BLUE NILE, INC.

705 Fifth Avenue South

Suite 900

Seattle, Washington 98104

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held On May 23, 2006

Dear Stockholder:

      You are cordially invited to attend the Annual Meeting of Stockholders of Blue Nile, Inc., a Delaware corporation (the “Company”). Notice is hereby given that the Annual Meeting will be held on Tuesday, May 23, 2006 at 2:00 PM Pacific Time at the Washington Athletic Club located at 1325 Sixth Avenue, Seattle, Washington 98101, for the following purposes:

      These items of business are more fully described in the Proxy Statement accompanying this Notice.

      The record date for the Annual Meeting is March 31, 2006. Only stockholders of record at the close of business on that date may vote at the Annual Meeting or any adjournment thereof. For ten days prior to the Annual Meeting, a complete list of stockholders entitled to vote at the Annual Meeting will be available for examination by any stockholder, for any purpose relating to the Annual Meeting, during ordinary business hours at the Company’s principal offices located at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104.

Seattle, Washington

April 21, 2006

BLUE NILE, INC.

705 Fifth Avenue South

Suite 900

Seattle, Washington 98104

PROXY STATEMENT

FOR THE 2006 ANNUAL MEETING OF STOCKHOLDERS

Tuesday, May 23, 2006

QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING

Why am I receiving these materials?

      Blue Nile, Inc. (sometimes referred to as the “Company” or “Blue Nile”) sent you this proxy statement and the enclosed proxy card because the Board of Directors of Blue Nile is soliciting your proxy to vote at the 2006 Annual Meeting of Stockholders (the “Annual Meeting”). You are invited to attend the Annual Meeting to vote on the proposals described in this proxy statement. However, you do not need to attend the Annual Meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card or follow the instructions below to submit your proxy over the telephone or on the Internet.

      Blue Nile intends to mail this proxy statement and accompanying proxy card on or about April 21, 2006 to all stockholders of record entitled to vote at the Annual Meeting.

Who can vote at the Annual Meeting?

      Only stockholders of record at the close of business on March 31, 2006 will be entitled to vote at the Annual Meeting. On this record date, there were 17,431,551 shares of common stock outstanding and entitled to vote.

      If on March 31, 2006 your shares were registered directly in your name with Blue Nile’s transfer agent, Mellon Investment Services, then you are a stockholder of record. As a stockholder of record, you may vote in person at the Annual Meeting or vote by proxy. Whether or not you plan to attend the Annual Meeting, please fill out and return the enclosed proxy card or vote by proxy over the telephone or on the Internet as instructed below to ensure your vote is counted.

      If on March 31, 2006 your shares were held, not in your name, but rather in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the Annual Meeting, unless you request and obtain a valid proxy from your broker or other agent.

What am I voting on?

      There are two matters scheduled for a vote:

How do I vote?

      You may either vote “For” both nominees to the Board of Directors or you may “Withhold” your vote for any nominee you specify. For the other matter to be voted on, you may vote “For” or “Against” or abstain from voting. The procedures for voting are fairly simple:

      If you are a stockholder of record, you may vote in person at the Annual Meeting, vote by proxy using the enclosed proxy card, vote by proxy over the telephone, or vote by proxy on the Internet. Whether or not you plan to attend the Annual Meeting, the Company urges you to vote by proxy to ensure your vote is counted. You may still attend the Annual Meeting and vote in person even if you have already voted by proxy.

      If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from Blue Nile. Simply complete and mail the proxy card to ensure that your vote is counted. Alternatively, you may vote by telephone or on the Internet as instructed by your broker or bank. To vote in person at the Annual Meeting, you must obtain a valid proxy from your broker, bank, or other agent. Follow the instructions from your broker, bank, or other agent included with these proxy materials, or contact your broker, bank, or other agent to request a proxy form.

How many votes do I have?

      On each matter to be voted upon, you have one vote for each share of common stock you own as of March 31, 2006.

What if I return a proxy card but do not make specific choices?

      If you return a signed and dated proxy card without marking any voting selections, your shares will be voted “For” the election of both nominees for director, and “For” the ratification of Deloitte & Touche LLP as Blue Nile’s auditors through December 31, 2006. If any other matter is properly presented at the Annual Meeting, your proxy (one of the individuals named on your proxy card) will vote your shares using his or her best judgment.

Who is paying for this proxy solicitation?

      Blue Nile will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, Blue Nile’s directors and employees may also solicit proxies in person, by telephone, or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies. Blue Nile may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

What does it mean if I receive more than one proxy card?

      If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

Can I change my vote after submitting my proxy?

      Yes. You can revoke your proxy at any time before the final vote at the Annual Meeting. If you are the record holder of your shares, you may revoke your proxy in any one of three ways:

      If your shares are held by your broker or bank as a nominee or other agent, you should follow the instructions provided by your broker, bank or other agent.

When are stockholder proposals due for next year’s Annual Meeting?

      As a stockholder, you may be entitled to present proposals in next year’s proxy materials if you comply with the requirements of the proxy rules established by the Securities and Exchange Commission. Proposals by our stockholders intended to be presented for consideration at Blue Nile’s 2007 Annual Meeting must be received by the Corporate Secretary of Blue Nile at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104, by December 22, 2006 (120 calendar days prior to the anniversary of the mailing date of this proxy statement), in order that they may be included in the proxy materials relating to that meeting.

      A stockholder proposal or nomination for director that will not be included in next year’s proxy materials, but that a stockholder intends to present in person at next year’s Annual Meeting, must comply with the notice, information and consent provisions contained in the Company’s Bylaws. In part, the Bylaws provide that to timely submit a proposal or nominate a director you must do so by submitting the proposal or nomination, in writing, to the Company’s Corporate Secretary at the Company’s principal

executive offices no later than the close of business on February 22, 2007 (90 days prior to the first anniversary of the 2006 Annual Meeting Date) nor earlier than the close of business on January 23, 2007 (120 days prior to the first anniversary of the 2006 Annual Meeting date). In the event that the Company sets an Annual Meeting date for 2007 that is not within 30 days before or after the anniversary of the 2006 Annual Meeting date, notice by the stockholder must be received no earlier than the close of business on the 120th day prior to the 2007 Annual Meeting and no later than the close of business on the later of the 90th day prior to the 2007 Annual Meeting or the 10th day following the day on which public announcement of the date of the 2007 Annual Meeting is first made. The Company’s Bylaws contain additional requirements to properly submit a proposal or nominate a director. If you plan to submit a proposal or nominate a director, please review the Company’s Bylaws carefully. You may obtain a copy of the Company’s Bylaws by mailing a request in writing to the Corporate Secretary of Blue Nile at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104.

How are votes counted?

      Votes will be counted by the inspector of elections appointed for the Annual Meeting, who will separately count “For” and “Withheld” and, with respect to the proposal other than the election of directors, “Against” votes, abstentions and broker non-votes. Abstentions will be counted towards the tabulation of votes cast on the proposal other than the election of directors, and will have the same effect as “Against” votes.

      If your shares are held by your broker as your nominee (that is, in “street name”), you will need to obtain a proxy form from the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to both proposals, because both proposals are considered routine matters. A “broker non-vote” occurs when a broker expressly instructs on a proxy card that it is not voting on a matter. Broker non-votes are counted for the purpose of determining the presence or absence of a quorum, but are not counted for determining the number of votes cast for or against a proposal.

How many votes are needed to approve each proposal?

What is the quorum requirement?

      A quorum of stockholders is necessary to hold a valid Annual Meeting. A quorum will be present if at least a majority of the outstanding shares are represented by stockholders present at the Annual Meeting or by proxy. On the record date, there were 17,431,551 shares of common stock outstanding and entitled to vote. Thus, 8,715,776 shares of common stock must be represented by stockholders present at the Annual Meeting or by proxy to have a quorum.

      Votes for and against, abstentions and broker non-votes will each be counted as present for purposes of determining the presence of a quorum. If there is no quorum, the chairman of the Annual Meeting or a majority of the votes present at the Annual Meeting may adjourn the Annual Meeting to another date.

How can I find out the results of the voting at the Annual Meeting?

      Preliminary voting results will be announced at the Annual Meeting. Final voting results will be published in the Company’s quarterly report on Form 10-Q for the second quarter of the fiscal year ending December 31, 2006.

