    of the Internet, particularly with respect to online commerce,
    does not continue to increase as rapidly as we anticipate, our
    business will be harmed.
      
    actual or perceived lack of security of information or privacy
    protection;
    possible disruptions, computer viruses, spyware, phishing,
    attacks or other damage to the Internet servers, service
    providers, network carriers and Internet companies or to
    users computers; and
    excessive governmental regulation.    We
    rely on our relationship with a third-party consumer credit
    company to offer financing for the purchase of our
    products.
    We may
    undertake acquisitions to expand our business, which may pose
    risks to our business and dilute the ownership of our existing
    stockholders.
    Our
    net sales may be negatively affected if we are required to
    charge taxes on purchases.
   17




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Government
    regulation of the Internet and
    e-commerce
    is evolving and unfavorable changes could substantially harm our
    business and results of operations.
      Our
    failure to address risks associated with payment methods, credit
    card fraud and other consumer fraud could damage our reputation
    and brand and may cause our business and results of operations
    to suffer.
   18




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##### Table of Contents



We may
    need to implement additional finance and accounting systems,
    procedures and controls as we grow our business and organization
    and to satisfy new reporting requirements.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties  sub-lease
  Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market
    Information and Dividend Policy
   19




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High


LowFiscal year 2006:First Quarter

$
41.40


$
30.80Second Quarter

$
35.93


$
28.28Third Quarter

$
37.19


$
24.10Fourth Quarter

$
39.52


$
33.32Fiscal year 2005:First Quarter

$
30.84


$
24.95Second Quarter

$
32.99


$
25.04Third Quarter

$
35.69


$
31.11Fourth Quarter

$
43.87


$
32.25    20




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##### Table of Contents



Performance
    Measurement Comparison(1)
    COMPARISON
    OF CUMULATIVE TOTAL STOCKHOLDER RETURN(2)
  
    (1)
    
    This Section is not soliciting material, is not
    deemed filed with the SEC and is not to be
    incorporated by reference in any filing of the Company under the
    1933 Act or the 1934 Act whether made before or after
    the date hereof and irrespective of any general incorporation
    language in any such filing.(2)
    
    Assumes $100 was invested on May 20, 2004, at the closing
    price on the date of Blue Niles initial public offering,
    in Blue Niles common stock and each index, and all
    dividends have been reinvested. No cash dividends have been
    declared on Blue Niles common stock. Stockholder returns
    over the indicated period should not be considered indicative of
    future stockholder returns. 21




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##### Table of Contents



Issuer
    Purchases of Equity Securities
  Rule 10b5-1
  Total Number of


Approximate DollarShares Purchased as


Value of SharesTotal Number


Average


Part of Publicly


that May Yet Beof Shares


Price Paid


Announced Plans or


Purchased Under thePurchased


per Share


Programs


Plans or Programs(In thousands)October 2, 2006 through
    October 29, 2006


400


$
36.01



400


$
96,379October 30, 2006 through
    November 26, 2006


31,061


$
35.97



31,061


$
95,262November 27, 2006 through
    December 31, 2006


60,600


$
34.17



60,600


$
93,192  22




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##### Table of Contents



Item 6.
    Selected
    Consolidated Financial Data    Form 10-K.
  BLUE
    NILE, INC.
  SELECTED CONSOLIDATED FINANCIAL DATA
  Year Ended


Year Ended


Year Ended


Year EndedDecember 31,


January 1,


January 2,


December 31,2006


2006


2005


2003


2002(In thousands, except per share data)Consolidated Statements of
    Operations Data:Net sales

$
251,587


$
203,169


$
169,242


$
128,894


$
72,120Gross profit


50,853



45,042



37,584



29,385



18,117Selling, general and
    administrative expenses


34,296



26,993



22,727



18,174



14,090Restructuring charges














(87
)


400Operating income


16,557



18,049



14,857



11,298



3,627Income before income taxes


19,980



20,553



15,629



11,286



1,627Income tax expense (benefit)


6,916



7,400



5,642



(15,700
)


Net income

$
13,064


$
13,153


$
9,987


$
26,986


$
1,627Basic net income per share

$
0.79


$
0.75


$
0.80


$
6.98


$
0.49Diluted net income per share

$
0.76


$
0.71


$
0.56


$
1.65


$
0.11Shares used in computing basic net
    income per share


16,563



17,550



12,450



3,868



3,336Shares used in computing diluted
    net income per share


17,278



18,597



17,885



16,363



14,160Additional Operating
    Data:Net cash provided by operating
    activities

$
40,518


$
31,272


$
29,751


$
19,816


$
16,730Gross profit margin


20.2
%


22.2
%


22.2
%


22.8
%


25.2
%Selling, general and
    administrative expenses as a percentage of net sales


13.6
%


13.3
%


13.5
%


14.1
%


19.6
%   23




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##### Table of Contents



As of


As of


As ofDecember 31,


January 1,


January 2,


As of December 31,2006


2006


2005


2003


2002(In thousands)Consolidated Balance Sheet
    Data:Cash and cash equivalents

$
78,540


$
71,921


$
59,499


$
30,383


$
22,597Marketable securities


19,767



42,748



41,868







Accounts receivable


1,640



1,877



1,028



916



481Inventories


14,616



11,764



9,914



10,204



5,181Accounts payable


66,625



50,157



37,775



26,288



15,791Working capital(1)


