Netflix (NFLX)

Reclassification and Revision of Immaterial Errors

Due to the nature of the Company’s streaming content model, the Company determined in 2008 that it should have applied the guidance in Statement of Financial Accounting Standards (“SFAS”) No. 63, Financial Reporting by Broadcasters (“SFAS 63”). SFAS 63 specifies classification of acquired streaming content as an asset only after certain criteria have been met, including availability of the streaming content for its first showing, and requires streaming content assets to be segregated between current and non-current based on estimated time of usage. The Company’s previous financial statements classified acquired streaming content as part of non-current content library and presented the related cash outflows as investing activities. The Company has revised its 2007 consolidated financial statements to correct immaterial errors that arose from not applying the provisions of SFAS 63. The revisions to the fiscal 2007 balance sheet included a reclassification of $16.3 million from content library, net to current content library, net and a reduction of content library, net and accounts payable by $4 million. In addition, $14.8 million has been reclassified from net cash used in investing activities to net cash used in operating activities in the Company’s 2007 consolidated statements of cash flows. The summarized interim financial information for 2007 and the first three quarters of 2008 reflected in Note 11, Selected Quarterly Financial Data has also been revised for the adoption of SFAS 63.

In fiscal 2008, it was determined that because the terms of the Company’s original facilities lease agreements required the Company’s involvement in the construction of certain 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

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Table of Contents

NETFLIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. Previously these arrangements were accounted for as operating leases. The Company has revised its 2007 and 2006 consolidated financial statements to correct immaterial errors in the historical accounting treatment. Specifically, total assets were increased by $36.5 million inclusive of $35.9 million for property and equipment, net and total liabilities were increased by $37.4 million for lease financing obligations at December 31, 2007. Net operating expenses were reduced by $0.6 million and $0.8 million in 2007 and 2006, respectively and interest expense on lease financing obligations was recorded in the amount of $1.2 million for both 2007 and 2006 in the consolidated statements of operations. Diluted net income per share remained unchanged for the years ended December 31, 2007 and 2006. Additionally, $0.4 million and $0.3 million, for 2007 and 2006 were reclassified from net cash provided by operating activities to net cash used in financing activities in the consolidated statements of cash flows. The summarized interim financial information for 2007 and the first quarter of 2008 reflected in Note 11, Selected Quarterly Financial Data has also been revised for the adoption of EITF 97-10.

Reclassification and Revision of Immaterial Errors

Due to the nature of the Company’s streaming content model, the Company determined in 2008 that it should have applied the guidance in Statement of Financial Accounting Standards (“SFAS”) No. 63, Financial Reporting by Broadcasters (“SFAS 63”). SFAS 63 specifies classification of acquired streaming content as an asset only after certain criteria have been met, including availability of the streaming content for its first showing, and requires streaming content assets to be segregated between current and non-current based on estimated time of usage. The Company’s previous financial statements classified acquired streaming content as part of non-current content library and presented the related cash outflows as investing activities. The Company has revised its 2007 consolidated financial statements to correct immaterial errors that arose from not applying the provisions of SFAS 63. The revisions to the fiscal 2007 balance sheet included a reclassification of $16.3 million from content library, net to current content library, net and a reduction of content library, net and accounts payable by $4 million. In addition, $14.8 million has been reclassified from net cash used in investing activities to net cash used in operating activities in the Company’s 2007 consolidated statements of cash flows. The summarized interim financial information for 2007 and the first three quarters of 2008 reflected in Note 11, Selected Quarterly Financial Data has also been revised for the adoption of SFAS 63.

In fiscal 2008, it was determined that because the terms of the Company’s original facilities lease agreements required the Company’s involvement in the construction of certain 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

F-7

Table of Contents

NETFLIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. Previously these arrangements were accounted for as operating leases. The Company has revised its 2007 and 2006 consolidated financial statements to correct immaterial errors in the historical accounting treatment. Specifically, total assets were increased by $36.5 million inclusive of $35.9 million for property and equipment, net and total liabilities were increased by $37.4 million for lease financing obligations at December 31, 2007. Net operating expenses were reduced by $0.6 million and $0.8 million in 2007 and 2006, respectively and interest expense on lease financing obligations was recorded in the amount of $1.2 million for both 2007 and 2006 in the consolidated statements of operations. Diluted net income per share remained unchanged for the years ended December 31, 2007 and 2006. Additionally, $0.4 million and $0.3 million, for 2007 and 2006 were reclassified from net cash provided by operating activities to net cash used in financing activities in the consolidated statements of cash flows. The summarized interim financial information for 2007 and the first quarter of 2008 reflected in Note 11, Selected Quarterly Financial Data has also been revised for the adoption of EITF 97-10.

Reclassification and Revision of Immaterial Errors

Reclassification and Revision of Immaterial Errors

Reclassification and Revision of Immaterial Errors