Proposal 1

Election Of Directors

      Blue Nile’s Board of Directors is divided into three classes. Each class consists, as nearly as possible, of one-third of the total number of directors, and each class has a three-year term. Vacancies on the Board of Directors may be filled only by persons elected by a majority of the remaining directors. A director elected by the Board of Directors to fill a vacancy in a class shall serve for the remainder of the full term of that class, and until the director’s successor is elected and qualified. This includes vacancies created by an increase in the number of directors.

      The Board of Directors presently has eight members. There are two directors in the class whose terms of office expire in 2006, Ms. Taylor and Mr. Tai. Ms. Taylor has been nominated by the Board of Directors and has agreed to stand for reelection. Mr. Tai has decided not to stand for reelection. On the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors has nominated Anne Saunders to stand for election at the 2006 Annual Meeting. If elected, Ms. Saunders would be an independent non-employee director. Ms. Saunders was recommended to the Nominating and Corporate Governance Committee by the Chief Executive Officer as a potential board nominee. Ms. Taylor was previously elected by the stockholders. If elected at the 2006 Annual Meeting, each of Ms. Taylor and Ms. Saunders would serve until the 2009 Annual Meeting and until her successor is elected and qualified, or until her death, resignation or removal. It is the Company’s policy to strongly encourage directors and nominees for director to attend the Annual Meeting. Mr. Vadon, Ms. Irvine, Mr. McAndrews and Mr. Tai attended the Annual Meeting held in 2005.

      For the election of directors, the two nominees receiving the most “For” votes (among votes properly cast in person or by proxy) will be elected. Only votes “For” or “Withheld” will affect the outcome. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the nominees named below. In the event that the nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as management may propose. Each person nominated for election has agreed to serve if elected, and the Company has no reason to believe that any nominee will be unable to serve.

      The following is a brief biography of each nominee and each director whose term will continue after the Annual Meeting.

Nominees for Election for a Three-year Term Expiring at the 2009 Annual Meeting

Mary Alice Taylor

      Mary Alice Taylor, age 56, has served as a director since March 2000 and has been nominated by the Board of Directors to stand for election at the 2006 Annual Meeting. Ms. Taylor is an independent business executive. She held a temporary assignment as Chairman and Chief Executive Officer of Webvan Group, Inc., an e-commerce company, from July 2001 to December 2001. Prior to that, she served as Chairman and Chief Executive Officer of HomeGrocer.com, an e-commerce company, from September 1999 until she completed a sale of the company to Webvan Group, Inc. in October 2000. From January 1997 to September 1999, Ms. Taylor served as Corporate Executive Vice President of Worldwide Operations and Technology for Citigroup, Inc., a financial services organization. Ms. Taylor holds a B.S. in Finance from Mississippi State University. Ms. Taylor also serves on the boards of directors of Allstate Corporation, an insurance company, Autodesk Inc., a design software company, and Sabre Holdings, an Internet travel services company.

Anne Saunders

      Anne Saunders, age 44, has been nominated by the Board of Directors to stand for election at the 2006 Annual Meeting. Ms. Saunders has served as the Senior Vice President of Global Brand Strategy and Communications of Starbucks Coffee Company, a coffee retailer, since January 2006. Ms. Saunders previously served in the following positions at Starbucks Coffee Company: Senior Vice President of Marketing from June 2005 to January 2006, Vice President of Marketing Retail - North America from June 2004 to June 2005, Vice President of Starbucks Interactive from January 2002 to June 2004, and Vice President of Wireless Initiatives from August 2001 to January 2002. Prior to joining Starbucks, Ms. Saunders served as the Chairman, Chief Executive Officer and President of eSociety, a business-to-business e-commerce company. She previously held various executive positions at McCaw Communications/ AT&T Wireless, a telecommunications company. Ms. Saunders holds a B.A. in Economics from Northwestern University and an M.B.A. from Fordham University.

The Board Of Directors Recommends

A Vote In Favor Of Each Named Nominee.

Directors Continuing in Office Until the 2007 Annual Meeting

Diane Irvine

      Diane Irvine, age 47, has served as Blue Nile’s Chief Financial Officer since December 1999 and as a director since May 2001. From February 1994 to May 1999, Ms. Irvine served as Vice President and Chief Financial Officer of Plum Creek Timber Company, Inc., a timberland management and wood products company. From September 1981 to February 1994, Ms. Irvine served in various capacities, most recently as a partner, with Coopers and Lybrand LLP, an accounting firm. Ms. Irvine serves on the board of directors of Davidson Companies, an investment banking and asset management company. Ms. Irvine holds a B.S. in Accounting from Illinois State University and an M.S. in Taxation from Golden Gate University.

Joseph Jimenez

      Joseph Jimenez, age 46, has served as a director since March 2000. Mr. Jimenez has served as Executive Vice President of H.J. Heinz Company, a food products company, since September 2001 and as the President and Chief Executive Officer of Heinz Europe since July 2002. From November 1998 to July 2002, Mr. Jimenez served as President and Chief Executive Officer of Heinz North America. Mr. Jimenez holds a B.A. in Economics from Stanford University and an M.B.A. from the University of California, Berkeley. Mr. Jimenez also serves on the board of directors of AstraZeneca, PLC, a medicine development company.

Brian McAndrews

      Brian McAndrews, age 47, has served as a director since April 2004. Mr. McAndrews has served as Chief Executive Officer and a director of aQuantive, Inc. since September 1999, and as President of aQuantive, Inc. since January 2000. From July 1990 to September 1999, Mr. McAndrews worked for ABC, Inc., a broadcasting and communications company, holding executive positions at ABC Sports, ABC Entertainment and ABC Television Network, and most recently he served as Executive Vice President and General Manager of ABC Sports. From 1984 to 1989, Mr. McAndrews served as a product manager for General Mills, Inc., a leading consumer products manufacturer. Mr. McAndrews holds an M.B.A. from Stanford University and a B.A. from Harvard University.

Directors Continuing in Office Until the 2008 Annual Meeting

Mark Vadon

      Mark Vadon, age 36, co-founded Blue Nile and has served as Chairman of the Board of Directors, Chief Executive Officer and President since its inception. From December 1992 to March 1999, Mr. Vadon was a consultant for Bain & Company, a management consulting firm. Mr. Vadon holds a B.A. in Social Studies from Harvard University and an M.B.A. from Stanford University.

Joanna Strober

      Joanna Strober, age 37, has served as a director since May 1999. Ms. Strober has served as the Director of Private Equity at Sterling Stamos Capital Management, a registered investment advisor, since August 2005. From June 2004 to August 2005, Ms. Strober served as the Managing Director of Pacific Community Ventures, a private equity firm. From January 2003 until June 2004, Ms. Strober served as the Managing Director at Symphony Technology Group, an enterprise software investment firm. From April 1996 to December 2002, Ms. Strober held various positions at Bessemer Venture Partners, a private venture capital firm, most recently serving as a General Partner from January 2000 to December 2002. From August 1994 to March 1996, Ms. Strober was an associate at Venture Law Group, a corporate law firm. Ms. Strober holds a B.A. in Political Science from the University of Pennsylvania and a J.D. from the University of California, Los Angeles.

W. Eric Carlborg

      W. Eric Carlborg, age 42, has served as a director since February 2005. From September 2005 to March 2006, Mr. Carlborg served as Chief Financial Officer of Provide Commerce, Inc., an e-commerce company. From July 2001 to October 2004, Mr. Carlborg served as a managing director at Merrill Lynch & Co., a financial services company. From January 2000 to June 2001, Mr. Carlborg served as the Chief Financial Officer at IKANO Communications, Inc., a provider of Internet products and services. Mr. Carlborg holds an M.B.A. from the University of Chicago and a B.A. in Economics from the University of Illinois.

Independence of The Board of Directors

      As required under the Nasdaq Stock Market (“Nasdaq”) listing standards, a majority of the members of a listed company’s Board of Directors must qualify as “independent,” as affirmatively determined by the Board of Directors. The Board of Directors consults with the Company’s counsel to ensure that the Board of Directors’ determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent listing standards of the Nasdaq, as in effect from time to time.

      Consistent with these considerations, after review of all relevant transactions and relationships between each director, or any of his or her family members, and the Company, its senior management and its independent auditors, the Board of Directors has affirmatively determined that all of the Company’s directors are independent directors within the meaning of the applicable Nasdaq listing standards, except for Mr. Vadon, the Chief Executive Officer of the Company and Ms. Irvine, the Chief Financial Officer of the Company.

