Netflix (NFLX)

2. Immaterial Error Corrections

In June 2004, the Company entered into a lease arrangement whereby the Company leased a building that was constructed by a third party. In June 2006, the Company entered into a similar lease arrangement whereby the Company leased a second building that was constructed by the same third party. Upon commencement of the leases, the Company accounted for both of these arrangements as operating leases under SFAS No. 13, Accounting for Leases, whereby the total minimum lease payment obligations under the leases were recognized as monthly rent expense on a straight-line basis over the terms of the leases.

In June 2008, it was determined that because the terms of the original lease agreements required the Company’s involvement in the construction of certain elements of the buildings, under Emerging Issues Task Force (“EITF”) No. 97-10, The Effect of Lessee Involvement in Asset Construction, the Company was deemed to be the owner (for accounting purposes only) of the buildings subject to the leases during the construction period. The Company should have reflected an asset on its balance sheet for the costs paid by the lessor to construct these buildings, as well as a corresponding liability. Upon completion of construction, the Company did not meet the “sale-leaseback” criteria under SFAS No. 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases; an amendment of FASB Statements No. 13, 66, and 91 and a rescission of FASB Statement No. 26 and Technical Bulletin No. 79-11, and therefore should have treated the leases as financing obligations and the assets and corresponding liabilities would not be derecognized.

The corrections to the historical financial statements to apply EITF No. 97-10 were considered immaterial and did not affect the total cash payments the Company has made or is obligated to make under the lease agreements, nor did it change the total expense to be recognized over the lease terms. However, the timing and nature of expense is different under this treatment as compared to operating lease treatment. Specifically, the Company should have recognized land lease expense, depreciation expense on the assets it is deemed to own and interest expense on the associated lease financing obligations.

As of September 30, 2008, property and equipment, net, included $40.7 million for the two buildings described above and related accumulated depreciation of $2.2 million. As of December 31, 2007, property and equipment, net, included $37.2 million and related accumulated depreciation of $1.3 million.

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The impact of these corrections on the previously presented periods is as follows:

Netflix, Inc.

2. Immaterial Error Corrections

In June 2004, the Company entered into a lease arrangement whereby the Company leased a building that was constructed by a third party. In June 2006, the Company entered into a similar lease arrangement whereby the Company leased a second building that was constructed by the same third party. Upon commencement of the leases, the Company accounted for both of these arrangements as operating leases under SFAS No. 13, Accounting for Leases, whereby the total minimum lease payment obligations under the leases were recognized as monthly rent expense on a straight-line basis over the terms of the leases.

In June 2008, it was determined that because the terms of the original lease agreements required the Company’s involvement in the construction of certain elements of the buildings, under Emerging Issues Task Force (“EITF”) No. 97-10, The Effect of Lessee Involvement in Asset Construction, the Company was deemed to be the owner (for accounting purposes only) of the buildings subject to the leases during the construction period. The Company should have reflected an asset on its balance sheet for the costs paid by the lessor to construct these buildings, as well as a corresponding liability. Upon completion of construction, the Company did not meet the “sale-leaseback” criteria under SFAS No. 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases; an amendment of FASB Statements No. 13, 66, and 91 and a rescission of FASB Statement No. 26 and Technical Bulletin No. 79-11, and therefore should have treated the leases as financing obligations and the assets and corresponding liabilities would not be derecognized.

The corrections to the historical financial statements to apply EITF No. 97-10 were considered immaterial and did not affect the total cash payments the Company has made or is obligated to make under the lease agreements, nor did it change the total expense to be recognized over the lease terms. However, the timing and nature of expense is different under this treatment as compared to operating lease treatment. Specifically, the Company should have recognized land lease expense, depreciation expense on the assets it is deemed to own and interest expense on the associated lease financing obligations.

As of June 30, 2008, property and equipment, net were increased by $38.8 million and lease financing obligations were increased by $39.6 million, of which the current portion was $1.0 million. As of December 31, 2007, property and equipment, net were increased by $35.8 million and lease financing obligations were increased by $36.5 million, of which the current portion was $0.8 million.

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Netflix, Inc.