41,881



76,869



77,838



16,663



1,795Total assets


122,106



138,005



128,382



62,305



30,914Total long-term obligations


666



863



1,071



1,126



1,091Mandatorily redeemable convertible
    preferred stock














57,485



57,215Total stockholders equity
    (deficit)


47,303



81,515



83,620



(27,238
)


(54,560
)     (1)
    
    Working capital consists of total current assets, including cash
    and cash equivalents, less total current liabilities.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion should be read in conjunction with
    the consolidated financial statements and related notes which
    appear elsewhere in this report. This discussion contains
    forward-looking statements that involve risks and uncertainties.
    Our actual results could differ materially from those
    anticipated in these forward-looking statements as a result of
    various factors, including those discussed below and elsewhere
    in this report, particularly under the heading
    Item 1A  Risk Factors.
  Management
    Overview
       24




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Critical
    Accounting Policies
    Revenue
    Recognition
   25




---



##### Table of Contents



Stock-based
    Compensation
      Increase


DecreaseExpected Term(1)


5.8
%


(6.2
)%Expected Volatility(1)


8.9
%


(9.0
)%     (1)
    
    Sensitivity to change in assumptions was determined using the
    Black-Scholes-Merton valuation model compared to the following
    original assumptions: stock price and exercise price equal to
    the closing market price of Blue Nile, Inc. common stock on
    December 29, 2006, expected term of 4.5 years,
    expected volatility of 36%, expected dividend yield of 0.0% and
    a risk free investment rate of 5.0%.  Results
    of Operations
    Year Ended


Year Ended


Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Net sales


100.0
%


100.0
%


100.0
%Gross profit


20.2



22.2



22.2Selling, general and
    administrative expenses


13.6



13.3



13.5Operating income


6.6



8.9



8.7Other income (expense), net


1.3



1.2



0.5Income before income taxes


7.9



10.1



9.2Income tax expense


2.7



3.6



3.3Net income


5.2
%


6.5
%


5.9
%     Net Sales.
  Gross Profit.
 26




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##### Table of Contents



Selling, General and Administrative
    Expenses.
  Fiscal Year. 13-week
    Comparison of


Comparison ofYear Ended


Year EndedDecember 31, 2006 to


January 1, 2006 toYear Ended


Year Ended


Year Ended


Year Ended


Year EndedDecember 31,


January 1,


January 2,


January 1, 2006


January 2, 20052006


2006


2005


$ Change


% Change


$ Change


% ChangeNet sales

$
251,587


$
203,169


$
169,242


$
48,418



23.8
%

$
33,927



20.0
%Cost of sales


200,734



158,127



131,658



42,607



26.9
%


26,469



20.1
%Gross profit


50,853



45,042



37,584



5,811



12.9
%


7,458



19.8
%Operating expenses:Selling, general and administrative


34,296



26,993



22,727



7,303



27.1
%


4,266



18.8
%Operating income


16,557



18,049



14,857



(1,492
)


−8.3
%


3,192



21.5
%Other income (expense), net:Interest income


3,323



2,499



709



824



33.0
%


1,790



252.5
%Other income


100



5



63



95



nm



(58
)


−92.1
%3,423



2,504



772



919



36.7
%


1,732



224.4
%Income before income taxes


19,980



20,553



15,629



(573
)


−2.8
%


4,924



31.5
%Income tax expense (benefit)


6,916



7,400



5,642



(484
)


−6.5
%


1,758



31.2
%Net income

$
13,064


$
13,153


$
9,987


$
(89
)


−0.7
%

$
3,166



31.7
%Basic net income per share

$
0.79


$
0.75


$
0.80


$
0.04



5.3
%

$
(0.05
)


−6.3
%Diluted net income per share

$
0.76


$
0.71


$
0.56


$
0.05



7.0
%

$
0.15



26.8
%   Comparison
    of Year Ended December 31, 2006 to Year Ended
    January 1, 2006
  Net
    Sales
    Gross
    Profit
   27




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##### Table of Contents



Selling,
    General and Administrative Expenses
      Other
    Income (Expense), Net
    Income
    Taxes
    Comparison
    of Year Ended January 1, 2006 to Year Ended January 2,
    2005
  Net
    Sales
   28




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##### Table of Contents



Gross
    Profit
    Selling,
    General and Administrative Expenses
    Other
    Income (Expense), Net
    Income
    Taxes
    Liquidity
    and Capital Resources
     29




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Rule 10b5-1 00-15.
    Less than








OverContractual Obligations

Total


1 Year


1-3 Years


4-5 Years


5 YearsOperating leases

$
2,182


$
446


$
977


$
759


$
Purchase obligations(1)


8,120



8,120











Purchase obligations(2)


392



392











$
10,694


$
8,958


$
977


$
759


$
     (1)
    