Information Regarding the Board of Directors and its Committees

      On April 27, 2004, the Board of Directors documented the governance practices followed by the Company and its Board of Directors in the Corporate Governance Policies of the Board of Directors (the “Governance Policies”). The Governance Policies provide the Board of Directors with the necessary authority to review and evaluate the Company’s business operations, as needed, and they are designed to facilitate the Board of Directors’ independent decision making authority. The Governance Policies are intended to align the interests of directors and management with those of the Company’s stockholders. The

Governance Policies, among other things, set forth the practices the Board of Directors will follow with respect to the selection of directors, the independence of the directors, meetings of the Board of Directors, committees of the Board of Directors and the responsibilities of the Board of Directors. The Governance Policies were adopted to, among other things, reflect changes to the Nasdaq listing standards and Securities and Exchange Commission rules adopted to implement provisions of the Sarbanes-Oxley Act of 2002. The Corporate Governance Policies of the Board of Directors, as well as the charters for each committee of the Board, may be viewed at www.bluenile.com in the corporate governance section of its investor relations page.

      As required under applicable Nasdaq listing standards, in fiscal year 2005, the Company’s independent directors met four times in regularly scheduled executive sessions at which only independent directors were present. The lead independent director, Mary Alice Taylor, presided over the executive sessions. Persons interested in communicating with the independent directors with their concerns or issues may address correspondence to a particular director or to the independent directors generally, in care of the Blue Nile Corporate Secretary at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104. If no particular director is named, letters will be forwarded, depending on the subject matter, to the Chair of the Audit, Compensation or Nominating and Corporate Governance Committee, as applicable.

      The Board of Directors has three committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The following table provides membership and meeting information for fiscal year 2005 for each of the committees of the Board of Directors:

      Below is a description of each committee of the Board of Directors. Each committee has authority to engage legal counsel or other experts or consultants, as it deems appropriate to carry out its responsibilities. The Board of Directors has determined that each member of each committee meets the applicable rules and regulations regarding “independence” and that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment with regard to the Company.

Audit Committee

      The Audit Committee of the Board of Directors oversees the Company’s corporate accounting and financial reporting process. For this purpose, the Audit Committee performs several functions. The Audit Committee, among other things:

      Four directors comprise the Audit Committee: Mr. Carlborg, Mr. Jimenez, Ms. Strober and Ms. Taylor. The Audit Committee met five times during fiscal year 2005. The Audit Committee has adopted a written Audit Committee charter that is attached as Appendix A to these proxy materials and is available on Blue Nile’s website, www.bluenile.com in the corporate governance section of its investor relations page.

      The Board of Directors annually reviews the Nasdaq listing standards definition of independence for Audit Committee members and has determined that all members of the Company’s Audit Committee are independent (as independence is currently defined in Rule 4350(d)(2)(A)(i) and (ii) of the Nasdaq listing standards). The Board of Directors has determined that Mr. Carlborg and Ms. Taylor each qualify as an “audit committee financial expert,” as defined in applicable SEC rules. The Board made a qualitative assessment of Mr. Carlborg and Ms. Taylor’s level of knowledge and experience based on a number of factors, including their formal education, prior experience, business acumen and independence. On February 1, 2006, Ms. Taylor resigned as the chair of the Audit Committee, and Mr. Carlborg was appointed chair of the Audit Committee.

Compensation Committee

      The Compensation Committee of the Board of Directors reviews and approves the overall compensation strategy and policies for the Company. The Compensation Committee, among other things:

      The Company also has a Stock Award Committee, currently consisting of Mr. Vadon and Ms. Irvine, that may award stock options to employees who are not officers within ranges determined by the Compensation Committee. Three directors comprise the Compensation Committee: Mr. Tai, Mr. Jimenez and Mr. McAndrews. In connection with Mr. Tai’s decision not to stand for re-election to the Board at the 2006 Annual Meeting, Mr. Jimenez has been appointed to serve as chair of the Compensation Committee immediately following the Annual Meeting. If Ms. Saunders is elected to the Board at the Annual Meeting, she will serve as a member of the Compensation Committee. All members of the Company’s Compensation Committee are independent (as independence is currently defined in Rule 4200(a)(15) of the Nasdaq listing standards). The Compensation Committee met eight times during fiscal year 2005. The Compensation Committee has adopted a written Compensation Committee charter that is attached as Appendix B to these proxy materials and is available on Blue Nile’s website, www.bluenile.com in the corporate governance section of its investor relations page.

Nominating and Corporate Governance Committee

      The Nominating and Corporate Governance Committee of the Board of Directors is responsible for, among other things:

      Three directors comprise the Nominating and Corporate Governance Committee: Ms. Strober, Ms. Taylor and Mr. McAndrews. Immediately following the Annual Meeting, Ms. Taylor will serve as chair of the Nominating and Corporate Governance Committee. All members of the Nominating and Corporate Governance Committee are independent (as independence is currently defined in Rule 4200(a)(15) of the Nasdaq listing standards). The Nominating and Corporate Governance Committee met three times during fiscal year 2005. The Nominating and Corporate Governance Committee has adopted a written Nominating and Corporate Governance Committee charter that is attached as Appendix C to these proxy materials and is available on Blue Nile’s website, www.bluenile.com in the corporate governance section of its investor relations page.

      The Nominating and Corporate Governance Committee reviews the experience and characteristics appropriate for members of the Board of Directors and director candidates in light of the Board of Directors’ composition at the time and skills and expertise needed at the Board and committee levels. The Nominating and Corporate Governance Committee also intends to consider such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to the affairs of the Company, demonstrated excellence in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of the Company’s stockholders. However, the Nominating and Corporate Governance Committee retains the right to modify these qualifications from time to time. In the case of incumbent directors whose terms of office are set to expire, the Nominating and Corporate Governance Committee reviews such directors’ overall service to the Company during their term, including the number of meetings attended, level of participation, quality of performance and any other relationships and transactions that might impair such directors’ independence. In the case of new director candidates, the Nominating and Corporate Governance Committee also determines whether the nominee must be “independent” under Nasdaq listing

standards, applicable SEC rules and regulations and the advice of counsel, if necessary. The Nominating and Corporate Governance Committee uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The Nominating and Corporate Governance Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the Board of Directors. The Nominating and Corporate Governance Committee meets to discuss and consider such candidates’ qualifications and then selects a nominee for recommendation to the Board of Directors by majority vote. To date, the Nominating and Corporate Governance Committee has not paid a fee to any third party to assist in the process of identifying or evaluating director candidates. To date, the Nominating and Corporate Governance Committee has not rejected a timely director nominee from a stockholder or stockholders holding more than 5% of Blue Nile’s voting stock.

      The Nominating and Corporate Governance Committee will consider properly submitted director candidates recommended by stockholders. The Nominating and Corporate Governance Committee does not intend to alter the manner in which it evaluates candidates based on whether the candidate was recommended by a stockholder or not. Stockholders who wish to recommend individuals for consideration by the Nominating and Corporate Governance Committee to become nominees for election to the Board of Directors may do so by delivering a written recommendation to the Nominating and Corporate Governance Committee at the following address: 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104, Attention: Corporate Secretary, at least 120 days prior to the anniversary date of the mailing of the Company’s proxy statement for the last Annual Meeting of Stockholders. Recommendations must include the full name of the proposed candidate, a description of the proposed candidate’s business experience for at least the previous five years, complete biographical information, a description of the proposed candidate’s qualifications as a director and a representation that the recommending stockholder is a beneficial or record owner of the Company’s stock. Any such submission must be accompanied by the written consent of the proposed candidate to be named as a nominee and to serve as a director if elected. No such recommendation of a candidate to the Nominating and Corporate Governance Committee shall be deemed to satisfy the nomination requirements set forth in our Bylaws.

Meetings of the Board of Directors

      The Board of Directors met nine times during the last fiscal year. Each Board member attended 75% or more of the aggregate of the meetings of the Board and of the committees on which he or she served, held during the period for which he or she was a director or committee member.

Stockholder Communications With The Board Of Directors

      The Company’s Board of Directors has adopted a formal process by which stockholders may communicate with the Board or any of its directors. Stockholders who wish to communicate with the Board may do so by sending written communications addressed to the Corporate Secretary of Blue Nile at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104. All communications will be compiled by the Corporate Secretary of the Company and submitted to the Board of Directors or the individual directors on a periodic basis.

Code Of Ethics

      The Company has adopted the Blue Nile, Inc. Code of Ethics that applies to all officers, directors and employees. The Code of Ethics is available on the Blue Nile website at www.bluenile.com in the corporate governance section of its investor relations page. If the Company makes any substantive amendments to the Code of Ethics or grants any waiver from a provision of the Code of Ethics to any executive officer or director, the Company will promptly disclose the nature of the amendment or waiver on its website.

