Stock-based Compensation

On May 21, 2013, the date of the 2013 Annual Meeting of Stockholders (the "Annual Meeting"), the Company's stockholders approved the 2013 Equity Incentive Plan (the “2013 Plan”), effective as of such date. The 2013 Plan is intended to be the successor to the Company's 2004 Equity Incentive Plan (the “2004 Plan”) and the Blue Nile, Inc. Third Amended and Restated 2004 Non-Employee Directors Stock Option Plan (the “Directors' Plan”).

As of June 30, 2013, with the addition of the 2013 Plan, the Company has five equity plans. Once the 2013 Plan became effective, the 2004 Plan was suspended and any equity compensation that would have been granted under the 2004 Plan will now be granted under the 2013 Plan. The Directors' Plan was suspended in April 2012 and no equity compensation has been granted under the Directors' Plan since that date. Any equity compensation that would have been granted under the Directors' Plan will now be granted under the 2013 Plan.

Additional information regarding the former plans is disclosed in the Annual Report.

Stock-based compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period for each stock option or restricted stock unit ("RSU") grant expected to vest with forfeitures estimated at the date of grant based on the Company's historical experience and future expectations.

The fair value of each stock option on the date of grant is estimated using the Black-Scholes-Merton option valuation model. The fair value of each RSU is based on the fair market value of the Company's common stock on the date of the grant.

The following weighted-average assumptions were used for the valuation of stock options granted during the periods presented:



	Quarter ended						Year to date ended
	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
Expected term	4.5 years			4.5 years			4.5 years			4.3 years
Expected volatility	54.0		%	59.0		%	56.9		%	59.1		%
Expected dividend yield	0.0		%	0.0		%	0.0		%	0.0		%
Risk-free interest rate	0.8		%	0.8		%	0.9		%	0.8		%
Estimated weighted-average fair value per stock option granted	$	15.54		$	14.05		$	14.68		$	15.48

The assumptions used to calculate the fair value of stock options granted are evaluated and revised, if necessary, to reflect market conditions and the Company’s experience.

A summary of stock option activity for the year to date ended June 30, 2013 is as follows:



	Options (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Balance, December 31, 2012	2,199		$	38.55
Granted	117		31.67
Exercised	(22	)	21.56
Canceled	(66	)	35.19
Balance, June 30, 2013	2,228		$	38.45	5.38	$	10,969
Vested and expected to vest at June 30, 2013	2,153		$	38.56	5.26	$	10,641
Exercisable, June 30, 2013	1,674		$	39.14	4.31	$	8,772

A summary of RSU activity for the year to date ended June 30, 2013 is as follows:



	RSUs (in thousands)		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Balance, December 31, 2012	3		$	29.67
Granted	95		31.85
Vested	(3	)	32.22
Canceled	(1	)	31.31
Balance, June 30, 2013	94		$	31.77	1.80	$	3,561
Vested and expected to vest at June 30, 2013	79		$	31.77	1.60	$	2,978

The aggregate intrinsic value in the tables above are before applicable income taxes and represent the amount recipients would have received if all stock options had been exercised or RSUs had been released on the last business day of the period indicated, based on the closing stock price of the Company's common stock on such date.

The total intrinsic value of stock options exercised during the year to date ended June 30, 2013 was $0.3 million. During the year to date ended June 30, 2013, the total fair value of stock options vested was $3.0 million. As of June 30, 2013, the Company had total unrecognized compensation costs related to unvested stock options and RSUs of $10.0 million, before income taxes. The Company expects to recognize this cost over a weighted average period of 2.7 years for the options and 3.4 years for the RSUs.