Key questions and answers from the fourth quarter fiscal 2007 earnings call conducted by Blue Nile Inc. on February 12, 2008.

James Friedland (Cowen & Company): You noted on the guidance on revenues that you had tough comps from Q1 last year. Could you comment specifically on what you’ve seen in the quarter to make you give guidance of flat sales?

Mark Vadon: We’re seeing what a lot of luxury retailers are seeing. It is that consumers are behaving very differently over the last 10 weeks than they have been for quite some time. We had a weak January and things have picked up slightly going into February but, it’s tough to give guidance for the full year. We don’t know how long this continues, whether what we’re seeing is a reaction to people spending what money they were going to spend at Christmas time and then pulling back now, or if it’s something more sustained than that. Our mindset is to give conservative guidance based on where we’re standing today. But, from a macro perspective, our is to gain share. We can’t change whether or not consumers are going to come into the market to make a purchase but we can do our best to try taking those consumers when they do, and we’ve been doing that well for almost nine years now and regardless of what the market does we will grow faster than other people.

The other anomaly we’ve seen over the last few weeks is that very high-end of the market, those price points above $25,000 that were healthy for a very long time, all of a sudden, is very weak. The high-end sales had 50% growth or above every single quarter of last year. We definitely didn’t see that in the last couple weeks of December and in January. The very high-end consumer is finally showing some vulnerability out there. The guidance we’re giving today is based on what we’ve seen so far.

James Friedland (Cowen & Company): You noted that you’d like to grow share in this tough environment. A couple of years ago you lowered prices, especially since marketing costs were starting to get up there. Would you undertake that strategy in the current environment to gain share?

Mark Vadon: On pricing, our mindset is we’ll look at that month by month. We think there’s an ability to lower price in order to get more of the market, we’ll do that. But our sense isn’t that we are mispriced relative to the market. It’s more that consumers aren’t out there. We’re seeing weakness in things like the number of search impressions that are delivered and that’s the number of people actually conducting searches and we’re seeing weakness in affiliate traffic. Overall consumers are holding back right now and it doesn’t matter if we bring prices down if the people aren’t in the market. We have a product where people are not going to pull back permanently, but we’re in a very transitional time right now and the market is relatively weak.

Mark Mahaney (Citigroup): Is the issue of rising metals prices crimping overall demand? Could you comment on how you navigate those headwinds if you see those as headwinds?

Diane Irvine : We saw dramatic increases last year and even year to date in 2008, but if you think about our product categories, the metals cost is a very small percentage of the total item. If you’re looking at a diamond ring or diamond earrings, we’re offering the greatest value consumers can have. We’re a place for them to come. If you look at our gross margins in Q4, we were not inhibited in terms of those prices so we feel that and we factor it into our pricing over the long term. But what we’re looking at today, which is based on the weak January, has everything to do with the consumer.

Lorraine Maikis (Merrill Lynch): Could you comment on our outlook for free cash flow for 2008? You did say in your guidance for the first quarter that you expect some higher year-over-year costs including marketing. Is that buying more keywords to try to drive share?

Diane Irvine : We don’t provide guidance in terms of free cash flow but we expect to have good profitability this year. We’ll be able to manage through whatever the environment becomes. You won’t have the one-time impact that we saw a year ago from converting to being a cash taxpayer. We also have lower cap ex during the year and I think we can do an even better job in terms of our working capital management. We’ll have a strong number for free cash flow in 2008.

In terms of marketing, we did see pricing pressure in Q4, which we always see during holiday. January where we saw weakness, our marketing spend on average was higher than we normally see, but I don’t think that is a trend on an ongoing basis. As you look at costs on the margin thus far in the quarter, we’ve had higher marketing costs. But if you look at the full year, what we’re really pointing to in terms of cost structure would be related to the renovation of our domestic fulfillment center in 2007 as well as the startup of our international operations.

Lorraine Maikis (Merrill Lynch): The inventory seemed to be a bit higher than you were expecting coming out of holiday. What is that? Is that non-engagement jewelry and is there clearance risk there?

Diane Irvine: If you look at our inventory, there is no risk there in terms of the product itself. We ended up a bit higher than we would have liked. We’ll be in good shape as we go through 2008. It would be setting for engagements, certainly a significant portion of our inventory at any given point in time is settings for diamond rings because we also want to be able to monetize the diamond. Then it would be other forms of jewelry. But if you look at our offering it’s classic merchandise. There’s nothing there that’s worrisome from that standpoint. It just ended up a bit higher than we would have liked.

Bridget Weishaar (JP Morgan): You’ve seen traffic levels down. Could you discuss what you’re seeing in terms of your conversion rates? Also have you experimented at all with prices to see what price elasticity is amongst your customers?

Mark Vadon: In Q4, we did not see traffic levels down. Traffic levels were in the mid-teens and conversion improved as well. With our 23% growth, a little more than half of that was traffic and the rest was conversion. That’s a healthy combination of drivers there. On price elasticity, over the years, we’ve run at many different price levels trying to understand price elasticity in the market and we have a fairly price-sensitive consumer. There is elasticity to what we’re doing here. At any given time, we’re playing with pricing in individual small areas of the inventory. There’s roughly 60,000 diamonds for sale on the website and when we feel that there’s parts of the market where there’s more demand than supply, there’s parts of the market that are weak, we will raise prices there and try to get a little bit more margin. In more commoditized areas, we’ll drop price and try to compete on price more. We’re maximizing where we’re at today, but that’s one where we continue to play with it. Right now our mindset is to maintain pricing on any given product line where it is today.

Doug Anmuth (Lehman Brothers): What did you see in terms of the user experience in changes to user behavior from updates that you made to the site and note number?

Diane Irvine: We’ve seen great things with our updated website. We see great results in terms of conversion. We have customers who are looking for more information, more tools in terms of doing their diamond searches and creating their customized product and that’s gone very well. Our team continues to do a great job in terms of making incremental improvements each and every day that speak to the consumer. That’s something we will continue to focus on this year. Especially, we look at whoever is coming to our website, we want to make it better and better for them to make their purchase and do their searches, get through that process. That’s gone well but we always feel like we have room to do even better.

Jennifer Bennett (JMP Securities): Could you talk about performance of engagement versus non-engagement? We think of engagement as relatively recession resistant and so is it really the non-engagement diamond and other jewelry that is being challenged?

Diane Irvine: We’ve seen a slow down at the very high end so that is impacting us, but more broadly if you look at this category of diamonds as being a luxury product, we’re seeing a pullback on the part of the consumer. We saw great results in 2007 and in Q4 and so I have no doubt that over the long term we continue to take share and we represent a great value and place for people to come who are in the market. We need to work through some of what we’re seeing in the economy.

Mark Vadon: I do believe the engagement category is more recession proof than other parts of the market, but a couple caveats to that. One is you can see periods of time where people will put off the purchase and wait until they feel a little better. They won’t put it off permanently, obviously, they’re still going to go ahead and get engaged and get married, but they will put it off. The other part, within engagement, there’s a piece of that market for us which we think of as upgrade rings. It’s people who’ve already been married for a significant amount of time buying the ring that they’ve always wanted and in that part of the market, it is much more of a luxury purchase as opposed to a necessity. That’s where we see, typically when we’re seeing the $50,000, the $100,000.