Report of the Audit Committee of the Board of Directors(1)

      As described more fully in its charter, the purpose of Blue Nile, Inc.’s (“Blue Nile”) Audit Committee (the “Audit Committee”) is to act on behalf of Blue Nile’s Board of Directors (the “Board”) in fulfilling the Board’s oversight responsibilities with respect to:

      The Audit Committee is made up solely of independent directors, as defined in the rules of The Nasdaq Stock Market, Inc. The composition of the Audit Committee, the attributes of its members and its responsibilities, as reflected in its charter, are intended to be in accordance with applicable requirements for corporate audit committees. A copy of the Audit Committee’s charter is attached as Appendix A to these proxy materials and is available on Blue Nile’s website, www.bluenile.com in the corporate governance section of its investor relations page. The Audit Committee reassesses the adequacy of the Audit Committee charter on an annual basis.

      It is the responsibility of Blue Nile’s management to prepare Blue Nile’s financial statements and periodic reports and the responsibility of Blue Nile’s outside independent auditors to audit those financial statements. Blue Nile’s independent outside auditing firm for fiscal year 2005 was PricewaterhouseCoopers LLP (“PwC”). The Audit Committee has ultimate authority and responsibility to select, compensate, evaluate and, when appropriate, replace the independent outside auditing firm. In accordance with existing Audit Committee policy and applicable law, all services to be provided by Blue Nile’s outside independent auditors are subject to pre-approval by the Audit Committee. This includes audit services, audit-related services, tax services and other services. In some cases, pre-approval is provided by the full Audit Committee, and relates to a particular category or group of services and is subject to a specific budget. In other cases, the Chair of the Audit Committee has the delegated authority from the Committee to pre-approve additional services, and such pre-approvals are then communicated and ratified by the full Audit Committee. Applicable law prohibits an issuer from obtaining certain non-audit services from its auditing firm so as to avoid certain potential conflicts of interest. Blue Nile has not obtained any of these services from PwC. See “Ratification of Selection of Independent Auditors” for more information regarding fees paid to PwC for services in fiscal years 2004 and 2005.

      As part of fulfilling its responsibilities, the Audit Committee reviewed and discussed the audited consolidated financial statements for fiscal year 2005 with management. The Audit Committee also discussed with PwC those matters relating to PwC’s judgments about the quality, as well as the acceptability, of Blue Nile’s accounting principles as required to be discussed with PwC by Statement on Auditing Standards No. 61, as amended, Communication with Audit Committees. In addition, the Audit Committee received the written disclosures and the letter required by Independent Standards Board Statement No. 1, Independence Discussions with Audit Committee, and has discussed PwC’s independence with representatives of the firm.

     

     

     

(1) Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings, including this proxy statement, in whole or in part, the following report shall not be incorporated by reference into any such filings.

      Based on the Audit Committee’s review of the audited consolidated financial statements and its discussions with management and PwC, the Audit Committee has recommended that the Board include the audited consolidated financial statements for the fiscal year ended January 1, 2006 in Blue Nile’s Annual Report on Form 10-K.

      On April 4, 2006, the Audit Committee of the Board of Directors approved the appointment of Deloitte & Touche LLP as the Company’s independent auditors to audit the Company’s financial statements for the fiscal year ending December 31, 2006 in place of PricewaterhouseCoopers LLP.

      In connection with the Company’s audits for the fiscal years ended January 2, 2005 and January 1, 2006, and in the subsequent period before PricewaterhouseCoopers LLP’s dismissal on April 4, 2006, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, that would have caused PricewaterhouseCoopers LLP to report the disagreement if it had not been resolved to the satisfaction of PricewaterhouseCoopers LLP. PricewaterhouseCoopers LLP’s reports on the financial statements for the past two fiscal years did not contain an adverse opinion or disclaimer of an opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. PricewaterhouseCoopers LLP’s letter to the Securities and Exchange Commission stating its agreement with the statements in this paragraph is filed as an exhibit to the Company’s Current Report on Form 8-K dated April 4, 2006.

Date: April 21, 2006

Proposal 2

Ratification Of Selection Of Independent Auditors

      The Audit Committee of the Board of Directors has selected Deloitte & Touche LLP as the Company’s independent auditors for the fiscal year ending December 31, 2006 and has further directed that management submit the selection of independent auditors for ratification by the stockholders at the Annual Meeting. Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions. PricwaterhouseCoopers LLP audited the Company’s fiscal 2001, 2002, 2003, 2004 and 2005 financial statements. Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

      Neither the Company’s Bylaws nor other governing documents or law requires stockholder ratification of the selection of Deloitte & Touche LLP as the Company’s independent auditors. If the stockholders fail to ratify the selection, however, the Audit Committee of the Board of Directors will reconsider whether or not to retain that firm. Regardless of the outcome of the stockholder vote, the Audit Committee of the Board of Directors in its discretion may direct the appointment of different independent auditors at any time during the year if it determines that such a change would be in the best interests of the Company and its stockholders.

      The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to ratify the selection of Deloitte & Touche LLP. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as a vote against this proposal. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been approved.

Principal Accountant Fees and Services

      The following table represents aggregate fees billed or expected to be billed to the Company for the fiscal years ended January 1, 2006 and January 2, 2005, by PricewaterhouseCoopers LLP, the Company’s principal accountant for each of these fiscal years. All fees described below were approved by the Audit Committee.

Pre-Approval Policies and Procedures

      The Audit Committee has adopted policies and procedures for the pre-approval of audit and non-audit services rendered by Blue Nile’s independent auditor. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the Audit Committee’s approval of the scope of the engagement of the independent auditor or on an individual explicit case-by-case basis before the independent auditor is engaged to provide each service. The pre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision must be reported to and ratified by the full Audit Committee at its next scheduled meeting. As such, the engagement of PricewaterhouseCoopers LLP to render all of the services described in the categories above was approved by the Audit Committee in advance of rendering those services or approved by a delegate and subsequently ratified by the Audit Committee at its next scheduled meeting.

      The Audit Committee has determined that the rendering of services other than audit services by PricewaterhouseCoopers LLP is compatible with maintaining the principal accountant’s independence.

Change In Independent Public Accountant

      On April 4, 2006, the Audit Committee of the Board of Directors approved the appointment of Deloitte & Touche LLP as the Company’s independent auditors to audit the Company’s financial statements for the fiscal year ending December 31, 2006 in place of PricewaterhouseCoopers LLP.

      In connection with the Company’s audits for the fiscal years ended January 2, 2005 and January 1, 2006, and in the subsequent period before PricewaterhouseCoopers LLP’s dismissal on April 4, 2006, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, that would have caused PricewaterhouseCoopers LLP to report the disagreement if it had not been resolved to the satisfaction of PricewaterhouseCoopers LLP. PricewaterhouseCoopers LLP’s reports on the financial statements for the past two fiscal years did not contain an adverse opinion or disclaimer of an opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. PricewaterhouseCoopers LLP’s letter to the Securities and Exchange Commission stating its agreement with the statements in this paragraph is filed as an exhibit to the Company’s Current Report on Form 8-K dated April 4, 2006.

The Board Of Directors Recommends

A Vote In Favor Of Proposal 2.

Security Ownership Of

Certain Beneficial Owners And Management

      The following table sets forth certain information regarding the ownership of the Company’s common stock as of March 17, 2006, except as otherwise indicated, by: (i) each director and nominee for director; (ii) each of our named executive officers (as defined herein); (iii) all executive officers, directors and nominees for director of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent of its common stock. Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o Blue Nile, 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934 (the “1934 Act”) requires the Company’s directors and executive officers, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.

      To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended January 1, 2006, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with, except as set forth below.

      During fiscal 2005, all transactions for Ms. Irvine were timely reported, but her direct holdings as reported inadvertently included her indirect shareholdings of: (i) 1,160 shares held by Douglas Royan Irvine as Custodian for the benefit of Laura Anne Irvine under the Washington Uniform Gift to Minors Act; (ii) 1,160 shares held by Douglas Royan Irvine as Custodian for the benefit of David Douglas Irvine under the Washington Uniform Gift to Minors Act; and (iii) 1,160 shares held by Douglas Royan Irvine as Custodian for the benefit of Jessica Leigh Irvine under the Washington Uniform Gift to Minors Act. This error was corrected on a Form 4 filed on August 12, 2005.