    Includes open merchandise purchase orders at December 31,
    2006(2)
    
    Includes commitments for advertising and marketing services at
    December 31, 2006   30




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Off-Balance
    Sheet Arrangements
    Impact of
    Inflation
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk   31




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##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  Index to
    Consolidated Financial Statements
  PageFinancial StatementsReports of
    Independent Registered Public Accounting Firms


33Consolidated
    Balance Sheets, as of December 31, 2006 and January 1,
    2006


35Consolidated
    Statements of Operations, for the fiscal years ended
    December 31, 2006, January 1, 2006 and January 2,
    2005


36Consolidated
    Statements of Changes in Mandatorily Redeemable Convertible
    Preferred Stock and Stockholders Equity (Deficit), for the
    fiscal years ended December 31, 2006, January 1, 2006
    and January 2, 2005


37Consolidated
    Statements of Cash Flows, for the fiscal years ended
    December 31, 2006, January 1, 2006 and January 2,
    2005


38Notes to
    Consolidated Financial Statements


39Selected Quarterly
    Financial Information (unaudited)


54Financial Statement
    ScheduleSchedule II, Valuation and
    Qualifying Accounts


55All other schedules are omitted
    because they are not applicable or the required information is
    shown in the financial statements or notes thereto.  32




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM            Share-Based Payment.
  Considering the Effects of Prior
    Year Misstatements when Quantifying Misstatements in Current
    Year Financial Statements
    
    33




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      
    34




---



##### Table of Contents



BLUE
    NILE, INC.



Consolidated
    Balance Sheets

(In thousands, except par value) December 31,


January 1,2006


2006ASSETSCurrent assets:Cash and cash equivalents

$
78,540


$
71,921Restricted cash


117



119Marketable securities


19,767



42,748Trade accounts receivable


1,484



1,567Other accounts receivable


156



310Inventories


14,616



11,764Deferred income taxes


598



3,223Prepaids and other current assets


740



844Total current assets


116,018



132,496Property and equipment, net


3,391



3,261Intangible assets, net


319



352Deferred income taxes


2,285



1,819Other assets


93



77Total assets

$
122,106


$
138,005LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
66,625


$
50,157Accrued liabilities


7,315



5,262Current portion of deferred rent


197



208Total current liabilities


74,137



55,627Deferred rent, less current portion


666



863Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par
    value; 5,000 shares authorized, none issued and outstandingCommon stock, $0.001 par
    value; 300,000 shares authorized 19,073 shares and
    18,646 shares issued, respectively; 15,972 shares and
    17,331 shares outstanding, respectively


19



19Additional paid-in capital


115,751



106,341Deferred compensation


(180
)


(480
)Accumulated other comprehensive
    (loss) income


(2
)


5Retained earnings (accumulated
    deficit)


7,110



(6,362
)Treasury stock, at cost;
    3,101 shares and 1,315 shares outstanding, respectively


(75,395
)


(18,008
)Total stockholders equity


47,303



81,515Total liabilities and
    stockholders equity

$
122,106


$
138,005    35




---



##### Table of Contents



BLUE
    NILE, INC.



Consolidated
    Statements of Operations

(In thousands, except per share data) Year Ended


Year Ended


Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Net sales

$
251,587


$
203,169


$
169,242Cost of sales


200,734



158,127



131,658Gross profit


50,853



45,042



37,584Operating expenses:Selling, general and administrative


34,296



26,993



22,727Operating income


16,557



18,049



14,857Other income (expense), net:Interest income


3,323



2,499



709Other income


100



5



633,423



2,504



772Income before income taxes


19,980



20,553



15,629Income tax expense


6,916



7,400



5,642Net income

$
13,064


$
13,153


$
9,987Basic net income per share

$
0.79


$
0.75


$
0.80Diluted net income per share

$
0.76


$
0.71


$
0.56    36




---



##### Table of Contents



BLUE
    NILE, INC.



Consolidated
    Statements of Changes in Mandatorily Redeemable Convertible
    Preferred Stock and

Stockholders
    Equity (Deficit)

(In thousands) MandatorilyRedeemable














Retained


Accumulated








TotalConvertible








Additional


Deferred


Earnings


Other


Treasury





StockholdersPreferred Stock


Common Stock


Paid-In


Stock


(Accumulated


Comprehensive


Stock





EquityShares


Amount


Shares


Amount


Capital


Compensation


Deficit)


Income (Loss)


Shares


Amount


(Deficit)Balance, December 31, 2003


10,000


$
57,485



5,128


$
5


$
4,247


$
(1,352
)

$
(29,502
)

$




(750
)

$
(636
)

$
(27,238
)Net income


























9,987















9,987Other comprehensive income (loss):Unrealized loss on marketable
    securities, net of tax






























(2
)










(2
)Total comprehensive income










































9,985Sale of common stock, net of
    offering expenses










2,301



2



42,514























42,516Conversion of mandatorily
    redeemable convertible preferred stock to common stock


(10,000
)


(57,485
)


10,920



11



57,474























57,485Deferred stock compensation on
    issuance of stock options


















228



(228
)


















