Key questions from the first quarter earnings call conducted by Blue Nile, Inc. on May 6, 2008.

Doug Anmuth (Lehman Brothers): Looking at the revenue growth rate, particularly in the back half of the year, even when you normalize for some of the things you just mentioned in the second quarter, it still looks like you are expecting growth to accelerate nicely in the back half. Can you talk about anything else in particular that you are thinking about there in the back half of the year?

Diane Irvine: We have no better information on the economy and how the second half will look in the U.S. compared to anyone else. Our goal, as we have stated in our earnings release, is to grow revenue and EBITDA by at least 10% this year. We will do everything we can internally in terms of managing the business and then we will see what the external environment holds. International growth is doing well and our focus on conversion and the customer is what we are all about so I feel good about the way we are operating internally.

Doug Anmuth (Lehman Brothers): Where you think you are positioned now in terms of inventory levels?

Diane Irvine: We made progress during the quarter. We ended the quarter still modestly higher than where we would like to be and so that is something that we will work through and we will continue to improve that position in the second quarter.

Doug Anmuth (Lehman Brothers): Can you comment on conversion rate trends during the quarter and also the traffic growth that you saw?

Diane Irvine: In terms of traffic, we saw healthy growth there and we will not provide any other color in terms of exactly what was happening with either traffic numbers or further detail.

Mark Mahaney (Citigroup): Of the international markets outside of Canada and the U.K., could you talk about one or two of the ones so far that have gained relatively material traction?

Mark C. Vadon: We are seeing some great progress. It is still early but some great progress from those new markets we have added. We do not want to give any detail on what we think the best markets are purely for competitive reasons right now. We have got a lot of work left to do there and we would rather do that work and push those markets before we give more detail on what we are seeing.

Mark Mahaney (Citigroup): Consistently in the past there has always been this gap between your U.S. sales and offline traditional retailers. It seems like that gap was much narrower this quarter. Could you comment on that?

Mark C. Vadon: It is still early to know what happened in the first quarter for the retailers that are out there. Our sense is that the environment got worse for the market as the quarter went on and that is purely coming from talking to people on the supply side. There has not been a tremendous amount of data. We will be getting some more data in the next week or some from people starting to release their first quarter numbers. The other part of that is our sense that people who are moving goods are discounting heavily. I think one of the large public players out there had announced they are going to be running on gross margins about five points lower than they have been traditionally and some of the smaller players out there are just discounting to move inventory to keep cash coming in the door. We do not have a full picture of everybody’s first quarter yet and from a top line standpoint, and even when we have that, when people will release their first quarter comp store sales coming up, until the earnings come out and mostly people are on a January 31st year-end, so it is going to be a while before we see the full financials for people, but our sense is the people who are moving stuff are moving at discounts that are going to be unhealthy when it comes to what their bottom line looks like.

Jack Murphy (William Blair): How sales trended through the quarter?

Diane Irvine: The sales trend did improve as we went through the quarter. I think on our last call, which was just before Valentine’s day, we were saying that we had seen things improve. I think in this economy, it is hard to predict but we did see sales improve as we got to the end of the first quarter and so we are doing all we can and we have such a great value proposition that we will continue to gain share and we are just focused on that every day.

Jack Murphy (William Blair): In the past you have talked about the high-end business, over $25,000. Could you talk about that on a comparable basis to the way you have in the past in terms of was that business growing in the quarter in total?

Mark C. Vadon: We are seeing mixed things depending on the price point. When you look at over $100,000 price points, that part of the business is still there but it is weak. We had a transaction earlier today of $200,000, so there is still transactions happening there but it is weak versus historically and especially versus the growth rates we saw there previously. When you get below $100,000, it is mixed. What we are seeing in general is kind of $25,000 to $50,000 is doing okay but $5,000 to $25,000 is also weak. It is hard to look at all the numbers and dissect what is the broader macroeconomic picture it is telling us, but overall as you start piecing together, below $5,000 is growing stronger than other parts. But then as you get into that $5,000 to $25,000, more of that aspirational part of the market, we are seeing weakness. You are seeing a better kind of $25,000 to $100,000 price points, better growth in that area where the people buying those, it is not necessarily aspirational purchases. It is truly luxury purchases but then at the mega price points, I think people are sitting on the sidelines right now just watching the market.

Jack Murphy (William Blair): Are you happy with the payables dynamics that you saw in the quarter and if at this level of guidance, what level of free cash flow you are thinking about?

Diane Irvine: We do not provide guidance on free cash flow but to f talk about what is happening there, I think there are a couple of things specific to the quarter. One is that dynamic that you generally see in the first quarter every year where we are paying down the payables that have built up during the holiday season. You see that and so we would expect a negative cash flow quarter. Now with inventory being modestly higher than where we would like it to be, clearly we did not have the working capital benefit there that I would like to see. Then the other thing that you point out is with slower growth, you do not see the same leverage from the payables in terms of the working capital. As we look at the year, I think if we can achieve the goal we set forth for ourselves in terms of revenue growth, we will be in good shape in terms of our free cash flow generation capabilities.

Mark C. Vadon: What we are seeing as far as days payable, but without the significant growth in the first quarter, the dollars of payables being generated is not as great as we have seen in the past. The ability to generate rally robust levels of free cash flow is tied to our growth numbers. With better growth and then with the increases we are seeing in payables and then hopefully getting ourselves in a better inventory position, as we put those together, you will see better free cash flow for the year than we were seeing over this last quarter.

Jim Friedland (Cowen and Company): On commodity pricing in general you have passed it along and gross margins have been growing nicely. If this trend continues, is that how you expect to run the business?

Diane Irvine: We do pass that along but I would say traditionally what we have done is we take a longer to pass that on, so we have generally compressed our own margins and then we find our points once or twice a year to raise our retail prices if necessary based upon the inbound price of the raw materials. We will keep that policy this year. We performed well on gross margin in the first quarter, so we are pleased with that performance. We want to drive those dollars to the bottom line so we will be monitoring that closely as we go through the year. Terri pointed out something special to gross margins a year ago in the second quarter where we were at 20.7% and 30 basis points of that gross margin was caused by a one-time benefit from a shipping refund, such that that should be taken into account as you look year-on-year.