Compensation of Directors

      Each non-employee director of the Company receives an annual retainer of $10,000 for serving on the Company’s Board of Directors, an additional $1,000 per member for serving on any committee of the Board of Directors and an additional $1,000 for serving as chairperson of the Audit Committee. The annual retainer of $10,000 is paid in quarterly installments. At the discretion of the Company’s Board of Directors, directors may be permitted to forego all or a portion of their annual $10,000 cash payment for service on the Board in exchange for a grant or grants of restricted stock under the 2004 Equity Incentive Plan having a fair market value equal to the amount of foregone cash compensation. In the fiscal year ended January 1, 2006, the total compensation paid to non-employee directors was $71,000; of this amount $41,170 was paid to the directors in cash and $29,830 was paid to the directors through a grant of an aggregate of 912 shares of stock in lieu of cash. The members of the Board of Directors are also eligible for reimbursement for their expenses incurred in attending Board and committee meetings in accordance with Company policy.

      In March 2004, the Company adopted the 2004 Non-Employee Directors’ Stock Option Plan. Under this plan, upon joining the Company’s Board of Directors, each non-employee director receives an option grant to purchase 20,000 shares of the Company’s common stock. The initial grant will vest monthly with respect to 1/30th of the shares subject to the grant for the first 12 months following the date of grant and 1/60th of the shares subject to the grant for the subsequent 36 months. Upon joining the Board of Directors in February 2005, Mr. Carlborg was issued an initial grant of 20,000 shares of common stock under the Company’s Non-Employee Directors’ Stock Option Plan.

      Each non-employee director will receive an additional option grant to purchase 16,000 shares of the Company’s common stock upon full vesting of either the option grant they received in April 2004 under the 1999 Equity Incentive Plan or, with respect to directors who joined the Board after the April 2004 grant, their initial grant under the 2004 Non-Employee Directors’ Stock Option Plan as well as any such subsequent additional grants.

      Each non-employee director will receive an annual option grant to purchase 4,000 shares of the Company’s common stock on the date following each Annual Meeting of stockholders, which will be reduced pro rata for each full quarter prior to the grant date during which the director did not serve as a non-employee director. In 2005, each director received their pro rata share of the Company’s common stock following the 2005 Annual Meeting of stockholders.

      In the event of a merger of the Company with or into another corporation or a consolidation, acquisition of assets or other change-in-control transaction involving the Company, the vesting of options granted to non-employee directors under the 1999 Equity Incentive Plan in April 2004 and all options granted under the 2004 Non-Employee Directors’ Stock Option Plan will accelerate in full for the directors who are then providing services to the Company or the Company’s affiliates.

      During fiscal year 2005, no options were exercised by directors under the 1999 Equity Incentive Plan or the 2004 Non-Employee Directors’ Stock Option Plan.

Executive Officers

      Set forth below is information regarding Blue Nile’s executive officers as of March 17, 2006.

      Mark Vadon co-founded Blue Nile and has served as Chairman of the Board of Directors, Chief Executive Officer and President since its inception. From December 1992 to March 1999, Mr. Vadon was a consultant for Bain & Company, a management consulting firm. Mr. Vadon holds a B.A. in Social Studies from Harvard University and an M.B.A. from Stanford University.

      Diane Irvine has served as Blue Nile’s Chief Financial Officer since December 1999 and as a director since May 2001. From February 1994 to May 1999, Ms. Irvine served as Vice President and Chief Financial Officer of Plum Creek Timber Company, Inc., a timberland management and wood products company. From September 1981 to February 1994, Ms. Irvine served in various capacities, most recently as a partner, with Coopers and Lybrand LLP, an accounting firm. Ms. Irvine serves on the board of directors of Davidson Companies, an investment banking and asset management company. Ms. Irvine holds a B.S. in Accounting from Illinois State University and an M.S. in Taxation from Golden Gate University.

      Susan Bell has served as Blue Nile’s Senior Vice President since June 2005. Ms. Bell has held executive level positions in both marketing and merchandising since she joined Blue Nile in September 2001. From October 2000 to February 2001, Ms. Bell served as Vice President of Merchandising and Marketing for The Body Shop Digital, an e-commerce company. From July 1984 to July 2000, Ms. Bell served in various capacities at Eddie Bauer, Inc., a clothing and merchandise retail company, most recently as Vice President and General Merchandising Manager. Ms. Bell holds a B.A. in Business Administration from San Francisco State University.

      Darrell Cavens has served as Blue Nile’s Senior Vice President since June 2005. Mr. Cavens served as Vice President of Development from October 2003 through June 2005, and as Blue Nile’s Chief Technology Officer from November 2000 to June 2005. From September 1999 to November 2000, Mr. Cavens served as Blue Nile’s Director of Technology. From April 1996 to September 1999, Mr. Cavens worked as Staff Engineer within the Advanced Development team at Starwave Corporation, an Internet development company. Mr. Cavens attended the University of Victoria in Canada from 1990 to 1994.

      Dwight Gaston has served as Blue Nile’s Senior Vice President since September 2005. From July 2003 to March 2005, Mr. Gaston served as Vice President of Operations, and from May 1999 to July 2003, Mr. Gaston served as Blue Nile’s Director of Fulfillment Operations. From June 1992 to June 1995 and from August 1997 to May 1999, Mr. Gaston was a consultant with Bain & Company, a management consulting firm. Mr. Gaston holds a B.A. in Economics from Rice University and an M.B.A. from Harvard University.

      Terri Maupin has served as Blue Nile’s Vice President of Finance and Controller since July 2004 and as Corporate Secretary since October 2004. From September 2003 to July 2004, Ms. Maupin served as Blue Nile’s Controller. From February 2001 to September 2003, Ms. Maupin served as the Staff Vice President of Finance and Controller at Alaska Air Group, Inc., the parent company of airline companies Alaska Airlines, Inc. and Horizon Air Industries, Inc., and Staff Vice President of Finance and Controller at Alaska Airlines, Inc. From September 1994 through January 2001, Ms. Maupin served in various capacities at Nordstrom, Inc., a clothing and merchandise retail company, most recently as Director of Financial Reporting. Ms. Maupin holds a B.A. in Accounting from Western Washington University.

Compensation of Executive Officers

      The following table sets forth compensation information earned by our Chief Executive Officer, the other four most highly compensated executive officers as of January 1, 2006 and any individual who would have been one of the four most highly compensated executive officers but was not serving as of January 1, 2006 (we refer to these officers as our “named executive officers”) as of the end of our last three fiscal years.

Summary Compensation Table

Stock Option Grants And Exercises

      The Company grants options to its executive officers under its 2004 Equity Incentive Plan. Prior to the adoption of the 2004 Equity Incentive Plan, the Company granted options to its executive officers under its 1999 Equity Incentive Plan. As of March 17, 2006, (i) options to purchase a total of 845,622 shares were outstanding under the 2004 Equity Incentive Plan and options to purchase 3,430,976 shares remained available for grant under the 2004 Equity Incentive Plan; and (ii) options to purchase a total of 912,282 shares were outstanding under the 1999 Equity Incentive Plan and options to purchase 0 shares remained available for grant under the 1999 Equity Incentive Plan. The Company has never granted any stock appreciation rights.

      The following table shows for the fiscal year ended January 1, 2006, certain information regarding options granted to, exercised by, and held at year end by, each of our named executive officers.

Option Grants in Last Fiscal Year

      The following table presents for Blue Nile’s named executive officers the number and value of securities underlying unexercised options that were held by those officers as of January 1, 2006. The numbers in the column entitled “Value of Unexercised In-The-Money Options at January 1, 2006” are based on the fair market value of Blue Nile’s common stock of $40.31 at January 1, 2006, less the exercise price payable for these shares.

Aggregated Option Exercises in Last Fiscal Year and Option Values at January 1, 2006

Employment, Severance and Change of Control Agreements

      Each of the Company’s named executive officers, except for Mr. Vadon, has signed offer letters. These offer letters provide that the officer is an at-will employee. These offer letters also provide for salary and stock option grants, as well as other customary benefits and terms.