Tax benefit from stock option
    exercises


















352























352Amortization of deferred stock
    compensation






















355



















355Reversal of deferred compensation
    relating to cancelled options


















(296
)


296



















Exercise of common stock options
    and warrants










128







145























145Issuance of common stock to
    directors










1







20























20Balance, January 2, 2005










18,478



18



104,684



(929
)


(19,515
)


(2
)


(750
)


(636
)


83,620Net income


























13,153















13,153Other comprehensive income (loss):Unrealized gain on marketable
    securities,
    net of tax






























7











7Total comprehensive income










































13,160Tax benefit from stock option
    exercises


















1,190























1,190Amortization of deferred stock
    compensation






















312



















312Reversal of deferred compensation
    relating to cancelled options


















(137
)


137



















Exercise of common stock options










167



1



574























575Issuance of common stock to
    directors










1







30























30Repurchase of common stock


































(565
)


(17,372
)


(17,372
)Balance, January 1, 2006










18,646



19



106,341



(480
)


(6,362
)


5



(1,315
)


(18,008
)


81,515Adjustment to beginning accumulated
    deficit (Note 1)


























408















408Net income


























13,064















13,064Other comprehensive income (loss):Unrealized loss on marketable
    securities,
    net of tax






























(7
)










(7
)Total comprehensive income










































13,465Tax benefit from exercise of stock
    options


















2,961























2,961Amortization of deferred stock
    compensation






















269



















269Reversal of deferred compensation
    relating to cancelled options


















(31
)


31



















Exercise of common stock options










425







2,251























2,251Issuance of common stock to
    directors










2







94























94Stock-based compensation


















4,135























4,135Repurchase of common stock


































(1,786
)


(57,387
)


(57,387
)Balance, December 31, 2006





$




19,073


$
19


$
115,751


$
(180
)

$
7,110


$
(2
)


(3,101
)

$
(75,395
)

$
47,303    37




---



##### Table of Contents



BLUE
    NILE, INC.



Consolidated
    Statements of Cash Flows

(In thousands) Year Ended


Year Ended


Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Operating activities:Net income

$
13,064


$
13,153


$
9,987Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


1,868



1,717



1,510Loss (gain) on disposal of fixed
    assets


5



11



(5
)Stock-based compensation


4,434



342



375Deferred income taxes


2,654



5,872



5,036Tax benefit from exercise of stock
    options


2,739



1,190



352Excess tax benefit from exercise
    of stock options


(172
)






Changes in assets and liabilities:Receivables, net


236



(849
)


(111
)Inventories


(2,852
)


(1,850
)


290Prepaid expenses and other assets


88



(41
)


(387
)Accounts payable


16,468



12,382



11,487Accrued liabilities


2,194



(452
)


1,246Deferred rent


(208
)


(203
)


(29
)Net cash provided by operating
    activities


40,518



31,272



29,751Investing activities:Purchases of property and equipment


(1,908
)


(1,072
)


(1,417
)Purchases of intangible assets










(416
)Proceeds from the sale of property
    and equipment


1



8



7Purchases of marketable securities


(75,030
)


(156,870
)


(82,870
)Proceeds from the sale of
    marketable securities


98,000



156,000



41,000Transfers of restricted cash


2



(119
)


400Net cash provided by (used in)
    investing activities


21,065



(2,053
)


(43,296
)Financing activities:Proceeds from the sale of common
    stock, net of issuance costs










42,516Repurchase of common stock


(57,387
)


(17,372
)


Proceeds from warrant and stock
    option exercises


2,251



575



145Excess tax benefit from exercise
    of stock options


172







Net cash (used in) provided by
    financing activities


(54,964
)


(16,797
)


42,661Net increase in cash and cash
    equivalents


6,619



12,422



29,116Cash and cash equivalents,
    beginning of period


71,921



59,499



30,383Cash and cash equivalents, end of
    period

$
78,540


$
71,921


$
59,499Supplemental disclosure of cash
    flow information:Cash paid for income taxes

$
325


$
328


$
235Non-cash investing and financing
    activities:Non-cash proceeds from the sale of
    property and equipment

$



$
21


$
    38




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  Note 1.
    Description
    of the Company and Summary of Significant Accounting
    Policies  The
    Company
    Change
    in Fiscal Year
  13-week
  Reclassifications
    Basis
    of Presentation
    Use of
    Estimates
    Concentration
    of Risk
     39




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended


Year Ended


Year EndedDecember 31, 2006


January 1, 2006


January 2, 2005Payments


Payments


PaymentsVendor A


9
%


11
%


10
%Vendor B


6
%


9
%


9
%Vendor C


6
%


5
%


6
%21
%


25
%


25
%   Cash
    and Cash Equivalents
    Restricted
    Cash
    Marketable
    Securities
  available-for-sale
      Inventories
    Property
    and Equipment
   40




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Asset

Life (In Years)Computers and equipment

3Software and website development

1-3Leasehold improvements

Shorter of lease term or asset lifeFurniture and fixtures

7   Capitalized
    Software
  98-1, (SOP 98-1) No. 00-2, 00-2).
  Impairment
    of Long-Lived Assets
    Intangible
    Assets
    Fair
    Value of Financial Instruments
    Treasury
    Stock
    Income
    Taxes
   41




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Revenue
    Recognition
  EITF 99-19,
      Cost
    of Sales
    Selling,
    General and Administrative Expense
        Advertising
   42




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Segments
    Stock-based
    Compensation
          No. 00-15, 00-15).
 43




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Year Ended December 31, 2006Impact of AdoptingAs Reported


SFAS 123ROperating income

$
16,557


$
(4,074
)Income before income taxes


19,980



(4,074
)Net income


13,064



(2,628
)Net income per share:Basic


0.79



(0.16
)Diluted


0.76



(0.14
)Cash flows from operating
    activities


40,518



(172
)Cash flows from financing
    activities


(54,964
)


172     Year Ended


Year EndedJanuary 1,


January 2,2006


2005Net income, as reported

$
13,153


$
9,987Deduct: Stock-based compensation
    expense determined under fair-value-based method, net of tax


(1,878
)


(630
)Pro forma net income

$
11,275


$
9,357Income per share:Basic  as reported

$
0.75


$
0.80Basic  pro forma

$
0.64


$
0.75Diluted  as reported

$
0.71


$
0.56Diluted  pro forma

$
0.61


$
0.52    44




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Expected term


4.5 years



4 years



4.3 yearsExpected volatility


36.0
%


44.6
%


56.0
%Expected dividend yield


0.0
%


0.0
%


0.0
%Risk-free interest rate


5.0
%


4.0
%


3.2
%Estimated fair value per option
    granted

$
11.86


$
12.57


$
14.06   
    Expected Term  This is the estimated period of time
    until exercise and is based primarily on historical experience
    for options with similar terms and conditions, giving
    consideration to future expectations. We also considered the
    expected terms of other companies that have contractual terms,
    expected stock volatility and employee demographics similar to
    ours.
    Expected Volatility  This is based on the
    Companys historical stock price volatility in combination
    with the two-year implied volatility of its exchange traded
    options.
    Expected Dividend Yield  The Company has not paid
    dividends in the past and does not expect to pay dividends in
    the near future.
    Risk-Free Interest Rate  This is the rate on Nominal
    U.S. Government Treasury Bills with lives commensurate with
    the expected term of the options on the date of grant.  Initial
    Adoption of Staff Accounting
    Bulletin No. 108
    Accumulated deficit,
    January 2, 2006, as reported

$
(6,362
)Cumulative effect adjustment


408Accumulated deficit,
    January 2, 2006, as restated

$
(5,954
)   Recent
    Accounting Pronouncements
  FAS 115-1, Other-Than-Temporary FAS 115-1), other-than-temporary, FAS 115-1 other-than-temporary FAS 115-1 FAS 115-1
 45




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   No. 06-3 06-3),
        Note 2.
    Initial
    Public Offering  Form S-1
     46




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 3.
    Inventories    December 31,


January 1,2006


2006Loose diamonds

$
230


$
629Fine jewelry, watches and other


14,386



11,135$
14,616


$
11,764   Note 4.  Property and Equipment
    December 31,


January 1,2006


2006Computers and equipment

$
4,369


$
3,700Software and website development


6,002



5,075Leasehold improvements


2,103



2,588Furniture and fixtures


590



57713,064



11,940Less: accumulated depreciation


(9,673
)


(8,679
)$
3,391


$
3,261     Note 5.
    Commitments
    and Contingencies  Leases
    OperatingLeases2007

$
4462008


4892009


4892010


4892011


270Thereafter


Total minimum lease payments

$
2,183  47




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Litigation
    Note 6.
    Preferred
    Stock      December 31, 2003Shares IssuableAuthorized


Shares


upon Conversion





LiquidationShares


Outstanding


to Common Stock


Amount


PreferenceSeries A mandatorily
    redeemable convertible preferred stock


6,667



2,667



2,770


$
5,989


$
6,000Series B mandatorily
    redeemable convertible preferred stock


3,353



1,326



1,488



4,508



4,510Series C mandatorily
    redeemable convertible preferred stock


3,906



1,560



1,996



26,023



26,045Series D mandatorily
    redeemable convertible preferred stock


1,930



772



991



14,050



14,050Series E mandatorily
    redeemable convertible preferred stock


10,000



3,675



3,675



6,915



28,05925,856



10,000



10,920


$
57,485


$
78,664   Form S-1
 48




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Series A


Series B


Series C


Series D


Series EShares


Amount


Shares


Amount


Shares


Amount


Shares


Amount


Shares


AmountBalance, December 31, 2002


2,667


$
5,989



1,326


$
4,508



1,560


$
26,023



772


$
14,050



3,534


$
6,645Conversion of debt to mandatorily
    redeemable convertible preferred stock


































141



270Balance December 31, 2003


2,667



5,989



1,326



4,508



1,560



26,023



772



14,050



3,675



6,915Conversion of mandatorily
    redeemable convertible preferred stock to common stock


(2,667
)


(5,989
)


(1,326
)


(4,508
)


(1,560
)


(26,023
)


(772
)


(14,050
)


(3,675
)


(6,915
)Balance January 2, 2005





$







$







$







$







$
   Preferred
    Stock Warrants
    Note 7.
    Stock-Based
    Compensation  Stock
    Option Plans
       49




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         No. 96-18, (EITF 96-18). EITF 96-18
 50




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Weighted AverageWeighted Average


Remaining


TotalOptions


Exercise Price


Contractual Term


Intrinsic Value(In thousands)Balance, December 31, 2003


1,403


$
2.47Granted


712



27.10Exercised


(103
)


0.92Canceled


(95
)


11.31Balance, January 2, 2005


1,917



11.26Granted


546



32.14Exercised


(167
)


3.43Canceled


(201
)


26.80Balance, January 1, 2006


2,095



15.84Granted


585



31.49Exercised


(425
)


5.30Canceled


(69
)


26.94Balance, December 31, 2006


2,186


$
21.73



7.59


$
33,153Vested and expected to vest at
    December 31, 2006


2,036


$
21.07



7.51


$
32,222Exercisable at December 31,
    2006


1,116


$
13.58



6.49


$
26,007      51




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Outstanding


ExercisableWeighted AverageRemainingContractual


Exercise





Weighted AverageRange of Exercise Price

Options


Life


Price


Options


Exercise Price(In thousands)


(In years)





(In thousands)$0.25 - $0.275


469



5.14


$
0.26



469


$
0.26$0.50 - $30.00


746



7.23



21.74



482



20.02$30.04 - $30.92


74



9.39



30.37



17



30.31$31.26


455



9.41



31.26







$31.43 - $42.15


442



8.65



33.23



148



32.912,186



7.59



21.73



1,116



13.58   Note 8.
    Common
    Stock    Common
    Stock Warrants
    Note 9.
    Employee
    Benefit Plan    Note 10.
    Income
    Taxes    Year Ended


Year Ended


Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Current income tax expense

$
4,350


$
1,525


$
605Deferred income tax benefit:Utilization of net operating losses


3,008



6,201



5,162Other, net


(442
)


(326
)


(125
)Total income tax expense

$
6,916


$
7,400


$
5,642  52




---



##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended


Year Ended


Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Statutory Federal income tax rate


35.0
%


35.0
%


35.0
%Other, net


(0.4
)


1.0



1.1Effective tax rate


34.6
%


36.0
%


36.1
%     December 31,


January 1,2006


2006Deferred tax assets:Current:Net operating loss carryforwards

$



$
2,937Reserves and allowances


499



429Deferred rent


68



68Other


99



Noncurrent:Stock options


1,395



Excess of book over tax
    depreciation and amortization


542



217Deferred rent


233



289Tax credit carryforwards






849Other


47



396Gross deferred tax assets


2,883



5,185Deferred tax liabilities






(143
)Net deferred tax assets

$
2,883


$
5,042     Note 11.
    Income
    Per Share   53




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##### Table of Contents



BLUE
    NILE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended


Year Ended


Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Net income

$
13,064


$
13,153


$
9,987Weighted average common shares
    outstanding


16,563



17,550



12,450Basic net income per share

$
0.79


$
0.75


$
0.80Dilutive effect of stock options
    and warrants


715



1,047



1,132Dilutive effect of convertible
    preferred stock










4,303Common stock and common stock
    equivalents


17,278



18,597



17,885Diluted net income per share

$
0.76


$
0.71


$
0.56     Year Ended


Year Ended


Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Stock options


1,159



177



230   Note 12.
    Selected
    Quarterly Financial Information (unaudited)    2006 quarter:

Q1


Q2


Q3


Q4Net sales

$
50,694


$
56,916


$
53,248


$
90,729Gross profit


10,369



11,348



10,431



18,705Net income


2,355



3,132



1,824



5,753Basic net income per share


0.14



0.19



0.11



0.36Diluted net income per share


0.13



0.18



0.11



0.35   2005 quarter:

Q1


Q2


Q3


Q4Net sales

$
44,116


$
43,826


$
41,996


$
73,231Gross profit


9,687



9,990



9,245



16,222Net income


2,602



2,793



2,469



5,289Basic net income per share


0.15



0.16



0.14



0.31Diluted net income per share


0.14



0.15



0.13



0.29  54




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##### Table of Contents



BLUE
    NILE, INC.
  SCHEDULE II
 VALUATION
    AND QUALIFYING ACCOUNTS
  ChargedBalance at


to Revenue,





Balance atBeginning


Costs or





End ofDescription

of Period


Expenses


Deductions (A)


PeriodYear ended December 31, 2006Reserve for sales returns

$
976


$
19,893


$
(19,690
)

$
1,179Reserve for fraud

$
151


$
(22
)

$
(24
)

$
105Year ended January 1, 2006Reserve for sales returns

$
988


$
16,989


$
(17,001
)

$
976Reserve for fraud

$
152


$
55


$
(56
)