      Options to purchase an aggregate of 40,000 shares of Blue Nile’s common stock granted to Ms. Irvine in 2003, and options to purchase an aggregate of 100,000 shares of Blue Nile’s common stock granted to Mr. Vadon in 2003 are subject to accelerated vesting, if, within 12 months following a change of control, the employee:

      Under the 1999 Equity Incentive Plan, in the event of a merger of the Company with or into another corporation or a consolidation, acquisition of assets or other change-in-control transaction involving the Company, if the surviving or acquiring entity does not assume or substitute the stock options, the vesting of each option issued under the 1999 Equity Incentive Plan will accelerate in full and the option will terminate if not exercised prior to the consummation of the transaction, and under the 1999 Equity Incentive Plan, if the surviving or acquiring entity assumes or substitutes the stock options, the vesting on each option shall accelerate as follows:

      Additionally, under the 1999 Equity Incentive Plan, if any person or entity, or group thereof acting together, acquires shares representing at least 50% of the voting power entitled to vote in the election of the Company’s directors, other than in certain corporate transactions, the vesting of each option granted under the 1999 Equity Incentive Plan will accelerate in full for those whose service with the Company or any of the Company’s affiliates has not terminated.

      Under the 2004 Equity Incentive Plan, in the event of certain corporate transactions, if the surviving or acquiring entity elects not to assume, continue or substitute for options granted under the 2004 Equity Incentive Plan, the vesting and exercisability of each option granted under the 2004 Equity Incentive Plan will accelerate in full for those whose service with the Company or any of the Company’s affiliates has not terminated and such options will be terminated if not exercised prior to the effective date of such corporate transaction.

Equity Compensation Plan Information

      Blue Nile currently maintains four compensation plans that provide for the issuance of Blue Nile’s common stock to officers and other employees, directors and consultants. These plans consist of the 1999 Equity Incentive Plan, the 2004 Equity Incentive Plan, the 2004 Non-Employee Directors’ Stock Option Plan and the 2004 Employee Stock Purchase Plan. Each of these four plans has been approved by the Company’s stockholders. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans as of January 1, 2006:

Report of the Compensation Committee of the Board of Directors

on Executive Compensation(1)

      As more specifically set forth in the Compensation Committee’s charter, the purpose of Blue Nile, Inc.’s (“Blue Nile” or the “Company”) Compensation Committee (the “Committee”) is to act on behalf of the Board of Directors (the “Board”) in fulfilling the Board’s responsibilities to oversee Blue Nile’s compensation policies, plans and programs and to review and determine the compensation to be paid to its executive officers. In fiscal year 2005, the Committee was comprised of three independent, non-employee directors: Augustus Tai, Joseph Jimenez and Brian McAndrews. Mr. Tai served as Chair of the Committee. In connection with Mr. Tai’s decision not to run for re-election to the Board at the 2006 Annual Meeting, Mr. Jimenez will serve as Chair of the Committee immediately following the 2006 Annual Meeting. If Ms. Saunders is elected to the Board, she will serve as a member of the Committee. Ms. Saunders would be an independent non-employee director.

      The Chair of the Committee reports the Committee’s actions and recommendations at the Board meetings. The Committee has access to internal personnel as the Committee deems necessary or appropriate, and the Committee has the authority to obtain, at the expense of Blue Nile, advice and assistance from internal or external legal, accounting or other advisors or consultants as it deems necessary or appropriate in the performance of its duties. The Committee regularly meets in executive sessions without members of management present.

Compensation Philosophy

      Blue Nile’s compensation program is designed to:

      The Committee believes that compensation paid to executive officers should be closely aligned with the performance of the Company on both a short-term and long-term basis, and that such compensation should be designed to attract and retain highly qualified executives. The Committee believes that the executive compensation program should be competitive in the market and should align executives’ financial interests with long-term shareholder value.

Components of Compensation

      The three main components of Blue Nile’s executive compensation for fiscal year 2005 were base salary, cash incentive bonuses and stock option awards. To assist in its review of the key elements of executive compensation for 2005, the Committee engaged an independent compensation consultant who provided comparative compensation information for equivalent positions at peer companies. The consultant’s analysis used several broad comparison groups of peer companies that were deemed to be relevant comparisons based on industry, size of company and other factors.

      Base Salary. In establishing base salaries for executive officers, the Committee considers the executive’s level of responsibility, experience, individual performance and contribution to Company performance, along with the market analysis performed by the independent consultant. Base salaries for Blue Nile executives are reviewed on an annual basis, and adjustments in base salaries may also be

     

     

     

considered at the time of a change in responsibilities. The base salaries for executives are designed to be competitive (which we define as approximately the 50th percentile) compared with prevailing market rates at peer companies for equivalent positions. In addition to reviewing executive officers’ compensation against the comparison group of peer companies, the Committee also seeks input from the chief executive officer regarding total compensation for the other executive officers reporting directly to him.

      Annual Incentive Bonuses. The Company has a cash incentive program for executive officers that provides variable cash incentives upon the achievement of financial and other performance objectives. The cash incentive bonuses are designed to be competitive (which we define as approximately 50th percentile) compared with prevailing market rates at peer companies for equivalent positions. For 2005, 60% of the aggregate target bonus pool was established based on the achievement of the Company’s free cash flow objectives for the fiscal year with the remainder of the pool established based on the achievement of other quantitative and qualitative objectives set forth by the Committee, including individual and Company performance objectives and other financial objectives. The maximum that could be awarded to an executive officer was 200% of the target bonus. After the end of the fiscal year 2005, the Committee reviewed Blue Nile’s achievement of the established performance targets and awarded a total of $113,752 to Blue Nile’s executive officers, including its chief executive officer, and the Committee approved bonus payments ranging from 30% to 100% of the individual bonus targets.

      Long-Term Incentive Compensation — Equity Awards. The Committee believes that equity awards tie compensation to the long-term performance of the Company and to the creation of stockholder value, and serve to closely align the long-term interests and financial incentives of its executive officers with those of the Company’s stockholders.

      In past years and in 2005, long-term incentive compensation of executive officers took the form of stock option awards. The Committee believes in the importance of equity ownership for all executive officers and employees, for purposes of incentive, retention and alignment with stockholders. In determining the size of stock option grants to executive officers, the Committee considers the value of total compensation for comparable positions at peer companies and factors such as the recipient’s level of responsibility, individual and Company performance, and the individual’s anticipated level of future contributions to the Company’s success. In fiscal year 2005, the executive officers (excluding the chief executive officer) were granted options to purchase between 12,000 and 62,000 shares of Blue Nile’s common stock, which ranged from 2.2 percent to 11.35 percent of the total options granted to Company employees. The exercise price of options granted to executives and other employees generally is the closing sales price of Blue Nile’s common stock on the last market trading day preceding the option grant award date. Executives receive value from these grants only if Blue Nile’s common stock appreciates over the long term. In general, the equity awards granted to executive officers vest over a 4-year period as follows: 1/4th of the shares vest one year after the vesting commencement date and 1/48th of the shares vest monthly thereafter.

Other Benefits

      Blue Nile does not maintain any non-qualified deferred compensation plans, defined benefit pension plans or supplemental retirement plans for its executive officers. The Company has a tax-qualified 401(k) defined contribution retirement plan (“401(k) Plan”) that is available to all eligible employees. The 401(k) Plan is a defined contribution plan designed to allow employees to accumulate retirement funds through employee and Company contributions. All Company contributions are made in cash and are invested in funds as directed by the participant, with the participant being able to select from a variety of mutual funds. Blue Nile does not offer participants the opportunity to invest in shares of Blue Nile stock through the 401(k) Plan. For 2005, Blue Nile’s contributions to the 401(k) Plan for all eligible employees, including executive officers, equaled 50% of the amount contributed by the employee up to 4% of such employee’s compensation. The Company contribution has a four year vesting period whereby 25% of such contribution vests annually.

Chief Executive Officer Compensation

      Base Salary. During fiscal year 2005, Mark Vadon received a base salary of $327,725. His base salary was $300,000 until the Committee increased his salary 28% to $385,000 in September 2005. This increase moved Mr. Vadon’s base salary closer to the median percentile of base salaries of chief executive officers at peer companies. When establishing Mr. Vadon’s salary, the Committee reviewed the factors listed above in the “Base Salary” section of this report, with particular focus on Blue Nile’s financial performance and Mr. Vadon’s personal performance.

      Annual Incentive Bonuses. For fiscal year 2005, Mr. Vadon was awarded an incentive bonus equal to $30,000, which represented 41% of his target bonus amount. Because the Company’s free cash flow objective for the fiscal year was not met, the bonus payout was below the target amount. The individual performance component of Mr. Vadon’s bonus was above target, based on the achievement of the performance objectives set forth by the Committee (listed above in the “Annual Incentive Bonuses” section of this report).