$
151Year ended January 2, 2005Reserve for sales returns

$
769


$
15,422


$
(15,203
)

$
988Reserve for fraud

$
188


$
8


$
(44
)

$
152     (A)
    
    Deductions for sales returns and fraud consist of actual credit
    card chargebacks and sales returns in each period. 55




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##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Disclosure
    Controls and Procedures
        Report
    of Management on Internal Control over Financial
    Reporting
  Rule 13a-15(f)
       56




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##### Table of Contents



Changes
    in Internal Control Over Financial Reporting
    /s/  Mark
    C. Vadon

/s/  Diane
    M. IrvineChief Executive Officer

President, Chief Financial Officer   Report
    of Independent Registered Public Accounting Firm
      Internal Control 
    Integrated Framework
        Internal
    Control  Integrated Framework Internal
 57




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##### Table of Contents



Control  Integrated Framework
  Share-Based Payment Considering the Effects of Prior
    Year Misstatements when Quantifying Misstatements in Current
    Year Financial Statements.
  
     Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence   58




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##### Table of Contents



Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules      Page1.

Financial Statements:Reports of Independent Registered
    Public Accounting Firms


33Consolidated Balance Sheets, as of
    December 31, 2006 and January 1, 2006


35Consolidated Statements of
    Operations, for the fiscal years ended December 31, 2006,
    January 1, 2006 and January 2, 2005


36Consolidated Statements of Changes
    in Mandatorily Redeemable Convertible Preferred Stock and
    Stockholders Equity (Deficit), for the fiscal years ended
    December 31, 2006, January 1, 2006 and January 2,
    2005


37Consolidated Statements of Cash
    Flows, for the fiscal years ended December 31, 2006,
    January 1, 2006 and January 2, 2005


38Notes to Consolidated Financial
    Statements


392.

Financial Statement Schedules:Schedule II, Valuation of
    Qualifying Accounts


55All other schedules are omitted
    because they are not applicable or the required information is
    shown in the financial statements or notes thereto.3.

Exhibits:The
    exhibits listed in the Index to Exhibits, which appears
    immediately following the signature page and is incorporated
    herein by reference, are filed as part of this Annual Report on
    Form 10-K.  59




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##### Table of Contents



SIGNATURES         By
    /s/  Diane
    M. Irvine   President and Chief Financial Officer
  60




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##### Table of Contents



POWER OF
    ATTORNEY
  attorney-in-fact attorneys-in-facts attorneys-in-fact
    By

/s/  Mark
    C. VadonMark
    C. Vadon

Chief Executive Officer and
    Director(Principal Executive Officer)

March 15, 2007By

/s/  Diane
    M. IrvineDiane
    M. Irvine

President and Chief Financial
    Officer(Principal Financial and
    Accounting Officer)

March 15, 2007By

/s/  W.
    Eric CarlborgW.
    Eric Carlborg

Director

March 15, 2007By

/s/  Joseph
    JimenezJoseph
    Jimenez

Director

March 15, 2007By

/s/  Brian
    P. McAndrewsBrian
    P. McAndrews

Director

March 15, 2007By

/s/  Anne
    SaundersAnne
    Saunders

Director

March 15, 2007By

/s/  Joanna
    A. StroberJoanna
    A. Strober

Director

March 15, 2007By

/s/  Mary
    Alice TaylorMary
    Alice Taylor

Director

March 15, 2007  61




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##### Table of Contents



EXHIBIT INDEX  Form 10-K
  ExhibitNumber

Description3
.1(1)

Amended and Restated Certificate
    of Incorporation of Blue Nile, Inc.3
.2(2)

Amended and Restated Bylaws of
    Blue Nile, Inc.4
.1

Reference is made to
    Exhibits 3.1 and 3.2.4
.2(3)

Specimen Stock Certificate.4
.3(2)

Amended and Restated Investor
    Rights Agreement dated June 29, 2001 by and between Blue
    Nile, Inc. and certain holders of Blue Nile, Inc.s
    preferred stock.10
.1.1(2)*

Blue Nile, Inc. Amended and
    Restated 1999 Equity Incentive Plan.10
.1.2(2)*

Form of Stock Option Agreement
    pursuant to the Blue Nile, Inc. 1999 Equity Incentive Plan.10
.2.1(3)*

Blue Nile, Inc. 2004 Non-Employee
    Directors Stock Option Plan.10
.2.2(6)*

Form of Stock Option Agreement
    pursuant to the Blue Nile, Inc. 2004 Non-Employee
    Directors Stock Option Plan.10
.3(2)*

Blue Nile, Inc. 2004 Employee
    Stock Purchase Plan.10
.4.1(4)*

Blue Nile, Inc. 2004 Equity
    Incentive Plan.10
.4.2(6)*

Form of Stock Option Agreement
    pursuant to the 2004 Equity Incentive Plan.10
.4.3(5)*

Blue Nile, Inc. Stock Grant Notice
    pursuant to the 2004 Equity Incentive Plan.10
.5.1(4)

Sublease Agreement, dated
    May 22, 2003, between Amazon.com Holdings, Inc. and the
    registrant.10
.5.2(4)

First Amendment to Sublease
    Agreement, dated July 3, 2003, between Amazon.com Holdings,
    Inc. and the registrant.10
.6.1(4)

Lease, dated June 28, 2001,
    between Gull Industries, Inc. and the registrant.10
.6.2(4)

First Amendment to Lease, dated
    December 11, 2002 between Gull Industries, Inc. and the
    registrant.10
.6.3(4)

Second Amendment to Lease, dated
    November 15, 2003, between Gull Industries, Inc. and the
    registrant.10
.7(8)

Commercial lease, dated
    July 21, 2006, between Gull Industries, Inc. and the
    registrant.10
.8(2)*

Offer Letter with Diane M. Irvine,
    dated December 1, 1999.10
.9(2)*

Offer Letter with Dwight Gaston,
    dated May 14, 1999.10
.10(2)*

Offer Letter with Susan S. Bell,
    dated August 22, 2001.10
.11(2)*

Offer Letter with Darrell Cavens,
    dated July 30, 1999.10
.12(4)*

Form of Indemnification Agreement
    entered into between Blue Nile, Inc. and each of its directors
    and executive officers.10
.13(7)*

Blue Nile, Inc. Executive Officer
    Cash Incentive Program.10
.14(7)

Director Compensation.21
.1(6)

Subsidiaries of the Registrant.23
.1(9)

Consent of Deloitte &
    Touche LLP.23
.2(9)

Consent of PricewaterhouseCoopers,
    LLP.24
.1

Powers of Attorney of Officers and
    Directors signing this report (see page 61).31
.1(9)

Certification of Chief Executive
    Officer Required Under
    Rule 13a-14(a)
    or
    Rule 15d-14(a)
    of the Securities Exchange Act of 1934, as amended.31
.2(9)

Certification of Principal
    Financial Officer Required Under
    Rule 13a-14(a)
    or
    Rule 15d-14(a)
    of the Securities Exchange Act of 1934, as amended. 62




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##### Table of Contents



ExhibitNumber

Description32
.1(10)

Certification of Chief Executive
    Officer Required Under
    Rule 13a-14(b)
    or
    Rule 15d-14(b)
    of the Securities Exchange Act of 1934, as amended, and
    18 U.S.C. Section 1350.32
.2(10)

Certification of Principal
    Financial Officer Required Under
    Rule 13a-14(b)
    or
    Rule 15d-14(b)
    of the Securities Exchange Act of 1934, as amended, and
    18 U.S.C. Section 1350.     *
    
    Denotes a management contract or compensatory plan, contract or
    agreement, in which the Companys directors or executive
    officers may participate.  (1)
    
    Previously filed as Exhibit 3.1 to Blue Nile, Inc.s
    Form 10-Q
    for the quarterly period ended July 4, 2004
    (No. 000-50763),
    as filed with the Securities and Exchange Commission on
    August 6, 2004, and incorporated by reference herein.(2)
    
    Previously filed as the like numbered exhibit to Blue Nile,
    Inc.s Registration Statement on
    Form S-1
    (No. 333-113494),
    as filed with the Securities and Exchange Commission on
    March 11, 2004, as amended, and incorporated by reference
    herein.(3)
    
    Previously filed as the like numbered exhibit to Blue Nile,
    Inc.s Registration Statement on
    Form S-1/A
    (No. 333-113494),
    as filed with the Securities and Exchange Commission on
    May 4, 2004, as amended, and incorporated by reference
    herein.(4)
    
    Previously filed as the like numbered exhibit to Blue Nile,
    Inc.s Registration Statement on
    Form S-1/A
    (No. 333-113494),
    as filed with the Securities and Exchange Commission on
    April 19, 2004, as amended, and incorporated by reference
    herein.(5)
    
    Previously filed as Exhibit 10.1 to Blue Nile, Inc.s
    Current Report on
    Form 8-K
    (No. 000-50763),
    as filed with the Securities and Exchange Commission on
    December 13, 2004 and incorporated by reference herein.(6)
    
    Previously filed as the like numbered exhibit to Blue Nile,
    Incs Annual Report on
    Form 10-K
    (No. 000-50763),
    as filed with the Securities and Exchange Commission on
    March 25, 2005 and incorporated by reference herein.(7)
    
    Previously filed as Item 1.01 to Blue Nile Incs
    Current Report on
    Form 8-K
    (No. 000-50763),
    as filed with the Securities and Exchange Commission on
    June 19, 2006 and incorporated by reference herein.(8)
    
    Previously filed as Item 1.01 to Blue Nile Incs
    Current Report on
    Form 8-K
    (No. 000-50763),
    as filed with the Securities and Exchange Commission on
    July 27, 2006 and incorporated by reference herein.(9)
    
    Filed herewith.(10)
    
    Filed herewith. The certifications attached as
    Exhibits 32.1 and 32.2 accompanies this Annual Report on
    Form 10-K
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    and shall not be deemed filed by Blue Nile, Inc. for
    purposes of Section 18 of the Securities Exchange Act of
    1934, as amended. 63