      Long-Term Incentive Compensation — Equity Awards. In August 2005, Mr. Vadon was granted an option to purchase 117,000 shares of Blue Nile’s common stock at an exercise price of $32.97 (the closing sales price of Blue Nile’s common stock on the last market trading day prior to the day the option grant was awarded) under Blue Nile’s 2004 Equity Incentive Plan. When determining the stock option grant, the Committee considered the factors listed above in the “Long-Term Incentive Compensation” section of this report, with a particular focus on Blue Nile’s financial performance and Mr. Vadon’s personal performance. The grant of an option to purchase 117,000 shares of Blue Nile’s common stock represented 21.41% of the total options granted to employees in fiscal year 2005. The August 2005 option grant vests as follows: 1/4th of the shares vest one year after the vesting commencement date of August 31, 2005, and 1/48th of the shares vest monthly thereafter.

Tax Treatment of Stock Options and Restricted Stock Purchase Rights

      Section 162(m) of the Internal Revenue Code (the “Code”) limits Blue Nile to a deduction for federal income tax purposes of no more than $1 million of compensation paid to each of the Named Executive Officers in a taxable year. Compensation above $1 million may be deducted if it is “performance-based compensation” within the meaning of the Code. However, Section 162(m) contains an exception to this deduction limit for compensation paid pursuant to a compensation plan or agreement that existed during the period in which a company was not publicly held. This exception applies until the earliest of (i) the expiration of the plan or agreement, (ii) the material modification of the plan or agreement, (iii) issuance of all shares or other compensation reserved under the plan, or (iv) the first meeting of stockholders at which directors are to be elected occurring after the close of the third calendar year following the calendar year in which Blue Nile’s initial public offering occurs. The Company’s compensation plans and agreements were in existence prior to Blue Nile’s initial public offering, and none of the events specified above has yet occurred. Accordingly, the Committee believes that compensation paid pursuant to its compensation plans and agreements is not subject to the deduction limitation under Section 162(m). Therefore, the Committee has not yet established a policy for determining which forms of incentive compensation awarded to its Named Executive Officers shall be designed to qualify as “performance-based compensation.” The Committee intends to comply with Code Section 162(m) in the future to the extent consistent with the best interests of Blue Nile.

Date: April 21, 2006

Compensation Committee Interlocks and Insider Participation

      None of Blue Nile’s executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on Blue Nile’s Board of Directors or Compensation Committee. No interlocking relationship exists between Blue Nile’s Board of Directors or Compensation Committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.

Performance Measurement Comparison(1)

      The following graph compares the cumulative total stockholder return on the Company’s common stock with the cumulative total return of the Nasdaq Market Index and Hemscott’s Internet Software and Services Group Index for the period beginning on May 20, 2004, the date of the Company’s public offering, through January 1, 2006, the Company’s 2005 fiscal year end.

COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN(2)

Certain Relationships and Related Transactions

      The Company has entered into indemnity agreements with certain officers and directors which provide, among other things, that the Company will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings to which he or she is, or may be, made a party by reason of his or her position as a director, officer or other agent of the Company, and otherwise to the fullest extent permitted under Delaware law and the Company’s Bylaws.

Annual Report on Form 10-K

      A copy of the Company’s Annual Report on Form 10-K for the year ended January 1, 2006, accompanies this Proxy Statement. It is also available on the Company’s website, www.bluenile.com in the financial information section of the investor relations page. An additional copy will be furnished without charge to stockholders of record upon request by mail to Investor Relations at Blue Nile, 705 Fifth Avenue South, Suite 900, Seattle Washington 98104.

Householding of Proxy Materials

      The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more stockholders sharing the same address by delivering a single proxy statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies.

      This year, a number of brokers with account holders who are Blue Nile stockholders will be “householding” Blue Nile’s proxy materials. A single proxy statement will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate proxy statement and annual report, please notify your broker, direct your written request to Blue Nile, Inc., Corporate Secretary at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104 or contact Terri K. Maupin, the Corporate Secretary, at (206) 336-6700. Stockholders who currently receive multiple copies of the proxy statement at their address and would like to request “householding” of their communications should contact their broker.

Other Matters

      The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the Annual Meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment.

Seattle, Washington

April 21, 2006

Appendix A

Blue Nile, Inc.

CHARTER OF THE AUDIT COMMITTEE

Purpose and Policy

      The primary purpose of the Audit Committee (the “Committee”) of the Board of Directors (the “Board”) of Blue Nile, Inc. (the “Company”) shall be to act on behalf of the Board in fulfilling the Board’s oversight responsibilities with respect to: (i) the Company’s corporate accounting, financial reporting practices and audits of financial statements; (ii) the quality and integrity of the Company’s financial statements and reports; (iii) the qualifications, independence and performance of any firm or firms of certified public accountants engaged as the Company’s independent outside auditors (the “Auditors”); (iv) the performance of the Company’s internal audit function; and (v) the Company’s systems of internal control over financial reporting.

      The policy of the Committee, in discharging these obligations, shall be to maintain and foster an open avenue of communication between the Committee, the Auditors and the Company’s financial management and internal audit teams.

Composition

      Until such time as the Company is subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Reporting Date”), the Committee shall consist of at least two (2) members of the Board. On and after the Reporting Date, the Committee shall consist of at least three (3) members of the Board. No Committee member shall be an employee of the Company and each member shall be free from any relationship that would interfere with the exercise of his or her independent judgment, as determined by the Board, in accordance with the applicable independence requirements of The Nasdaq Stock Market (“Nasdaq”) and the rules and regulations of the Securities and Exchange Commission (“SEC”), including any exceptions permitted by such requirements. At least one member shall satisfy any applicable Nasdaq and SEC financial experience requirements as in effect from time to time. The members of the Committee shall be appointed by and serve at the discretion of the Board. Vacancies occurring on the Committee shall be filled by the Board. The Committee’s Chairperson shall be designated by the Board or, if it does not do so, the Committee members shall elect a Chairperson by vote of a majority of the full Committee.

Operating Principles and Processes

      In fulfilling its functions and responsibilities, the Committee should give due consideration to the following operating principles and processes:

Meetings

      The Committee will hold at least four (4) regular meetings per year and additional meetings as the Committee deems appropriate. Meetings may be called by the Chairperson of the Committee or the Chairman of the Board.

Minutes and Reports

      Minutes of each meeting will be kept and distributed to each member of the Committee, members of the Board who are not members of the Committee and the Secretary of the Company. The Chairperson of the Committee will report to the Board from time to time, or whenever so requested by the Board. In addition, the Chairperson of the Committee or his or her delegate shall be available to answer any questions the other directors may have regarding the matters considered and actions taken by the Committee.

Authority

      The Committee shall have full access to all books, records, facilities and personnel of the Company as deemed necessary or appropriate by any member of the Committee to discharge his or her responsibilities hereunder. The Committee shall have authority to retain, at the Company’s expense, advice and assistance from internal and external legal, accounting or other advisors or consultants as it deems necessary or appropriate in the performance of its duties. The Company shall make available to the Committee all funding necessary for the Committee to carry out its duties, including, without limitation, the payment of such expenses. The Committee shall have authority to require that any of the Company’s personnel, counsel, Auditors or investment bankers, or any other consultant or advisor to the Company attend any meeting of the Committee or meet with any member of the Committee or any of its special legal, accounting or other advisors and consultants.

Responsibilities

      The Committee’s responsibility is one of oversight. The members of the Audit Committee are not employees of the Company, and they do not perform, or represent that they perform, the functions of management or the independent auditors. The Committee relies on the expertise and knowledge of management, the internal auditor and the independent registered accounting firm in carrying out its oversight responsibilities. The management of the Company is responsible for preparing accurate and complete financial statements in accordance with generally accepted accounting principles and for establishing and maintaining appropriate accounting principles and financial reporting policies and satisfactory internal control over financial reporting. The independent registered accounting firm is responsible for auditing the Company’s annual consolidated financial statements and the effectiveness of the Company’s internal control over financial reporting and reviewing the Company’s quarterly financial statements. It is not the responsibility of the Committee to prepare or certify the Company’s financial statements or guarantee the audits or reports of the independent auditors, nor is it the duty of the Audit Committee to certify that the independent auditor is “independent” under applicable rules. These are the fundamental responsibilities of management and the independent auditors.

      The operation of the Committee will be subject to the provisions of the Bylaws of the Company and Delaware General Corporation Law, each as in effect from time to time. The Committee shall oversee the Company’s financial reporting process on behalf of the Board, shall have direct responsibility for the appointment, compensation, retention and oversight of the Auditors and shall report the results of its activities to the Board. The Committee’s functions and procedures should remain flexible to address

changing circumstances most effectively. To implement the Committee’s purpose and policy, the Committee shall, to the extent the Committee deems necessary or appropriate, be charged with the following functions and processes with the understanding, however, that the Committee may supplement or (except as otherwise required by applicable laws or rules) deviate from these activities as appropriate under the circumstances:

      It shall be the responsibility of management to prepare the Company’s financial statements and periodic reports and the responsibility of the Auditors to audit those financial statements. These functions shall not be the responsibility of the Committee, nor shall it be the Committee’s responsibility to ensure that the financial statements or periodic reports are complete and accurate, conform to GAAP or otherwise comply with applicable laws.

Appendix B

Blue Nile, Inc.

CHARTER OF THE COMPENSATION COMMITTEE

Purpose and Policy

      The primary purpose of the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of Blue Nile, Inc. (the “Company”) shall be to act on behalf of the Board in fulfilling the Board’s responsibilities to oversee the Company’s compensation policies, plans and programs, and to review and determine the compensation to be paid to the Company’s executive officers and directors. The term “compensation” shall include salary, long-term incentives, bonuses, perquisites, equity incentives, severance arrangements, retirement benefits and other related benefits and benefit plans.

      The policy of the Committee shall be as follows:

Composition

      The Committee shall consist of at least two (2) members of the Board. Each Committee member shall meet the (i) independence requirements of the rules of the Nasdaq National Market (“Nasdaq”); (ii) non-employee director definition of Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); (iii) outside director definition of 162(m) of the Internal Revenue Code of 1986 (the “Code”); and (iv) any other requirements imposed by applicable law. The members of the Committee shall be appointed by and serve at the discretion of the Board. Vacancies occurring on the Committee shall be filled by the Board. The Committee’s Chairperson shall be designated by the Board or, if it does not do so, the Committee members shall elect a Chairperson by vote of a majority of the full Committee.

Operating Principles and Processes

      In fulfilling its functions and responsibilities, the Committee should give due consideration to the following operating principles and processes:

Meetings

      The Committee will hold at least two (2) regular meetings per year and additional meetings as the Committee deems appropriate. Meetings may be called by the Chairperson of the Committee or the Chairman of the Board. Notwithstanding anything to the contrary set forth herein, the Chief Executive Officer may not be present for any portion of any meeting of the Committee at which the compensation of the Chief Executive Officer is deliberated or voted upon.

Minutes and Reports

      Minutes of each meeting will be kept and distributed to each member of the Committee, members of the Board who are not members of the Committee and the Secretary of the Company. The Chairperson of the Committee will report to the Board from time to time, or whenever so requested by the Board. In addition, the Chairperson of the Committee or his or her delegate shall be available to answer any questions the other directors may have regarding the matters considered and actions taken by the Committee.

Authority

      The Committee shall have full access to all books, records, facilities and personnel of the Company as deemed necessary or appropriate by any member of the Committee to discharge his or her responsibilities hereunder. The Committee shall have the authority to obtain, at the expense of the Company, advice and assistance from internal or external legal, accounting or other advisors and consultants as it deems necessary or appropriate in the performance of its duties. The Company shall make available to the committee all funding necessary for the Committee to carry out its duties, including, without limitation, the payment of such expenses. Except as limited by applicable laws, rules and regulations, the Committee shall have authority to require that any of the Company’s personnel, counsel, auditors or investment bankers, or any other consultant or advisor to the Company attend any meeting of the Committee or meet with any member of the Committee or any of its special legal, accounting or other advisors and consultants. In addition, the Committee shall have sole authority to retain and terminate any compensation consultant to assist in the evaluation of director, chief executive officer or senior executive compensation, including sole authority to approve such consultant’s reasonable fees and other retention terms, all at the Company’s expense.

      The Committee may form and delegate authority to subcommittees as appropriate, including, but not limited to, a subcommittee composed of one or more members of the Board to grant stock awards under the Company’s equity incentive plans to persons who are not (a) “Covered Employees” under Section 162(m) of the Code from time to time; (b) individuals with respect to whom the Company wishes to comply with Section 162(m) of the Code or (c) then subject to Section 16 of the Exchange Act.

Responsibilities

      The operation of the Committee will be subject to the provisions of the Bylaws of the Company and Delaware General Corporation Law, each as in effect from time to time. The Committee shall oversee the Company’s compensation strategy and policies as set forth below. The Committee’s functions and procedures should remain flexible to address changing circumstances most effectively. To implement the Committee’s purpose and policy, the Committee shall, to the extent the Committee deems necessary or appropriate, be charged with the following functions and processes with the understanding, however, that

the Committee may supplement or (except as otherwise required by applicable laws or rules) deviate from these activities as appropriate under the circumstances:

Appendix C

BLUE NILE, INC.

CHARTER OF THE

NOMINATING AND CORPORATE GOVERNANCE COMMITTEE

Purpose and Policy

      The primary purpose of the Nominating and Corporate Governance Committee (the “Committee”) of the Board of Directors (the “Board”) of Blue Nile, Inc. (the “Company”) shall be to act on behalf of the Board in fulfilling the Board’s responsibilities to: (i) identify, review and evaluate candidates to serve as directors of the Company; (ii) evaluate the composition, performance and other aspects of the Company’s Board committees; (iii) make other recommendations to the Board regarding affairs relating to the directors of the Company; (iv) develop and review from time to time a plan of succession for key management; and (v) administer and oversee all aspects of the Company’s corporate governance functions on behalf of the Board.

      The policy of the Committee, in discharging these obligations, shall be to select well-qualified director nominees, and develop and review a set of corporate governance principles that enhance the overall management of the Company and provide a basis for governance that serves the best interests of the Company’s stockholders in building long-term value.

Composition

      The Committee shall consist of at least two (2) members of the Board. No Committee member shall be an employee of the Company and each member shall be free from any relationship that would interfere with the exercise of his or her independent judgment, as determined by the Board, in accordance with the applicable independence requirements of The Nasdaq Stock Market (“Nasdaq”) and the rules and regulations of the Securities and Exchange Commission (“SEC”), including any exceptions permitted by such requirements.

      The members of the Committee shall be appointed by and serve at the discretion of the Board. Vacancies occurring on the Committee shall be filled by the Board. The Committee’s Chairperson shall be designated by the Board or, if it does not do so, the Committee members shall elect a Chairperson by vote of a majority of the full Committee.

Operating Principles and Processes

      In fulfilling its functions and responsibilities, the Committee should give due consideration to the following operating principles and processes:

Meetings

      The Committee will hold at least one (1) regular meeting per year and additional meetings as the Committee deems appropriate. Meetings may be called by the Chairperson of the Committee or the Chairman of the Board.

Minutes and Reports

      Minutes of each meeting will be kept and distributed to each member of the Committee, members of the Board who are not members of the Committee and the Secretary of the Company. The Chairperson of the Committee will report to the Board from time to time, or whenever so requested by the Board. In addition, the Chairperson of the Committee or his or her delegate shall be available to answer any questions the other directors may have regarding the matters considered and actions taken by the Committee.

Authority

      The Committee shall have full access to all books, records, facilities and personnel of the Company as deemed necessary or appropriate by any member of the Committee to discharge his or her responsibilities hereunder. The Committee shall have authority to retain, at the Company’s expense, advice and assistance from internal and external legal, accounting or other advisors or consultants as it deems necessary or appropriate in the performance of its duties. The Company shall make available to the Committee all funding necessary for the Committee to carry out its duties, including, without limitation, the payment of such expenses. The Committee shall have authority to require that any of the Company’s personnel, counsel, Auditors or investment bankers, or any other consultant or advisor to the Company attend any meeting of the Committee or meet with any member of the Committee or any of its special legal, accounting or other advisors and consultants. The Committee may form and delegate authority to subcommittees as appropriate.

Responsibilities

      The operation of the Committee will be subject to the provisions of the Bylaws of the Company and Delaware General Corporation Law, each as in effect from time to time. The Committee shall oversee the Company’s nomination and corporate governance matters as established below and shall report the results of its activity to the Board. The Committee’s functions and procedures should remain flexible to address changing circumstances most effectively. To implement the Committee’s purpose and policy, the Committee shall, to the extent the Committee deems necessary or appropriate, be charged with the following functions and processes with the understanding, however, that the Committee may supplement or (except as otherwise required by applicable laws or rules) deviate from these activities as appropriate under the circumstances: