Edgar Filing: NETFLIX INC

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 2002

REGISTRATION NO. 333-83878
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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NETFLIX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 7841 77-0467272
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)

970 UNIVERSITY AVENUE
LOS GATOS, CA 95032
(408) 399-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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W. BARRY MCCARTHY, JR.
CHIEF FINANCIAL OFFICER
970 UNIVERSITY AVENUE
LOS GATOS, CA 95032
(408) 399-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES TO:

LARRY W. SONSINI, ESQ. ROBERT SANCHEZ, ESQ. JONATHAN A. SCHAFFZIN, ESQ.
PETER H. BERGMAN, ESQ. WILSON SONSINI GOODRICH & ROSATI CAHILL GORDON & REINDEL
JEFFREY S. CANNON, ESQ. PROFESSIONAL CORPORATION 80 PINE STREET
KEVIN K. ROONEY, ESQ. 7927 JONES BRANCH DRIVE NEW YORK, NEW YORK 10005
WILSON SONSINI GOODRICH & ROSATI LANCASTER BUILDING WESTPARK, (212) 701-3000
PROFESSIONAL CORPORATION SUITE 400
650 PAGE MILL ROAD MCLEAN, VIRGINIA 22102
PALO ALTO, CA 94304 (703) 734-3100
(650) 493-9300

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to rule
434, please check the following box. [_]

======================================================================================================
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
------------------------------------------------------------------------------------------------------
Common Stock $0.001 par value......................... $115,000,000 $10,580
======================================================================================================

(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Amount previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

================================================================================

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2002

PROSPECTUS
----------

[LOGO] NETFLIX, INC.

COMMON STOCK

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This is Netflix, Inc.'s initial public offering of common stock. We are
selling all of the shares.

We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National
Market under the symbol "NFLX."

INVESTING IN OUR COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.

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PER SHARE TOTAL
--------- -----

Public offering price............................ $ $
Underwriting discount............................ $ $
Proceeds, before expenses, to Netflix, Inc....... $ $

The underwriters may also purchase up to an additional shares from
us at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

The shares will be ready for delivery on or about , 2002.

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MERRILL LYNCH & CO.

THOMAS WEISEL PARTNERS LLC

U.S. BANCORP PIPER JAFFRAY

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The date of this prospectus is , 2002.

[INSIDE FRONT COVER]

TABLE OF CONTENTS

PAGE
----

Summary.................................................................................. 1
Risk Factors............................................................................. 5
Forward-Looking Statements............................................................... 19
Use of Proceeds.......................................................................... 19
Dividend Policy.......................................................................... 19
Capitalization........................................................................... 20
Dilution................................................................................. 21
Selected Financial and Other Data........................................................ 22
Management's Discussion and Analysis of Financial Condition and Results of Operations.... 24
Business................................................................................. 40
Management............................................................................... 48
Certain Relationships and Related Transactions........................................... 58
Principal Stockholders................................................................... 61
Description of Capital Stock............................................................. 65
Shares Eligible for Future Sale.......................................................... 69
Underwriting............................................................................. 72
Legal Matters............................................................................ 75
Experts.................................................................................. 75
Where You Can Find More Information...................................................... 75
Index to Financial Statements............................................................ F-1

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You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus or other date stated in this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since that date.

Netflix, Netflix.com, CineMatch and Mr. DVD are our trademarks. Each
trademark, trade name or service mark of any other company appearing in this
prospectus belongs to its holder.

SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND
OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS BEFORE YOU DECIDE TO INVEST IN OUR COMMON STOCK.

OUR COMPANY

We are the largest online entertainment subscription service in the
United States providing more than 600,000 subscribers access to a comprehensive
library of more than 11,500 movie, television and other filmed entertainment
titles. Our standard subscription plan allows subscribers to have three titles
out at the same time with no due dates, late fees or shipping charges for
$19.95 per month. Subscribers can view as many titles as they want in a month.
Subscribers select titles at our Web site (WWW.NETFLIX.COM) aided by our
proprietary CineMatch technology, receive them on DVD by first-class mail and
return them to us at their convenience using our prepaid mailers. Once a title
has been returned, we mail the next available title in a subscriber's queue. In
2001, our total revenues were $75.9 million and our net loss was $38.6 million.
For the three months ended March 31, 2002, our total revenues were $30.5
million and our net loss was $3.6 million.

In 2001, domestic consumers spent more than $32 billion on in-home filmed
entertainment, representing approximately 80% of total filmed entertainment
expenditures, according to Adams Media Research. Consumer video rentals and
purchases comprised the largest portion of in-home filmed entertainment,
representing $23 billion, or 73% of the market in 2001, according to Adams
Media Research.

The home video segment of the in-home filmed entertainment market is
undergoing a rapid technology transition away from VHS to DVD. The DVD player
is the fastest selling consumer electronics device in history, according to DVD
Entertainment Group. In September 2001, standalone set-top DVD player shipments
outpaced VCR shipments for the first time in history, and this trend continued
throughout the remainder of 2001. At the end of 2001, approximately 25 million
U.S. households had a standalone set-top DVD player, representing an increase
of 97% in 2001. Adams Media Research estimates that the number of U.S.
households with a DVD player will grow to 67 million in 2006, representing
approximately 60% of U.S. television households in 2006.

Our subscription service has grown rapidly since its launch in September
1999. We believe our growth has been driven primarily by our unrivalled
selection, consistently high levels of customer satisfaction, rapid customer
adoption of DVD players and our increasingly effective marketing strategy. We
primarily use pay-for-performance marketing programs and free trial offers to
acquire new subscribers. In the San Francisco Bay area, where the U.S. Postal
Service can make one- or two-day deliveries from our San Jose distribution
center, approximately 2.8% of all households subscribe to Netflix.

We currently provide titles on DVD only. We are focused on rapidly
growing our subscriber base and revenues and utilizing our proprietary
technology to minimize operating costs. Our technology is extensively employed
to manage and integrate our business, including our Web site interface, order
processing, fulfillment operations and customer service. We believe our
technology also allows us to maximize our library utilization and to run our
fulfillment operations in a flexible manner with minimal capital requirements.

Our scalable infrastructure and online interface eliminate the need for
expensive retail outlets and allow us to service our large and expanding
subscriber base from one primary distribution center and a series of low-cost
regional distribution centers. We utilize proprietary technology developed
in-house to manage the shipping and receiving of a total of 5.3 million DVDs
per month. Our software automates the process of tracking and routing titles to
and from each of our distribution centers and allocates order responsibilities
among them. We plan to operate low-cost regional distribution centers
throughout the United States to reduce delivery times and increase library
utilization.

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We were incorporated in Delaware in August 1997 and changed our name from
NetFlix.com, Inc. to Netflix, Inc. in March 2002. Our executive offices are
located at 970 University Avenue, Los Gatos, California 95032, and our
telephone number at that address is (408) 399-3700. Our Web site is located at
http://www.netflix.com. The information contained in our Web site does not
constitute a part of this prospectus.

THE OFFERING

Common stock offered by Netflix........ shares

Common stock to be outstanding after
the offering......................... shares

Use of proceeds........................ We estimate that our net proceeds
from this offering will be
approximately $ million. We intend
to use the net proceeds for:

. repayment of approximately $13.9
million of indebtedness under our
subordinated promissory notes,
including accrued interest as of
March 31, 2002; and

. general corporate purposes,
including working capital.

Risk factors........................... See "Risk Factors" and other
information included in this
prospectus for a discussion of
factors you should carefully consider
before deciding to invest in shares
of our common stock.

Proposed Nasdaq National Market symbol. NFLX

Unless we indicate otherwise, all information in this prospectus: (1)
assumes no exercise of the over-allotment option granted to the underwriters;
(2) assumes the conversion into common stock of each outstanding share of our
preferred stock, which will occur automatically upon the completion of this
offering; (3) is based upon 45,197,271 shares outstanding as of March 31, 2002,
including shares to be issued to certain studios immediately prior to this
offering based on our capitalization as of March 31, 2002; (4) gives effect to
a proposed for reverse stock split to be effected prior to the
completion of this offering; and (5) excludes:

. 12,861,856 shares of common stock issuable upon the exercise of stock
options outstanding as of March 31, 2002, with a weighted average
exercise price of $1.00 per share and 3,400,595 shares of common
stock available for future option grants under our 1997 Stock Plan
and 2002 Stock Plan, as of March 31, 2002;

. 21,053,931 shares of common stock issuable upon exercise of warrants
with a weighted average exercise price of $1.07 per share; and

. 1,750,000 shares of common stock reserved for issuance under our 2002
Employee Stock Purchase Plan.

SUMMARY FINANCIAL AND OTHER DATA

The summary financial data below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
included elsewhere in this prospectus.

THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- -----------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Total revenues................................... $ 5,006 $ 35,894 $ 75,912 $ 17,057 $30,527
Gross profit (loss).............................. 633 11,033 26,005 (1,120) 15,369
Operating loss................................... (30,031) (57,557) (37,227) (20,417) (3,151)
Net loss......................................... (29,845) (57,363) (38,618) (20,598) (3,605)
Net loss per share:
Basic and diluted............................. $ (7.13) $ (13.52) $ (7.05) $ (4.09) $ (0.59)
Pro forma--basic and diluted/(1)/............. $ (0.91) $ (0.08)
Supplemental pro forma/(2)/...................
Number of shares used in computing per shares
amounts:
Basic and diluted............................. 4,183 4,243 5,479 5,039 6,141
Pro forma--basic and diluted/(1)/............. 42,296 44,503
Supplemental pro forma/(2)/...................

AS OF MARCH 31, 2002
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA/(1)/ AS ADJUSTED/(3)/
-------- ------------- ---------------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 15,671 $15,671 $
Working capital (deficit)........................ (9,547) (9,547)
Total assets..................................... 44,306 44,306
Long-term debt, less current portion............. 4,117 4,117
Redeemable convertible preferred stock........... 101,830 --
Stockholders' equity (deficit)................... (91,306) 10,524

THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
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1999 2000 2001 2001 2002
-------- -------- -------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)

OTHER DATA:
EBITDA/(4)/ (unaudited).......................... $(21,223) $(28,179) $ (1,716) $(3,600) $ 3,583
Number of subscribers (unaudited)................ 107 292 456 303 603
Net cash provided by (used in):
Operating activities.......................... $(16,529) $(22,706) $ 4,847 $(2,805) $ 6,505
Investing activities.......................... (19,742) (24,972) (12,670) (4,087) (5,798)
Financing activities.......................... 49,408 48,375 9,059 (927) (1,167)

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(1) The pro forma balance sheet data, pro forma net loss per share--basic and
diluted, and pro forma number of shares--basic and diluted give effect to
the conversion of all outstanding shares of our preferred stock, including
the Series F Non-Voting Preferred Stock to be issued to studios immediately
prior to this offering, into shares of common stock automatically upon
completion of this offering.

(2) The supplemental pro forma net loss per share--basic and diluted gives
effect to the repayment of our subordinated promissory notes with the
proceeds from the offering for the shares solely sold to repay these
subordinated promissory notes.

(3) The pro forma as adjusted column gives effect to the sale of shares
of common stock offered by us at an assumed initial public offering price
of $ per share and the application of the net proceeds from the
offering, after deducting underwriting discounts and commissions and
estimated offering expenses, including repayment of our subordinated
promissory notes.

(4) EBITDA consists of operating loss before depreciation, amortization,
non-cash charges for equity instruments granted to non-employees and
stock-based compensation. EBITDA provides an alternative measure of cash
flow from operations. You should not consider EBITDA as a substitute for
operating loss, as an indicator of our operating performance or as an
alternative to cash flows from operating activities as a measure of
liquidity. We may calculate EBITDA differently from other companies.

RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING
SHARES IN THIS OFFERING. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE HARMED. IN
THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD
LOSE ALL OR PART OF YOUR INVESTMENT.

RISKS RELATED TO OUR BUSINESS

WE HAVE A LIMITED OPERATING HISTORY AND HISTORY OF NET LOSSES, AND WE
ANTICIPATE THAT WE WILL EXPERIENCE NET LOSSES FOR THE FORESEEABLE FUTURE.

You should consider our business and prospects in light of the risks,
expenses and difficulties encountered by companies in their early stage of
development. We have experienced significant net losses since our inception
and, given the significant operating and capital expenditures associated with
our business plan, anticipate continuing net losses for the foreseeable future.
If we do achieve profitability, we cannot be certain that we will be able to
sustain or increase such profitability. We incurred net losses of $38.6 million
for the year ended 2001. As of March 31, 2002, we had total stockholders'
deficit of $91.3 million. Only recently, beginning in 2001, have we generated
positive cash flow from operations, and we cannot be certain that we will be
able to sustain or increase such positive cash flow from operations from period
to period in the future. To achieve and sustain profitability, we must
accomplish numerous objectives, including substantially increasing the number
of paying subscribers to our service. We cannot assure you that we will be able
to achieve these objectives.

IF OUR EFFORTS TO ATTRACT SUBSCRIBERS ARE NOT SUCCESSFUL, OUR REVENUES WILL BE
AFFECTED ADVERSELY.

We must continue to attract and retain subscribers. To succeed, we must
continue to attract a large number of subscribers who have traditionally used
video retailers, video rental outlets, pay cable channels, such as HBO and
Showtime, and pay-per-view and video-on-demand, or VOD, for in-home filmed
entertainment. Our ability to attract and retain subscribers will depend in
part on our ability to consistently provide our subscribers a high quality
experience for selecting, viewing, receiving and returning titles, including
providing accurate recommendations through our CineMatch technology. If
consumers do not perceive our service offering to be of high quality, or if we
introduce new services that are not favorably received by them, we may not be
able to attract or retain subscribers. In addition, many of our new subscribers
originate from word-of-mouth advertising and referrals from existing
subscribers. If our efforts to satisfy our existing subscribers are not
successful, we may not be able to attract new subscribers, and as a result, our
revenue will be affected adversely.

WE RELY HEAVILY ON OUR PROPRIETARY TECHNOLOGY TO PROCESS DELIVERIES AND RETURNS
OF OUR DVDS AND TO MANAGE OTHER ASPECTS OF OUR OPERATIONS, AND THE FAILURE OF
THIS TECHNOLOGY TO OPERATE EFFECTIVELY COULD ADVERSELY AFFECT OUR BUSINESS.

We use complex proprietary software to process deliveries and returns of
our DVDs and to manage other aspects of our operations. Our proprietary
technology is intended to allow our primary distribution center in San Jose,
California and our recently opened regional distribution centers to be operated
on an integrated basis. We have only recently begun shipping DVDs from our
regional distribution centers, and we are continuing to modify the software
used to manage the delivery and return process for these regional distribution
centers as our utilization of these facilities increases and as we open and
operate additional distribution centers. If we are unable to maintain and
enhance our technology to manage the processing of DVDs among our distribution
centers in a timely and efficient manner, our ability to retain existing
subscribers and to add new subscribers may be impaired.

IF WE ARE NOT ABLE TO MANAGE OUR GROWTH, OUR BUSINESS COULD BE AFFECTED
ADVERSELY.

We have expanded rapidly since we launched our Web site in April 1998. We
anticipate that further expansion of our operations will be required to address
any significant growth in our subscriber base and to take

advantage of favorable market opportunities. Any future expansion will likely
place significant demands on our managerial, operational, administrative and
financial resources. If we are not able to respond effectively to new or
increased demands that arise because of our growth, or, if in responding, our
management is materially distracted from our current operations, our business
may be affected adversely. In addition, if we do not have sufficient breadth
and depth of the titles necessary to satisfy increased demand arising from
growth in our subscriber base, our subscriber satisfaction may be affected
adversely.

The increased utilization of our regional distribution centers is
intended to decrease the delivery and return times for DVDs. We anticipate that
subscribers will exchange more titles as a result of the reduced time that DVDs
spend in transit, our shipping and delivery costs and revenue sharing expenses
will increase, which would adversely affect our operating results if not offset
by increased subscriber retention and other mitigating factors.

We have no experience offering our subscription service outside the
United States. If we offer our service outside the United States, we will need
to focus substantial resources to handling operations in a foreign environment,
including addressing issues related to foreign labor markets and the regulatory
environments. As a result, our managerial, operational, administrative and
financial resources may be strained. Any international expansion may not
achieve the subscription acquisition or operating results anticipated by us at
the time we determine to expand our operations internationally.

IF WE EXPERIENCE EXCESSIVE RATES OF SUBSCRIBER CHURN, OUR REVENUES AND BUSINESS
WILL BE HARMED.

We must minimize the rate of loss of existing subscribers while adding
new subscribers. For the 12 months ended March 31, 2002, an average of
approximately 8% of our total subscribers cancelled their subscriptions each
month. Subscribers cancel their subscription to our service for many reasons,
including a perception that they do not use the service sufficiently, delivery
takes too long, the service is a poor value and customer service issues are not
satisfactorily resolved. We must continually add new subscribers both to
replace subscribers who cancel and to continue to grow our business beyond our
current subscriber base. If too many of our subscribers cancel our service, or
if we are unable to attract new subscribers in numbers sufficient to grow our
business, our operating results will be adversely affected. Further, if
excessive numbers of subscribers cancel our service, we may be required to
incur significantly higher marketing expenditures than we currently anticipate
to replace these subscribers with new subscribers.

OUR OPERATING RESULTS ARE EXPECTED TO BE DIFFICULT TO PREDICT BASED ON A NUMBER
OF FACTORS THAT ALSO WILL AFFECT OUR LONG-TERM PERFORMANCE.

We expect our operating results to fluctuate significantly in the future
based on a variety of factors, many of which are outside our control and
difficult to predict. As a result, period-to-period comparisons of our
operating results may not be a good indicator of our future or long-term
performance. The following factors may affect us from period-to-period and may
affect our long-term performance:

. our ability to manage our fulfillment processes to handle significant
increases in the number of subscribers and subscriber selections;

. our ability to improve or maintain gross margins in our business;

. changes by our competitors to their product and service offerings;

. price competition;

. our ability to maintain an adequate breadth and depth of titles;

. our ability to manage our inventory levels;

. changes in promotional support offered by studios;

. our ability to maintain, upgrade and develop our Web site, our
internal computer systems and our fulfillment processes and utilize
efficiently our distribution centers;

. fluctuations in consumer spending on DVD players, DVDs and related
products;

. fluctuations in the use of the Internet for the purchase of consumer
goods and services such as those offered by us;

. technical difficulties, system downtime or Internet disruptions;

. our ability to attract new and qualified personnel in a timely and
effective manner and retain existing personnel;

. the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;

. our ability to effectively manage the development of new business
segments and markets;

. our ability to maintain and develop new and existing marketing
relationships;

. our ability to successfully manage the integration of operations and
technology resulting from acquisitions;

. governmental regulation and taxation policies; and

. general economic conditions and economic conditions specific to the
Internet, online commerce and the movie industry.

In addition to these factors, our operating results may fluctuate based
upon seasonal fluctuations in DVD player sales and in the use of the Internet.
During our limited operating history, we have experienced greater additions of
new subscribers during late fall and the winter months, and these seasonal
fluctuations may continue in future periods.

IF OUR EFFORTS TO BUILD STRONG BRAND IDENTITY, AND IMPROVE SUBSCRIBER
SATISFACTION AND LOYALTY ARE NOT SUCCESSFUL, WE MAY NOT BE ABLE TO ATTRACT OR
RETAIN SUBSCRIBERS, AND OUR OPERATING RESULTS WILL BE AFFECTED ADVERSELY.

The Netflix brand is only four years old, and we must continue to build
strong brand identity. To succeed, we must continue to attract and retain a
large number of owners of DVD players who have traditionally relied on
store-based rental outlets and persuade them to subscribe to our service
through our Web site. We may be required to incur significantly higher
advertising and promotional expenditures than we currently anticipate to
attract large numbers of new subscribers. We believe that the importance of
brand loyalty will increase with a proliferation of DVD subscription services
and other means of distributing titles, such as VOD. If our branding efforts
are not successful, our operating results and our ability to attract and retain
subscribers will be affected adversely.

In addition, DVD players have become available for purchase for under
$100. Purchasers of DVD players at low price levels may be less inclined than
earlier purchasers of DVD players to try our subscription service or may not be
willing to commit to a monthly subscription fee. If we are unable to attract
similar interest from new purchasers of DVD players as we have from purchasers
of DVD players to date, our revenues may be affected adversely.

IF WE EXPERIENCE DELIVERY PROBLEMS OR IF OUR SUBSCRIBERS OR POTENTIAL
SUBSCRIBERS LOSE CONFIDENCE IN THE U.S. MAIL SYSTEM, WE COULD LOSE SUBSCRIBERS,
WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

We rely exclusively on the U.S. Postal Service to deliver DVDs from our
distribution centers and for subscribers to return DVDs to us. We are subject
to risks associated with using the public mail system to meet our shipping
needs, including delays caused by bioterrorism, potential labor activism and
inclement weather. For example, in the fall of 2001 terrorists used the U.S.
Postal Service to deliver envelopes containing Anthrax, following which mail
deliveries around the United States experienced significant delays. Our DVDs
also are

subject to risks of breakage during delivery and handling by the U.S. Postal
Service. Our failure to timely deliver DVDs to our subscribers could cause them
to become dissatisfied and cancel our service, which could adversely affect our
operating results.

INCREASES IN THE COST OF DELIVERING DVDS COULD ADVERSELY AFFECT OUR GROSS
PROFIT AND MARKETING EXPENSES.

Increases in postage delivery rates will adversely affect our gross
profit if we elect not to raise our subscription rates to offset the increase.
The U.S. Postal Service has announced that it will increase the rate for
first-class postage from $0.34 to $0.37 in June 2002. In addition, the U.S.
Postal Service has announced long-term plans to reduce its costs and make its
service more efficient. If the U.S. Postal Service curtails its services, such
as by the discontinuation of Saturday delivery service, our ability to timely
deliver DVDs could diminish, and our subscriber satisfaction could be affected
adversely.

Currently, most filmed entertainment is packaged on a single lightweight
DVD. Our delivery process is designed to accommodate the delivery of one DVD to
fulfill a selection. Because of the lightweight nature of a DVD, we generally
mail one envelope containing a title using standard first-class postage,
however, studios occasionally provide additional content on a second DVD, or
may package a title on two DVDs. If packaging of filmed entertainment on
multiple DVDs were to become more prevalent, or if the weight of DVDs were to
increase, our costs of delivery and fulfillment processing would increase. In
addition, we expense shipping costs of free trial programs to new subscribers
as marketing expense. Therefore, if the cost of delivering titles were to
increase, our marketing expense would be adversely affected.

IF WE ARE UNABLE TO EFFECTIVELY UTILIZE OUR CINEMATCH TECHNOLOGY, OUR BUSINESS
MAY SUFFER.

Based on proprietary algorithms, our CineMatch technology enables us to
predict and recommend titles and effectively merchandize our library to our
subscribers. We believe that in order for CineMatch to function most
effectively, it must access a large database of user ratings. We cannot assure
you that the proprietary algorithms in our CineMatch technology will continue
to function effectively to predict and recommend titles, or that we will
continue to be successful in enticing subscribers to rate enough titles for our
database to effectively predict and recommend new or existing titles.

If CineMatch does not enable us to predict and recommend titles that our
subscribers will enjoy our personal movie recommendation service will be less
useful, in which event:

. our subscriber satisfaction may decrease, subscribers may perceive
our service to be of lower value and our ability to attract and
retain subscribers may be affected adversely;

. our ability to effectively merchandise and utilize our library will
be affected adversely; and

. our subscribers may default to choosing titles from among new
releases or other titles that cost us more to provide, and our
margins may be affected adversely.

IF WE DO NOT CORRECTLY ANTICIPATE OUR SHORT AND LONG-TERM NEEDS FOR TITLES THAT
WE ACQUIRE PURSUANT TO REVENUE SHARING AGREEMENTS, OUR SUBSCRIBER SATISFACTION
AND RESULTS OF OPERATIONS MAY BE AFFECTED ADVERSELY.

Under our revenue sharing agreements, we generally pre-order titles prior
to their release on DVD based on our anticipated needs. If we anticipate
inaccurately and we acquire insufficient copy depth for specific titles, it is
generally impracticable for us to acquire additional copy depth for such titles
while such titles are subject to revenue sharing. If we do not acquire
sufficient copies of titles, we may not satisfy subscriber demand and our
subscriber satisfaction and results of operations could be affected adversely.
Conversely, if we attempt to mitigate this risk and acquire more copies than
needed to satisfy our subscriber demand, then our inventory utilization would
become less effective and our gross margins would be affected adversely.

IF OUR SUBSCRIBERS SELECT TITLES THAT ARE MORE EXPENSIVE FOR US TO ACQUIRE AND
DELIVER ON A MORE FREQUENT BASIS, OUR EXPENSES WOULD INCREASE.

Certain titles cost us more to acquire or result in greater revenue
sharing expenses depending on the source from whom they are acquired and the
terms on which they are acquired. If subscribers select these more costly
titles more often on a proportional basis compared to all titles selected, our
revenue sharing and other DVD acquisition expenses could increase, and our
gross margins could be adversely affected.

IF WE ARE UNABLE TO OFFSET INCREASED DEMAND FOR TITLES WITH INCREASED
SUBSCRIBER RETENTION OR OPERATING MARGINS, OUR OPERATING RESULTS MAY BE
AFFECTED ADVERSELY.

Subscribers to our service can view as many titles as they want every
month and, depending on the service plan, may have out between two and eight
titles at a time. With our use of regional distribution centers, there will be
a reduction in the transit time of DVDs. As a result, we anticipate that our
subscribers will exchange more titles per month which will increase our
operating costs. If our subscriber retention does not increase or our operating
margins do not improve to an extent necessary to offset the effect of increased
operating costs, our operating results will be adversely affected.

In addition, subscriber demand for titles may increase for a variety of
other reasons beyond our control, including promotion by studios and seasonal
variations in movie watching. Our subscriber growth and retention may be
affected adversely if we attempt to increase our monthly subscription fees to
offset any increased costs of acquiring or delivering titles.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY, OUR BUSINESS WILL BE AFFECTED
ADVERSELY.

The market for in-home filmed entertainment is intensely competitive and
subject to rapid change. Many consumers maintain simultaneous relationships
with multiple in-home filmed entertainment providers and can easily shift
spending from one provider to another. For example, consumers may subscribe to
HBO, rent a DVD from Blockbuster, buy a DVD from Wal-Mart and subscribe to
Netflix, or some combination thereof, all in the same month. Competitors may be
able to launch new businesses at relatively low cost. DVDs represent only one
of many existing and potential new technologies for viewing filmed
entertainment. In addition, the growth in adoption of DVD technology is not
mutually exclusive from the growth of other technologies. If we are unable to
successfully compete with current and new competitors and technologies, we may
not be able to achieve adequate market share, increase our revenues, or achieve
and maintain profitability. Our principal competitors include, or could include:

. video rental outlets, such as Blockbuster Video and Hollywood
Entertainment;

. movie retail stores, such as Best Buy, Wal-Mart and Amazon.com;

. subscription entertainment services, such as HBO and Showtime;

. pay-per-view and video-on-demand services;

. online DVD sites, such as dvdovernight and Rentmydvd.com;

. Internet movie providers, such as Movielink, backed by Columbia
TriStar, Warner Bros. and a few other studios, Movies.com, backed by
Walt Disney and Twentieth Century Fox, CinemaNow.com, backed by
Blockbuster and Microsoft, and Movie Flix;

. cable providers, such as AOL Time Warner and Comcast; and

. direct broadcast satellite providers, such as DirectTV and Echostar.

Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we do. Some of our

competitors have adopted, and may continue to adopt, aggressive pricing
policies and devote substantially more resources to marketing and Web site and
systems development than we do. Increased competition may result in reduced
operating margins, loss of market share and reduced revenues. In addition, our
competitors may form strategic alliances with studios and distributors that
could affect adversely our ability to obtain filmed entertainment on favorable
terms.

IF CONSUMER ADOPTION OF DVD PLAYERS SLOWS, OUR BUSINESS COULD BE ADVERSELY
AFFECTED.

The rapid adoption of DVD players has been fueled by strong retail
support, strong studio support and falling DVD player prices. If retailers or
studios reduce their support of the DVD format, or if manufacturers raise
prices, continued DVD adoption by consumers could slow. If new or existing
technologies, such as D-VHS, were to become more popular at the expense of the
adoption or use of DVD technology, consumers may delay or avoid purchasing a
DVD player. Our subscriber growth will be substantially influenced by future
consumer adoption of DVD players, and if such adoption slows, our subscriber
growth may also slow.

WE DEPEND ON STUDIOS TO RELEASE TITLES ON DVD FOR AN EXCLUSIVE TIME PERIOD
FOLLOWING THEATRICAL RELEASE.

Our ability to attract and retain subscribers is related to our ability
to offer new releases of filmed entertainment on DVD prior to their release to
other distribution channels. Except for theatrical release, DVD and VHS
currently enjoy a significant competitive advantage over other distribution
channels, such as pay-per-view and VOD, because of the early timing of the
distribution window for DVD and VHS. The window for DVD and VHS rental and
retail sales is generally exclusive against other forms of non-theatrical movie
distribution, such as pay-per-view, premium television, basic cable and network
and syndicated television. The length of the exclusive window for movie rental
and retail sales varies, typically ranging from 30 to 90 days.

Our business could suffer increased competition if:

. the window for rental were no longer the first following the
theatrical release; or

. the length of this window were shortened.

The order, length and exclusivity of each window for each distribution
channel is determined solely by the studio releasing the title, and we cannot
assure you that the studios will not change their policies in the future in a
manner that would be adverse to our business and results of operations.

In addition, any conditions that adversely affect the movie industry,
including constraints on capital, financial difficulties, regulatory
requirements and strikes, work stoppages or other disruptions involving
writers, actors or other essential personnel, could affect adversely the
availability of new titles, consumer demand for filmed entertainment and our
business.

IF WE ARE UNABLE TO RENEGOTIATE OUR REVENUE SHARING AGREEMENTS WHEN THEY EXPIRE
ON TERMS FAVORABLE TO US, OR IF THE COST TO US OF PURCHASING TITLES ON A
WHOLESALE BASIS INCREASES, OUR GROSS MARGINS MAY BE AFFECTED ADVERSELY.

Since 2000, we have entered into over 50 revenue sharing arrangements
with studios and distributors. In 2001, we acquired approximately 80% of our
titles through revenue sharing agreements with studios and distributors,
including our agreements with Columbia TriStar Home Entertainment and Warner
Home Video. These revenue sharing agreements generally have terms of up to five
years. The length of time we share revenue on each title ends after a fixed
period. As our revenue sharing agreements expire, we may be required to
negotiate new terms that could be disadvantageous to us.

Titles that we do not acquire under a revenue sharing agreement are
purchased on a wholesale basis from studios or other distributors. If the price
of titles that we purchase wholesale increases, our gross margin will be
affected adversely.

IF THE SALES PRICE OF DVDS TO RETAIL CONSUMERS DECREASES, OUR ABILITY TO
ATTRACT NEW SUBSCRIBERS MAY BE AFFECTED ADVERSELY.

The cost of manufacturing DVDs is substantially less than the price for
which new DVDs are generally sold in the retail market. Thus, we believe that
studios and other resellers of DVDs have significant flexibility in pricing
DVDs for retail sale. If the retail price of DVDs were to become significantly
lower, consumers may choose to purchase DVDs rather than subscribe to our
service.

IF DISPOSABLE DVDS ARE DEVELOPED, ADOPTED AND SUPPORTED AS A METHOD OF CONTENT
DELIVERY BY THE STUDIOS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.

We are currently aware that certain entities are attempting to develop
disposable DVDs. As currently contemplated, disposable DVDs would allow a
consumer to view a DVD for an unlimited number of times during a given time
period, following which the DVD becomes unplayable by a chemical reaction, and
is then disposable. If disposable DVDs become a viable alternative method of
content delivery supported by the studios, our business could be adversely
affected.

IF WE FAIL TO MAINTAIN OR ADEQUATELY REPLACE OUR OUTSIDE SOURCES OF NEW
SUBSCRIBERS OR ARE UNABLE TO CONTINUE TO MARKET OUR SERVICE IN THE MANNER
CURRENTLY CONDUCTED, OUR SUBSCRIBER LEVELS MAY BE AFFECTED ADVERSELY AND OUR
MARKETING EXPENSES MAY INCREASE.

We obtain a large portion of our new subscribers through incentive-based
online marketing programs. We engage third parties to solicit new subscribers
through the use of banner ads, pop-under and pop-over placements, direct links
and e-mails. We also have an active affiliate program by which third parties
register with us and obtain particular advertisements from us for use on their
Web sites or through other online marketing forums. In addition, we have
engaged in various offline incentive-based marketing programs. For example, we
obtain subscribers through solicitations placed inside the packaging of stand
alone DVD players through arrangements we have with DVD player manufacturers,
including ApexDigital, JVC Corporation of America, Panasonic Consumer
Electronics Company, Philips Consumer Electronics, RCA, Samsung, Sanyo-Fisher,
Sharp, Sony Electronics and Toshiba. We have recently explored other
incentive-based advertising channels including newspaper and television
advertising. These third parties may not continue to participate in our
marketing programs if the programs do not provide sufficient value for their
participation, our competitors offer better terms or the market for
incentive-based advertising decreases. If we are unable to maintain or replace
these sources of subscribers, our subscriber levels may be affected adversely
and our cost of marketing may increase.

We also may not be able to continue to support the marketing of our
service in the manner currently marketed if such activities are adverse to our
business. Laws or regulations may be enacted which prohibit use of mass emails
or similar marketing activities. Even if no relevant law or regulation is
enacted, we may discontinue use or support of certain activities if we become
concerned that subscribers or potential subscribers deem them intrusive or they
otherwise adversely affect our goodwill and brand. For example, we recently
terminated our relationship with certain third party online e-mail brokers who
were unwilling or unable to comply with our standards for solicitation which
include among other things that all recipients have "opted-in" to receive the
solicitation. If these marketing activities are curtailed, our ability to
attract new subscribers may be affected adversely.

In addition, while the DVD player manufacturers with whom we have
promotional relationships are required to include our promotional materials
with every DVD player they sell, we cannot effectively control what portion of
DVD players sold by them actually include the promotional materials. If these
DVD player manufacturers do not fully comply with the terms of our promotional
relationships, our ability to attract new subscribers may be affected adversely.

FOLLOWING THE OFFERING, WE MAY NEED ADDITIONAL CAPITAL, AND WE CANNOT BE SURE
THAT ADDITIONAL FINANCING WILL BE AVAILABLE.

Historically, we have funded our operating losses and capital
expenditures through proceeds from private equity and debt financings and
equipment leases. Although we currently anticipate that the proceeds of

this offering, together with our available funds and cash flow from operations,
will be sufficient to meet our cash needs for the foreseeable future, we may
require additional financing. Our ability to obtain financing will depend,
among other things, on our development efforts, business plans, operating
performance and condition of the capital markets at the time we seek financing.
We cannot assure you that additional financing will be available to us on
favorable terms when required, or at all. If we raise additional funds through
the issuance of equity, equity-linked or debt securities, those securities may
have rights, preferences or privileges senior to the rights of our common
stock, and our stockholders may experience dilution.

ANY SIGNIFICANT DISRUPTION IN SERVICE ON OUR WEB SITE OR IN OUR COMPUTER
SYSTEMS COULD RESULT IN A LOSS OF SUBSCRIBERS.

Subscribers and potential subscribers access our service through our Web
site, where the title selection process is integrated with our delivery
processing systems and software. Our reputation and ability to attract, retain
and serve our subscribers is dependent upon the reliable performance of our Web
site, network infrastructure and fulfillment processes. Interruptions in these
systems could make our Web site unavailable and hinder our ability to fulfill
selections. Much of our software is proprietary, and we rely on the expertise
of members of our engineering and software development teams for the continued
performance of our software and computer systems. Service interruptions or the
unavailability of our Web site could diminish the overall attractiveness of our
subscription service to existing and potential subscribers.

Our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions and delays
in our service and operations and loss, misuse or theft of data. Our Web site
periodically experiences directed attacks intended to cause a disruption in
service. Any attempts by hackers to disrupt our Web site service or our
internal systems, if successful, could harm our business, be expensive to
remedy and damage our reputation. Our general business disruption insurance
does not cover expenses related to direct attacks on our Web site or internal
systems. Efforts to prevent hackers from entering our computer systems are
expensive to implement and may limit the functionality of our services. Any
significant disruption to our Web site or internal computer systems could
result in a loss of subscribers and adversely affect our business and results
of operations.

Our communications hardware and the computer hardware used to operate our
Web site are hosted at the facilities of a third party provider. Hardware for
our delivery systems is maintained in our distribution centers. Fires, floods,
earthquakes, power losses, telecommunications failures, break-ins and similar
events could damage these systems and hardware or cause them to fail
completely. Problems faced by our third party Web hosting provider, with the
telecommunications network providers with whom it contracts or with the systems
by which it allocates capacity among its subscribers, including us, could
impact adversely the experience of our subscribers. Any of these problems could
result in a loss of subscribers.

OUR EXECUTIVE OFFICES AND PRIMARY DISTRIBUTION CENTER ARE LOCATED IN THE SAN
FRANCISCO BAY AREA. IN THE EVENT OF AN EARTHQUAKE, OTHER NATURAL OR MAN-MADE
DISASTER OR POWER LOSS, OUR OPERATIONS WOULD BE AFFECTED ADVERSELY.

Our executive offices and primary distribution center are located in the
San Francisco Bay area. Our business and operations could be materially
adversely affected in the event of electrical blackouts, fires, floods,
earthquakes, power losses, telecommunications failures, break-ins or similar
events. We may not be able to effectively shift our fulfillment and delivery
operations due to disruptions in service in the San Francisco Bay area or any
other facility. Because the San Francisco Bay area is located in an
earthquake-sensitive area, we are particularly susceptible to the risk of
damage to, or total destruction of, our primary distribution center and the
surrounding transportation infrastructure. We are not insured against any
losses or expenses that arise from a disruption to our business due to
earthquakes. Further, the State of California has experienced deficiencies in
its power supply over the last year, resulting in occasional rolling
black-outs. If rolling blackouts or other disruptions in power occur, our
business and operations would be disrupted, and our business would be affected
adversely.

THE LOSS OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO ATTRACT,
ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE, COULD
SERIOUSLY HARM OUR EXISTING BUSINESS AND NEW SERVICE DEVELOPMENTS.

We depend on the continued services and performance of our key personnel,
including Reed Hastings, our Chief Executive Officer, President and Chairman of
the Board, W. Barry McCarthy, Jr., our Chief Financial Officer and Secretary,
Thomas R. Dillon, our Vice President of Operations, Leslie J. Kilgore, our Vice
President of Marketing, and Neil Hunt, our Vice President of E-Commerce. In
addition, much of our key technology and systems are custom made for our
business by our personnel so that the loss of our key technology personnel
could disrupt the operation of our title selection and fulfillment systems and
have an adverse effect on our ability to grow and expand our systems.

PRIVACY CONCERNS COULD LIMIT OUR ABILITY TO LEVERAGE OUR SUBSCRIBER DATA.

In the ordinary course of business, and in particular, in connection with
providing our personal movie recommendation service, we collect and utilize
data supplied by our subscribers. We currently face certain legal obligations
regarding the manner in which we treat such information. Other businesses have
been criticized by privacy groups and governmental bodies for attempts to link
personal identities and other information to data collected on the Internet
regarding users' browsing and other habits. Increased regulation of data
utilization practices, including self-regulation, as well as increased
enforcement of existing laws could have an adverse effect on our business.

OUR REPUTATION AND RELATIONSHIPS WITH SUBSCRIBERS WOULD BE HARMED IF OUR
BILLING DATA WERE TO BE ACCESSED BY UNAUTHORIZED PERSONS.

To secure transmission of confidential information obtained by us for
billing purposes, including subscribers' credit card data, we rely on licensed
encryption and authentication technology. In conjunction with the credit card
companies, we take measures to protect against unauthorized intrusion into our
subscribers' credit card and other data. If, despite these measures, we
experienced any unauthorized intrusion into our subscribers' data, current and
potential subscribers may become unwilling to provide the information to us
necessary for them to become subscribers, and our business could be affected
adversely. Similarly, if a well-publicized breach of the consumer data security
of any other major consumer Web site were to occur, there could be a general
public loss of confidence in the use of the Internet for commerce transactions,
which could adversely affect our business.

In addition, because we obtain subscribers' billing information on our
Web site, we do not obtain signatures from subscribers in connection with the
use of credit cards by them. Under current credit card practices, to the extent
we do not obtain cardholders' signatures, we are liable for fraudulent credit
card transactions, even where the associated financial institution approves
payment of the orders. We do not currently carry insurance against the risk of
fraudulent credit card transactions. A failure to adequately control fraudulent
credit card transactions would harm our business and results of operations.

OUR RELATIONSHIP WITH SUBSCRIBERS AND CREDIT CARD COMPANIES COULD BE HARMED IF
OUR BILLING SOFTWARE FAILS.

We have in the past experienced problems with our subscriber billing
software, causing us to overbill subscribers. Although we have and will
continue to credit the accounts of the subscribers we overbill, problems with
our billing software may have an adverse effect on our subscriber satisfaction
and may cause one or more of the major credit companies to disallow our
continued use of their payment products. In addition, if our billing software
fails and we fail to bill subscribers our cash flow and results of operations
will be affected adversely.

IF OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS ARE NOT ADEQUATELY PROTECTED TO
PREVENT USE OR APPROPRIATION BY OUR COMPETITORS, THE VALUE OF OUR BRAND AND
OTHER INTANGIBLE ASSETS MAY BE DIMINISHED, AND OUR BUSINESS MAY BE ADVERSELY
AFFECTED.

We rely and expect to continue to rely on a combination of
confidentiality and license agreements with our employees, consultants and
third parties with whom we have relationships, as well as trademark, copyright,

patent and trade secret protection laws, to protect our proprietary rights. We
have filed trademark applications in the United States for the Netflix,
Netflix.com, CineMatch and Mr. DVD names, and have filed a U.S. patent
application for aspects of our technology. We intend to file an amended
trademark application for the Netflix design logo responsive to a denial of our
initial application for the Netflix design logo. From time to time we expect to
file additional trademark and patent applications. Nevertheless, these
applications may not be approved, third parties may challenge any patents
issued to or held by us, third parties may knowingly or unknowingly infringe
our patents, trademarks and other proprietary rights, and we may not be able to
prevent infringement without substantial expense to us. If the protection of
our proprietary rights is inadequate to prevent use or appropriation by third
parties, the value of our brand and other intangible assets may be diminished,
competitors may be able to more effectively mimic our service and methods of
operations, the perception of our business and service to subscribers and
potential subscribers may become confused in the marketplace and our ability to
attract subscribers may be adversely affected.

INTELLECTUAL PROPERTY CLAIMS AGAINST US COULD BE COSTLY AND RESULT IN THE LOSS
OF SIGNIFICANT RIGHTS RELATED TO, AMONG OTHER THINGS, OUR WEB SITE, CINEMATCH
TECHNOLOGY AND TITLE SELECTION PROCESSES.

Trademark, patent and other intellectual property rights are becoming
increasingly important to us and other Internet companies. If there is a
successful claim of patent infringement against us and we are unable to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, our business

and competitive position may be affected adversely. Many companies are devoting
significant resources to developing patents that could potentially affect many
aspects of our business. There are numerous patents that broadly claim means
and methods of conducting business on the Internet. We may be accused of
infringing certain of these patents. In addition, other parties may assert
infringement or unfair competition claims against us that could relate to any
aspect of our technology, business processes or other intellectual property. We
have not exhaustively searched patents relative to our technology. We cannot
predict whether third parties will assert claims of infringement against us,
the subject matter of any of these claims or whether these assertions or
prosecutions will adversely affect our business. If we are forced to defend
ourselves against any of these claims, whether they are with or without merit
or are determined in our favor, we may face costly litigation, diversion of
technical and management personnel, inability to use our current Web site or
CineMatch technology or product shipment delays. As a result of a dispute, we
may have to develop non-infringing technology or enter into royalty or
licensing agreements. These royalty or licensing agreements, if required, may
be unavailable on terms acceptable to us, or at all.

IF WE ARE UNABLE TO PROTECT OUR DOMAIN NAMES, OUR REPUTATION AND BRAND COULD BE
AFFECTED ADVERSELY.

We currently hold various domain names relating to our brand, including
Netflix.com. Failure to protect our domain names could affect adversely our
reputation and brand, and make it more difficult for users to find our Web site
and our service. The acquisition and maintenance of domain names generally are
regulated by governmental agencies and their designees. The regulation of
domain names in the United States may change in the near future. Governing
bodies may establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, we may be unable to acquire or maintain relevant domain names.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. We may be
unable to prevent third parties from acquiring domain names that are similar
to, infringe upon or otherwise decrease the value of our trademarks and other
proprietary rights.

BECAUSE OUR BUSINESS IS ACCESSED OVER THE INTERNET, IF THE INTERNET
INFRASTRUCTURE IS NOT DEVELOPED OR MAINTAINED, WE WILL LOSE SUBSCRIBERS.

The Internet may not become a viable commercial marketplace for many
potential subscribers due to inadequate development of network infrastructure
and enabling technologies that address consumer concerns about:

. network performance;

. security;

. reliability;

. speed of access;

. ease of use; and

. bandwidth availability.

The Internet has experienced a variety of outages and delays as a result
of damage to portions of its infrastructure, and it could face outages and
delays in the future. These outages and delays could frustrate public use of
the Internet, including use of our Web site offerings. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols to handle increased levels of activity or due to
governmental regulation.

IF WE BECOME SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH OR
UPLOAD FROM OUR USERS, OUR RESULTS OF OPERATIONS WOULD BE AFFECTED ADVERSELY.

As a publisher of online content, we face potential liability for
negligence, copyright, patent or trademark infringement or other claims based
on the nature and content of materials that we publish or distribute. We also
may face potential liability for content uploaded from our users in connection
with our community-related content or movie reviews. If we become liable, then
our business may suffer. Litigation to defend these claims could be costly and
harm our results of operations. We cannot assure you that we are adequately
insured to cover claims of these types or to indemnify us for all liability
that may be imposed on us.

WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS, OR INCUR
GREATER OPERATING EXPENSES, IF GOVERNMENT REGULATION OF THE INTERNET OR OTHER
AREAS OF OUR BUSINESS CHANGES OR IF CONSUMER ATTITUDES TOWARD USE OF THE
INTERNET CHANGE.

The adoption or modification of laws or regulations relating to the
Internet or other areas of our business could limit or otherwise adversely
affect the manner in which we currently conduct our business. In addition, the
growth and development of the market for online commerce may lead to more
stringent consumer protection laws, which may impose additional burdens on us.
If we are required to comply with new regulations or legislation or new
interpretations of existing regulations or legislation, this compliance could
cause us to incur additional expenses or alter our business model.

The manner in which Internet and other legislation may be interpreted and
enforced cannot be precisely determined and may subject either us or our
customers to potential liability, which in turn could have an adverse effect on
our business, results of operations and financial condition. The adoption of
any laws or regulations that adversely affect the popularity or growth in use
of the Internet could decrease the demand for our subscription service and
increase our cost of doing business.

In addition, if consumer attitudes toward use of the Internet change,
consumers may become unwilling to select their entertainment online or
otherwise provide us with information necessary for them to become subscribers.
Further, we may not be able to effectively market our services online to users
of the Internet. If we are unable to interact with consumers because of changes
in their attitude toward use of the Internet, our subscriber acquisition and
retention and operating results may be affected adversely.

RISKS RELATED TO THIS OFFERING

OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL EXERCISE SIGNIFICANT
CONTROL OVER NETFLIX.

After the completion of this offering, our executive officers and
directors, their immediate family members and affiliated venture capital funds
will beneficially own, in the aggregate, approximately % of

our outstanding common stock. In addition, Jay Hoag, one of our directors, will
beneficially own approximately % of our outstanding common stock, Reed
Hastings, our president, chief executive officer, and chairman of our board of
directors will beneficially own approximately % of our outstanding common
stock and Michael Schuh, one of our directors, will beneficially own
approximately % of our outstanding common stock. These stockholders may
have individual interests that are different from yours and will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent someone from acquiring or merging
with us.

PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD DISCOURAGE A
TAKEOVER THAT STOCKHOLDERS MAY CONSIDER FAVORABLE.

Following this offering, our charter documents may discourage, delay or
prevent a merger or acquisition that a stockholder may consider favorable
because they:

. authorize our board of directors, without stockholder approval, to
issue up to 10,000,000 shares of undesignated preferred stock;

. provide for a classified board of directors;

. prohibit our stockholders from acting by written consent;

. establish advance notice requirements for proposing matters to be
approved by stockholders at stockholder meetings; and

. prohibit stockholders from calling a special meeting of stockholders.

As a Delaware corporation, we are also subject to certain Delaware
anti-takeover provisions. Under Delaware law, a corporation may not engage in a
business combination with any holder of 15% or more of its capital stock unless
the holder has held the stock for three years or, among other things, the board
of directors has approved the transaction. Our board of directors could rely on
Delaware law to prevent or delay an acquisition of us. For a description of our
capital stock, see "Description of Capital Stock."

OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE FOLLOWING THIS OFFERING.

Prior to this offering, there has been no public market for shares of our
common stock. An active market may not develop following completion of this
offering, or if developed, may not be maintained.

The market prices of the securities of Internet and technology-related
companies have been extremely volatile. The price at which our common stock
will trade after this offering could be extremely volatile and may fluctuate
substantially due to the following factors, some of which are beyond our
control:

. variations in our operating results;

. variations between our actual operating results and the expectations
of securities analysts, investors and the financial community;

. announcements of developments affecting our business, systems or
expansion plans by us or others;

. market volatility in general; and

. the operating results of our competitors.

As a result of these and other factors, investors in our common stock may
not be able to resell their shares at or above the initial offering price.

In the past, securities class action litigation often has been instituted
against companies following periods of volatility in the market price of their
securities. This type of litigation, if directed at us, could result in
substantial costs and a diversion of management's attention and resources.

WE WILL RECORD SUBSTANTIAL EXPENSES RELATED TO OUR ISSUANCE OF STOCK OPTIONS
THAT MAY HAVE A MATERIAL NEGATIVE IMPACT ON OUR OPERATING RESULTS FOR THE
FORESEEABLE FUTURE.

We are required to recognize, as a reduction of stockholders' equity,
deferred compensation equal to the difference between the deemed fair market
value of our common stock for financial reporting purposes and the exercise
price of these options at the date of grant. This deferred compensation is
amortized over the vesting period of the applicable options, generally three to
four years, using the graded vesting method. At December 31, 2001,
approximately $5.7 million of deferred compensation related to employee stock
options remained unamortized. The resulting amortization expense will have a
material negative impact on our operating results in future periods. In
addition, in August and September 2001 we repriced options to purchase an
aggregate of 2,741,386 shares of our common stock to $1.00 per share. We cannot
predict the amount of compensation expense that we will have to recognize on a
quarterly basis for these repriced options, and it could materially negatively
impact our operating results for future periods. See further disclosure of
variable award accounting on pages 27 and 28 under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Operating
Expenses--Stock-Based Compensation."

FUTURE SALES OF OUR COMMON STOCK, INCLUDING THE SHARES PURCHASED IN THIS
OFFERING, MAY DEPRESS OUR STOCK PRICE.

Sales of substantial amounts of our common stock in the public market
following this offering by our existing stockholders or upon the exercise of
outstanding options or warrants to purchase shares of our common stock may
adversely affect the market price of our common stock. Such sales could create
public perception of difficulties or problems with our business. As a result,
these sales might make it more difficult for us to sell securities in the
future at a time and price that we deem necessary or appropriate.

Upon completion of this offering, we will have outstanding shares
of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options and warrants after March 31,
2002. Holders of of our currently outstanding shares and warrants and
options to acquire shares have entered into lock-up agreements with the
underwriters of this offering. With limited exceptions, these lock-up
agreements prohibit a stockholder from selling, contracting to sell or
otherwise disposing of any common stock or any securities that are convertible
into or exercisable for common stock for 180 days from the date of this
prospectus, although Merrill Lynch may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. As a result of these lock-up agreements, notwithstanding
possible earlier eligibility for sale under the provisions of Rule 144, 144(k)
or 701, none of these shares may be sold until 181 days after the date of this
prospectus.

Of the outstanding shares subject to lock-up agreements:

. of these shares will be tradable without restriction pursuant
to Rule 144(k) 181 days after the date of this prospectus; and

. of these shares will be tradable, subject to the limitations
imposed by Rule 144 181 days after the date of this prospectus.

FINANCIAL FORECASTING BY US AND FINANCIAL ANALYSTS WHO MAY PUBLISH ESTIMATES OF
OUR FINANCIAL RESULTS WILL BE DIFFICULT BECAUSE OF OUR LIMITED OPERATING
HISTORY, AND OUR ACTUAL RESULTS MAY DIFFER FROM FORECASTS.

As a result of our recent growth and our limited operating history, it is
difficult to accurately forecast our revenues, gross profit, operating
expenses, number of paying subscribers, number of DVDs shipped per day and
other financial and operating data. The inability by us or the financial
community to accurately forecast our operating results could cause our net
losses in a given quarter to be greater than expected, which could cause a

decline in the trading price of our common stock. We have a limited amount of
meaningful historical financial data upon which to base planned operating
expenses. We base our current and forecasted expense levels and DVD
acquisitions on our operating plans and estimates of future revenues, which are
dependent on the growth of our subscriber base and the demand for titles by our
subscribers. As a result, we may be unable to make accurate financial forecasts
or to adjust our spending in a timely manner to compensate for any unexpected
shortfalls in revenues. We believe that these difficulties in forecasting are
even greater for financial analysts that may publish their own estimates of our
financial results.

OUR MANAGEMENT MAY NOT USE THE PROCEEDS OF THIS OFFERING EFFECTIVELY.

Our management has broad discretion over the use of proceeds of this
offering. In addition, our management has not designated a specific use for a
substantial portion of the proceeds of this offering. Accordingly, it is
possible that our management may allocate the proceeds in ways that do not
improve our operating results. In addition, these proceeds may not be invested
to yield a favorable rate of return.

WE HAVE NO INTENTION TO PAY CASH DIVIDENDS ON OUR COMMON STOCK FOR THE
FORESEEABLE FUTURE, AND OUR LEASE FINANCING AGREEMENTS PROHIBIT US FROM DOING
SO.

We currently expect to retain future earnings, if any, to finance the
growth and development of our business and do not anticipate paying any cash
dividends for the foreseeable future. Further, lease financing agreements to
which we are a party and pursuant to which we have outstanding indebtedness,
prohibit us from paying any dividends. Therefore, you will not receive any
return on an investment in our common stock unless you sell your common stock
for a price greater than which you paid for it.

FORWARD-LOOKING STATEMENTS

You should not place undue reliance on forward-looking statements in this
prospectus. This prospectus contains forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. We use words such as "anticipates,"
"believes," "plans," "expects," "future," "intends" and similar expressions to
identify such forward-looking statements. Forward- looking statements include
statements regarding our business strategy, future operating performance, the
size of the market for our services and our prospects. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us described in "Risk Factors" starting on page 5 and elsewhere
in this prospectus. We caution you not to rely on these statements without also
considering the risks and uncertainties associated with these statements and
our business that are addressed in this prospectus.

This prospectus contains various estimates related to the Internet,
e-commerce and the filmed entertainment industry. These estimates have been
included in studies published or produced by market research and other firms
including Adams Media Research, DVD Entertainment Group and the National Cable
Television Association. These estimates have been produced by industry analysts
based on trends to date, their knowledge of technologies and markets, and
customer research, but these are forecasts only and are subject to inherent
uncertainty.

USE OF PROCEEDS

The net proceeds to us from the sale of shares being offered by us
at an assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, are estimated to be approximately $ million, or
approximately $ million if the underwriters' over-allotment option is
exercised in full.

The principal purposes of this offering are to create a public market for
our common stock, to facilitate our future access to the public capital markets
and to provide us with flexibility in the future, including to acquire
additional businesses, products or technologies either with the net proceeds
from this offering or through the publicly traded common stock we create
through this offering, although we have no present intention to acquire any
such businesses, products or technologies at this time. We intend to use a
portion of the net proceeds of this offering to repay all outstanding
indebtedness under our subordinated promissory notes, which was approximately
$13.9 million as of March 31, 2002, including accrued interest and for general
corporate purposes, including working capital. Our subordinated promissory
notes, issued in July 2001, accrue interest at a stated rate of 10% per year
compounded annually and mature upon the earlier of July 10, 2011 and the
completion of this offering. The proceeds we received from the issuance of our
subordinated promissory notes have been used for working capital, capital
expenditures and general corporate purposes.

We have not allocated a specific amount of our net proceeds from this
offering to any particular purpose, other than repayment of indebtedness under
our subordinated promissory notes. The net proceeds that we actually expend for
general corporate purposes may vary significantly depending on a number of
factors, including future revenue growth, if any, and our cash flows. As a
result, we will retain broad discretion over the allocation of the net proceeds
from this offering. Pending use of the net proceeds from this offering, we
intend to invest the net proceeds in short-term, investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock.
We currently expect to retain future earnings, if any, to finance the growth
and development of our business and do not anticipate paying any cash dividends
in the foreseeable future. Our existing lease financing agreements prohibit us
from paying any dividends.

CAPITALIZATION

The following table sets forth our cash, cash equivalents and
capitalization as of March 31, 2002:

. on an actual basis;

. on a pro forma basis assuming the conversion of all shares of our
preferred stock into shares of common stock automatically upon
completion of this offering and the filing of our amended and
restated certificate of incorporation upon completion of this
offering, including shares to be issued to certain studios
immediately prior to this offering; and

. on a pro forma as adjusted basis to reflect the sale of shares
of our common stock at an assumed initial public offering price of
$ per share, less the underwriting discounts and commissions and
estimated offering expenses, and the application of the net proceeds
from this offering.

This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
our financial statements and notes to those statements appearing elsewhere in
this prospectus.

AS OF MARCH 31, 2002
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)

Cash and cash equivalents.............................................................. $ 15,671 $ 15,671 $
========= ========= ===

Subordinated promissory notes, net of unamortized discount of $10.8 million............ $ 3,158 $ 3,158 $--
Capital lease obligations, net of current portion...................................... 959 959
--------- --------- ---
Total long-term debt............................................................ 4,117 4,117

Redeemable convertible preferred stock and warrants:
Series B, C, D, E and E-1 Convertible Preferred Stock: 26,925,014 shares
authorized; 20,316,909 shares issued and outstanding (actual); no shares issued
or outstanding.................................................................... 101,479 --
Convertible preferred stock warrants............................................... 351 --
--------- --------- ---
Total redeemable convertible preferred stock and warrants....................... 101,830

Stockholders' equity (deficit):
Preferred stock, $0.001 par value: 10,000,000 shares authorized (pro forma and
pro forma as adjusted); no shares issued and outstanding.......................... -- --
Series A Convertible Preferred Stock, $0.001 par value: 5,000,000 shares
authorized; 4,444,545 shares issued and outstanding (actual); no shares issued
or outstanding (pro forma and pro forma as adjusted).............................. 4 --
Series F Convertible Preferred Stock, $0.001 par value: 3,500,000 shares
authorized; 1,712,954 outstanding (actual); no shares issued and outstanding
(pro forma and pro forma as adjusted)............................................. 2 --
Common stock, $0.001 par value: 100,000,000 shares authorized (actual);
150,000,000 shares authorized (pro forma and pro forma as adjusted);
6,575,750 shares issued and outstanding (actual); 45,197,271 shares issued and
outstanding (pro forma) and shares issued and outstanding (pro forma
as adjusted)...................................................................... 7 45
Additional paid-in capital............................................................. 62,105 163,903
Deferred stock-based compensation...................................................... (12,553) (12,553)
Accumulated deficit.................................................................... (140,871) (140,871)
--------- --------- ---
Total stockholders' equity (deficit)............................................ $ (91,306) $ 10,524 $
--------- --------- ---
Total capitalization............................................................ $ 14,641 $ 14,641 $
========= ========= ===

DILUTION

If you invest in our stock, your interest will be diluted to the extent
of the difference between the public offering price per share of our common
stock and the pro forma net tangible book value per share of our common stock
after this offering.

The pro forma net tangible book value of our common stock on March 31,
2002 was $ million or $ per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding, after giving effect to the automatic conversion of our preferred
stock into common stock upon the completion of this offering at an assumed
initial public offering price of $ per share. Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of our common stock in this offering and the net tangible
book value per share of our common stock immediately afterwards. After giving
effect to our sale of million shares of common stock offered by this
prospectus at an assumed initial public offering price of $ per share and
after deducting the underwriting discounts, commissions and estimated offering
expenses payable by us, and the application of a portion of the net proceeds to
repay all outstanding indebtedness under our subordinated promissory notes, our
pro forma net tangible book value would have been $ million, or
approximately $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and
an immediate dilution in pro forma net tangible book value of $ per share
to new investors. The following table illustrates the per share dilution:

Estimated public offering price per share...................................... $
--
Pro forma net tangible book value per share as of March 31, 2002............ $
Increase per share attributable to new investors............................
--
Pro forma net tangible book value per share after this offering................
--
Dilution in pro forma net tangible book value per share to new investors....... $
==

This table excludes all options and warrants that will remain outstanding
upon completion of this offering. See Notes 4, 6 and 7 to Notes to Financial
Statements. The exercise of outstanding options and warrants having an exercise
price less than the offering price would increase the dilutive effect to new
investors.

The following table sets forth on a pro forma basis, as of March 31,
2002, the differences between the number of shares of common stock purchased
from us, the total price and average price per share paid by existing
stockholders and by the new investors, before deducting expenses payable by us,
using the estimated public offering price of $ per share.

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------ PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
------- ---------- ------ ---------- ---------

Existing stockholders.................. % $ % $
New investors..........................
------- ------- -- -------
Total............................... 100.0% $ 100.0%
======= ======= == =======

If the underwriter's over-allotment option is exercised in full, the
number of shares held by new public investors will be increased to or
approximately % of the total number of shares of our common stock outstanding
after this offering.

SELECTED FINANCIAL AND OTHER DATA

The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and are qualified by reference to our financial statements and
notes thereto appearing elsewhere in this prospectus. The audited statement of
operations data set forth below for the years ended December 31, 1999, 2000 and
2001 and the audited balance sheet data as of December 31, 2000 and 2001 are
derived from, and are qualified by reference to, the financial statements of
Netflix included elsewhere in this prospectus. The statement of operations data
for the years ended December 31, 1998 and for the period from August 29, 1997
(inception) to December 31, 1997 and the balance sheet data as of December 31,
1997, 1998 and 1999 are derived from, and are qualified by reference to, the
financial statements of Netflix not included elsewhere in this prospectus. The
statement of operations data for the three months ended March 31, 2001 and 2002
and the balance sheet data as of March 31, 2002, are derived from, and
qualified by reference to, the unaudited financial statements of Netflix
included elsewhere in this prospectus and include all adjustments necessary for
a fair presentation on the same basis as the annual financial statements. The
historical results are not necessarily indicative of results to be expected for
any future period.

PERIOD FROM
AUGUST 29, 1997 THREE MONTHS
(INCEPTION) TO YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, -------------------------------------- -----------------
1997 1998 1999 2000 2001 2001 2002
--------------- -------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenues:
Subscription......................................... $ -- $ 585 $ 4,854 $ 35,894 $ 74,255 $ 17,057 $30,069
Sales................................................ -- 754 152 -- 1,657 -- 458
----- -------- -------- -------- -------- -------- -------
Total revenues........................................ -- 1,339 5,006 35,894 75,912 17,057 30,527
Cost of revenues:
Subscription......................................... -- 535 4,217 24,861 49,088 18,177 14,872
Sales................................................ -- 776 156 -- 819 -- 286
----- -------- -------- -------- -------- -------- -------
Total cost of revenues............................... -- 1,311 4,373 24,861 49,907 18,177 15,158
----- -------- -------- -------- -------- -------- -------
Gross profit.......................................... -- 28 633 11,033 26,005 (1,120) 15,369
Operating expenses:
Fulfillment*......................................... -- 763 2,446 10,247 13,452 3,613 4,155
Technology and development*.......................... 100 3,857 7,413 16,823 17,734 5,474 3,181
Marketing*........................................... 103 4,052 14,070 25,727 21,031 6,653 7,938
General and administrative*.......................... 158 1,358 1,993 6,990 4,658 1,514 1,309
Restructuring charges................................ -- -- -- -- 671 -- --
Stock-based compensation*............................ -- 1,151 4,742 8,803 5,686 2,043 1,937
----- -------- -------- -------- -------- -------- -------
Total operating expenses............................. 361 11,181 30,664 68,590 63,232 19,297 18,520
----- -------- -------- -------- -------- -------- -------
Operating loss........................................ (361) (11,153) (30,031) (57,557) (37,227) (20,417) (3,151)
----- -------- -------- -------- -------- -------- -------
Interest and other income (expense), net.............. 2 72 186 194 (1,391) (181) (454)
----- -------- -------- -------- -------- -------- -------
Net loss.............................................. $(359) $(11,081) $(29,845) $(57,363) $(38,618) $(20,598) $(3,605)
===== ======== ======== ======== ======== ======== =======
Basic and diluted net loss per share.................. $ -- $ (12.27) $ (7.13) $ (13.52) $ (7.05) $ (4.09) $ (0.59)
===== ======== ======== ======== ======== ======== =======
Weighted average shares outstanding used in computing
net loss per share................................... -- 903 4,183 4,243 5,479 5,039 6,141

* Amortization of stock-based compensation not
included in expense line-item:
Fulfillment........................................ $ -- $ 105 $ 624 $ 2,298 $ 1,201 $ 429 $ 294
Technology and development......................... -- 223 1,141 2,871 1,930 724 855
Marketing.......................................... -- 253 351 1,886 1,403 498 596
General and administrative......................... -- 570 2,626 1,748 1,152 392 192
----- -------- -------- -------- -------- -------- -------
$ -- $ 1,151 $ 4,742 $ 8,803 $ 5,686 $ 2,043 $ 1,937
===== ======== ======== ======== ======== ======== =======

AS OF DECEMBER 31, AS OF
-------------------------------------------- MARCH 31,
1997 1998 1999 2000 2001 2002
------ ------- -------- -------- -------- ---------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents............................. $1,582 $ 1,061 $ 14,198 $ 14,895 $ 16,131 $ 15,671
Working capital (deficit)............................. 1,360 (4,704) 11,028 (1,655) (6,656) (9,547)
Total assets.......................................... 1,901 4,849 34,773 52,488 41,630 44,306
Capital lease obligations, less current portion....... -- 172 811 2,024 1,057 959
Notes payable, less current portion................... -- -- 3,959 1,843 -- --
Subordinated notes payable............................ -- -- -- -- 2,799 3,158
Redeemable convertible preferred stock................ -- 6,321 51,819 101,830 101,830 101,830
Stockholders' equity (deficit)........................ 1,636 (8,044) (32,028) (73,267) (90,504) (91,306)

PERIOD FROM THREE MONTHS
AUGUST 29, 1997 ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------- -----------------
1997 1998 1999 2000 2001 2001 2002
--------------- ------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

OTHER DATA:
EBITDA/(1)/ (unaudited)............................... $ (356) $(9,575) $(21,223) $(28,179) $ (1,716) $ (3,600) $ 3,583
Number of subscribers (unaudited)..................... -- -- 107 292 456 303 603
Net cash provided by (used in):
Operating activities................................. $ (261) $(5,408) $(16,529) $(22,706) $ 4,847 $ (2,805) $ 6,505
Investing activities................................. (152) (2,363) (19,742) (24,972) (12,670) (4,087) (5,798)
Financing activities................................. (1,995) (7,250) 49,408 48,375 9,059 (927) (1,167)

--------

(1) EBITDA consists of operating loss before depreciation, amortization,
non-cash charges for equity instruments granted to non-employees and
stock-based compensation. EBITDA provides an alternative measure of cash
flow from operations. You should not consider EBITDA as a substitute for
operating loss, as an indicator of our operating performance or as an
alternative to cash flows from operating activities as a measure of
liquidity. We may calculate EBITDA differently from other companies.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS FOR MANY REASONS,
INCLUDING THE RISKS FACED BY US DESCRIBED IN "RISK FACTORS" STARTING ON PAGE 5
AND ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

We were organized as a Delaware corporation in August 1997. We have
incurred significant losses since our inception. As of March 31, 2002, we had a
total stockholders' deficit of $91.3 million. We expect that we will continue
to incur substantial losses for the foreseeable future. We also expect to incur
significant marketing, technology and development, general and administrative
and stock-based compensation expenses. As a result, we will need to
significantly increase our operating margins to achieve profitability and may
never achieve profitability.

CRITICAL ACCOUNTING POLICIES

We believe our change to the estimated life over which we amortize the
costs of acquiring titles for our library and the selection of a method of
amortization for the costs we incur to acquire titles for our library are
critical accounting policies because they involve some of the more significant
judgments and estimates used in the preparation of our financial statements.

CHANGE IN ESTIMATED LIFE OF THE COST OF OUR LIBRARY

In late 2000 and early 2001, we entered into a series of revenue sharing
agreements with studios which substantially changed our business model for
acquiring DVDs and satisfying subscriber demand for titles. These revenue
sharing agreements enable us to acquire DVDs at a lower upfront cost than
traditional buying arrangements. We share a percentage of the net revenues
generated by the use of each particular title with these studios over a fixed
period of time, generally 12 months. Before the change in our business model,
we typically acquired fewer copies of a particular title and utilized each copy
over a longer period of time. The implementation of these revenue sharing
agreements improved our ability to acquire larger quantities of newly released
titles and satisfy a substantial portion of subscriber demand for such titles
over a shorter period of time. On January 1, 2001, we revised the amortization
policy for the cost of our library from an accelerated method using a three
year life to the same accelerated method of amortization using a one year life.

The change in life has been accounted for as a change in accounting
estimate and is accounted for on a prospective basis from January 1, 2001. Had
the DVDs acquired prior to January 1, 2001 been amortized using a three-year
life, amortization expense for 2001 would have been $4.7 million lower than the
amount recorded in our financial statements, representing a $0.86 per share
impact on loss per common share in 2001.

SELECTION OF A METHOD OF AMORTIZATION OF UPFRONT COSTS OF OUR LIBRARY

Under our revenue sharing agreements, we remit an upfront payment to
acquire titles from the studios. This payment includes a contractually
specified initial fixed license fee that is capitalized. Some payments also
include a contractually specified prepayment of future revenue sharing
obligations that is classified as prepaid revenue sharing expense and is
applied against future revenue sharing obligations. A nominal amount is also
capitalized upon acquisition of a particular title for the cost of the
estimated number of DVDs we expect to purchase at the end of the title term.
This cost is amortized with the cost of the initial license fee on an
accelerated basis over one year. We believe the use of an accelerated method is
appropriate because we normally experience heavy initial demand for a title,
which subsides once initial demand has been satisfied.

REVENUES

We derive substantially all of our revenues from monthly subscription
fees. From the launch of our Web site in April 1998 through January 1999, we
generated revenues primarily from individual DVD rentals and sales to
customers. In March 1999, we stopped selling new DVDs. From February 1999
through October 1999, we generated revenues primarily from individual DVD
rentals to customers. In September 1999, we launched our subscription service,
and through February 2000, for a fixed monthly subscription fee of $15.95,
subscribers could have up to four titles per month with no due dates or late
fees, and for $3.98, could order an additional title. In February 2000, we
modified our standard subscription service to provide subscribers access to an
unlimited number of titles for $19.95 per month, with a maximum of four titles
out at any time. Existing subscribers were switched to our new service, some at
$15.95 per month and the rest at $19.95 per month. In October 2000, we again
modified our standard subscription service to provide subscribers access to an
unlimited number of titles for a fixed monthly fee, with a maximum of three
titles out at the same time. There is no minimum subscription period and
subscribers can cancel our service at any time.

We had an insignificant amount of DVD sales in 1999 and no DVD sales in
2000. Beginning in late 2000, as part of the change in our business model, we
began acquiring larger quantities of particular titles through our revenue
sharing agreements. As a result, once initial demand for a particular title has
been satisfied, we may hold a number of titles in excess of the quantities
needed to satisfy ongoing subscriber demand. Several studios allow us to sell
the DVDs acquired from them at the end of the revenue sharing term. Before we
sell a particular title, we compare the number of copies we hold to estimated
future demand to determine the number of copies we can sell without
jeopardizing our ability to satisfy future subscriber demand. From time to
time, we expect to make bulk sales of our used DVDs to resellers.

We recognize subscription revenues ratably during each subscriber's
monthly subscription period. We record refunds to subscribers as a reduction of
revenues or deferred revenues, as appropriate. We recognize revenues from the
sale of used DVDs to resellers when the DVDs are shipped to the reseller.
Historically, revenues from DVD rentals and shipping revenues also were
recognized when the product was shipped to the customer.

In addition to our standard service, we also offer a lower priced plan in
which subscribers can keep two titles at the same time for $13.95 per month, as
well as higher priced plans offering four, five and eight titles out at the
same time for $24.95, $29.95 and $39.95 per month, respectively. As of March
31, 2002, approximately 90% of our paying subscribers paid $19.95 or more per
month.

COST OF REVENUES

COST OF SUBSCRIPTION REVENUES

We acquire titles for our library using traditional buying methods and
revenue sharing agreements. Traditional buying methods normally result in
higher upfront costs when compared to titles obtained through revenue sharing
agreements. Cost of subscription revenues consists of revenue sharing costs,
amortization of our

library, amortization of intangible assets related to equity instruments issued
to certain studios and postage and packaging costs related to shipping titles
to paying subscribers.

REVENUE SHARING COSTS. Our revenue sharing agreements generally commit
us to pay an initial upfront fee for each DVD acquired. Under certain of our
revenue sharing agreements, we pay an additional minimum revenue sharing fee
for each DVD shipped to a subscriber. Other than the initial upfront payment
for DVD's acquired, we are not obligated to pay any minimum revenue sharing fee
on DVDs that are not shipped. We characterize these payments to the studios as
revenue sharing costs. As of December 31, 2001, we had revenue sharing
agreements with over 40 studios that expire at various dates beginning in 2002.

AMORTIZATION OF THE COST OF DVDS. Prior to January 1, 2001, we amortized
our cost of DVDs using an accelerated method over an estimated life of three
years and assumed no salvage value. On January 1, 2001, we revised the
estimated life to one year and assumed a salvage value of $2.00 for the DVDs
that we believe we will eventually sell.

AMORTIZATION OF INTANGIBLE ASSETS RELATED TO EQUITY ISSUED TO
STUDIOS. In 2000, in connection with signing revenue sharing agreements with
Columbia TriStar Home Entertainment, Dreamworks International Distribution and
Warner Home Video, we agreed to issue each of these studios an amount of our
Series F Non-Voting Preferred Stock equal to 1.204% of our fully diluted equity
securities outstanding. In 2001, in connection with signing revenue sharing
agreements with Twentieth Century Fox Home Entertainment and Universal Studios
Home Video, we agreed to issue to each of the two studios an amount of our
Series F Non-Voting Preferred Stock equal to 1.204% of our fully diluted equity
securities outstanding. As of December 31, 2001, the aggregate of Series F
Non-Voting Preferred Stock granted to these five studios equaled 6.02% of our
fully diluted equity securities outstanding. Prior to this offering, these
studios are entitled to receive additional grants of Series F Non-Voting
Preferred Stock to maintain their equity interests at 1.204% of our fully
diluted equity securities outstanding. Consequently, when we grant options or
issue stock, we also are obligated to issue additional shares of Series F
Non-Voting Preferred Stock to these studios to maintain their equity ownership
interest at 6.02% in the aggregate. Our Series F Non-Voting Preferred Stock
automatically converts into our common stock upon the closing of this offering.
We recognize our obligation to grant these equity interests at fair value as an
intangible asset and we increase additional paid-in capital on our balance
sheet. We then amortize the intangible asset on a straight-line basis to cost
of subscription revenues over the term of each revenue sharing agreement with
each studio. The term for the three agreements entered into in 2000 is five
years and the term for the two agreements entered into 2001 is three years.
Each time there is a dilution event prior to this offering, we will determine
the value of our obligation to issue additional equity interests. The
determined value is added to the intangible asset and amortized to cost of
subscription revenues over the remaining term of the applicable revenue sharing
agreement.

POSTAGE AND PACKAGING. Postage and packaging costs consist of the
postage costs to mail titles to and from our paying subscribers, each of which
is currently $0.34 but will increase to $0.37 on June 30, 2002, and the
packaging costs for the mailers.

COST OF SALES REVENUES

Cost of revenues for DVD sales includes the salvage value for used DVDs
sold and, historically, cost of merchandise sold to customers.

OPERATING EXPENSES

FULFILLMENT

Fulfillment expense represents those expenses incurred in operating and
staffing our distribution and customer service centers, including costs
attributable to receiving, inspecting and warehousing our library.

Fulfillment also includes credit card fees and other collection related
expenses. Through December 2001, we maintained only one distribution center in
San Jose, California. We are currently shipping DVDs to subscribers from eight
regional distribution centers, at various levels of capacity. We plan to open a
limited number of additional regional distribution centers in 2002. As we open
and operate new regional distribution centers, we expect that our fulfillment
costs will increase.

TECHNOLOGY AND DEVELOPMENT

Technology and development expense consists of payroll and related
expenses we incur related to testing, maintaining and modifying our Web site,
CineMatch technology, telecommunications systems and infrastructure and other
internal-use software systems. Technology and development expense also includes
depreciation of the computer hardware we use to run our Web site and store our
data. We continuously research and test a variety of potential improvements to
our internal hardware and software systems in an effort to improve our
productivity and enhance our subscribers' experience. We expect to continue to
invest in technology and improvements in our Web site and internal-use software
and, as a result, we expect our technology and development expense will
continue to increase. We believe certain costs we have incurred on several
improvement projects have ongoing benefit. Consequently, we capitalized
technology and development related expenses of $0.3 million in 1999, $1.3
million in 2000 and $1.2 million in 2001. The capitalized amounts are amortized
on a straight-line basis over the estimated period of benefit of each
improvement, ranging from one to two years.

MARKETING

Marketing expense consists of marketing expenditures and other
promotional activities, including revenue sharing costs, postage and packaging
costs and library amortization costs related to free trial periods. In the
second half of 2001, we implemented several new subscriber acquisition
activities which provide incentives in the form of pay-for-performance payments
for each new subscriber provided to us. We anticipate that our marketing
expense will increase in future periods as a result of the overall growth in
our subscriber base, free trial offers and pay-for-performance arrangements.

GENERAL AND ADMINISTRATIVE

General and administrative expense consists of payroll and related
expenses for executive, finance, content acquisition and administrative
personnel, as well as recruiting, professional fees and other general corporate
expenses.

STOCK-BASED COMPENSATION

Stock-based compensation for equity instruments issued to employees
represents the aggregate difference, at the grant date, between the respective
exercise price of stock options or stock grants and the deemed fair market
value of the underlying stock. Stock-based compensation is generally amortized
over the vesting period of the underlying options or grants based on an
accelerated amortization method.

In 2001, we offered our employees and directors the right to exchange
certain stock options. We exchanged employee options to purchase 2.7 million
shares of common stock with varying exercise prices in exchange for options to
purchase 2.7 million shares of common stock with an exercise price of $1.00.
The stock option exchange resulted in variable award accounting treatment for
all of the exchanged options. Variable award accounting will continue until all
options subject to variable accounting are exercised, cancelled or expire.
Variable accounting treatment will result in unpredictable and potentially
significant charges or credits to our operating expenses from fluctuations in
the market price of our common stock.

For each hypothetical one-dollar increase or decrease in the fair value
of our common stock, we will record deferred compensation in an amount equal to
the number of shares underlying the variable awards

multiplied by the one-dollar change. However, to the extent these variable
awards are not fully vested, our stock compensation expense will be less than
the amount we record as deferred compensation. For example, if at December 31,
2001 the fair value of our common stock had increased or decreased by $1.00,
our deferred stock-based compensation would change by approximately $2.7
million and our stock-based compensation expense would be affected by
approximately $0.4 million. Once these variable awards become fully vested, our
stock based compensation will be affected on a dollar for dollar basis and a
change in our stock price will directly impact the amount we record as
stock-based compensation in an amount equal to the number of shares underlying
the variable awards outstanding multiplied by the change in the fair value of
our common stock. For example, assuming all 2.7 million variable awards are
fully vested and outstanding and assuming an increase (decrease) in the fair
value of our common stock of $1.00 in a quarter, our stock-based compensation
expense (credit) related to the variable awards for that quarter would be $2.7
million. As of March 31, 2002, most of these variable awards were not fully
vested and had a variety of final vesting dates over the next three years.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

REVENUES

SUBSCRIPTION REVENUES. Our subscription revenues increased from $17.1
million for the three months ended March 31, 2001 to $30.1 million for the
three months ended March 31, 2002, representing a 76% increase. This increase
was driven primarily by a 78% increase in the average number of subscribers
between 2001 and 2002. We believe the increase in the number of subscribers was
caused by our unrivalled selection of titles, consistently high levels of
subscriber satisfaction, the rapid consumer adoption of DVD players and our
increasingly effective marketing programs.

SALES REVENUES. Our sales revenues increased from $0.0 for the three
months ended March 31, 2001 to $0.5 million for the three months ended March
31, 2002. This increase was due to our sale of used DVDs to resellers. We did
not sell any titles during the three months ended March 31, 2001.

COST OF REVENUES AND GROSS PROFIT

COST OF SUBSCRIPTION REVENUES. Cost of subscription revenues decreased
from $18.2 million for the three months ended March 31, 2001 to $14.9 million
for the three months ended March 31, 2002, representing an 18% decrease. This
decrease was attributable primarily to the net effect of the following:

. REVENUE SHARING COSTS. Our revenue sharing costs increased from $2.4
million for the three months ended March 31, 2001 to $6.2 million for
the three months ended March 31, 2002, representing a 157% increase.
As a percentage of subscription revenues, our revenue sharing costs
increased from 14% in the three months ended March 31, 2001 to 20% in
the three months ended March 31, 2002. This increase was due
primarily to a substantial increase in the percentage of titles
subject to revenue sharing agreements mailed to our subscribers.

. DVD AMORTIZATION COSTS. Our DVD amortization costs decreased from
$11.1 million for the three months ended March 31, 2001 to $2.7
million for the three months ended March 31, 2002, representing a 76%
decrease. The decrease was attributable to an increase in
amortization in the three months ended March 31, 2001 which was
caused by the change in the estimated life of our DVD library from
three years to one year. In addition, the decrease was also caused by
a decrease in acquisitions of DVD library from $23.9 million in 2000
compared to $8.9 million in 2001.

. AMORTIZATION OF INTANGIBLE ASSETS RELATED TO EQUITY ISSUED TO
STUDIOS. We recorded intangible assets of $0.9 million for the three
months ended March 31, 2001 and $0.8 million for the three months
ended March 31, 2002 related to our issuance of Series F Non-Voting
Preferred Stock to studios. We recorded related amortization of these
intangible assets of $0.4 million for the three

months ended March 31, 2001 and $0.6 million for the three months
ended March 31, 2002. The increase in amortization of intangible
assets was attributed to increases in intangible assets caused by our
obligation to issue additional shares of Series F Non-Voting
Preferred Stock to these studios upon dilution.

. POSTAGE AND PACKAGING COSTS. Our postage and packaging costs
increased from $4.3 million for the three months ended March 31, 2001
to $5.4 million for the three months ended March 31, 2002,
representing a 26% increase. This increase was attributable primarily
to an increase in the number of DVDs mailed to our subscribers. As a
percentage of subscription revenues, our postage and packaging costs
decreased from 25% for the three months ended March 31, 2001 to 18%
for the three months ended March 31, 2002 primarily due to a decrease
in the postage per title as a result of packaging improvements.

COST OF SALES REVENUES. Cost of sales revenues increased from $0.0 for
the three months ended March 31, 2001 to $0.3 million for the three months
ended March 31, 2002. This increase was attributable to our decision to sell
used DVDs to resellers.

GROSS PROFIT. Our gross profit increased from a $1.1 million loss for
the three months ended March 31, 2001 to $15.4 million profit for the three
months ended March 31, 2002. Our gross profit increased primarily as a result
of the growth in our subscription revenues and a decrease in our direct costs
of providing those subscription services.

OPERATING EXPENSES

FULFILLMENT. Fulfillment expenses increased from $3.6 million for the
three months ended March 31, 2001 to $4.2 million for the three months ended
March 31, 2002, representing a 15% increase. This increase was primarily
attributable to increases in the overall volume of the activities of our
primary fulfillment center and an increase in credit card fees from $0.8
million for the three months ended March 31, 2001 to $1.0 million for the three
months ended March 31, 2002. As a percentage of subscription revenues,
fulfillment expenses decreased from 21% for the three months ended March 31,
2001 to 14% for the three months ended March 31, 2002 primarily due to a
combination of an increasing revenue base and improvements in our fulfillment
productivity due to our continuous efforts to refine and streamline our
fulfillment operations. Credit card fees as a percentage of revenues declined
from approximately from 5% in the three months ended March 21, 2001, to
approximately 3% in the three months ended March 31, 2002, but increased in
terms of absolute dollars, due to a 76% increase in subscription revenues.

TECHNOLOGY AND DEVELOPMENT. Excluding capitalized software development
costs, our technology and development expenses decreased from $5.5 million for
the three months ended March 31, 2001 to $3.2 million for the three months
ended March 31, 2002, representing a 42% decrease. This decrease was caused
primarily by decreases in personnel costs as a result of employees terminated
as part of our restructuring during the quarter ended September 30, 2001. As a
percentage of subscription revenues, technology and development expenses
decreased from 32% for the three months ended March 31, 2001 to 11% for the
three months ended March 31, 2002 primarily due to an increase in subscription
revenues.

MARKETING. Our marketing expenses increased from $6.7 million for the
three months ended March 31, 2001 to $7.9 million for the three months ended
March 31, 2002, representing a 19% increase. This increase was attributable
primarily to growth in the number of new subscribers offset by decreases in the
marketing cost per acquired subscriber. As a percentage of subscription
revenues, marketing expenses decreased from 39% for the three months ended
March 31, 2001 to 26% for the three months ended March 31, 2002 primarily due
to an increase in subscription revenues and a reduction in free trials.

GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
decreased from $1.5 million for the three months ended March 31, 2001 to $1.3
million for the three months ended March 31, 2002, representing

a 14% decrease. This decrease was attributable primarily to our cost
containment efforts. As a percentage of subscription revenues, general and
administrative expenses decreased from 9% for the three months ended March 31,
2001 to 4% for the three months ended March 31, 2002 primarily due to an
increase in subscription revenues.

STOCK-BASED COMPENSATION. Our stock-based compensation expenses
decreased from $2.0 million for the three months ended March 31, 2001 to $1.9
million for the three months ended March 31, 2002, representing a 5% decrease.
This decrease was attributable to reduced charges caused by utilization of the
graded vesting method of stock compensation amortization offset by increased
charges related to variable award accounting.

INTEREST AND OTHER INCOME (EXPENSE), NET

Interest and other income (expense), net consists primarily of interest
earned on our cash and cash equivalents offset by interest expense related to
interest-bearing obligations. We had interest and other expense, net of $0.2
million for the three months ended March 31, 2001 and interest and other
expense, net of $0.5 million for the three months ended March 31, 2002. This
change was attributable primarily to a decrease in interest income caused by a
decrease in our interest bearing cash balances and additional interest charges
caused by the issuance of subordinated notes payable with a face amount of
$13.0 million in July 2001.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 2001

REVENUES

SUBSCRIPTION REVENUES. Our subscription revenues increased from $35.9
million in 2000 to $74.3 million in 2001, representing a 107% increase. This
increase was driven primarily by an 88% increase in the average number of
subscribers between 2000 and 2001. We believe the increase in the number of
subscribers was caused by our unrivalled selection of titles, consistently high
levels of subscriber satisfaction, the rapid consumer adoption of DVD players
and our increasingly effective marketing programs. In addition, part of the
increase was due to a $4.00 increase in the monthly subscription fee charged to
some of our subscribers beginning in October 2000.

SALES REVENUES. Our sales revenues increased from $0.0 in 2000 to $1.7
million in 2001. This increase was due to our sale of used DVDs to resellers.
We did not sell any titles in 2000.

COST OF REVENUES AND GROSS PROFIT

COST OF SUBSCRIPTION REVENUES. Cost of subscription revenues increased
from $24.9 million in 2000 to $49.1 million in 2001, representing a 97%
increase. This increase was attributable primarily to:

. REVENUE SHARING COSTS. Our revenue sharing costs increased from $1.6
million in 2000 to $12.8 million in 2001, representing a 692%
increase. As a percentage of subscription revenues, our revenue
sharing costs increased from 4% in 2000 to 17% in 2001. This increase
was due primarily to a substantial increase in the percentage of
titles subject to revenue sharing agreements mailed to our
subscribers.

. DVD AMORTIZATION COSTS. Our DVD amortization costs increased from
$11.3 million in 2000 to $19.5 million in 2001, representing a 73%
increase. This increase was attributable primarily to the decrease in
the period over which we amortize the cost of our library. As a
percentage of subscription revenues, our DVD amortization costs
decreased from 31% in 2000 to 26% in 2001 primarily due to lower
upfront prices paid for DVDs in connection with our revenue sharing
agreements.

. AMORTIZATION OF INTANGIBLE ASSETS RELATED TO EQUITY ISSUED TO
STUDIOS. We recorded deferred costs of $6.1 million in 2000 and $4.1
million in 2001 related to our issuance of equity to studios. We

recorded related amortization of intangible assets of $0.6 million in
2000 and $2.1 million in 2001. This increase was attributable to a
full year of amortization in 2001 as compared to a partial year of
amortization in 2000, additional deferred charges for two new revenue
sharing agreements in 2001 and increases in deferred charges caused
by our obligation to issue additional equity securities to these
studios.

. POSTAGE AND PACKAGING COSTS. Our postage and packaging costs
increased from $11.4 million in 2000 to $14.7 million in 2001,
representing a 29% increase. This increase was attributable primarily
to an increase in the number of DVDs mailed to our subscribers. As a
percentage of subscription revenues, our postage and packaging costs
decreased from 32% in 2000 to 20% in 2001 primarily due to a decrease
in the postage rate per title as a result of packaging improvements.

COST OF SALES REVENUES. Cost of sales revenues increased from $0.0 in
2000 to $0.8 million in 2001. This increase was attributable to our decision to
sell used DVDs to resellers in 2001. We did not sell any DVDs in 2000.

GROSS PROFIT. Our gross profit increased from $11.0 million in 2000 to
$26.0 million in 2001, representing a 136% increase and gross profit
percentages of 31% in 2000 and 34% in 2001. Our gross profit percentages
increased primarily as a result of the growth in our subscription revenues and
a decrease in our direct incremental costs of providing those subscription
services.

OPERATING EXPENSES

FULFILLMENT. Fulfillment expenses increased from $10.2 million in 2000
to $13.5 million in 2001, representing a 31% increase. This increase was
primarily attributable to increases in the overall volume of the activities of
our primary fulfillment center and an increase in credit card fees from $1.6
million in 2000 to $3.2 million in 2001. As a percentage of subscription
revenues, fulfillment expenses decreased from 29% in 2000 to 18% in 2001
primarily due to a combination of an increasing revenue base and improvements
in our fulfillment productivity due to our continuous efforts to refine and
streamline our fulfillment operations. Credit card fees increased due to an
increase in subscription revenues.

TECHNOLOGY AND DEVELOPMENT. Excluding capitalized software development
costs, our technology and development expenses increased from $16.8 million in
2000 to $17.7 million in 2001, representing a 5% increase. This increase was
primarily the result of our investment in storing data, handling large
increases in traffic on our Web site and maintaining and modifying our software
related to our Web site, CineMatch technology and our internal-software
infrastructure. As a percentage of subscription revenues, technology and
development expenses decreased from 47% in 2000 to 24% in 2001 primarily due to
an increase in subscription revenues.

MARKETING. Our marketing expenses decreased from $25.7 million in 2000
to $21.0 million in 2001, representing a 18% decrease. This decrease was
primarily attributable to scaling back the number of free trial offers for part
of 2001 and a reduction in our free trial offer period of 30 days to typically
14 days for the balance of 2001. As a percentage of subscription revenues,
marketing expenses decreased from 72% in 2000 to 28% in 2001 primarily due to
an increase in subscription revenues.

GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
decreased from $7.0 million in 2000 to $4.7 million in 2001, representing a 33%
decrease. This decrease was primarily attributable to our cost containment
efforts in 2001 and the $1.3 million one-time cost of our withdrawn public
offering in 2000. As a percentage of subscription revenues, general and
administrative expenses decreased from 19% in 2000 to 6% in 2001 primarily due
to an increase in subscription revenues.

RESTRUCTURING. In 2001, we recorded a restructuring expense of $0.7
million relating to severance payments made to 45 employees we terminated in an
effort to restructure our organization to streamline our processes and reduce
expenses. We had no restructuring expense in prior years.

STOCK-BASED COMPENSATION. Our stock-based compensation expenses
decreased from $8.8 million in 2000 to $5.7 million in 2001, representing a 35%
decrease. This decrease was primarily attributable to reduced charges caused by
utilization of the graded vesting method of stock compensation amortization and
fewer options issued at exercise prices below deemed fair value. The following
table shows the amounts of stock-based compensation expense that would have
been recorded under the following categories of operating expenses had
stock-based compensation expense not been separately stated on the statement of
operations:

YEAR ENDED
DECEMBER 31,
--------------
2000 2001
------ ------
(IN THOUSANDS)

Fulfillment...................................... $2,298 $1,201
Technology and development....................... 2,871 1,930
Marketing........................................ 1,886 1,403
General and administrative....................... 1,748 1,152
------ ------
$8,803 $5,686
====== ======

INTEREST AND OTHER INCOME (EXPENSE), NET

We had interest and other income, net of $0.2 million in 2000 and
interest and other expense, net of $1.4 million in 2001. The change between
2000 and 2001 was attributable primarily to a decrease in interest income
caused by a decrease in our interest bearing cash balances and additional
interest charges caused by the issuance of subordinated notes payable with a
face amount of $13.0 million. These notes payable have a carrying amount of
$2.8 million at December 31, 2001. The difference between the carrying amount
and face amount is being accreted to interest expense using an effective rate
of 21% per annum. Upon completion of this offering, the remaining unamortized
discount on our subordinated promissory notes, $10.9 million at December 31,
2001, will be recorded as an expense in the period of the offering.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 2000

REVENUES

SUBSCRIPTION REVENUES. Our subscription revenues increased from $4.9
million in 1999 to $35.9 million in 2000, representing a 639% increase. This
increase was driven primarily by a substantial increase in the number of
subscribers between 1999 and 2000. We believe the increase in subscribers was
caused by our unrivalled selection of titles, consistently high levels of
subscriber satisfaction, the rapid consumer adoption of DVD players and our
increasingly effective marketing programs.

SALES REVENUES. Our sales revenues decreased from $0.2 million in 1999
to $0.0 in 2000 due to our decision to discontinue selling new DVDs through our
Web site in 1999.

COST OF REVENUES AND GROSS PROFIT

COST OF SUBSCRIPTION REVENUES. Cost of subscription revenues increased
from $4.2 million in 1999 to $24.9 million in 2000, representing a 490%
increase. This increase was primarily attributable to:

. REVENUE SHARING COSTS. Our revenue sharing costs increased from $0.0
in 1999 to $1.6 million in 2000. Our revenue sharing costs increased
as a result of our decision in 2000 to enter into revenue sharing
agreements as a means to lower our upfront costs of acquiring titles.
We did not have any revenue sharing agreements in 1999.

. DVD AMORTIZATION COSTS. Our DVD amortization costs increased from
$1.8 million in 1999 to $11.3 million in 2000. This increase was
attributable primarily to an increase in the cost of

acquisitions of DVDs from $9.9 million in 1999 to $23.9 in 2000. As a
percentage of subscription revenues, our DVD amortization costs
decreased from 37% in 1999 to 31% in 2000 primarily due to growth in
our subscription revenues at a rate in excess of the growth in our
amortization.

. AMORTIZATION OF INTANGIBLE ASSETS RELATED TO EQUITY ISSUED TO CERTAIN
STUDIOS. Our intangible assets increased from $0.0 in 1999 to $6.1
million in 2000 due to our issuance of Series F Non-Voting Preferred
Stock to Columbia TriStar Home Entertainment, Dreamworks
International Distribution and Warner Home Video. We also recorded
related amortization of intangible assets of $0.6 million in 2000. We
did not issue any equity to studios and accordingly had no
amortization in 1999.

. POSTAGE AND PACKAGING COSTS. Our postage and packaging costs
increased from $2.4 million in 1999 to $11.4 million in 2000. This
increase was attributable primarily to an increase in the number of
DVDs mailed to our subscribers. As a percentage of subscription
revenues, our postage and packaging costs decreased from 49% in 1999
to 32% in 2000 primarily due to lower packaging costs per shipment as
a result of a reduction in the weight of our packaging materials.

COST OF SALES REVENUES. Cost of sales revenues decreased from $0.2
million in 1999 to $0.0 in 2000. This decrease was attributable to our decision
to discontinue selling new DVDs through our Web site in 1999.

GROSS PROFIT. Our gross profit increased from $0.6 million in 1999 to
$11.0 million in 2000, representing gross profit percentages of 13% in 1999 and
31% in 2000. Our gross profit percentages increased primarily as a result of
the growth in our subscription revenues and a decrease in our direct costs of
providing those subscription services.

OPERATING EXPENSES

FULFILLMENT. Fulfillment expenses increased from $2.4 million in 1999 to
$10.2 million in 2000, representing a 319% increase. This increase was
attributable primarily to increases in the overall volume of the activities of
our primary fulfillment center and an increase in credit card fees from $0.2
million in 1999 to $1.6 million in 2000. As a percentage of subscription
revenues, fulfillment expenses decreased from 50% in 1999 to 29% in 2000
primarily due to a combination of an increasing revenue base and improvements
in our fulfillment productivity as a result of our continuous efforts to refine
and streamline our fulfillment operations offset by the increase in credit card
fees.

TECHNOLOGY AND DEVELOPMENT. Excluding capitalized software development
costs, our technology and development expenses increased from $7.4 million in
1999 to $16.8 million in 2000, representing a 127% increase. This increase was
primarily the result of our investment in storing data, handling large
increases in traffic on our Web site and maintaining and modifying our software
related to our Web site, CineMatch technology and our internal-software
infrastructure. As a percentage of subscription revenues, technology and
development expenses decreased from 153% in 1999 to 47% in 2000 primarily due
to an increase in subscription revenues.

MARKETING. Our marketing expenses increased from $14.1 million in 1999
to $25.7 million in 2000, representing a 83% increase. This increase was
attributable primarily to our intensified efforts to acquire new subscribers
through external advertising agencies, television commercials and an increase
in the length of our free trial period. As a percentage of subscription
revenues, marketing expenses decreased from 290% in 1999 to 72% in 2000
primarily due to an increase in subscription revenues.

GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
increased from $2.0 million in 1999 to $7.0 million in 2000, representing a
251% increase. This increase was attributable primarily to increases in
personnel and facility-related costs associated with the expansion of our
business and the $1.3 million cost of our withdrawn public offering. As a
percentage of subscription revenues, general and administrative expense
decreased from 41% in 1999 to 19% in 2000 primarily due to an increase in
subscription revenues.

STOCK-BASED COMPENSATION. Our stock-based compensation expense increased
from $4.7 million in 1999 to $8.8 million in 2000, representing an 86%
increase. This increase was attributable primarily to charges we recorded
related to issuing options to employees at exercise prices below the deemed
fair value at the dates of grant. The following table shows the amounts of
stock-based compensation expense that would have been recorded under the
following categories of operating expenses had stock-based compensation expense
not been separately stated on the statement of operations:

YEAR ENDED
DECEMBER 31,
- --------------
1999 2000
------ ------
(IN THOUSANDS)

Fulfillment................................................ $ 624 $2,298
Technology and development................................. 1,141 2,871
Marketing.................................................. 351 1,886
General and administrative................................. 2,626 1,748
------ ------
$4,742 $8,803
====== ======

INTEREST AND OTHER INCOME (EXPENSE), NET

We had interest and other income, net of $0.2 million in 1999 and 2000.
Interest income increased from $0.9 million in 1999 to $1.6 million in 2000 as
a result of an increase in our overall average cash balance during 2000 which
was caused by the receipt of $50.0 million in proceeds from the sale of Series
E preferred stock. Interest expense increased from $0.7 million to $1.5 million
as a result of an increase in interest bearing debt in 2000.

SELECTED QUARTERLY OPERATING RESULTS

The following tables set forth unaudited quarterly statement of
operations data for the nine quarters ended March 31, 2002 as well as the
percentage of total revenues represented for selected items. The information
for each of these quarters has been prepared on substantially the same basis as
the audited financial statements included elsewhere in this prospectus and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, except as otherwise indicated, necessary for the fair
presentation of the results of operations for such periods. This data should be
read in conjunction with the audited financial statements and the related notes
included elsewhere in this prospectus. These quarterly operating results are
not necessarily indicative of our operating results for any future period.

THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
2000 2000 2000 2000 2001 2001 2001 2001 2002
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)

Revenues:
Subscription................. $ 5,174 $ 7,147 $ 10,182 $ 13,391 $ 17,057 $17,392 $18,444 $21,362 $30,069
Sales........................ -- -- -- -- -- 967 434 256 458
-------- -------- -------- -------- -------- ------- ------- ------- -------
Total revenues............. 5,174 7,147 10,182 13,391 17,057 18,359 18,878 21,618 30,527

Cost of revenues:
Subscription................. 3,128 5,150 7,213 9,370 18,177 10,776 9,667 10,468 14,872
Sales........................ -- -- -- -- -- 446 176 197 286
-------- -------- -------- -------- -------- ------- ------- ------- -------
Total cost of revenues..... 3,128 5,150 7,213 9,370 18,177 11,222 9,843 10,665 15,158
-------- -------- -------- -------- -------- ------- ------- ------- -------
Gross profit.................... 2,046 1,997 2,969 4,021 (1,120) 7,137 9,035 10,953 15,369

Operating expenses:
Fulfillment.................. 1,823 2,477 2,368 3,579 3,613 3,589 3,283 2,967 4,155
Technology and development... 3,248 3,959 4,041 5,575 5,474 4,896 4,463 2,901 3,181
Marketing.................... 6,122 5,639 6,616 7,350 6,653 4,090 3,444 6,844 7,938
General and administrative... 764 1,761 1,863 2,602 1,514 1,031 1,003 1,110 1,309
Restructuring charges........ -- -- -- -- -- -- 671 -- --
Stock-based compensation..... 1,963 2,530 2,073 2,237 2,043 1,436 1,220 987 1,937
-------- -------- -------- -------- -------- ------- ------- ------- -------
Total operating expenses... 13,920 16,366 16,961 21,343 19,297 15,042 14,084 14,809 18,520
-------- -------- -------- -------- -------- ------- ------- ------- -------
Operating loss.................. (11,874) (14,369) (13,992) (17,322) (20,417) (7,905) (5,049) (3,856) (3,151)
-------- -------- -------- -------- -------- ------- ------- ------- -------
Interest and other income
(expense), net................. (102) 302 210 (216) (181) (96) (505) (609) (454)
-------- -------- -------- -------- -------- ------- ------- ------- -------
Net loss........................ $(11,976) $(14,067) $(13,782) $(17,538) $(20,598) $(8,001) $(5,554) $(4,465) $(3,605)
======== ======== ======== ======== ======== ======= ======= ======= =======
Other Data:
EBITDA/(1)/ (unaudited)...... $ (6,248) $ (7,366) $ (6,175) $ (8,390) $ (3,600) $ (131) $ 613 $ 1,402 $ 3,583
Number of subscribers
(unaudited)................. 156 194 239 292 303 308 334 456 603

--------
(1) EBITDA consists of operating loss before depreciation, amortization,
non-cash charges for equity instruments granted to non-employees and
stock-based compensation. EBITDA provides an alternative measure of cash
flow from operations. You should not consider EBITDA as a substitute for
operating loss, as an indicator of our operating performance or as an
alternative to cash flows from operating activities as a measure of
liquidity. We may calculate EBITDA differently from other companies.

THREE MONTHS ENDED
-----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
2000 2000 2000 2000 2001 2001 2001 2001 2002
--------- -------- --------- -------- --------- -------- --------- -------- ---------

Revenues:
Subscription.................. 100 % 100 % 100 % 100 % 100 % 95 % 98 % 99 % 98 %
Sales......................... 0 0 0 0 0 5 2 1 2
---- ---- ---- ---- ---- --- --- --- ---
Total revenues............. 100 100 100 100 100 100 100 100 100
Cost of revenues:
Subscription.................. 60 72 71 70 107 59 51 48 49
Sales......................... 0 0 0 0 0 2 1 1 1
---- ---- ---- ---- ---- --- --- --- ---
Total cost of revenues..... 60 72 71 70 107 61 52 49 50
---- ---- ---- ---- ---- --- --- --- ---
Gross profit..................... 40 28 29 30 (7) 39 48 51 50
Total operating expenses......... 269 229 166 159 113 82 75 69 61
---- ---- ---- ---- ---- --- --- --- ---
Operating loss................... (229) (201) (137) (129) (120) (43) (27) (18) (11)
---- ---- ---- ---- ---- --- --- --- ---
Interest and other expense, net.. (2) 4 2 (2) (1) (1) (2) (3) (1)
---- ---- ---- ---- ---- --- --- --- ---
Net loss......................... (231)% (197)% (135)% (131)% (121)% (44)% (29)% (21)% (12)%
==== ==== ==== ==== ==== === === === ===

SUBSCRIPTION REVENUES

The increase in total subscription revenues for all quarters presented
was caused by increases in the number of our paying subscribers. We believe the
number of paying subscribers increased for several reasons including the
unrivalled selection offered by our subscription service, consistently high
levels of customer satisfaction, the rapid consumer adoption of DVD players and
our increasingly effective marketing programs.

COST OF SUBSCRIPTION REVENUES

On January 1, 2001, we revised the estimated life of our library from
three years to one year. Amortization expense for the quarter ended March 31,
2001 includes an increase in amortization caused by the effect of revising the
life of our library. The decrease in DVD amortization expense as a percentage
of subscription revenues between the quarter ended March 31, 2001 and the
quarter ended June 30, 2001 is caused primarily by a decrease in the
amortizable cost of our library.

TECHNOLOGY AND DEVELOPMENT

The decrease between the quarter ended September 30, 2001 and the quarter
ended December 31, 2001 was caused by decreases in personnel costs as a result
of employees terminated as a part of our restructuring during the quarter ended
September 30, 2001.

MARKETING

The decrease during each of the three quarters subsequent to the fourth
quarter of 2000 is due to scaling back our free trial offers during the first
two quarters of 2001. The increase in marketing expense in the fourth quarter
of 2001 results from an increase in the number of free trials offered to new
subscribers as well as an increase in the expense we incurred for
pay-for-performance subscriber referral programs.

GENERAL AND ADMINISTRATIVE

The decrease between the quarter ended December 31, 2000 and the quarter
ended March 31, 2001 was caused by expenses incurred in relation to our
withdrawn initial public offering that were expensed during the quarter ended
December 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily with $117.5 million raised
through private sales of our common and preferred equity securities and
subordinated promissory notes. As of March 31, 2002, we had cash and cash
equivalents of $15.7 million.

We expect to devote substantial resources to continue to expand our
subscriber base, expand our library to meet subscriber demand, automate our
fulfillment operations and maintain and enhance the systems necessary to
support our growth. Although we anticipate that our current cash and cash
equivalents and cash flows, excluding the net proceeds from this offering, will
be sufficient to fund our activities for at least the next 12 months and the
foreseeable future, we cannot assure you that we will not be required to use
the proceeds from this offering, obtain additional financing within this time
period or that additional financing, if needed, will be available on terms
acceptable to us, or at all. In addition, although there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies, we may, from time to time, evaluate
acquisitions of other businesses, products and technologies. If we are unable
to raise additional equity or debt financing, if and when needed, we could be
forced to significantly curtail our operations.

In July 2001, we issued subordinated promissory notes and warrants to
purchase 20,456,866 shares of our common stock at an exercise price of $1.00
per share for net proceeds of $12.8 million. We allocated $10.9 million of the
proceeds to the warrants and recorded it as additional paid-in capital and $1.9
million to the notes payable. The resulting discount of $11.1 million is being
accreted to interest expense using an effective annual interest rate of 21%.
Our subordinated promissory notes accrue interest at a stated rate of 10% per
year compounded annually. The subordinated notes and all accrued interest are
due and payable upon the earlier to occur of July 10, 2011 or the completion of
this offering. As a result, upon completion of this offering, the remaining
unamortized discount will be recorded as an expense in the period of the
offering.

At March 31, 2002, we had redeemable convertible preferred stock with a
redemption value of $101.7 million. The holders of this redeemable convertible
preferred stock have the option to redeem their shares for cash during a 60-day
period commencing June 12, 2004. The redeemable convertible preferred stock
will automatically convert to common stock upon the closing of this offering.
Upon such conversion, the redemption right will terminate.

At March 31, 2002, we had a note payable secured by substantially all of
our assets with an unpaid balance of $1.0 million. The note payable is due in
monthly principal installments of $0.2 million plus interest through September,
2002.

At March 31, 2002, our current liabilities exceeded our current assets by
$9.5 million, and we had cash of $15.7 million, accounts payable of $16.3
million and accrued expenses of $4.4 million. At March 31, 2002 we also had
commitments to make payments on capital leases and operating leases of
approximately $3.4 million during the remainder of 2002, $4.0 million in 2003,
$2.9 million in 2004 and $1.5 million in 2005. Our working capital deficiency
has increased from $6.7 million at December 31, 2001 to $9.5 million at March
31, 2002. Deferred revenues of $4.9 million at December 31, 2001 and $6.3
million at March 31, 2002 are included in the determination of our working
capital deficiency. These amounts represent cash collected in advance of
revenue recognition and will not result in cash outflows. Excluding deferred
revenues, our working capital deficiency was $1.7 million at December 31, 2001
and $3.3 million at March 31, 2002. The increase in our working capital
deficiency was caused primarily by our decision to spend approximately $6.6
million in the three months ended March 31, 2002 for the acquisition of titles
for our library.

CASH FLOWS

Net cash used in operating activities was $16.5 million in 1999 and $22.7
million in 2000. Net cash provided by operating activities was $4.8 million in
2001. Cash used in operating activities in 1999 was primarily attributable to a
net loss of $29.8 million, partially offset by deferred compensation expense,
depreciation and amortization expense, non-cash interest expense, increases in
accounts payable, accrued expenses, and deferred revenue. Cash used in
operating activities in 2000 was primarily attributable to a net loss of $57.4
million and an increase in prepaid and other current assets, partially offset
by deferred compensation expense, depreciation and amortization expense,
non-cash interest expenses, increases in accounts payable, accrued expenses and
deferred revenue. Cash provided by operating activities in 2001 was primarily
attributable to an increase in revenue, a decrease in operating expenses and an
increase in accounts payable.

Net cash used in investing activities was $19.7 million in 1999, $25.0
million in 2000 and $12.7 million in 2001. Net cash used in investing
activities in 1999 was primarily attributable to our acquisition of titles for
our DVD library, short-term investments and property and equipment. Net cash
used in investing activities in 2000 was primarily attributable to our
acquisition of titles for our library and property and equipment, partially
offset by proceeds from the sale of short-term investments. Net cash used in
investing activities in 2001 was primarily attributable to our acquisition of
titles for our library and property and equipment. The 63% decrease in cash
used to acquire DVDs in 2001 from 2000, primarily reflects the reduced cash
requirements to acquire DVDs under our revenue sharing agreements. While DVD
acquisition expenditures are classified as cash flows from investing activities
you may wish to consider these together with cash flows from operating
activities.

Net cash provided by financing activities was approximately $49.4 million
in 1999, $48.4 million in 2000 and $9.1 million in 2001. Net cash provided by
financing activities in 1999 was primarily attributable to proceeds from the
sale of our Series C and Series D Convertible Preferred Stock and from a note
payable, partially offset by payments on a note payable and capital lease
obligations. Net cash provided by financing activities in 2000 was primarily
attributable to proceeds from the sale of our Series E Convertible Preferred
Stock, partially offset by payments on notes payable and capital lease
obligations. Net cash provided by financing activities in 2001 was primarily
attributable to proceeds from the sale of common stock warrants and
subordinated promissory notes, partially offset by payments on notes payable
and capital lease obligations.

GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY

We anticipate that our business will be affected by general economic and
other consumer trends. Our business may be subject to fluctuations in future
operating periods due to a variety of factors, many of which are outside of our
control. For example, we believe that sales of DVD players have affected the
growth of new subscribers. To date, there has been a distinct seasonal pattern
to the sale of DVD players which accelerates during the Christmas holiday
season.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, or
SFAS No. 141. The standard concludes that all business combinations within the
scope of the statement will be accounted for using the purchase method.
Previously, the pooling-of-interests method was required whenever certain
criteria were met. Because those criteria did not distinguish economically
dissimilar transactions, similar business combinations were accounted for using
different methods that produced dramatically different financial statement
results. SFAS No. 141 no longer permits the use of pooling-of-interest method
of accounting. In addition, the statement also requires separate recognition of
intangible assets apart from goodwill if they meet one of two criteria: the
contractual-legal criterion or the separability criterion. SFAS No. 141 also
requires the disclosure of the primary reasons for a business combination and
the allocation of the purchase price paid to the assets acquired and
liabilities assumed by major balance sheet caption. The provisions of SFAS No.
141 apply to all business combinations initiated after June 30, 2001. The
adoption of this standard will not impact our financial statements.

In June 2001, the FASB also issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, or SFAS No. 142. It addressed how intangible assets that are
acquired individually or within a group of assets (but not those acquired in a
business combination) should be accounted for in the financial statements upon
their acquisition. SFAS No. 142 adopts a more aggregate view of goodwill and
bases the accounting on the units of the combined entity into which an acquired
entity is aggregated. SFAS No. 142 also prescribes that goodwill and intangible
assets that have indefinite useful lives will not be amortized but rather
tested at least annually for impairment. Intangible assets that have definite
lives will continue to be amortized over their useful lives, but no longer with
the constraint of the 40-year ceiling. SFAS No. 142 provides specific guidance
for the testing of goodwill for impairment, which may require re-measurement of
the fair value of the reporting unit. Additional ongoing financial statement
disclosures are also required. The provisions of the statement are required to
be applied starting with fiscal years beginning after December 15, 2001. The
statement is required to be applied at the beginning of the fiscal year and
applied to all goodwill and other intangible assets recognized in the
financials at that date. Impairment losses are to be reported as resulting from
a change in accounting principle. We implemented SFAS No. 142 beginning
January 1, 2002. The adoption of this standard will not impact our financial
statements.

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, or SFAS No. 144. It supersedes
SFAS No. 121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, and APB Opinion No. 30, REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS. It establishes a single account model
based upon the framework of SFAS No. 121. It removes goodwill and intangible
assets from its scope. It describes a probability-weighted cash flow estimation
approach to deal with certain situations. It also establishes a "primary asset"
approach to determine the cash flow estimation period for a group of assets and
liabilities that represents the unit of accounting for a long-lived asset to be
held and used. The provisions of SFAS 144 are effective for fiscal years
beginning after December 15, 2001. The adoption of this standard will not
impact our financial statements.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve
principal, while at the same time maximizing income we receive from investments
without significantly increased risk. Some of the securities we invest in may
be subject to market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
value of our investment will decline. To minimize this risk in the future, we
intend to maintain our portfolio of cash equivalents and investments in a
variety of securities, including commercial paper, money market funds,
government and non-government debt securities and certificates of deposit with
maturities of less than thirteen months. In general, money market funds are not
subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate.

BUSINESS

OUR COMPANY

Our subscription service has grown rapidly since its launch in September
1999. We believe our growth has been driven primarily by our unrivalled
selection, consistently high levels of customer satisfaction, rapid consumer
adoption of DVD players and our increasingly effective marketing programs. In
the San Francisco Bay area, where we have one- or two-day delivery,
approximately 2.8% of all households subscribe to Netflix.

Our proprietary CineMatch technology enables us to create a customized
store for each subscriber and to generate personalized recommendations which
effectively merchandize our comprehensive library of titles. We provide more
than 18 million personal recommendations daily. In March 2002, more than 11,000
of our more than 11,500 titles were selected by our subscribers. In comparison,
most entertainment service providers merchandize a narrow selection of box
office hits. A national video rental chain generates nearly 70% of its rental
revenues from new releases. We generate approximately 70% of our activity from
back catalogue titles. We believe that our CineMatch technology, based on
proprietary algorithms and the more than 70 million movie ratings we have
collected from our users during the past two years, enables us to build deep
subscriber relationships and maintain a high level of library utilization.

We market our service to consumers primarily through pay-for-performance
marketing programs, including online promotions, advertising insertions with
most leading DVD player manufacturers and promotions with electronics and video
software retailers. These programs encourage consumers to subscribe to our
service and include a free trial period of typically 14 days. At the end of the
trial period, subscribers are automatically enrolled as paying subscribers,
unless they cancel their subscription. Approximately 90% of trial subscribers
become paying subscribers. All paying subscribers are billed monthly in advance
by credit card.

We stock almost every title available on DVD, excluding mature and adult
content. We have established revenue sharing relationships with more than 50
studios and distributors. These relationships provide us access to titles on
terms attractive to us. We also purchase titles directly from studios,
distributors and independent producers.

We are focused on rapidly growing our subscriber base and revenues and
utilizing our proprietary technology to minimize operating costs. Our
technology is extensively employed to manage and integrate our business,
including our Web site interface, order processing, fulfillment operations and
customer service. We believe that our technology also allows us to maximize our
library utilization and to run our fulfillment operations in a flexible manner
with minimal capital requirements.

We currently provide titles to our subscribers on DVD only. However, we
continue to monitor additional delivery technologies and, when appropriate,
believe that we are well-positioned to offer digital distribution and
additional delivery options to our subscribers.

INDUSTRY OVERVIEW

Filmed entertainment is distributed broadly through a variety of
distribution channels. Out-of-home distribution channels include movie
theaters, airlines and hotels. In-home distribution channels include home

video rental and retail outlets, cable and satellite television, pay-per-view,
video-on-demand, or VOD, and broadcast television. Currently, studios
distribute their filmed entertainment content approximately six months after
theatrical release to the home video market, seven to nine months to
pay-per-view and VOD, one year to satellite and cable and two to three years to
basic cable and syndicated networks.

IN-HOME FILMED ENTERTAINMENT MARKET

Domestic consumer expenditures for in-home filmed entertainment reached
$32 billion in 2001 and are projected to grow to $46 billion in 2006, according
to Adams Media Research. This market is vital to studios. Consumer spending on
in-home filmed entertainment was nearly four times the $8.1 billion consumers
spent at theaters in 2001, according to Adams Media Research.

Consumer rentals and purchases of VHS and DVD titles are the largest
source of domestic consumer expenditures on in-home filmed entertainment,
representing approximately $23.4 billion, or 73% of the market in 2001,
according to Adams Media Research. Video rental outlet inventory is generally
heavily weighted toward new releases to satisfy current consumer demand
generated by heavy advertising and promotional spending by the studios.

Consumers access subscription-based services, such as HBO or Showtime,
primarily through cable or satellite providers. According to Adams Media
Research, subscription delivered content is the second largest source of
domestic consumer expenditures on in-home filmed entertainment, representing
approximately $7.5 billion, or 24% of the market in 2001. The National Cable
Television Association estimates that the number of available programming
networks has grown from 82 in 1991 to 231 in 2001.

Pay-per-view and VOD currently represent the smallest segment of the
market. Consumer selection is generally limited to less than 100 titles.
Limited title selection may contribute to the relatively small size of the
pay-per-view and VOD markets. The market for pay-per-view and near-VOD was
$813 million in 2001, representing less than 3% of the in-home filmed
entertainment market, and is expected to grow to $1.3 billion in 2006,
according to Adams Media Research. The market for cable VOD was $85 million in
2001, representing less than 1% of the in-home filmed entertainment market, and
is expected to grow to $1.1 billion in 2006, according to Adams Media Research.

CONSUMER TRANSITION TO DVD

The home video segment of the in-home filmed entertainment market is
undergoing a rapid technology transition away from VHS to DVD. We believe this
transition is analogous to the shift in the music industry from audio cassettes
to compact discs that resulted in significant additional demand for both new
releases and back catalogue inventory. Specifically, the music industry
benefited from consumers replacing their old library of audio cassettes with
higher quality compact discs. We believe the home video segment is likely to
see a similar trend as consumers rediscover back catalogue titles on higher
quality DVDs.

The DVD player is the fastest selling consumer electronics device in
history, according to DVD Entertainment Group. At year-end 2001, there were 25
million U.S. television households with a standalone set-top DVD player,
representing 23% of U.S. television households. The number of homes with a
standalone set-top DVD player increased 97% in 2001, according to Adams Media
Research. In September 2001, DVD player shipments outpaced VCR shipments for
the first time in history, and this trend continued throughout the remainder of
2001. The number of U.S. households with a DVD player is expected to grow to 67
million by the end of 2006, representing approximately 60% of U.S. television
households in 2006, according to Adams Media Research.

Every major domestic movie studio supports the DVD format. DVD rentals
reached $2.3 billion in 2001, up 214% from 2000 and are expected to account for
more than 50% of video rental revenue by 2003, up

from 7% in 2000, according to Adams Media Research. We believe this projected
growth in DVD rental revenue is the direct result of consumer adoption of the
DVD.

CHALLENGES FACED BY CONSUMERS IN SELECTING IN-HOME FILMED ENTERTAINMENT

The proliferation of new releases available for in-home filmed
entertainment combined with the additional demand for back catalogue titles on
DVD create two primary challenges for consumers in selecting titles.

Despite the large number of titles, consumers lack a deep selection of
titles from existing subscription channels and traditional video rental
outlets. Subscription channels, such as HBO and Showtime, and pay-per-view
services currently offer a narrow selection of titles at specified times due to
programming schedule constraints and technological issues relating to channel
capacity. Traditional video rental outlets primarily focus on offering new
releases and devote limited space to display and stock back catalogue titles.

Even when consumers have access to the vast number of titles available,
they generally have limited means to effectively sort through the titles. In
2000, over 750 domestic and foreign films were rated for theatrical release in
the United States and over 5,300 new releases and back-catalogue titles,
excluding adult titles, were released on DVD. In addition, consumers are faced
with 161 network and cable television shows covering 126 hours of weekly
television viewing. We believe our CineMatch technology provides our
subscribers the tools to select titles within the vast array of options that
appeal to their individual preferences.

COMPETITIVE STRENGTHS

We believe that our revenue and subscriber growth are a result of the
following competitive strengths:

. COMPREHENSIVE LIBRARY OF TITLES. We have developed strategic
relationships with top studios and distributors, enabling us to
establish and maintain a broad and deep selection of titles. Since
our service is available nationally, we believe that we can
economically acquire and provide subscribers a broader selection of
titles than video rental outlets, video retailers, subscription
channels, pay-per-view and VOD services. We currently offer virtually
every title available from the more than 50 studios and distributors
from whom we acquire titles. To maximize our selection of titles, we
continuously add newly released titles to our library. Our library
contains numerous copies of popular new releases, as well as the many
titles that appeal to more select audiences.

. PERSONALIZED MERCHANDIZING. We utilize our proprietary CineMatch
technology to create a custom interface for each subscriber to
effectively merchandize our library. Users rate titles on our Web
site, and our CineMatch technology compares these ratings against the
database of ratings collected from our entire user base. For each
visitor, these comparisons are used to make predictions about
specific titles the visitor may enjoy. These predictions are used to
merchandize titles to visitors throughout the Web site. We believe
that CineMatch allows us to create demand for our entire library and
maximize utilization of each title. Although we offer a complete
selection of new releases, many subscriber selections are from back
catalogue titles. In March 2002, subscribers selected more than
11,000 of our more than 11,500 titles, representing over 95% of all
titles in our library. We believe that as the number of our
subscribers and ratings database grows, CineMatch will be able to
more accurately predict individual preferences.

. SCALABLE BUSINESS MODEL. We believe that we have a scalable,
low-cost business model designed to maximize our revenues and
minimize our costs. Subscribers' prepaid monthly credit card payments
and the recurring nature of our subscription business provide working
capital benefits and significant near-term revenue visibility. In
order to manage and contain subscriber acquisition costs, we
primarily utilize pay-for-performance marketing programs with online
affiliates and others and use low-cost inserts in DVD player boxes.
We have entered into revenue sharing agreements with studios and
distributors to lower our upfront cash payments which enhance our

ability to expand the depth and breadth of our library. Our library
remains active beyond the new release window. In January 2002,
approximately 70% of the titles we delivered were from our back
catalogue. Our scalable infrastructure and online interface eliminate
the need for expensive retail outlets and allow us to service our
large and expanding subscriber base from a series of low-cost
regional distribution centers. We employ temporary, hourly and
part-time workers to contain labor costs and provide maximum
operating flexibility. Finally, we have low delivery costs through
the use of standard first class mail to ship and return titles to and
from subscribers.

. CONVENIENCE, SELECTION AND DELIVERY. Subscribers can conveniently
select titles by building and modifying a personalized queue of
titles on our Web site. We create a unique experience for subscribers
because most pages on our Web site are tailored to individual
selection and ratings history. Under our standard service,
subscribers can have three titles out at the same time with no due
dates or late fees. Once selected, titles are sent to subscribers by
first-class mail and returned to us in pre-paid mailers. Upon receipt
of returned titles, we automatically mail subscribers the next
available title in their queue of selected titles.

GROWTH STRATEGY

Our strategy to provide a premier filmed entertainment subscription
service to our large and growing loyal subscriber base includes the following
key elements:

. PROVIDING A COMPELLING VALUE PROPOSITION FOR SUBSCRIBERS. We provide
subscribers access to our comprehensive library with no due dates,
late fees or shipping charges for a fixed monthly fee. We merchandize
titles in easy to recognize lists including new releases, genres and
other targeted categories. Our convenient, easy to use Web site
allows subscribers to quickly select current titles, reserve upcoming
releases and build an individual queue for future viewing using our
proprietary personalization technology. Our CineMatch technology
provides subscribers with recommendations of titles from our library.
We quickly deliver titles to subscribers from our regional
distribution centers by standard first-class mail.

. UTILIZING TECHNOLOGY TO ENHANCE SUBSCRIBER EXPERIENCE AND OPERATE
EFFICIENTLY. We utilize proprietary technology developed in-house to
manage the processing and distribution of more than 100,000 DVDs per
day from our distribution centers. Our software automates the process
of tracking and routing titles to and from each of our distribution
centers and allocates order responsibilities among them. We
continuously monitor, test and seek to improve the efficiency of our
distribution, processing and inventory management systems as our
subscriber base and shipping volume grows. We plan to operate
low-cost regional distribution centers throughout the United States
to reduce delivery time and increase library utilization. See
"--Fulfillment Operations" on page 46. We believe that shorter
delivery time will result in improved customer acquisition, retention
and satisfaction.

. BUILDING MUTUALLY BENEFICIAL RELATIONSHIPS WITH FILMED ENTERTAINMENT
PROVIDERS. We have entered into revenue sharing agreements with
studios that lower our upfront cost of acquiring titles, minimize our
inventory risk and increase the depth and breadth of our library. Our
growing subscriber base provides studios with an additional
distribution outlet for popular movies and television series, as well
as niche titles and programs. Through our growing subscriber and
ratings database, we also help studios reach targeted audiences to
promote new theatrical and home video releases.

. IMPLEMENTING DIGITAL DELIVERY. We continuously monitor the
development of additional digital distribution technologies.
Historically, new technologies, including the VCR and more recently
the DVD player, have led to the creation of additional distribution
channels for filmed entertainment. We intend to utilize our strong
relationships with the studios to obtain rights to acquire and
deliver filmed entertainment through emerging digital distribution
platforms as they become economically, commercially and
technologically viable for those subscribers who prefer digital
distribution.

OUR WEB SITE--WWW.NETFLIX.COM

We have applied substantial resources to plan, develop and maintain
proprietary technology to implement the features of our Web site, such as
subscription account signup and management, personalized movie merchandising,
inventory optimization and customer support. Our software is written in a
variety of languages and runs on industry standard platforms.

Our CineMatch technology uses proprietary algorithms to compare
subscriber movie preferences with preferences of other users contained in our
database. This technology enables us to provide personalized predictions and
movie recommendations unique to each subscriber.

We believe our dynamic store software optimizes subscriber satisfaction
and the management of our library by integrating CineMatch predictions,
subscribers' current queues and viewing histories, inventory levels and other
factors to determine which movies to merchandise to each subscriber.

Our proprietary movie search engine indexes our extensive library by
title, actor, director and producer, and sorts them by genre into collections.

Our account signup and management tools provide a subscriber interface
familiar to online shoppers. We use a real-time postal address validator to
help our subscribers enter correct postal addresses and to determine the
additional postal address fields required to assure speedy and accurate
delivery. We use an online credit card authorization service to help our
subscribers avoid typographic errors in their credit card entries. These
features help prevent fraud and subscriber disappointment resulting from
failures to initiate a trial.

Throughout our Web site, we have extensive measurement and testing
capabilities, allowing us to continuously optimize our Web site according to
our needs as well as those of our subscribers. We use random control testing
extensively.

Our Web site is run on hardware and software co-located at a service
provider offering reliable network connections, power, air conditioning and
other essential infrastructure. We manage the Web site 24 hours a day, seven
days a week. We utilize a variety of proprietary software, freely available
tools and commercially supported tools, integrated in a system designed to
rapidly and precisely diagnose and recover from failures. Many of our Web site
systems are redundant, including most of the networking hardware and the Web
servers. We conduct upgrades and installations of software in a manner designed
to minimize disruptions to our subscribers.

MERCHANDIZING

The key to our merchandizing efforts is the personal recommendations
generated by our CineMatch technology. All subscribers and site visitors are
given many opportunities to rate titles. Based on the ratings we collect, we
are able to determine how a particular subscriber will likely feel about other
titles in our library. We can also generate "average" ratings for titles.

CineMatch ratings also determine which titles are displayed to a
subscriber and in which order. For example, a list of new releases may be
ranked by user preference rather than by release date, allowing subscribers to
quickly find titles they are more likely to enjoy. Ratings also determine which
titles are featured in lead page positions on our Web site to increase customer
satisfaction and selection activity. Finally, CineMatch data is used to
generate lists of similar titles, which has proved to be a powerful method for
catalogue browsing. Subscribers often start from a familiar title and use our
CineMatch Similars to find other titles they may enjoy.

Recommendations are available to anyone who has rated titles on our Web
site, whether or not they are a subscriber. By aggregating the ratings of our
subscribers and other visitors, we have built what we believe to be the world's
largest personal movie ratings database, containing more than 70 million
ratings.

We also provide our subscribers with decision support information about
each title in our library. This information includes:

. factual data, including length, rating, cast and crew, special DVD
features and screen formats;

. editorial perspective, including plot synopses, movie trailers and
reviews written by our editors and by other Netflix subscribers; and

. CineMatch data, including personal rating, average rating and other
similar titles the subscriber may enjoy.

MARKETING

We have multiple marketing channels through which we attract subscribers
to our service. We compensate the majority of our channel partners on a
pay-for-performance basis. We believe that our paid marketing efforts are
significantly enhanced by the benefits of word-of-mouth advertising, our
subscriber referrals and our active public relations program. Approximately 30%
of our subscribers are referrals from existing subscribers or come from other
unpaid marketing channels. We believe that improvements we have made to the
subscriber experience have enhanced our subscriber acquisition efforts. In a
simple random sample conducted in January 2002, approximately 85% of
respondents said they would be likely to recommend our service to a friend. We
focus our paid marketing efforts on the following channels:

ONLINE ADVERTISING

Online advertising is our largest paid source of new subscribers. Our
advertisements are placed directly by us, indirectly through brokers, and
through our affiliate program with hundreds of third parties to appear online
in banner ads, pop-over advertisements, pop-under advertisements and in emails.
Third parties that place our advertisements and generate online subscriber
referrals are generally paid a cash bounty for each subscriber referred to us,
with no minimum or maximum amounts for which we are liable. Subscribers
referred to us through our affiliate program are tracked by an independent
third party.

DVD PLAYER MANUFACTURERS

We have agreements with leading DVD player manufacturers requiring them
to place a Netflix insert inside DVD player boxes that describes our service
and offers a free trial. Our insert advertisements were placed in approximately
84% of all standalone set-top DVD player boxes sold in the United States in
2001. Our DVD player manufacturer and reseller relationships include those with
Apex Digital, JVC Corporation of America, Panasonic Consumer Electronics
Company, Philips Consumer Electronics, RCA, Samsung, Sanyo-Fisher, Sharp, Sony
Electronics and Toshiba.

OTHER CHANNELS

We also work with a number of other channels on an opportunistic basis.
We have a relationship with a leading consumer electronics and video retailer,
which uses point-of-sale materials and stickers on product packaging to promote
Netflix in its stores.

CONTENT ACQUISITION

We have entered into revenue sharing arrangements with more than 50
studios and distributors. The arrangements cover six of the top eight studios,
including Buena Vista Home Video, Columbia TriStar Home Entertainment,
Dreamworks International Distribution, Twentieth Century Fox Home
Entertainment, Universal Studios Home Video and Warner Home Video. Under these
agreements we generally obtain titles for a low initial cost in exchange for a
commitment to share a percentage of our subscription revenues for a defined
period of time. After the revenue sharing period expires for a title, the
agreements generally grant us the right to acquire

for a minimal fee a percentage of the units for retention or sale by us. The
balance of the units are destroyed or returned to the originating studio. The
principal terms of each agreement are similar in nature but are generally
unique to each studio. In addition to revenue sharing agreements, we also
purchase titles from various studios and distributors, including Paramount and
MGM, and other suppliers, including Ingram Entertainment, Inc. and Video
Product Distributors, on a purchase order basis. In 2001, we acquired
approximately 80% of our titles through our revenue sharing arrangements.

FULFILLMENT OPERATIONS

We currently stock more than 11,500 titles on more than 3.2 million DVDs.
During March 2002, we shipped to and received from subscribers more than 5.3
million DVDs. We have applied substantial resources developing, maintaining and
testing the proprietary technology that helps us manage the fulfillment of
individual orders and the integration of our Web site, transaction processing
systems, fulfillment operations, inventory levels and coordination of our
distribution centers.

Our primary distribution center is housed in a 50,000 square foot
facility in San Jose, California. In addition, we operate several regional
distribution centers. We currently are shipping DVDs to subscribers from eight
regional distribution centers, at various levels of capacity, located in Santa
Ana, California, Worcester, Massachusetts, Tacoma, Washington, Houston, Texas,
Minneapolis, Minnesota, Duluth, Georgia, Flushing, New York and Denver,
Colorado. We plan to open a limited number of regional distribution centers in
2002. We estimate the set-up cost of a regional center to be approximately
$60,000. We believe that we can ship up to 500,000 DVDs per day from our San
Jose distribution center and an additional 50,000 DVDs per day from each of our
regional distribution centers.

We believe our regional distribution centers allow us to improve the
subscription experience for non-San Francisco Bay area subscribers by
shortening the transit time for our DVDs in the U.S. Postal Service. Based on
performance standards established by the U.S. Postal Service for its postal
zones, we expect to be able to provide one- or two-day delivery service to at
least 90% of the U.S. population by the second half of 2002.

CUSTOMER SERVICE

We believe that our ability to establish and maintain long-term
relationships with subscribers depends, in part, on the strength of our
customer support and service operations. We encourage and utilize frequent
communication with and feedback from our subscribers in order to continually
improve our Web site and our service. Our customer service center operates 13
hours a day, seven days a week. We utilize email to proactively correspond with
subscribers. We also offer phone support for subscribers who prefer to talk
directly with a customer service representative. We focus on eliminating the
causes of customer support calls and automating certain self-service features
on our Web site, such as the ability to report and correct most shipping
problems. Currently, we support over 10,000 subscribers per customer support
representative. Our customer service operations are housed in our San Jose,
California facility.

COMPETITION

Video rental outlets and retailers against whom we compete include
Blockbuster Video, Hollywood Entertainment, Amazon.com, Wal-Mart and Best Buy.
We believe that we compete with these video rental outlets and movie retailers
primarily on the basis of title selection, convenience and price. We believe
that our scalable business model and our subscription service with home
delivery and access to our comprehensive library competes favorably against
traditional video rental outlets.

We also compete against online DVD sites, such as Rentmydvd.com and
dvdovernight, subscription entertainment services, such as HBO and Showtime,
pay-per-view and VOD providers and cable and satellite providers. We believe we
are able to provide greater subscriber satisfaction due to the broader and
deeper selection of titles we are able to offer subscribers, our ability to
personalize our library to each subscriber based on the subscriber's selection
history, personal ratings and the tastes and preferences of similar users
through our CineMatch technology and extensive database of user preferences and
the ease by which subscribers are able to select and return titles.

VOD has received considerable media attention. VOD is now widely deployed
in most major hotels, and has early deployments in many major cable systems.
Within a few years, we believe VOD will become widely available to digital
cable and satellite subscribers. VOD carries as many titles as can be
effectively merchandized on a set-top box platform, generally up to 100 recent
releases, plus adult content. For consumers who primarily want the latest big
releases, VOD may be a convenient distribution channel. We believe that our
strategy of developing a large and growing subscriber base and our ability to
personalize our library to each subscriber by leveraging our extensive database
of user preferences positions us favorably to provide digital distribution of
filmed entertainment as that market develops.

EMPLOYEES

As of March 31, 2002, we had 260 full-time employees. Of these full-time
employees, 160 were in fulfillment operations, 51 were in technology and
development, 22 were in marketing and 27 were general or administrative
employees. We utilize part-time and temporary employees to respond to
fluctuating seasonal demand for DVD shipments. We had 129 temporary employees
as of March 31, 2002. Our employees are not covered by a collective bargaining
agreement, and we consider our relations with our employees to be good.

INTELLECTUAL PROPERTY

We use a combination of trademark, copyright and trade secret laws and
confidentiality agreements to protect our proprietary intellectual property. We
have applied for several trademarks and one patent. Our trademark and patent
applications may not be allowed. Even if these applications are allowed, they
may not provide us a competitive advantage. To date, we have relied primarily
on proprietary processes and know-how to protect our intellectual property
related to our Web site and fulfillment processes. Competitors may challenge
successfully the validity and scope of our trademarks.

From time to time, we may encounter disputes over rights and obligations
concerning intellectual property. We believe that our service offering does not
infringe the intellectual property rights of any third party. However, we
cannot assure you that we will prevail in any intellectual property dispute.

FACILITIES

Our executive offices are located in Los Gatos, California, where we
lease approximately 25,000 square feet under a lease that expires in October
2005, subject to the right of the lessor to terminate our lease which expires
in 2003. We also lease approximately 50,000 square feet of space in San Jose,
California, where we maintain our customer service center, information
technology operations and primary distribution center under a lease that
expires in December 2004. As of March 31, 2002, we also had entered into leases
for no more than one year for a total of approximately 40,000 square feet for
facilities in Santa Ana, California, Worcester, Massachusetts, Tacoma,
Washington, Denver, Colorado, Flushing, New York, Duluth, Georgia, Houston,
Texas, Minneapolis, Minnesota, and Lansing, Michigan for use as regional
distribution centers.

LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table sets forth certain information with respect to our
executive officers, directors and key employees as of March 31, 2002.

NAME AGE POSITION
---- --- --------

EXECUTIVE OFFICERS AND DIRECTORS
Reed Hastings................ 41 Chief Executive Officer, President and Chairman of the Board
W. Barry McCarthy, Jr........ 48 Chief Financial Officer and Secretary
Thomas R. Dillon............. 58 Vice President of Operations
Leslie J. Kilgore............ 36 Vice President of Marketing
Timothy M. Haley(1)(2)....... 47 Director
Jay C. Hoag(2)............... 43 Director
A. Robert Pisano(1).......... 59 Director
Michael N. Schuh(1).......... 58 Director

KEY EMPLOYEES
Marc B. Randolph............. 43 Vice President of New Markets
Neil Hunt.................... 40 Vice President of E-Commerce
J. Mitchell Lowe............. 49 Vice President of Business Development
Patricia J. McCord........... 48 Vice President of Human Resources
Michael Osier................ 39 Vice President of IT Operations
Ted Sarandos................. 37 Vice President of Content Acquisition
David Hyman.................. 36 General Counsel

--------
(1) Member of the audit committee.
(2) Member of the compensation committee.

REED HASTINGS has served as our Chief Executive Officer since September
1998, our President since July 1999 and Chairman of the Board since inception.
Mr. Hastings also currently serves as President of the California State Board
of Education. From June 1998 to July 1999, Mr. Hastings served as Chief
Executive Officer of Technology Network, a political service organization for
the technology industry. Mr. Hastings served as Chief Executive Officer of Pure
Atria Software, a maker of software development tools, from its inception in
October 1991 until it was acquired by Rational Software Corporation, a software
development company, in August 1997. Mr. Hastings holds an M.S.C.S. degree from
Stanford University and a B.A. from Bowdoin College.

W. BARRY MCCARTHY, JR. has served as our Chief Financial Officer since
April 1999 and our Secretary since May 1999. From January 1993 to December
1999, Mr. McCarthy was Senior Vice President and Chief Financial Officer of
Music Choice, a music programming service distributed over direct broadcast
satellite and cable systems. From June 1990 to December 1992, Mr. McCarthy was
Managing Partner of BMP Partners, a financial consulting and advisory firm.
From 1982 to 1990, Mr. McCarthy was an Associate, Vice President and Director
with Credit Suisse First Boston, an investment banking firm. Mr. McCarthy holds
an M.B.A. from The Wharton School of Business at the University of Pennsylvania
and a B.A. from Williams College.

THOMAS R. DILLON has served as our Vice President of Operations since
April 1999. From January 1998 to April 1999, Mr. Dillon served as Chief
Information Officer at Candescent Technologies Corp., a manufacturer of flat
panel displays. From May 1987 to December 1997, he served as Chief Information
Officer of Seagate Technology, a maker of computer peripherals. Mr. Dillon
currently serves on the board of directors of Tricord Systems, Inc., a
designer, developer and marketer of server appliances. Mr. Dillon holds a B.S.
from the University of Colorado.

LESLIE J. KILGORE has served as our Vice President of Marketing since
March 2000. From February 1999 to March 2000, Ms. Kilgore served as a Director
of Marketing for Amazon.com, an Internet retailer. Ms. Kilgore served as a
brand manager for The Procter & Gamble Company, a manufacturer and marketer of
consumer products, from August 1992 to February 1999. Ms. Kilgore holds an
M.B.A. from the Stanford University Graduate School of Business and a B.S. from
The Wharton School of Business at the University of Pennsylvania.

TIMOTHY M. HALEY has served as one of our directors since June 1998. Mr.
Haley is a co-founder of Redpoint Ventures, a venture capital firm, and has
been a Managing Director of the firm since November 1999. Mr. Haley has been a
Managing Director of Institutional Venture Partners, a venture capital firm,
since February 1998. From June 1986 to February 1998, Mr. Haley was the
President of Haley Associates, an executive recruiting firm in the high
technology industry. Mr. Haley currently serves on the Board of Directors of
several private companies. Mr. Haley holds a B.A. from Santa Clara University.

JAY C. HOAG has served as one of our directors since June 1999. Since
June 1995, Mr. Hoag has been a General Partner at Technology Crossover
Ventures, a venture capital firm. Mr. Hoag serves on the board of directors of
EXE Technologies, Inc., eLoyalty Corporation, Expedia, Inc. and several private
companies. Mr. Hoag holds an M.B.A. from the University of Michigan and a B.A.
from Northwestern University.

A. ROBERT PISANO has served as one of our directors since April 2000.
Since September 2001, Mr. Pisano has been the National Executive Director and
Chief Executive Officer of the Screen Actors Guild. From August 1993 to April
1999, Mr. Pisano served as Executive Vice President, and the Vice Chairman and
Director of Metro-Goldwyn-Mayer Inc., a motion picture and television studio.
Mr. Pisano holds an LL.B. from the Boalt Hall School of Law at the University
of California, Berkeley and a B.A. from San Jose State University.

MICHAEL N. SCHUH has served as one of our directors since February 1999.
From August 1998 to the present, Mr. Schuh has served as a member of Foundation
Capital, a venture capital firm. Prior to joining Foundation Capital, Mr. Schuh
was a founder and Chief Executive Officer of Intrinsa Corporation, a supplier
of productivity solutions for software development organizations from 1994 to
1998. Mr. Schuh serves on the board of directors of several private companies.
Mr. Schuh holds a B.S.E.E. from the University of Maryland.

MARC B. RANDOLPH has served as our Vice President of New Markets since
December 2001, as our President from October 1998 to July 1999, as our
Executive Producer from July 1999 to November 2001, as our President and Chief
Executive Officer from August 1997 to September 1998 and as a member of our
board of directors from inception to February 2002. From October 1996 to August
1997, Mr. Randolph served as Vice President of Marketing for IntegrityQA, a
maker of software development tools, and its successor, Pure Atria Software.
Mr. Randolph holds a B.A. from Hamilton College.

NEIL HUNT has served as our Vice President of E-Commerce since January
1999. From August 1997 to January 1999, Mr. Hunt served as a Director of
Engineering of Rational Software Corporation, and from April 1992 to August
1997, in various engineering roles for its predecessor, Pure Atria Software.
Mr. Hunt holds a Ph.D. from the University of Aberdeen, U.K and a B.S. from the
University of Durham, U.K.

J. MITCHELL LOWE has served as our Vice President of Business Development
since February 1998 and was a consultant to Netflix from October 1997 to
February 1998. Mr. Lowe is a founder of and served as Chief Executive Officer
and director of Interaction, Inc., a video rental chain, from January 1984 to
June 2000. Mr. Lowe served on the Board of Directors of the Video Software
Dealers Association from 1991 to 1998 and as its Chairman of the Board from
1996 to 1997.

PATRICIA J. MCCORD has served as our Vice President of Human Resources
since November 1998. From January 1998 to November 1998, Ms. McCord was a
principal of Patty McCord Consulting, consulting various startup businesses.
From June 1994 to July 1997, Ms. McCord served as Director of Human Resources
at Rational Software Corporation and Pure Atria Software.

MICHAEL OSIER has served as our Vice President of IT Operations since
March 2000. From July 1997 to March 2000, Mr. Osier served as Director of
Enterprise Operations for Quantum Corporation, a supplier of tape drives. From
March 1995 to July 1997 Mr. Osier served as Senior Manager for Conner
Peripherals, a storage company and Seagate Technologies.

TED SARANDOS has served as our Vice President of Content Acquisitions
since March 2000. From May 1999 to March 2000, Mr. Sarandos served as Vice
President of Product and Merchandising at Video City, a video rental company.
From 1993 to May 1999, Mr. Sarandos served as Western Regional Director of
Sales and Operations for ETD, a video rental company.

DAVID HYMAN has served as our general counsel since February 2002. From
August 1999 to February 2002, Mr. Hyman served as General Counsel and Senior
Corporate Counsel for Webvan Group, Inc., an Internet retailer. From November
1995 to August 1999, Mr. Hyman served as an associate at Morrison & Foerster
LLP, a law firm. Mr. Hyman holds a J.D. from the University of Virginia School
of Law and a B.A. from the University of Virginia.

CLASSIFIED BOARD OF DIRECTORS

Our certificate of incorporation will provide for a classified board of
directors consisting of three classes of directors, each serving staggered
three year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, one of the nominees to the board will be elected
to a one year term, two will be elected to two year terms and two will be
elected to three-year terms. Thereafter, directors will be elected for three
year terms. Mr. Pisano has been designated a Class I director whose term
expires at the 2003 annual meeting of stockholders. Messrs. Schuh and Haley
have been designated Class II directors whose term expires at the 2004 annual
meeting of stockholders. Messrs. Hastings and Hoag have been designated Class
III directors whose term expires at the 2005 annual meeting of stockholders.

Our executive officers are appointed by the board of directors on an
annual basis and serve until their successors have been duly elected and
qualified. There are no family relationships among any of our directors or
executive officers.

BOARD COMMITTEES

We established an audit committee and compensation committee in March
2000.

Our audit committee consists of Messrs. Haley, Pisano and Schuh. The
audit committee reviews our internal accounting procedures and consults with
and reviews the services provided by our independent accountants.

Our compensation committee consists of Messrs. Haley and Hoag. The
compensation committee reviews and recommends to the board of directors the
compensation and benefits of our employees.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of our board of directors or compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of
directors or compensation committee.

DIRECTOR COMPENSATION

In September 2001, we granted A. Robert Pisano an option to purchase
100,000 shares of our common stock. In June 2000, we granted Mr. Pisano an
option to purchase 100,000 shares of our common stock. This option was repriced
in September 2001. These options now have an exercise price of $1.00 per share
and expire ten years after the date of grant. We do not currently have a plan
to compensate our directors for their service as members of the board of
directors.

EXECUTIVE COMPENSATION

The table below summarizes the compensation earned for services rendered
to Netflix in all capacities for each of the years in the three-year period
ended December 31, 2001 by our Chief Executive Officer and our executive
officers in 2001. These executives are referred to as the named executive
officers elsewhere in this prospectus.

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES ALL
UNDERLYING OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY OPTIONS COMPENSATION
---------------------------- ---- -------- ------------ ------------

Reed Hastings/(1)/........................................... 2001 $ 13,800 1,500,000 $ --
Chief Executive Officer, President, Chairman of the Board 2000 13,800 -- --
1999 15,510 -- --

W. Barry McCarthy, Jr........................................ 2001 200,000 305,000 3,501/(2)/
Chief Financial Officer 2000 196,538 -- 64,794/(3)/
1999 131,540 330,000 32,451/(4)/

Thomas R. Dillon............................................. 2001 200,000 583,000/(5)/ 5,389/(6)/
Vice President of Operations 2000 195,962 50,000 774/(7)/
1999 131,250 330,000 --

Leslie J. Kilgore............................................ 2001 190,000 853,000(8) 3,914/(9)/
Vice President of Marketing 2000 141,038 350,000 64,168/(10)/
1999 -- -- --
Marc B. Randolph/(11)/....................................... 2001 200,000 500,000 2,315/(12)/
Vice President of New Markets 2000 196,538 -- 180/(7)/
1999 169,768 -- --

--------
(1) Mr. Hastings' annual salary for 2002 has been increased to $200,000.
(2) Includes $3,231 representing our matching contribution made under our
401(k) plan and $270 for taxable amounts attributable to Mr. McCarthy
under our group term life insurance policy.
(3) Includes $64,524 representing taxable amounts attributable to Mr. McCarthy
for relocation expenses paid by us and $270 for taxable amounts
attributable to Mr. McCarthy under our group term life insurance policy.
(4) Includes amounts attributable to Mr. McCarthy for relocation expenses paid
by us.
(5) Includes 105,000 shares underlying options that were repriced in January
2001 and 155,000 shares underlying options that were repriced in August
2001. The options repriced in January 2001 were originally granted to Mr.
Dillon in December 1999 and the options repriced in August 2001 include
the options repriced in January 2001 and the options granted to Mr. Dillon
in August 2000.
(6) Includes $4,615 representing our matching contribution made under our
401(k) plan and $774 for taxable amounts attributable to Mr. Dillon under
our group term life insurance policy.
(7) Includes taxable amounts attributable to the employee under our group term
life insurance policy.
(8) Includes 300,000 shares underlying options that were repriced in January
2001 and 350,000 shares underlying options that were repriced in August
2001. The options repriced in January 2001 were originally granted to Ms.
Kilgore in March 2000 and the options repriced in August 2001 include the
options repriced in January 2001 and an additional option granted to Ms.
Kilgore in August 2000.
(9) Includes $3,752 representing our matching contribution made under our
401(k) plan and $162 for taxable amounts attributable to Ms. Kilgore under
our group term life insurance policy.
(10) Includes $64,043 representing amounts attributable to Ms. Kilgore for
relocation expenses paid by us and $125 for taxable amounts attributable
to Ms. Kilgore under our group term life insurance policy.
(11) Mr. Randolph is no longer one of our executive officers.
(12) Includes $2,135 representing our matching contribution made under our
401(k) plan and $180 for taxable amounts attributable to Mr. Randolph
under our group term life insurance policy.

OPTION GRANTS DURING LAST FISCAL YEAR

The following table sets forth certain information with respect to stock
options granted to each of the named executive officers in the year ended
December 31, 2001. The potential realizable value is calculated based on the
term of the option, which is ten years and an assumed initial public offering
price of $ and assumed rates of stock appreciation of 5% and 10%,
compounded annually. These assumed rates of appreciation comply with the rules
of the Securities and Exchange Commission and do not represent our estimate of
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of our common stock.

In 2001, we granted options to purchase an aggregate of 10,372,978 shares
to employees, including the repricing of options to purchase 1,354,600 shares
in January 2001 and options to purchase 2,641,386 shares in August 2001. All
options have a term of ten years. Optionees may pay the exercise price of their
options by cash, check, promissory note or delivery of already-owned shares of
our common stock. All options are immediately exercisable upon grant for
restricted stock which is subject to repurchase by us at cost in the event of
the optionee's termination of employment for any reason (including death or
disability) to the extent our right of repurchase has not lapsed. See
"--Employment Agreements and Change in Control Arrangements." Most options vest
over four years, with 25% of the options vesting on the date one year after the
vesting commencement date, and 1/48th of the remaining options vesting each
month thereafter.

POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------- ---------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES EXERCISE
UNDERLYING IN LAST PRICE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- --------------- ----------- --------- ---------- -------- --------

Reed Hastings................ 1,500,000 14.5% $1.00 07/18/11 $ $
W. Barry McCarthy, Jr........ 305,000/(1)/ 3.0 1.00 07/18/11
Thomas R. Dillon............. 583,000/(2)/ 5.6 1.00 07/18/11
Leslie J. Kilgore............ 853,000/(3)/ 8.2 1.00 07/18/11
Marc B. Randolph............. 500,000 4.8 1.00 07/18/11

--------
(1) Mr. McCarthy disclaims beneficial ownership of 23,400 shares of common
stock underlying these options. See "Principal Stockholders."
(2) Includes 105,000 shares underlying options that were repriced in January
2001 and 155,000 shares underlying options that were repriced in August
2001. The options repriced in January 2001 were originally granted to Mr.
Dillon in December 1999 and the options repriced in August 2001 include the
options repriced in January 2001 and the options granted to Mr. Dillon in
August 2000.
(3) Includes 300,000 shares underlying options that were repriced in January
2001 and 350,000 shares underlying options that were repriced in August
2001. The options repriced in January 2001 were originally granted to Ms.
Kilgore in March 2000 and the options repriced in August 2001 include the
options repriced in January 2001 and an additional option granted to Ms.
Kilgore in August 2000.

AGGREGATE OPTION EXERCISES DURING THE LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES

The following table sets forth information with respect to the named
executive officers concerning option exercises for the year ended December 31,
2001, and exercisable and unexercisable options held as of December 31, 2001.

The "Value of Unexercised In-the-Money Options at December 31, 2001" is
based on an assumed initial public offering price of $ per share, less
the per share exercise price of the option multiplied by the number of shares
issued upon exercise of the option.

NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 2001 DECEMBER 31, 2001
- ON VALUE ------------------------ -------------------------
NAME EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
---- -------- -------- ------------- ----------- ------------- -----------

Reed Hastings................ -- $ -- -- 1,500,000 $ -- $
W. Barry McCarthy, Jr........ 30,000 -- -- 595,000/(1)/ --
Thomas R. Dillon............. -- -- -- 703,000 --
Leslie J. Kilgore............ -- -- -- 553,000 --
Marc B. Randolph............. -- -- -- 500,000 --

--------
(1) Mr. McCarthy disclaims beneficial ownership of 127,992 shares of common
stock underlying these options. See "Principal Stockholders."

COMPENSATION PLANS

1997 STOCK PLAN

Our 1997 Stock Plan was adopted by our board of directors and approved by
our stockholders in 1997 and was last amended and restated in October 2001. Our
1997 Stock Plan provided for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code, to our employees, and for
the grant of nonstatutory stock options and stock purchase rights to our
employees, directors and consultants. The number of shares reserved under our
1997 Stock Plan will be reduced at the effective time of this offering in an
amount equal to the number of shares then reserved for issuance, but not yet
granted. Shares returned to the 1997 Stock Plan after this offering will be
available for issuance at the discretion of our board of directors. As of
February 28, 2002, we had reserved a total of 11,198,864 shares of our common
stock for issuance pursuant to outstanding and unexercised options and an
additional 1,331,456 shares available for future option grants.

Our 1997 Stock Plan provides that in the event of a merger or sale of
substantially all of the assets, the successor corporation will assume or
substitute each option or stock purchase right. If the outstanding options or
stock purchase rights are not assumed or substituted, the administrator will
provide notice to the optionee that he or she has the right to exercise the
option or stock purchase right as to all of the shares subject to the option or
stock purchase right, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option or
stock purchase right will terminate upon the expiration of the 15-day period.
In addition, if, within 12 months of a merger or sale of assets, a holder of an
option under our 1997 Stock Plan is terminated involuntarily other than for
cause, the vesting schedule for such holder's option will accelerate with
respect to an amount of shares equal to the number of shares that would
otherwise vest within 12 months after the date of the termination of such
holder.

In addition, in July 2001 we granted to Reed Hastings an option to
purchase 1,500,000 shares of our common stock, which is subject to vesting over
three years, and in February 2002 we granted to Mr. Hastings an option to
purchase 300,000 shares of our common stock, which is subject to vesting over
four years, each with an exercise price of $1.00 per share. Both of these
options were granted outside of our 1997 Stock Plan, but on terms substantially
identical thereto, and are exercisable for ten years from the date of grant.

2002 STOCK PLAN

Our board of directors adopted the 2002 Stock Plan in February 2002 and
our stockholders approved the 2002 Stock Plan in 2002. The 2002 Stock Plan
provides for the grant of incentive stock options, within the meaning of
Section 422 of the Internal Revenue Code, to our employees, and for the grant
of nonstatutory stock options and stock purchase rights to our employees,
directors and consultants.

NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE 2002 STOCK PLAN. We
have reserved 2,000,000 shares of our common stock for issuance pursuant to the
2002 Stock Plan, in addition to the number of shares which have been reserved
but not issued under our 1997 Stock Plan as of the effective date of this
offering. In addition, our 2002 Stock Plan provides for annual increases in the
number of shares available for issuance under our 2002 Stock Plan on the first
day of each fiscal year, beginning with our fiscal year 2003, equal to the
lesser of 5% of the outstanding shares of common stock on the first day of the
applicable fiscal year, 3,000,000 shares, and another amount as our board of
directors may determine.

ADMINISTRATION OF THE 2002 STOCK PLAN. Our board of directors or, with
respect to different groups of optionees, different committees appointed by our
board, will administer the 2002 Stock Plan. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code, the committee will consist of two or more
"outside directors" within the meaning of Section 162(m). The administrator has
the power to determine the terms of the options and stock purchase rights
granted, not inconsistent with the terms of the 2002 Stock Plan, including the
exercise price (which may be reduced by the administrator after the date of
grant), the number of shares subject to each option or stock purchase right,
the exercisability of the options and stock purchase rights and the form of
consideration payable upon exercise.

OPTIONS. The administrator will determine the exercise price of options
granted under the 2002 Stock Plan, but with respect to all incentive stock
options and nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code, the exercise price must at least equal the fair market
value of our common stock on the date of grant. The term of an incentive stock
option may not exceed ten years, except that with respect to any participant
who owns 10% of the voting power of all classes of our outstanding capital
stock, the term may not exceed five years and the exercise price must equal at
least 110% of the fair market value on the grant date. The administrator
determines the term of all other options.

No optionee may be granted an option to purchase more than 1,500,000
shares in any fiscal year. In connection with his or her initial service as an
employee, an optionee may be granted an option to purchase up to an additional
500,000 shares.

After termination of employment, a participant may exercise his or her
option for the period of time stated in the option agreement. Generally, if
termination is due to death or disability, the option will remain exercisable
for 12 months. In all other cases, the option will generally remain exercisable
for three months. However, an option may never be exercised later than the
expiration of its term.

STOCK PURCHASE RIGHTS. Stock purchase rights, which represent the right
to purchase our common stock, may be issued under our 2002 Stock Plan. The
administrator will determine the purchase price of stock purchase rights
granted under our 2002 Stock Plan. Unless the administrator determines
otherwise, a restricted stock purchase agreement will grant us a repurchase
option that we may exercise upon the voluntary or involuntary termination of
the purchaser's service with us for any reason, including death or disability.
The purchase price for shares we repurchase will generally be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The administrator determines the rate at which our
repurchase option will lapse.

TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless otherwise
determined by the administrator, our 2002 Stock Plan generally does not allow
for the transfer of options or stock purchase rights and only the optionee may
exercise an option or stock purchase right during his or her lifetime.

ADJUSTMENTS UPON CHANGE IN CONTROL. Our 2002 Stock Plan provides that in
the event of a change in control, the successor corporation will assume or
substitute each option or stock purchase right. If the outstanding options or
stock purchase rights are not assumed or substituted, the administrator will
provide notice to the optionee that he or she has the right to exercise the
option or stock purchase right as to all of the shares subject to the option

or stock purchase right, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option or
stock purchase right will terminate upon the expiration of the 15-day period.

AMENDMENT AND TERMINATION OF THE 2002 STOCK PLAN. Our 2002 Stock Plan
will automatically terminate in 2012, unless we terminate it sooner. In
addition, our board of directors has the authority to amend, suspend or
terminate the 2002 Stock Plan provided it does not impair the rights of any
optionee.

2002 EMPLOYEE STOCK PURCHASE PLAN

Concurrently with this offering, we intend to implement an employee stock
purchase plan. Our board of directors adopted the 2002 Employee Stock Purchase
Plan in February 2002 and our stockholders approved our 2002 Employee Stock
Purchase Plan in 2002.

NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE 2002 EMPLOYEE STOCK
PURCHASE PLAN. A total of 1,750,000 shares of our common stock will be made
available for sale under the 2002 Employee Stock Purchase Plan. In addition,
the plan provides for annual increases in the number of shares available for
issuance under the 2002 Employee Stock Purchase Plan on the first day of each
fiscal year, beginning with our fiscal year 2003, equal to the lesser of:

. 2% of the outstanding shares of our common stock on the first day of
the applicable fiscal year;

. 1,000,000 shares; and

. such other amount as our board may determine.

ADMINISTRATION OF THE 2002 EMPLOYEE STOCK PURCHASE PLAN. Our board of
directors or a committee established by our board will administer the 2002
Employee Stock Purchase Plan. Our board of directors or its committee has full
and exclusive authority to interpret the terms of the plan and determine
eligibility.

ELIGIBILITY TO PARTICIPATE. Our employees and employees of future
designated subsidiaries are eligible to participate in the 2002 Employee Stock
Purchase Plan if they are customarily employed for at least 20 hours per week
and more than five months in any calendar year. However, an employee may not be
granted an option to purchase stock under the 2002 Employee Stock Purchase Plan
if:

. the employee immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our
capital stock, or

. the employee's rights to purchase stock under all of our employee
stock purchase plans accrues at a rate that exceeds $25,000 worth of
stock for each calendar year.

OFFERING PERIODS AND CONTRIBUTIONS. Our 2002 Employee Stock Purchase
Plan is intended to qualify under Section 423 of the Internal Revenue Code and
contains consecutive, overlapping 24-month offering periods. Each offering
period includes four six-month purchase periods. The offering periods generally
start on the first trading day on or after May 1 and November 1 of each year,
except for the first such offering period which will commence on the first
trading day on or after the effective date of this offering and most likely
will end on the first trading day on or after May 1, 2004 and the second
offering period which will commence on November 1, 2002. All eligible employees
automatically will be enrolled in the first offering period, but payroll
deductions and continued participation in the first offering period will not be
determined until after the effective date of the Form S-8 registration
statement which is intended to register the shares reserved for issuance under
the plan. The plan permits participants to purchase common stock through
payroll deductions of up to 15% of their eligible compensation which generally
includes a participant's base salary, commissions, overtime pay, shift premium,
incentive compensation, incentive payments and bonuses, but excludes all other
compensation. A participant may purchase a maximum of 12,500 shares during a
six-month purchase period.

PURCHASE OF SHARES. Amounts deducted and accumulated by the participant
are used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair

market value of our common stock at the beginning of an offering period or at
the end of a purchase period. If the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, participants will be withdrawn from the current offering period
following their purchase of shares on the purchase date and automatically will
be re-enrolled in a new offering period. Participants may end their
participation at any time during an offering period, and will be paid their
payroll deductions to date. Participation ends automatically upon termination
of employment with us.

TRANSFERABILITY OF RIGHTS. A participant may not transfer rights granted
under the 2002 Employee Stock Purchase Plan other than by will, the laws of
descent and distribution or as otherwise provided under the plan.

ADJUSTMENTS UPON CHANGE IN CONTROL. In the event of a change in control,
a successor corporation may assume or substitute each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set, which shall be before the date of the proposed
change in control. In such event, the administrator will provide notice of the
new exercise date to each optionee at least ten business days before the new
exercise date.

AMENDMENT AND TERMINATION OF THE 2002 EMPLOYEE STOCK PURCHASE PLAN. The
administrator has the authority to amend or terminate our plan, except that,
subject to certain exceptions described in the 2002 Employee Stock Purchase
Plan, no such action may adversely affect any outstanding rights to purchase
stock under the plan.

401(K) RETIREMENT PLAN

On January 1, 1998, we adopted the Netflix 401(k) Retirement Plan which
covers all of our eligible employees who are at least 21 years old and have
completed one month of service with us. The 401(k) Plan currently excludes from
participation employees of affiliated employers, employees under a collective
bargaining agreement and nonresident alien employees. The 401(k) Plan is
intended to qualify under Sections 401(a), 401(m) and 401(k) of the Internal
Revenue Code and the 401(k) Plan trust is intended to qualify under Section
501(a) of the Internal Revenue Code. All contributions to the 401(k) Plan by
eligible employees, and the investment earnings thereon, are not taxable to
such employees until withdrawn and are 100% vested immediately. Our eligible
employees may elect to reduce their current compensation up to the maximum
statutorily prescribed annual limit and to have such salary reductions
contributed on their behalf to the 401(k) Plan.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

In a change in control, if the options under our amended and restated
1997 Stock Plan are not assumed or substituted for, each outstanding option
will fully vest and become immediately exercisable. In addition, if, within 12
months of a change in control, a holder of an option under our amended and
restated 1997 Stock Plan is terminated involuntarily other than for cause, the
vesting schedule for such holder's option will accelerate with respect to an
amount of shares equal to the number of shares that would otherwise vest over
the following 12 months.

In April 1999, our board of directors awarded W. Barry McCarthy, Jr. an
option to purchase 330,000 shares of our common stock under a stock option
agreement. One-quarter of the shares underlying Mr. McCarthy's option vested in
April 2000 and 1/48 of the total shares vest each month thereafter. Pursuant to
an offer letter from us to Mr. McCarthy, upon a change of control of Netflix,
the vesting schedule will accelerate with respect to an amount of shares equal
to the number of shares that would otherwise vest over the following 12 months
or 50% of the unvested options, whichever is greater. All of the shares
underlying this option will be fully vested on April 14, 2003, subject to Mr.
McCarthy continuing to be our employee through that date.

In April 1999, our board of directors awarded Thomas R. Dillon an option
to purchase 225,000 shares of our common stock under a stock option agreement.
One-quarter of the shares underlying Mr. Dillon's option vested in March 2000
and 1/48th of the total shares vest each month thereafter. Pursuant to an offer
letter from us

to Mr. Dillon, if, upon a change of control of Netflix, Mr. Dillon is
terminated, the vesting schedule will accelerate with respect to an amount of
shares equal to the number of shares that would otherwise vest over the
following 12 months. In the event that Mr. Dillon's employment is terminated by
us not for cause, Mr. Dillon will be entitled to severance of three months
continued salary and benefits. In addition, Mr. Dillon is entitled to an annual
bonus targeted at $15,000 based on our performance.

In March 2000, our board of directors awarded Leslie Kilgore an option to
purchase 300,000 shares of our common stock under a stock option agreement.
One-quarter of the shares underlying Ms. Kilgore's option were to vest in March
2001 and 1/48 of the total shares each month thereafter. In January 2001,
Ms. Kilgore's options were repriced and the terms adjusted such that
one-quarter of the shares underlying Ms. Kilgore's option vested in December
2000 and 1/48 of the total shares vest each month thereafter. Pursuant to an
offer letter from us to Ms. Kilgore, if, upon a change of control of Netflix,
Ms. Kilgore is involuntarily terminated or her role within the subsequent
company is substantially and materially altered without her consent, the
vesting schedule will accelerate with respect to an amount of shares equal to
the number of shares that would otherwise vest over the following 12 months.
All of the shares underlying Ms. Kilgore's option will be fully vested on
December 20, 2004, subject to Ms. Kilgore continuing to be our employee through
that date. In the event that Ms. Kilgore's employment is terminated by us not
for cause, Ms. Kilgore will be entitled to severance of three months continued
salary and benefits.

LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION

Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for breach of
their fiduciary duties as directors, except liability for any of the following:

. any breach of their duty of loyalty to the corporation or its
stockholders;

. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

. payments of dividends or approval of stock repurchases or redemptions
that are prohibited by Delaware law; or

. any transaction from which the director derived an improper personal
benefit.

This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

Our certificate of incorporation and bylaws will provide that we shall
indemnify our directors, officers, employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. Our bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether Delaware law would
permit indemnification.

We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our certificate of
incorporation and bylaws. These agreements, among other things, provide for
indemnification of our directors and officers for expenses, judgments, fines,
penalties and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as a director or officer or at
our request.

We believe that these provisions and agreements are necessary to attract
and retain qualified persons as directors and executive officers. There is no
pending litigation or proceeding involving any of our directors, officers,
employees or agents. We are not aware of any pending or threatened litigation
or proceeding that might result in a claim for indemnification by a director,
officer, employee or agent.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SUBORDINATED PROMISSORY NOTE AND WARRANT FINANCING

In July 2001, we issued $13.0 million aggregate original principal amount
of subordinated promissory notes and warrants to acquire an aggregate of
20,456,866 shares of common stock to raise capital to finance our operations.
The warrants were sold for $0.001 per underlying share of common stock and have
an exercise price of $1.00 per share. The following executive officers, 5%
stockholders and certain family members of our executive officers and directors
at that time participated in the subordinated promissory note and warrant
financing:

PRINCIPAL
AMOUNT OF UNDERLYING AGGREGATE
PURCHASER NOTES WARRANTS CONSIDERATION
--------- ---------- ---------- -------------

Entities affiliated with Jay C. Hoag/(1)/.................. $8,290,287 13,815,411 $8,304,102
Entities affiliated with Michael N. Schuh/(2)/............. 2,772,388 4,620,067 2,777,008
Entities affiliated with Timothy M. Haley/(3)/............. 1,670,667 1,670,666 1,672,337
W. Barry McCarthy, Jr...................................... 30,000 30,000 30,030
Randolph Randolph/(4)/..................................... 2,500 2,842 2,503

--------

(1)Consists of: (i) TCV II, V.O.F.; (ii) Technology Crossover Ventures II,
C.V.; (iii) TCV II Strategic Partners, L.P.; (iv) TCV II (Q), L.P.; (v)
Technology Crossover Ventures II, L.P.; (vi) TCV IV, L.P.; (vii) TCV IV
Strategic Partners, L.P.; and (viii) TCV Franchise Fund, L.P. See footnote
(2) in "Principal Stockholders" for a description of Mr. Hoag's relationship
with these entities. Mr. Hoag is one of our directors.

(2)Consists of: (i) Foundation Capital Leadership Fund, L.P. and (ii)
Foundation Capital Leadership Principals Fund, LLC. See footnote (5) in
"Principal Stockholders" for a description of Mr. Schuh's relationship to
these entities. Mr. Schuh is one of our directors.

(3)Consists of: (i) Institutional Venture Partners VIII, L.P. and (ii) IVM
Investment Fund VIII, LLC. See footnote (6) in "Principal Stockholders" for
a description of Mr. Haley's relationship to these entities. Mr. Haley is
one of our directors.

(4)Mr. Randolph is the brother of Marc B. Randolph, a former director and our
Vice President of New Markets.

PREFERRED STOCK SALES

SERIES E PREFERRED STOCK. In April 2000, we sold 5,332,689 shares of
Series E Preferred Stock, at a purchase price of $9.38 per share, and sold
warrants to acquire Series E Preferred Stock, at a purchase price of $0.01 per
underlying share of Series E Preferred Stock, to raise capital to finance our
operations. The warrants have an exercise price of $14.07 per share. Each share
of Series E Preferred Stock will convert into approximately 2.04 shares of
common stock and each warrant to purchase shares of Series E Preferred Stock
will represent a warrant to purchase such number of shares of common stock
multiplied by approximately 2.04 upon completion of this offering. The
following 5% stockholders and certain family members of our executive officers
and directors at that time purchased shares and warrants in that financing:

SHARES
NUMBER UNDERLYING AGGREGATE
PURCHASER OF SHARES WARRANTS CONSIDERATION
--------- --------- ---------- -------------

Entities affiliated with Jay C. Hoag/(1)/.................. 4,359,876 435,988 $40,899,997
Entities affiliated with Michael N. Schuh/(2)/............. 319,829 31,983 3,000,316
Entities affiliated with Timothy M. Haley/(3)/............. 319,829 31,983 3,000,316
Europ@web B.V./(4)/........................................ 319,829 31,983 3,000,316
Muriel Randolph/(5)/....................................... 5,330 533 50,001
Randolph Randolph.......................................... 5,330 533 50,001

--------

(1)Consists of: (i) TCV II, V.O.F.; (ii) Technology Crossover Ventures II,
C.V.; (iii) TCV II Strategic Partners, L.P.; (iv) TCV II (Q), L.P.; (v)
Technology Crossover Ventures II, L.P.; (vi) TCV IV, L.P.; and (vii) TCV
Franchise Fund, L.P. Of the shares acquired by TCV IV, L.P., 147,690 of such
shares were subsequently

transferred to TCV IV Strategic Partners, L.P. by TCV IV, L.P. See footnote
(2) in "Principal Stockholders" for a description of Mr. Hoag's relationship
with these entities.

(2)Consists of: (i) Foundation Capital II, L.P.; (ii) Foundation Capital II
Entrepreneurs Fund, LLC; and (iii) Foundation Capital II Principals Fund,
LLC. See footnote (5) in "Principal Stockholders" for a description of Mr.
Schuh's relationship to these entities.

(3)Consists of: (i) Institutional Venture Partners VIII, L.P.; and (ii) IVM
Investment Fund VIII, LLC. See footnote (6) in "Principal Stockholders" for
a description of Mr. Haley's relationship to these entities.

(4)Europ@web, B.V. was a holder of more than 5% of our stock. The shares
purchased by Europ@web, B.V. were transferred to Finanzas, B.V., an
affiliate of Europ@web. The shares of Series E Preferred Stock held by
Finanzas, B.V. were converted into shares of Series E-1 Preferred Stock in
connection with our subordinated promissory note and warrant financing.

(5)Muriel Randolph is the mother of Marc B. Randolph. The shares of Series E
Preferred Stock held by Ms. Randolph were converted into shares of Series
E-1 Preferred Stock in connection with our subordinated promissory note and
warrant financing.

SERIES D PREFERRED STOCK. In June 1999 and October 1999, we sold an
aggregate of 4,649,927 shares of Series D Preferred Stock, at a purchase price
of $6.52 per share, to raise capital to finance our operations. Each share of
Series D Preferred Stock will convert into approximately 1.42 shares of common
stock upon completion of this offering. The following 5% stockholders purchased
shares in that financing:

NUMBER AGGREGATE
PURCHASER OF SHARES CONSIDERATION
--------- --------- -------------

Forum Holding Amsterdam B.V./(1)/.......................... 4,081,118 $26,608,889
Entities affiliated with Jay C. Hoag/(2)/.................. 366,735 2,391,112
Entities affiliated with Michael N. Schuh/(3)/............. 153,374 999,998

--------

(1)The shares of Series D Preferred Stock acquired by Forum Holding Amsterdam
B.V. have been transferred to Finanzas, B.V.

(2)Consists of: (i) TCV II, V.O.F.; (ii) Technology Crossover Ventures II,
C.V.; (iii) TCV II Strategic Partners, L.P.; (iv) TCV II (Q), L.P.; and (v)
Technology Crossover Ventures II, L.P.

(3)Consists of: (i) Foundation Capital II, L.P.; (ii) Foundation Capital II
Entrepreneurs Fund, LLC; and (iii) Foundation Capital II Principals Fund,
LLC. See footnote (5) in "Principal Stockholders" for a description of Mr.
Schuh's relationship to these entities.

SERIES C PREFERRED STOCK. In February 1999 and June 1999, we sold an
aggregate of 4,650,269 shares of Series C Preferred Stock, at a purchase price
of $3.27 per share, to raise capital to finance our operations. Each share of
Series C Preferred Stock will convert into approximately 1.32 shares of common
stock upon completion of this offering. The following 5% stockholders,
directors, executive officers and certain of their family members purchased
shares in that financing:

NUMBER AGGREGATE
PURCHASER OF SHARES CONSIDERATION
--------- --------- -------------

Entities affiliated with Michael N. Schuh/(1)/............. 1,834,863 $6,000,002
Entities affiliated with Jay C. Hoag/(2)/.................. 1,834,862 5,999,999
Entities affiliated with Timothy M. Haley/(3)/............. 611,621 2,000,001
Reed Hastings.............................................. 234,557 767,001
Muriel Randolph............................................ 22,936 75,001
Hastings 1996 Irrevocable Trust/(4)/....................... 9,174 29,999
Wil Hastings/(5)/.......................................... 9,174 29,999
Joan Hastings/(6)/......................................... 5,505 18,001

--------

(1)Consists of: (i) Foundation Capital II, L.P.; (ii) Foundation Capital II
Entrepreneurs Fund, LLC; and (iii) Foundation Capital II Principals Fund,
LLC. See footnote (5) in "Principal Stockholders" for a description of Mr.
Schuh's relationship to these entities.

(2)Consists of: (i) TCV II, VOF; (ii) Technology Crossover Ventures II, C.V.;
(iii) TCV II Strategic Partners, L.P.; (iv) TCV II (Q), L.P.; and (v)
Technology Crossover Ventures II, L.P.

(3)Consists of (i) Institutional Venture Partners VIII, L.P. and (ii) IVM
Investment Fund VIII, LLC. See footnote (6) in "Principal Stockholders" for
a description of Mr. Haley's relationship to these entities.

(4)Wil and Joan Hastings are the trustees of the Hastings 1996 Irrevocable
Trust.

(5)Wil Hastings is the father of Reed Hastings, our Chief Executive Officer,
President and Chairman of the Board.

(6)Joan Hastings is the mother of Reed Hastings.

LETTER AGREEMENT WITH CERTAIN STOCKHOLDERS

In connection with our sale of Series C Preferred Stock in February 1999,
we entered into a letter agreement with Technology Crossover Ventures II, L.P.,
Institutional Venture Partners VIII, L.P. and Foundation Capital II, L.P.
concerning our initial public offering. In connection with our sale of Series D
Preferred Stock in June 1999, the letter agreement was amended and restated to
add Forum Holding Amsterdam B.V. as a party. Under this agreement, as amended
and restated, we have agreed to require that the managing underwriters offer an
aggregate of 10% of the shares to be sold in this offering for sale to these
Series C and Series D preferred stockholders, subject to compliance with
applicable law. Each of these four stockholders has the right to participate
with respect to that portion of the 10% allocation equal to their pro rata
ownership of our Series C and Series D Preferred Stock as compared to the other
participating stockholders. Any sales of our common stock pursuant to this
agreement will occur concurrently with this offering.

LETTER AGREEMENT WITH FORUM HOLDING AMSTERDAM B.V.

In June 1999, in connection with our sale of Series D Preferred Stock, we
entered into a letter agreement with Forum Holding Amsterdam B.V. granting to
LVMH Moet Hennessy Louis Vuitton, an affiliate of Forum Holding Amsterdam B.V.,
the right of first refusal with respect to any joint venture we propose to
create in Europe for the sale, rental or distribution of products. The letter
agreement terminates in June 2004.

COMMON STOCK SALES

Since December 31, 1998, we have issued an aggregate of 2,062,000 shares
of our common stock to our executive officers and directors for an aggregate
consideration of $241,100.

PRINCIPAL STOCKHOLDERS

The table below sets forth information regarding the beneficial ownership
of our common stock as of February 28, 2002, by the following individuals or
groups:

. each person or entity who is known by us to own beneficially more
than 5% of our outstanding stock;

. each of the named executive officers;

. each of our directors; and

. all of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to the securities. Except as otherwise indicated, and
subject to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock held by them. Shares of common stock subject to options or warrants that
are currently exercisable or exercisable within 60 days are deemed to be
outstanding and beneficially owned for the purpose of computing the percentage
ownership of that person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. Because all options
granted under our 1997 Stock Plan and outside the plan are exercisable upon
grant for restricted stock, all of the shares of our common stock underlying
options held by our executive officers and directors are deemed to be
beneficially owned by such person. Unless otherwise indicated, the address for
each stockholder listed in the following table is c/o Netflix, Inc., 970
University Avenue, Los Gatos, CA 95032.

Applicable percentage ownership in the following table is based on
45,129,402 shares of common stock outstanding as of February 28, 2002, pro
forma to reflect the conversion of all outstanding shares of preferred stock
into common stock upon the closing of this offering and the issuance of
additional shares to certain studios immediately prior to the closing of this
offering.

To the extent that any shares are issued upon exercise of options,
warrants or other rights to acquire our capital stock that are presently
outstanding or granted in the future or reserved for future issuance under our
stock plans, there will be further dilution to new public investors.

PERCENT OF SHARES
NUMBER OUTSTANDING
OF SHARES ---------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING/(1)/
---------------- ------------ -------- ------------

Jay C. Hoag/(2)/............................................................ 25,665,421 43.5%
528 Ramona Street
Palo Alto, CA 94301

Technology Crossover Management IV, L.L.C./(3)/............................. 19,198,047 34.3
528 Ramona Street Palo Alto, CA 94301

Reed Hastings/(4)/.......................................................... 9,452,289 20.1

Michael N. Schuh/(5) /...................................................... 7,910,877 15.9
70 Willow Road, Suite 200
Menlo Park, CA 94025

Timothy M. Haley and Institutional Venture Management VIII, LLC/(6)/........ 6,751,543 14.4
c/o Redpoint Ventures 3000 Sand Hill Road Building 2, Suite 290 Menlo
Park, CA 94025

Finanzas B.V./(7)/.......................................................... 6,182,331 13.7
Locatellikade 1
Parnassustoren
1076 AZ Amsterdam
The Netherlands

Technology Crossover Management II, L.L.C./(8)/............................. 5,969,259 12.5
528 Ramona Street Palo Alto, CA 94301

Foundation Capital Management Co. II, LLC/(9) /............................. 3,290,810 7.3
70 Willow Road, Suite 200 Menlo Park, CA 94025

Marc B. Randolph/(10)/...................................................... 2,522,000 5.5

Leslie J. Kilgore/(11)/..................................................... 962,000 2.1

W. Barry McCarthy, Jr./(12)/................................................ 957,000 2.1

Thomas R. Dillon/(13)/...................................................... 946,000 2.1

A. Robert Pisano/(14)/...................................................... 200,000 *

All directors and executive officers as a group (8 persons)/(15)/........... 52,845,130 75.4%

--------
* Less than 1% of our outstanding shares of common stock.

(1)Assumes that the persons named below do not purchase any shares in this
offering. However, certain of the persons named below, or entities
affiliated with such persons, have the right to purchase shares in this
offering. See "Certain Relationships and Related Transactions--Letter
Agreement with Certain Stockholders."

(2)Mr. Hoag is not the record holder of any of our securities and disclaims
beneficial ownership of the shares set forth next to his name except to the
extent of his pecuniary interest therein. Mr. Hoag is deemed by Securities
and Exchange Commission rules to beneficially own the shares set forth next
to his name because he is a Managing Member of Technology Crossover
Management II, L.L.C., Technology Crossover Management IV, L.L.C. and TCVF
Management, L.L.C. As the sole managing members of these entities,
Mr. Hoag, along with Richard H. Kimball, have the power to make voting
decisions on behalf of such entities. TCVF Management, L.L.C. is the sole
general partner of, and has sole investment

control over, TCV Franchise Fund, L.P., which is the record holder of
217,840 of our shares and a warrant to acquire 280,275 of our shares. Mr.
Kimball also disclaims beneficial ownership of the shares set forth next to
Mr. Hoag's name except to the extent of his pecuniary interest therein.

(3)Technology Crossover Management IV, L.L.C. is not the record holder of any
of our securities. It is the sole general partner of, and has sole
investment control over, TCV IV, L.P. and TCV IV Strategic Partners, L.P.
TCV IV, L.P. is the record holder of 8,094,046 of our shares and a warrant
to purchase 10,413,867 of our shares. TCV IV Strategic Partners, L.P. is
the record holder of 301,815 of our shares and a warrant to acquire 388,319
of our shares.

(4) Includes options to purchase an aggregate of 1,800,000 shares.

(5)Mr. Schuh is not the record holder of any of our securities and disclaims
beneficial ownership of the shares set forth next to his name except to the
extent of his pecuniary interest therein. Mr. Schuh is deemed by Securities
and Exchange Commission rules to beneficially own the shares set forth next
to his name because he is a Manager of Foundation Capital Management Co.
II, LLC and FC Leadership Management Co., LLC. As a Manager, Mr. Schuh has
the power to make voting decisions on behalf of such entities. FC
Leadership Management Co., LLC is the sole general partner of, and has sole
investment control over, Foundation Capital Leadership Fund, L.P., which is
the record holder of a warrant to acquire 4,500,065 of our shares. FC
Leadership Management Co., LLC is also the sole manager of, and has sole
investment control over, Foundation Capital Leadership Principals Fund,
LLC, which is the record holder of a warrant to acquire 120,002 of our
shares.

(6)Mr. Haley is not the record holder of any of our securities and disclaims
beneficial ownership of the shares set forth next to his name except to the
extent of his pecuniary interest therein. Mr. Haley is deemed by Securities
and Exchange Commission rules to beneficially own the shares set forth next
to his name because he is, together with Samuel D. Collella, Reid W.
Dennis, Ruthann Quindlen, L. James Strand, William P. Tai, T. Peter Thomas,
Geoffrey Y. Yang, Rebecca B. Robertson and R. Thomas Dyal, the sole
Managing Directors of Institutional Venture Management VIII, LLC. As a
Managing Director, Mr. Haley has the power to make voting decisions on
behalf of Institutional Venture Management VIII, LLC. Institutional Venture
Management VIII, LLC is the sole general partner of, and has sole
investment control over, Institutional Venture Partners VIII, L.P., which
is the record holder of 5,001,829 of our shares and a warrant to acquire
1,639,759 of our shares. Institutional Venture Management VIII, LLC is also
the sole manager of, and has sole investment control over, IVM Investment
Fund VIII, LLC and IVM Investment Fund VIII-A, L.L.C. IVM Investment Fund
VIII, LLC is the record holder of 62,590 of our shares and a warrant to
acquire 30,907 of our shares. IVM Investment Fund VIII-A, LLC is the record
holder of 16,458 of our shares. Messrs. Collella, Dennis, Strand, Tai,
Thomas, Yang, Dyal and Mses. Quindlen and Robertson also disclaim
beneficial ownership of the shares set forth next to Mr. Haley's name
except to the extent of their pecuniary interest therein.

(7) Includes a warrant to purchase 65,376 shares.

(8)Technology Crossover Management II, L.L.C. is not the record holder of any
of our securities. It is the sole general partner of, and has sole
investment control over, TCV II (Q), L.P., TCV II Strategic Partners, L.P.
and Technology Crossover Ventures II, L.P. TCV II (Q), L.P. is the record
holder of 1,190,252 of our shares and a warrant to acquire 1,005,125 of our
shares. TCV II Strategic Partners, L.P. is the record holder of 211,225 of
our shares and a warrant to acquire 178,374 of our shares. Technology
Crossover Ventures II, L.P. is the record holder of 1,548,166 of our shares
and a warrant to acquire 1,307,371 of our shares. Technology Crossover
Management II, L.L.C. is also the sole investment general partner of, and
has sole investment control over TCV II, V.O.F. and Technology Crossover
Ventures II, C.V. TCV II, V.O.F. is the record holder of 50,292 of our
shares and a warrant to acquire 42,470 of our shares. Technology Crossover
Ventures II, C.V. is the record holder of 236,374 of our shares and a
warrant to acquire 120,002 of our shares.

(9) Foundation Capital Management Co. II, LLC is not the record holder of any
of our securities. It is the sole manager of, and has sole investment
control over, Foundation Capital II Entrepreneurs Fund, LLC and Foundation
Capital II Principals Fund, LLC. Foundation Capital II Entrepreneurs Fund,
LLC is the record holder of 329,079 of our shares and Foundation Capital
II Principals Fund, LLC is the record holder of 164,536 of our shares.
Foundation Capital Management Co. II, LLC is also the sole general partner
of, and

has sole investment control over, Foundation Capital II, L.P., which is the
record holder of 2,797,195 of our shares. The other Managers of Foundation
Capital Management Co. II, LLC are James C. Anderson, William B. Elmore,
Kathryn C. Gould and Paul G. Koontz. They also disclaim beneficial
ownership of the shares beneficially owned by Foundation Capital Management
Co. II, LLC except to the extent of their pecuniary interest therein.

(10) Includes: (i) 65,000 shares held by Mr. Randolph in his capacity as
trustee of the Marc & Lorraine Randolph 2000 Logan B. Randolph Trust; (ii)
65,000 shares held by Mr. Randolph in his capacity as trustee of the Marc
& Lorraine Randolph 2000 Morgan B. Randolph Trust; (iii) 65,000 shares
held by Mr. Randolph in his capacity as trustee of the Marc & Lorraine
Randolph 2000 Hunter B. Randolph Trust; and (iv) options to purchase an
aggregate of 500,000 shares. Mr. Randolph disclaims beneficial ownership
of the shares of common stock held of record by each of Marc Randolph,
Trustee of the Marc & Lorraine Randolph 2000 Logan B. Randolph Trust, Marc
Randolph, Trustee of the Marc & Lorraine Randolph 2000 Hunter B. Randolph
Trust and Marc Randolph, Trustee of the Marc & Lorraine Randolph 2000
Morgan B. Randolph Trust.

(11) Includes options to purchase an aggregate of 962,000 shares.

(12) Includes: (i) options to purchase an aggregate of 893,000 shares; (ii) a
warrant to purchase 30,000 shares; and (iii) 20,000 shares held by W.
Barry McCarthy, Jr., Trustee of the Peter Dudley McCarthy Trust--2001 u/i
dtd. December 31, 2001. Mr. McCarthy disclaims beneficial ownership of the
20,000 shares he holds as Trustee of the Peter Dudley McCarthy Trust--2001
u/i dtd. December 31, 2001 and 117,992 shares underlying options for which
he has agreed to transfer investment and voting power.

(13) Includes options to purchase an aggregate of 946,000 shares.

(14) Includes options to purchase an aggregate of 200,000 shares.

(15) Includes, without duplication, the shares, options and warrants listed in
footnotes (2) through (6), (8), (9) and (11) through (14) above.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED AND OUTSTANDING CAPITAL STOCK

We will be authorized to issue 150,000,000 shares of common stock, $0.001
par value, and 10,000,000 shares of undesignated preferred stock, $0.001 par
value, upon the closing of this offering, pursuant to the amended and restated
certificate of incorporation that we intend to file effective as of the
closing. Pursuant to our existing certificate of incorporation, all of the
shares of our preferred stock issued and outstanding prior to the closing of
this offering will be converted to common stock.

Prior to the completion of this offering, we will file an amended and
restated certificate of incorporation to effect a for reverse stock
split of our common stock. Pursuant to the reverse stock split, shares of
our common stock held by our current stockholders will be combined into one
share of our common stock. The number of shares of common stock into which our
shares of preferred stock will be converted upon the closing of this offering
will be appropriately adjusted to take into account the reverse stock split.
Except where otherwise noted, the information in this prospectus concerning
share amounts takes into account the effect of the anticipated reverse stock
split.

COMMON STOCK

As of February 28, 2002, there were 45,129,402 shares of common stock
outstanding which were held of record by 159 stockholders, taking into account
the anticipated conversion of our outstanding preferred stock into an aggregate
of 38,621,521 shares of common stock prior to the closing of this offering.

Pursuant to our certificate of incorporation to be in effect upon the
closing of this offering, holders of our common stock will be entitled to one
vote per share on all matters to be voted upon by our stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred
stock, common stockholders will be entitled to receive ratably such dividends,
if any, as may be declared from time to time by our board of directors out of
funds legally available for that purpose. In the event of a liquidation,
dissolution or winding up of Netflix, our common stockholders will be entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding.
Common stockholders will have no preemptive or conversion rights or other
subscription rights. There will be no redemption or sinking fund provisions
applicable to our common stock.

PREFERRED STOCK

Pursuant to our certificate of incorporation to be in effect upon the
closing of this offering, our board of directors will be authorized, without
any action by our stockholders, to designate and issue preferred stock in one
or more series and to designate the powers, preferences and rights of each
series, which may be greater than the rights of our common stock. It is not
possible to state the actual effect of the issuance of any shares of preferred
stock upon the rights of holders of our common stock until the board of
directors determines the specific rights of the holders of such preferred
stock. However, the effects might include, among other things:

. impairing dividend rights of our common stock;

. diluting the voting power of our common stock;

. impairing the liquidation rights of our common stock; and

. delaying or preventing a change in control of us without further
action by our stockholders.

Upon the completion of this offering, no shares of our preferred stock
will be outstanding, and we have no present plans to issue any shares of our
preferred stock following this offering.

WARRANTS

At February 28, 2002, warrants to purchase an aggregate of 21,053,931
shares of our common stock were outstanding. These warrants generally expire
five years from the date of issue and have a weighted average exercise price of
$1.07 per share.

REGISTRATION RIGHTS

Following this offering, the holders of an aggregate shares of our
common stock and shares of common stock underlying outstanding warrants,
will be entitled to the following rights with respect to registration of such
shares under the Securities Act. These rights are provided under the terms of
an agreement between us and certain holders of our stock. Beginning six months
following the date of this prospectus, if holders of at least 50% of the then
outstanding securities entitled to such registration rights request that an
amount of securities having a reasonably anticipated aggregate offering price
to the public, before deduction of underwriter discounts and commissions, of at
least $20,000,000 be registered, we may be required, on up to two occasions, to
register their shares for public resale. Also, these holders may require on
four separate occasions, but no more than twice within any 12-month period,
that we register their shares for public resale on Form S-3, if available, or
similar short-form registration if the value of the securities to be registered
is at least $2,000,000. Depending on certain conditions, however, we may defer
such registration for up to 90 days. Furthermore, in the event we elect to
register any of our shares of common stock for purposes of effecting any public
offering, these holders will be entitled to include a portion of their shares
of common stock in the registration, but we may reduce the number of shares
proposed to be registered if necessary due to market conditions. All expenses
in connection with any such registration, other than underwriting discounts and
commissions, will be borne by us. All of these registration rights will
terminate five years following the closing of this offering, or, with respect
to any particular stockholder, at such time as the holder is entitled to sell
all of its shares in any three month period under Rule 144 of the Securities
Act.

ANTI-TAKEOVER PROVISIONS

Certain provisions of Delaware law and our certificate of incorporation
and bylaws as will be in effect following the closing of this offering could
make the following more difficult:

. the acquisition of Netflix by means of a tender offer;

. acquisition of control of Netflix by means of a proxy contest or
otherwise; and

. the removal of our incumbent officers and directors.

These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids, and are
designed to encourage persons seeking to acquire control of us to negotiate
with our board of directors. We believe that the benefits of increased
protection against an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging such proposals. Among
other things, negotiation of such proposals could result in improved terms for
our stockholders.

DELAWARE ANTI-TAKEOVER LAW. We are subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved by our board of directors in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The applicability of this provision may have an
anti-takeover effect with respect to transactions not approved in advance by
the board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.

ELECTION AND REMOVAL OF DIRECTORS. Our board of directors will be
divided into three classes, each serving staggered three-year terms. As a
result, only a portion of our board of directors will be elected each year. To
implement the classified structure, prior to the closing of this offering, one
of the nominees to the board will be elected to a one-year term, two will be
elected to two-year terms and two will be elected to three-year terms.
Thereafter, directors will be elected for three-year terms. Directors may be
removed only for cause and with the approval of the holders of two-thirds of
our outstanding stock. The board of directors will have the exclusive right to
increase or decrease the size of the board and to fill vacancies on the board.
This system of electing directors may tend to discourage a third party from
making a tender offer or otherwise attempting to obtain control of us, because
it generally makes it more difficult for stockholders to replace a majority of
the directors.

STOCKHOLDER MEETINGS. Under our certificate of incorporation as will be
in effect following the closing of this offering, only the board of directors,
the chairman of the board, the chief executive officer or the president may
call special meetings of stockholders.

REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws will contain advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.

ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Our certificate of
incorporation as will be in effect following the closing of this offering
eliminates the right of stockholders to act by written consent without a
meeting. This provision will make it more difficult for stockholders to take
action opposed by the board of directors.

NO CUMULATIVE VOTING. Our certificate of incorporation as will be in
effect following the closing of this offering does not provide for cumulative
voting in the election of directors, which, under Delaware law, precludes
stockholders from cumulating their votes in the election of directors,
frustrating the ability of minority stockholders to obtain representation on
the board of directors.

UNDESIGNATED PREFERRED STOCK. The authorization of undesignated
preferred stock will make it possible for the board of directors, without
stockholder approval, to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to obtain control of
us. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of Netflix.

AMENDMENT OF PROVISIONS IN THE CERTIFICATE OF INCORPORATION. Our
certificate of incorporation will require the affirmative vote of the holders
of at least two-thirds of our outstanding voting stock in order to amend any
provision of our certificate of incorporation concerning:

. the required vote to amend or repeal the section of the certificate
of incorporation providing for the right to amend or repeal
provisions of the certificate of incorporation;

. management of the business by our board of directors;

. absence of the authority of stockholders to act by written consent;

. authority to call a special meeting of stockholders;

. procedure and content of stockholder proposals concerning business to
be conducted at a meeting of stockholders, including election of
directors;

. number of directors and structure of the board of directors;

. removal of directors and the filling of vacancies on the board;

. director nominations by stockholders;

. absence of the necessity of directors to be elected by written ballot;

. personal liability of directors to us and our stockholders; and

. indemnification of our directors, officers, employees and agents.

AMENDMENT OF PROVISIONS IN THE BYLAWS. Our certificate of incorporation
will require the affirmative vote of the holders of at least two-thirds of our
outstanding voting stock in order to amend any provision of our bylaws
concerning:

. meetings of or actions taken by stockholders;

. number of directors and their term of office;

. election and qualification of directors;

. removal of directors and the filling of vacancies on the board;

. indemnification of our directors, officers, employees and agents; and

. amendment to our bylaws.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is Equiserve Trust
Company, N.A.

NASDAQ NATIONAL MARKET LISTING

We have applied for listing on the Nasdaq National Market under the
symbol "NFLX."

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock,
and there can be no assurance that a significant public market for the common
stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock, including shares issued upon exercise of
outstanding options and warrants, in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through sale of our equity securities.
Sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price of our
common stock and our ability to raise equity capital in the future.

Upon completion of this offering, we will have outstanding shares
of common stock based upon shares outstanding as of February 28, 2002, assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants after this offering. Holders of of our
outstanding shares have entered into lock-up agreements with the underwriters
of this offering. Holders of of our outstanding shares are not subject
to lock-up agreements with the underwriters. With limited exceptions, these
lock-up agreements prohibit a stockholder from selling, contracting to sell or
otherwise disposing of any common stock or any securities that are convertible
into or exercisable for common stock for 180 days from the date of this
prospectus, although Merrill Lynch may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. As a result of these lock-up agreements, notwithstanding
possible earlier eligibility for sale under the provisions of Rule 144, 144(k)
or 701, none of these shares may be sold until 181 days after the date of this
prospectus.

Of the outstanding shares subject to lock-up agreements:

. of these shares will be tradable without restriction pursuant
to Rule 144(k) 181 days after the date of this prospectus; and

. of these shares will be tradable, subject to the limitations
imposed by Rule 144 181 days after the date of this prospectus.

Of the outstanding shares that are not subject to lock-up
agreements with the underwriters:

. of these shares are tradable without restriction pursuant to
Rule 144(k) immediately following this offering; and

. of these shares will be tradable 91 days from the date of this
prospectus, subject to the manner of sale requirement of Rule 144,
unless we register these shares for resale before that time.

In addition, as of February 28, 2002, there were outstanding options to
purchase 12,998,864 shares of common stock and warrants to purchase 21,053,931
shares of common stock. % of the shares of common stock underlying such
options and % of the shares underlying such warrants are subject to
lock-up agreements.

All of our warrants contain a "net exercise" provision permitting the
holders to exercise the warrants without paying the exercise price if the fair
market value of our common stock exceeds the exercise price per share. If these
holders elect to exercise their warrants by the "net exercise" method, they
will receive fewer shares of common stock than they would have otherwise been
entitled to had they exercised the warrant by paying cash. The following table
illustrates how many shares of common stock underlying our warrants would be
saleable beginning 181 days after the date of this prospectus and the
restrictions, if any, upon such resale, assuming that their shares are not
registered by us, they exercise the warrants by the "net exercise" method and
the fair market value of our shares of common stock on the date of exercise is
$ :

NUMBER OF SHARES
NUMBER OF SHARES OF COMMON STOCK
NUMBER OF DAYS OF COMMON STOCK ISSUED BY US UPON
AFTER THE DATE OF THIS UNDERLYING THE "NET EXERCISE" OF
PROSPECTUS WARRANTS THE WARRANTS RESTRICTIONS UPON RESALE
---------------------- ---------------- ----------------- --------------------------------------------------------

181 None
181 Shares are subject to the volume limitations of Rule 144
From time to time
after 181 days Shares are subject to the volume limitations of Rule 144

If our warrant holders acquire shares of common stock upon exercise of a
warrant other than through a "net exercise," they will have to hold the shares
acquired for at least one year following exercise prior to sale, unless we
register the shares acquired. Because we do not know what the fair market value
of our stock price will be in the future, we cannot estimate how many shares of
our common stock will be saleable upon a "net exercise" of our warrants.

RULES 144 AND 701

In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned shares
of our common stock for at least one year including the holding period of any
prior owner, except an affiliate of Netflix, would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:

. 1% of the number of shares of common stock then outstanding which
will equal approximately shares immediately after this offering;
and

. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to
such sale.

Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have
been our affiliate at any time during the three months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years including the holding period of any prior owner, except an affiliate of
Netflix, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.

Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions. Any employee,
officer, director or consultant who purchased shares under a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling such shares. However, in this offering % of
Rule 701 shares are subject to lock-up agreements and will only become eligible
for sale at the earlier of the expiration of the 180-day lock-up agreements or
no sooner than 90 days after the offering upon obtaining the prior written
consent of Merrill Lynch.

STOCK OPTIONS

Following the effectiveness of this offering, we will file a registration
statement on Form S-8 registering shares of common stock subject to outstanding
options and reserved for future issuance under our stock plans. As of February
28, 2002, options to purchase a total of 12,998,864 shares were outstanding. In
addition, a total of 5,081,456 shares were reserved for future issuance under
our 1997 Stock Plan, 2002 Stock Plan and 2002 Employee Stock Purchase Plan.
Common stock issued upon exercise of outstanding vested options or issued under
our 2002 Employee Stock Purchase Plan, other than common stock issued to
affiliates are available for immediate resale in the open market.

REGISTRATION RIGHTS

Beginning six months after the date of this prospectus, holders of
shares and holders of warrants to purchase shares of common stock will
be entitled to certain demand registration rights for sale in the public
market. Registration of such shares under the Securities Act would result in
such shares becoming freely tradable without restriction under the Securities
Act, except for shares held by affiliates, immediately upon the effectiveness
of such registration.

UNDERWRITING

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Thomas Weisel
Partners LLC and U.S. Bancorp Piper Jaffray, Inc. are acting as representatives
of each of the underwriters named below. Subject to the terms and conditions
set forth in a purchase agreement among us and the underwriters, we have agreed
to sell to the underwriters, and each of the underwriters has agreed, severally
and not jointly, to purchase from us, the number of shares of common stock set
forth opposite its name below.

NUMBER
UNDERWRITER OF SHARES
----------- ---------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................
Thomas Weisel Partners LLC................................
U.S. Bancorp Piper Jaffray, Inc...........................
-------
Total............................................
=======

Subject to the terms and conditions set forth in the purchase agreement,
the underwriters have agreed, severally and not jointly, to purchase all of the
shares sold under the purchase agreement if any of these shares are purchased.
If an underwriter defaults, the purchase agreement provides that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreement may be terminated.

We have agreed to indemnify the underwriters against specified
liabilities, including some liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect of
those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.

COMMISSIONS AND DISCOUNTS

The representatives have advised us that they propose initially to offer
the shares to the public at the initial public offering price set forth on the
cover page of this prospectus and to dealers at that price less a concession
not in excess of $ per share. The underwriters may allow, and the dealers
may reallow, a discount not in excess of $ per share to other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.

The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the underwriters of their over-allotment options.

PER WITHOUT WITH
SHARE OPTION OPTION
----- ------- ------

Public offering price............................ $ $ $
Underwriting discount............................ $ $ $
Proceeds, before expenses, to Netflix............ $ $ $

The total expenses of the offering, not including the underwriting
discount, are estimated at approximately $ and are payable by us.

OVER-ALLOTMENT OPTION

We have granted an option to the underwriters to purchase up to
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise this option for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
this option, each will be obligated, subject to conditions contained in the
purchase agreement, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.

RESERVED SHARES

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered hereby to be sold to
some of our directors, officers, employees, distributors, dealers, business
associates and related persons. The number of shares of common stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of this offering will be
offered by the underwriters to the general public on the same terms as the
other shares offered in this prospectus.

In connection with the purchase of our Series C Preferred Stock, we
entered into a letter agreement with Foundation Capital II, L.P., Technology
Crossover Ventures II, L.P. and Institutional Venture Partners VIII, L.P.,
dated February 16, 1999, pursuant to which we agreed to require the managing
underwriter or underwriters of our initial public offering to offer to each of
the foregoing parties the right to purchase, in the aggregate, 10% of the total
shares to be issued by us in this offering. In connection with the purchase of
our Series D Preferred Stock, we amended the letter agreement to add Forum
Holding Amsterdam B.V. as a party. At our request, the underwriters will offer
% of the shares available for sale in this offering to these investors.

NO SALES OF SIMILAR SECURITIES

We and our executive officers and directors and certain existing
stockholders have agreed, subject to limited exceptions, not to sell or
transfer any common stock or securities convertible into, exchangeable for
exercisable for, or repayable with common stock, for 180 days after the date of
this prospectus without first obtaining the written consent of Merrill Lynch.
Specifically, we and these other persons have agreed not to directly or
indirectly:

. offer, pledge, sell or contract to sell any common stock;

. sell any option or contract to purchase any common stock;

. purchase any option or contract to sell any common stock;

. grant any option, right or warrant for the sale of any common stock;

. lend or otherwise dispose of or transfer any common stock;

. request or demand that we file a registration statement related to
the common stock; or

. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.

QUOTATION ON THE NASDAQ NATIONAL MARKET

We have applied to list our common stock for quotation on the Nasdaq
National Market under the symbol "NFLX."

Before this offering, there has been no public market for our common
stock. The initial public offering price was determined through negotiations
among us and the representatives. In addition to prevailing market conditions,
the factors considered in determining the initial public offering price are:

. the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;

. our financial information;

. the history of, and the prospects for, its past and present
operations, and the prospects for, and timing of, our future revenues;

. an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;

. the present state of our development; and

. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.

An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price. The underwriters do not expect
to sell more than five percent of the shares being offered in this offering to
accounts over which they exercise discretionary authority.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of the shares is completed, Securities and
Exchange Commission rules may limit underwriters and selling group members from
bidding for and purchasing our common stock. However, the representatives may
engage in transactions that stabilize the price of the common stock, such as
bids or purchases to peg, fix or maintain that price.

The underwriters may purchase and sell the common stock in the open
market. These transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in
an amount not greater than the underwriters' option to purchase additional
shares from the issuer in the offering. The underwriters may close out any
covered short position by either exercising their option to purchase additional
shares or purchasing shares in the open market. In determining the source of
shares to close out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common shares in the open market after pricing that could
adversely affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of common shares made by
the underwriters in the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.

Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in
the market price of the common stock. As a result, the price of the common
stock may be higher than the price that might otherwise exist in the open
market.

Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the representatives make any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for
us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the underwriters by
Cahill Gordon & Reindel, New York, New York. As of the date of this prospectus,
WS Investment Company 99A, WS Investment Company 98A and WS Investments '97B,
investment partnerships composed of certain current and former members of and
persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as well as certain individual attorneys of this firm, beneficially
own an aggregate of 126,640 shares of our common stock.

EXPERTS

The financial statements of Netflix, Inc. as of December 31, 2000 and
2001 and for each of the years in the three-year period ended December 31, 2001
appearing in this prospectus and registration statement have been audited by
KPMG LLP, independent auditors, as set forth in their report thereon, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to us and our
common stock, see the registration statement and the exhibits and schedules
thereto. Any document we file may be read and copied at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our filings with the Commission are also available to
the public from the Commission's Web site at HTTP://WWW.SEC.GOV.

Upon completion of this offering, we will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934
and, accordingly, will file periodic reports, other reports, proxy statements
and other information with the Commission. Such periodic reports, other
reports, proxy statements and other information will be available for
inspection and copying at the Commission's public reference rooms, and the Web
site of the Commission referred to above.

NETFLIX, INC.

INDEX TO FINANCIAL STATEMENTS

PAGE
----

Independent Auditors' Report............................................................. F-2

Balance Sheets as of December 31, 2000 and 2001.......................................... F-3

Statements of Operations for the three years ended December 31, 2001..................... F-4

Statements of Stockholders' Deficit for the three years ended December 31, 2001.......... F-5

Statements of Cash Flows for the three years ended December 31, 2001..................... F-6

Notes to Financial Statements............................................................ F-7

F-1

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND STOCKHOLDERS
NETFLIX, INC.

We have audited the accompanying balance sheets of Netflix, Inc.
(formerly known as NetFlix.com, Inc.) as of December 31, 2000 and 2001, and the
related statements of operations, stockholders' deficit, and cash flows for
each of the years in the three-year period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Netflix, Inc. as of
December 31, 2000 and 2001, and its results of operations and its cash flows
for each of the years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States
of America.

/s/ KPMG LLP

Mountain View, California
February 27, 2002

F-2

NETFLIX, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

AS OF AS OF
DECEMBER 31, MARCH 31, 2002
-------------------- --------------------
2000 2001 ACTUAL PRO FORMA
--------- --------- --------- ---------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents................................................. $ 14,895 $ 16,131 $ 15,671 $ 15,671
Prepaid expenses ......................................................... 2,738 1,019 1,818 1,818
Prepaid revenue sharing expense........................................... 636 732 277 277
Other current assets...................................................... 32 1,670 2,099 2,099
--------- --------- --------- ---------
Total current assets................................................... 18,301 19,552 19,865 19,865

DVD library, net.............................................................. 16,909 3,633 6,702 6,702
Intangible assets, net........................................................ 5,582 7,917 7,990 7,990
Property and equipment, net................................................... 9,959 8,205 7,426 7,426
Deposits...................................................................... 643 1,677 1,691 1,691
Other assets.................................................................. 1,094 646 632 632
--------- --------- --------- ---------
Total assets........................................................... $ 52,488 $ 41,630 $ 44,306 $ 44,306
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................................... $ 7,690 $ 13,715 $ 16,292 $ 16,292
Accrued expenses.......................................................... 5,919 4,544 4,358 4,358
Deferred revenue.......................................................... 2,773 4,937 6,287 6,287
Current portion of capital lease obligations.............................. 1,282 1,345 1,433 1,433
Notes payable............................................................. 2,292 1,667 1,042 1,042
--------- --------- --------- ---------
Total current liabilities.............................................. 19,956 26,208 29,412 29,412

Deferred rent................................................................. 102 240 253 253
Capital lease obligations, less current portion............................... 2,024 1,057 959 959
Note payable.................................................................. 1,843 -- -- --
Subordinated notes payable, net of unamortized discount of $10,851 and
$10,767 at December 31, 2001 and March 31, 2002, respectively................ -- 2,799 3,158 3,158
--------- --------- --------- ---------
Total liabilities...................................................... 23,925 30,304 33,782 33,782

Commitments and contingency (notes 4 and 5)

Redeemable convertible preferred stock (note 6)............................... 101,830 101,830 101,830 --

Stockholders' deficit (note 7):
Convertible preferred stock, $0.001 par value; 8,500,000 shares authorized;
4,444,545, 6,157,499, 6,157,499 and no shares issued and outstanding at
December 31, 2000, December 31, 2001, March 31, 2002 and
March 31, 2002 pro forma, respectively; aggregate liquidation
preference of $2,222....................................................... 4 6 6 --
Common stock, $0.001 par value; 100,000,000 shares authorized (actual);
150,000,000 shares authorized (pro forma); 6,407,476, 6,485,737,
6,575,750 and 45,197,271 shares issued and outstanding at
December 31, 2000, December 31, 2001, March 31, 2002 and March 31,
2002 pro forma, respectively............................................... 7 7 7 45
Additional paid-in capital.................................................. 34,636 52,474 62,105 163,903
Deferred stock-based compensation........................................... (9,266) (5,725) (12,553) (12,553)
Accumulated deficit......................................................... (98,648) (137,266) (140,871) (140,871)
--------- --------- --------- ---------
Total stockholders' deficit............................................ (73,267) (90,504) (91,306) 10,524
--------- --------- --------- ---------
Total liabilities and stockholders' deficit............................ $ 52,488 $ 41,630 $ 44,306 $ 44,306
========= ========= ========= =========

See accompanying notes to financial statements.

F-3

NETFLIX, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- -----------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- -------
(UNAUDITED)

Revenues:
Subscription.................................. $ 4,854 $ 35,894 $ 74,255 $ 17,057 $30,069
Sales......................................... 152 -- 1,657 -- 458
-------- -------- -------- -------- -------
Total revenues............................. 5,006 35,894 75,912 17,057 30,527
-------- -------- -------- -------- -------
Cost of revenues:
Subscription.................................. 4,217 24,861 49,088 18,177 14,872
Sales......................................... 156 -- 819 -- 286
-------- -------- -------- -------- -------
Total cost of revenues..................... 4,373 24,861 49,907 18,177 15,158
-------- -------- -------- -------- -------
Gross profit (loss).............................. 633 11,033 26,005 (1,120) 15,369
-------- -------- -------- -------- -------
Operating expenses:
Fulfillment*.................................. 2,446 10,247 13,452 3,613 4,155
Technology and development*................... 7,413 16,823 17,734 5,474 3,181
Marketing*.................................... 14,070 25,727 21,031 6,653 7,938
General and administrative*................... 1,993 6,990 4,658 1,514 1,309
Restructuring charges......................... -- -- 671 -- --
Stock-based compensation*..................... 4,742 8,803 5,686 2,043 1,937
-------- -------- -------- -------- -------
Total operating expenses................... 30,664 68,590 63,232 19,297 18,520
-------- -------- -------- -------- -------
Operating loss................................... (30,031) (57,557) (37,227) (20,417) (3,151)
-------- -------- -------- -------- -------
Other income (expense):
Interest and other income..................... 924 1,645 461 182 77
Interest expense.............................. (738) (1,451) (1,852) (363) (531)
-------- -------- -------- -------- -------
Net loss......................................... $(29,845) $(57,363) $(38,618) $(20,598) $(3,605)
======== ======== ======== ======== =======

Net loss per share--basic and diluted............ $ (7.13) $ (13.52) $ (7.05) $ (4.09) $ (0.59)
======== ======== ======== ======== =======

Weighted average shares--basic and diluted....... 4,183 4,243 5,479 5,039 6,141

Pro forma net loss per share--basic and diluted
(unaudited)..................................... $ (0.91) $ (0.08)

======== =======

Pro forma weighted average shares--basic and
diluted......................................... 42,296 44,503

======== =======

*Amortization of stock-based compensation not
included in expense line-item:
Fulfillment................................... $ 624 $ 2,298 $ 1,201 $ 429 $ 294
Technology and development.................... 1,141 2,871 1,930 724 855
Marketing..................................... 351 1,886 1,403 498 596
General and administrative.................... 2,626 1,748 1,152 392 192
-------- -------- -------- -------- -------
$ 4,742 $ 8,803 $ 5,686 $ 2,043 $ 1,937
======== ======== ======== ======== =======

See accompanying notes to financial statements.

F-4

NETFLIX, INC.

STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)

CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED TOTAL
---------------- ---------------- PAID-IN STOCK-BASED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIT
--------- ------ --------- ------ ---------- ------------ ----------- -------------

Balances as of January 1, 1999........... 4,444,545 $ 4 2,580,250 $ 3 $ 8,100 $ (4,711) $ (11,440) $ (8,044)
Exercise of options..................... -- -- 3,971,361 4 353 -- -- 357
Issuance of common stock upon exercise
of warrants........................... -- -- (600,450) (1) (30) -- -- (31)
Repurchase of restricted stock.......... -- -- 271,489 1 30 -- -- 31
Warrants issued in connection with debt
financing............................. -- -- -- -- 762 -- -- 762
Deferred stock-based compensation....... -- -- -- -- 6,872 (6,872) -- --
Stock-based compensation expense........ -- -- -- -- -- 4,742 -- 4,742
Net loss................................ -- -- -- -- -- -- (29,845) (29,845)
--------- --- --------- --- ------- -------- --------- --------
Balances as of December 31, 1999......... 4,444,545 4 6,222,650 7 16,087 (6,841) (41,285) (32,028)
Exercise of options and issuance of
restricted stock...................... -- -- 243,009 -- 422 -- -- 422
Repurchase of restricted stock.......... -- -- (79,960) -- (141) -- -- (141)
Issuance of common stock for services
rendered.............................. -- -- 21,777 -- 306 -- -- 306
Warrants issued in connection with
operating lease....................... -- -- -- -- 216 -- -- 216
Warrants issued in connection with
services rendered..................... -- -- -- -- 285 -- -- 285
Warrants issued in connection with debt
financing............................. -- -- -- -- 105 -- -- 105
Subscribed Series F non-voting preferred
stock................................. -- -- -- -- 6,128 -- -- 6,128
Deferred stock-based compensation....... -- -- -- -- 11,228 (11,228) -- --
Stock-based compensation expense........ -- -- -- -- -- 8,803 -- 8,803
Net loss................................ -- -- -- -- -- -- (57,363) (57,363)
--------- --- --------- --- ------- -------- --------- --------
Balances as of December 31, 2000......... 4,444,545 4 6,407,476 7 34,636 (9,266) (98,648) (73,267)
Exercise of options..................... -- -- 90,137 -- 125 -- -- 125
Repurchases of restricted common stock.. -- -- (16,876) -- (12) -- -- (12)
Issuance of common stock in exchange for
services rendered..................... -- -- 5,000 -- 10 -- -- 10
Warrants issued in connection with
subordinated notes payable............ -- -- -- -- 10,884 -- -- 10,884
Warrants issued in connection with
capital lease obligation.............. -- -- -- -- 172 -- -- 172
Warrants issued in exchange for services
rendered.............................. -- -- -- -- 18 -- -- 18
Issued Series F non-voting preferred
stock................................. 1,712,954 2 -- -- 4,279 -- -- 4,281
Subscribed Series F non-voting preferred
stock................................. -- -- -- -- 217 -- -- 217
Deferred stock-based compensation
(forfeitures) net..................... -- -- -- -- 2,145 (2,145) -- --
Stock-based compensation expense........ -- -- -- -- -- 5,686 -- 5,686
Net loss................................ -- -- -- -- -- -- (38,618) (38,618)
--------- --- --------- --- ------- -------- --------- --------
Balances as of December 31, 2001......... 6,157,499 6 6,485,737 7 52,474 (5,725) (137,266) (90,504)

Exercise of options (unaudited)......... -- -- 90,013 -- 87 -- -- 87
Subscribed Series F non-voting preferred
stock (unaudited)..................... -- -- -- -- 779 -- -- 779
Deferred stock-based compensation
(unaudited)........................... -- -- -- -- 8,765 (8,765) -- --
Stock-based compensation expense
(unaudited)........................... -- -- -- -- -- 1,937 -- 1,937
Net loss (unaudited).................... -- -- -- -- -- -- (3,605) (3,605)
--------- --- --------- --- ------- -------- --------- --------
Balances as of March 31, 2002 (unaudited) 6,157,499 $ 6 6,575,750 $ 7 $62,105 $(12,553) $(140,871) $(91,306)
========= === ========= === ======= ======== ========= ========

See accompanying notes to financial statements.

F-5

NETFLIX, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- -------------------
1999 2000 2001 2001 2002
-------- -------- -------- --------- --------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $(29,845) $(57,363) $(38,618) $(20,598) $(3,605)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation of property and equipment......................... 884 3,605 5,507 1,313 1,457
Amortization of DVD library.................................... 3,182 15,681 22,127 13,095 2,917
Amortization of intangible assets.............................. -- 546 2,163 356 706
Noncash charges for equity instruments granted to non-
employees..................................................... -- 598 28 10 --
Stock-based compensation expense............................... 4,742 8,803 5,686 2,043 1,937
Loss on disposal of property and equipment..................... -- 145 -- -- --
Gain on disposal of DVDs....................................... -- -- -- -- (283)
Noncash interest expense....................................... 398 497 1,017 124 395
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.................... (85) (2,686) (15) 214 (773)
Accounts payable............................................. 2,271 2,356 6,025 928 2,577
Accrued expenses............................................. 1,571 2,708 (1,375) (574) (186)
Deferred revenue............................................. 353 2,302 2,164 245 1,350
Deferred rent................................................ -- 102 138 39 13
-------- -------- -------- --------- --------
Net cash (used in) provided by operating activities......... (16,529) (22,706) 4,847 (2,805) 6,505
-------- -------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............................... (6,322) -- -- -- --
Proceeds from sale of short-term investments...................... -- 6,322 -- -- --
Purchases of property and equipment............................... (3,295) (6,210) (3,233) (954) (95)
Acquisitions of DVD library....................................... (9,866) (23,895) (8,851) (2,999) (6,161)
Proceeds from sale of DVDs........................................ -- -- -- -- 458
Deposits and other assets......................................... (259) (1,189) (586) (134) --
-------- -------- -------- --------- --------
Net cash used in investing activities....................... (19,742) (24,972) (12,670) (4,087) (5,798)
-------- -------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable convertible preferred stock.. 45,498 50,011 -- -- --
Proceeds from issuance of common stock............................ 357 422 125 26 87
Net proceeds from issuance of subordinated notes payable and
detachable warrants.............................................. -- -- 12,831 -- --
Repurchases of common stock....................................... -- (141) (12) -- --
Proceeds from issuance of notes payable........................... 5,000 -- -- -- --
Principal payments on notes payable and capital lease obligations. (1,447) (1,917) (3,885) (953) (1,254)
-------- -------- -------- --------- --------
Net cash provided by financing activities............... 49,408 48,375 9,059 (927) (1,167)
-------- -------- -------- --------- --------
Net increase (decrease) in cash and cash equivalents................ 13,137 697 1,236 (7,819) (460)
Cash and cash equivalents, beginning of period...................... 1,061 14,198 14,895 14,895 16,131
-------- -------- -------- --------- --------
Cash and cash equivalents, end of period............................ $ 14,198 $ 14,895 $ 16,131 $ 7,076 $ 15,671
======== ======== ======== ========= ========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest............................................ $ 283 $ 948 $ 860 $ 239 $ 136
======== ======== ======== ========= ========
Noncash investing and financing activities:
Purchase of assets under capital lease obligations.............. $ 1,026 $ 3,000 $ 520 $ -- $ 583
======== ======== ======== ========= ========
Discount on capital lease obligation............................ $ 762 $ 105 $ 172 $ -- $ --
======== ======== ======== ========= ========
Warrants issued as a deposit on an operating lease.............. $ -- $ 216 $ -- $ -- $ --
======== ======== ======== ========= ========
Exchange of Series F non-voting convertible preferred stock
for intangible asset........................................... $ -- $ 6,128 $ 4,498 $ 920 $ 779
======== ======== ======== ========= ========

See accompanying notes to financial statements

F-6

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Netflix, Inc. (the "Company"), was incorporated on August 29, 1997
(inception) and began operations on April 14, 1998. The Company provides an
online entertainment subscription service providing subscribers access to a
comprehensive library of filmed entertainment titles formatted on digital video
disk ("DVD"). The standard subscription plan provides subscribers access to an
unlimited number of titles for $19.95 per month with no due dates or late fees.
The subscribers select titles at the Company's website at www.netflix.com.

UNAUDITED INTERIM FINANCIAL STATEMENTS

The unaudited interim financial information as of March 31, 2002 and for
the three months ended March 31, 2001 and 2002 has been prepared on the same
basis as the audited financial statements. In the opinion of management, such
unaudited information includes all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of this interim information when
read in conjunction with the audited financial statements and notes thereto.

PROPOSED INITIAL PUBLIC OFFERING AND PRO FORMA INFORMATION

In February 2002, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission ("SEC") to
sell shares of its common stock in connection with a proposed initial public
offering ("IPO"). In February 2002, the Board of Directors and the Company's
stockholders also approved, subject to the completion of an IPO, an amendment
to the Company's certificate of incorporation which will set the authorized
number of shares of common stock at 150,000,000 and the authorized number of
shares of preferred stock at 10,000,000.

The unaudited pro forma balance sheet as of March 31, 2002 reflects the
assumed automatic conversion of the redeemable convertible preferred stock into
28,993,766 shares of common stock and the assumed automatic conversion of the
Series A and F convertible preferred stock into 9,627,755 shares of common
stock. Costs directly attributable to the proposed initial public offering of
$736 are included in prepaid expenses in the balance sheet as of March 31, 2002.

CASH AND CASH EQUIVALENTS

The Company considers highly liquid instruments with original maturities
of three months or less, at the date of purchase, to be cash equivalents. The
Company's cash and cash equivalents are principally on deposit in short-term
asset management accounts at three large financial institutions.

DVD LIBRARY

Historically, the Company purchased DVDs from studios and distributors.
In 2000 and 2001, the Company entered into a series of revenue sharing
agreements with several studios which changed the business model for acquiring
DVDs and satisfying subscriber demand. These revenue sharing agreements enable
the Company to obtain DVDs at a lower up front cost than under traditional
buying arrangements. The Company

F-7

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

shares a percentage of the actual net revenues generated by the use of each
particular title with the studios over a fixed period of time, which is
typically 12 months for each DVD title (hereinafter referred to as the "title
term"). At the end of the title term, the Company has the option of either
returning the DVD title to the studio or purchasing the title. Before the
change in business model, the Company typically acquired fewer copies of a
particular title upfront and utilized each copy acquired over a longer period
of time. The implementation of these revenue sharing agreements improved the
Company's ability to obtain larger quantities of newly released titles and
satisfy subscriber demand for such titles over a shorter period of time.

In connection with the change in business model, on January 1, 2001, the
Company revised the amortization policy for the cost of its DVD library from an
accelerated method using a three year life to the same accelerated method of
amortization over one year. The change in life has been accounted for as a
change in accounting estimate and is accounted for on a prospective basis from
January 1, 2001. Had the DVDs acquired prior to January 1, 2001 been amortized
using the three year life, amortization expense for 2001 would have been $4.7
million lower than the amount recorded in the accompanying financial
statements, which represents a $0.86 per share impact on loss per share in 2001.

Under certain revenue sharing agreements the Company remits an upfront
payment to acquire titles from the studios. This payment includes a
contractually specified initial fixed license fee that is capitalized and
amortized in accordance with the Company's DVD library amortization policy.
Some payments also include a contractually specified prepayment of future
revenue sharing obligations that is classified as prepaid revenue sharing
expense and is applied against future revenue sharing obligations. A nominal
amount is also capitalized upon acquisition of a particular title for the cost
of the estimated number of DVDs the Company expects to purchase at the end of
the title term. This cost is amortized with the cost of the initial license fee
on an accelerated basis over one year.

Several studios permit the Company to sell used DVDs upon the expiration
of the title term. For those DVDs that the Company estimates it will sell at
the end of the title term, a salvage value of $2.00 per DVD is provided. For
those DVDs that the Company does not expect to sell, no salvage value is
provided. The Company currently estimates that approximately 15% of DVDs
acquired will be sold at the end of the title term. As of December 31, 2001 and
March 31, 2002, the salvage values of $578 and $696, respectively, are included
in DVD library in the accompanying financial statements.

During 1999 and 2000, the Company's DVDs were amortized on an accelerated
method (sum of the years digits method) over a period of three years with no
salvage value.

DVD library and accumulated amortization are as follows:

AS OF DECEMBER 31, AS OF
------------------ MARCH 31,
2000 2001 2002
------- ------- ---------

DVD library...................................... $26,188 $35,039 $41,026
Less accumulated amortization.................... 9,279 31,406 34,324
------- ------- -------
DVD library, net................................. $16,909 $ 3,633 $ 6,702
======= ======= =======

F-8

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED

MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

INTANGIBLE ASSETS

During 2000, in connection with revenue sharing agreements with three
studios, the Company agreed to issue each studio an equity interest equal to
1.204% of its fully diluted equity securities outstanding in the form of Series
F Non-Voting Convertible Preferred Stock ("Series F Preferred Stock"). In 2001,
in connection with revenue sharing agreements with two additional studios, the
Company agreed to issue each studio an equity interest of 1.204% of its fully
diluted equity securities outstanding in the form of Series F Preferred Stock.

As of December 31, 2001 and March 31, 2002, the aggregate equity
interests of these five studios equaled 6.02% of the outstanding fully diluted
equity interests. If, at any time prior to the effective date of an initial
public offering, these interests represent less than 6.02% of the Company's
outstanding fully diluted equity securities, then the Company is obligated to
issue additional shares of Series F Preferred Stock for no additional
consideration to maintain those studios' aggregate fully diluted equity
interest at 6.02%. The Series F Preferred Stock automatically converts into
common stock on a one-for-one basis just prior to the effective date of an
initial public offering with at least $20 million in aggregate gross proceeds.
Upon conversion, the Company's obligation to maintain the studios' equity
interests at 6.02% expires.

The Company measures the original issuances and any subsequent
adjustments using the deemed fair value of the securities at the issuance and
any subsequent adjustment dates. Each share of Series F Preferred Stock is
convertible into one share of Common Stock upon a qualified "IPO".
Additionally, Series F Preferred Stock preference in liquidation is the same as
Common Stock. Accordingly, the deemed fair value of the Series F Preferred
Stock is equal to the deemed fair value of the Company's common stock. The
deemed value is recorded as an intangible asset and is amortized to cost of
subscription revenues ratably over the remaining term of the agreements which
are either three or five years. Total gross intangible assets related to these
agreements as of December 31, 2000, December 31, 2001 and March 31, 2002 was
$6,128, $10,210 and $10,989, respectively. Accumulated amortization as of
December 31, 2000, December 31, 2001 and March 31, 2002 was $546, $2,622 and
$3,287, respectively.

During 2001, in connection with a strategic marketing alliance agreement,
the Company issued 416,440 shares of Series F Preferred Stock. Under the
agreement, the strategic partner has committed to provide, on a best-efforts
basis, a stipulated number of impressions to a co-branded Web site and the
Company's Web site over a period of 24 months. In addition, the Company is
allowed to use the partner's trademark and logo in marketing the Company's
subscription services. The Company recognized the deemed fair value of these
instruments as an intangible asset with a corresponding credit to additional
paid-in capital. The intangible asset is being amortized on a straight-line
basis to marketing expense over the two year term of the strategic marketing
alliance. The gross intangible asset related to this agreement as of December
31, 2001 and March 31, 2002 was $416. Accumulated amortization as of December
31, 2001 and March 31, 2002 was $87 and $128, respectively.

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the shorter of
the estimated useful lives of the respective assets, generally up to three
years, or the lease term, if applicable.

F-9

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If such assets are considered to be impaired, the impairment to
be recognized is measured as the difference between the carrying amount of the
long-lived asset and its fair value. Fair value for impairment purposes is
measured based on quoted market prices in active markets; where quoted prices
in active markets are not available, fair value is estimated using undiscounted
estimated cash flows over the remaining life of the respective asset.

CAPITALIZED SOFTWARE COSTS

The Company capitalizes costs related to developing or obtaining
internal-use software. Capitalization of costs begins after the conceptual
formulation stage has been completed. Capitalized software costs are included
in internal-use software in property and equipment and amortized over the
estimated useful life of the software, which ranges from one to two years.

REVENUE SHARING

Revenue sharing expense is recorded as DVD's subject to revenue sharing
agreements are shipped to subscribers.

REVENUE RECOGNITION

Subscription revenues are recognized ratably during each subscriber's
monthly subscription period. Refunds to customers are recorded as a reduction
of revenues or deferred revenue, as appropriate. Revenues from sales of DVDs
are recorded upon shipment. Prior to adopting a subscription model, revenues
from individual DVD rentals were recorded upon shipment.

COST OF REVENUES

Cost of subscription revenues consists of revenue sharing costs,
amortization of the DVD library, amortization of intangible assets related to
equity instruments issued to studios and postage and packaging costs related to
DVDs provided to paying subscribers. Cost of revenues for DVD sales includes
the salvage value of used DVDs that have been sold.

FULFILLMENT

Fulfillment costs represent those costs incurred in operating and
staffing the Company's fulfillment and customer service centers, including
costs attributable to receiving, inspecting and warehousing the Company's DVD
library. Fulfillment costs also include credit card fees.

TECHNOLOGY AND DEVELOPMENT

Technology and development costs consist of payroll and related costs
incurred related to testing, maintaining and modifying the Company's Web Site,
Cinematch software and other internal-use software systems. Technology and
development costs also include depreciation on the computer hardware the
Company uses to run its Web site and store data.

F-10

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

MARKETING

Marketing consists of advertising, public relations, subscriber
acquisition costs and other costs related to promotional activities including
revenue-sharing payments, postage, packaging and DVD library amortization
related to free trial periods.

SUBSCRIBER ACQUISITION AND ADVERTISING EXPENSES

The Company expenses subscriber acquisition and advertising costs as
incurred. These amounts are included in marketing expenses in the accompanying
financial statements. Subscriber acquisition and advertising expenses were
$3,913, $10,424 and $12,041 for the years ended December 31, 1999, 2000 and
2001, respectively. Subscriber acquisition and advertising expenses were $3,227
and $4,922 for the three month periods ended March 31, 2001 and 2002,
respectively.

STOCK-BASED COMPENSATION

The Company accounts for its stock-based employee compensation plans
using the intrinsic-value method. Deferred stock-based compensation expense is
recorded if, on the date of grant, the current market value of the underlying
stock exceeds the exercise price. The Company amortizes deferred stock-based
compensation using the graded vesting method which is prescribed by Financial
Accounting Standards Board (FASB) Interpretation No. 28 (FIN 28). Deferred
compensation resulting from repriced options is calculated pursuant to FASB
Interpretation No. 44 and amortized using FIN 28. Options granted to
nonemployees are considered compensatory and are accounted for at fair value
pursuant to Statement of Financial Accounting Standards (SFAS) No. 123. The
Company discloses the pro forma effect of using the fair value method of
accounting for all employee stock-based compensation arrangements in accordance
with SFAS No. 123.

INCOME TAXES

The Company accounts for income taxes using the asset and liability
method. Deferred income taxes are recognized by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for any tax benefits
for which future realization is uncertain.

COMPREHENSIVE LOSS

Net loss, as reported in the statements of operations, is the Company's
only component of comprehensive loss during all periods presented.

NET LOSS PER SHARE

Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
common stock from

F-11

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED

MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

outstanding options and warrants to purchase common stock, using the treasury
stock method, and convertible securities using the "if-converted" method. All
potential common stock issuances have been excluded from the computations of
diluted net loss per share for all periods presented because the effect would
be antidilutive.

Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares (rounded to nearest thousand):

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ---------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------

Stock options............................... 1,594,000 3,418,000 8,999,000 3,336,000 12,862,000
Warrants.................................... 93,000 708,000 21,054,000 708,000 21,054,000
Common stock subject to repurchase.......... 2,776,000 1,526,000 419,000 1,238,000 324,000
Redeemable convertible preferred stock...... 14,984,000 20,317,000 28,994,000 20,317,000 28,994,000
Convertible preferred stock................. 4,445,000 4,445,000 6,157,000 5,305,000 6,157,000
Subscribed preferred stock.................. -- 1,321,000 3,213,000 921,000 3,471,000
---------- ---------- ---------- ---------- ----------
Totals................................... 23,892,000 31,735,000 68,836,000 31,825,000 72,862,000
========== ========== ========== ========== ==========

UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE--Pro forma basic and
diluted net loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding for the period
(excluding shares subject to repurchase) plus the weighted average number of
shares of common stock resulting from the assumed conversion upon the closing
of the planned initial public offering of outstanding shares of convertible
preferred stock as if the shares had been converted immediately upon their
issuance.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Company's cash, accounts payable and borrowings
approximates their carrying values due to their short maturity or fixed-rate
structure.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

SEGMENT REPORTING

The Company is organized in a single operating segment for purposes of
making operating decisions and assessing performance. The chief operating
decision maker evaluates performance, makes operating decisions and allocates
resources based on financial data consistent with the presentation in the
accompanying financial statements.

F-12

NETFLIX, INC.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 addresses the
accounting for and reporting of business combinations and requires that all
business combinations be accounted for using the purchase method of accounting.
SFAS No. 141 is effective for all business combinations initiated after June
30, 2001. The adoption of SFAS No. 141 did not have any effect on the Company's
financial statements.

SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. SFAS No. 142 changes the accounting for
goodwill from amortization method to an impairment-only method. The
amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of SFAS No. 142. For goodwill acquired
by June 30, 2001, SFAS No. 142 is effective for all fiscal years beginning
after December 15, 2001. Goodwill and intangible assets acquired after June 30,
2001, will be subject to immediate adoption of SFAS No. 142. The adoption of
SFAS No. 142 will not have any effect on the Company's financial statements.

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS No. 144). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. SFAS No. 144 requires companies to
separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. The Company is required to adopt SFAS No. 144 on January 1,
2002. The provisions of SFAS No. 144 for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities. Management does not expect the adoption of
SFAS No. 144 to have a material impact on the Company's financial statements.

2. PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:

AS OF DECEMBER 31, AS OF
------------------ MARCH 31,
2000 2001 2002
------- ------- ---------

Computer equipment............................... $ 8,644 $ 9,245 $ 9,583
Internal-use software............................ 3,500 5,285 5,549
Furniture and fixtures........................... 1,608 2,033 2,102
Leasehold improvements........................... 868 1,627 1,634
------- ------- -------
14,620 18,190 18,868
Less accumulated depreciation.................... 4,661 9,985 11,442
------- ------- -------
$ 9,959 $ 8,205 $ 7,426
======= ======= =======

F-13

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

Property and equipment includes approximately $5,101 and $5,500 of assets
under capital leases as of December 31, 2000 and 2001, respectively.
Accumulated amortization of assets under these leases totaled $2,185 and $2,276
as of December 31, 2000 and 2001, respectively. Internal-use software includes
approximately $1,595 and $2,795 of internally incurred capitalized software
development costs as of December 31, 2000 and 2001, respectively. Accumulated
amortization of capitalized software development costs totaled $1,080 and 1,835
as of December 31, 2000 and 2001, respectively.

3. ACCRUED EXPENSES

Accrued expenses consisted of the following:

AS OF
DECEMBER 31, AS OF
------------- MARCH 31,
2000 2001 2002
------ ------ ---------

Accrued state sales and use tax.................. $2,663 $2,379 $2,580
Employee benefits................................ 1,918 1,476 1,089
Other............................................ 1,338 689 689
------ ------ ------
$5,919 $4,544 $4,358
====== ====== ======

4. DEBT AND RELATED WARRANTS

CAPITAL LEASE OBLIGATIONS

The Company has entered into capital leases for the acquisition of
equipment. The Company has outstanding capitalized lease obligations under
these arrangements of $3,306, $2,402 and $2,392 as of December 31, 2000,
December 31, 2001 and March 31, 2002, respectively. Such amounts are payable in
monthly installments of principal and interest with effective interest rates
ranging between 16.3% and 27.4% per annum.

NOTES PAYABLE

The Company has a note payable with an unpaid balance of $4,135, $1,667
and $1,042 as of December 31, 2000, December 31, 2001 and March 31, 2002,
respectively. The note payable is secured by substantially all of the assets of
the Company, accrues interest at 12% per annum and is payable in monthly
installments of principal and interest through September 2002.

SUBORDINATED NOTES PAYABLE

In July 2001, the Company issued subordinated promissory notes and
warrants to purchase 20,456,866 shares of its common stock at an exercise price
of $1.00 per share for net proceeds of $12,831. The subordinated notes have an
aggregate face value of $13,000 and stated interest rate of 10%. Approximately
$10,884 of the proceeds was allocated to the warrants as additional paid-in
capital and $1,947 was allocated to the subordinated notes payable. The
resulting discount of $11,053 is being accreted to interest expense using an
effective annual interest rate of 21%. The face value of the subordinated notes
and all accrued interest are due and payable upon the earlier of July 2011 or
the consummation of a qualified initial public offering. As of December 31,
2001 and March 31, 2002, accrued unpaid interest of $650 and $925,
respectively, is included in

F-14

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

the carrying amount of the subordinated notes payable balance of $2,799 and
$3,158, respectively, in the accompanying financial statements. Upon a change
in control, as defined, the subordinated note holders are entitled to
consideration equal to three times the face value of the notes plus accrued
interest.

WARRANTS AND COMMON STOCK ISSUED WITH DEBT INSTRUMENTS

In February 1999, in connection with borrowings under a note payable, the
Company issued to the lender 271,489 shares of common stock at $0.11 per share.
The Company accounted for the fair value of the common stock of approximately
$762 as an increase to additional paid-in capital with a corresponding
provision to debt discount. The debt discount was accreted to interest expense
over 24 months.

In May 2000, in connection with a capital lease, the Company issued a
warrant that provided the lender the right to purchase 23,007 shares of common
stock at $6.52 per share. The Company accounted for the fair value of the
warrant of approximately $105 as an increase to additional paid-in capital with
a corresponding provision to debt discount. The debt discount is being accreted
to interest expense over the term of the related debt, which is 36 months.

In July 2001, in connection with borrowings under subordinated promissory
notes, the Company issued to the note holders warrants to purchase 20,456,866
shares of common stock. The Company accounted for the fair value of the
warrants of $10,884 as an increase to additional paid-in capital with a
corresponding discount on subordinated notes payable.

In July 2001, in connection with a capital lease agreement, the Company
granted warrants to purchase 255,000 shares of common stock at an exercise
price of $1.00 per share. The fair value of approximately $172 was recorded as
an increase to additional paid-in capital with a corresponding reduction to the
capitalized lease obligation. The debt discount is being accreted to interest
expense over the term of the lease agreement which is 45 months.

The fair values of warrants were estimated at the date of issuance of
each warrant using the Black-Scholes valuation model with the following
assumptions: the term of the warrant; risk-free rates between 4.92% to 6.37%;
volatility of 80% for all periods; and a dividend yield of 0.0%.

WARRANTS, OPTIONS AND COMMON STOCK ISSUED IN EXCHANGE FOR CASH AND SERVICES
RENDERED

In March 2000, in consideration for employee recruiting and placement
services rendered, the Company issued 21,777 shares of common stock to a
consultant. The Company recorded the deemed fair value of the common stock
issued of $306 as marketing expense.

Also in March 2000, in consideration for marketing services rendered, the
Company issued an option to a consultant to purchase 15,000 shares of common
stock at $4.50 per share. The Company recorded the fair value of the option of
approximately $195 as marketing expense.

In April 2000, in connection with the sale of Series E preferred stock,
the Company sold warrants to purchase 533,003 shares of Series E preferred
stock at a price of $0.01 per share. The warrants have an exercise

F-15

NETFLIX, INC.

price of $14.07 per share. The proceeds from the sale of these warrants were
recorded as part of the issuance of Series E preferred stock in the
accompanying statement of stockholders' deficit. In July 2001, in connection
with a modification of the terms of the Series E preferred stock, certain
Series E warrant holders agreed to the cancellation of warrants to purchase
500,487 shares of Series E preferred stock. The remaining warrants to purchase
32,516 shares are exercisable at $14.07 per share.

In November 2000, in connection with an operating lease, the Company
issued a warrant that provided the lessor the right to purchase 60,000 shares
of common stock at $2.00 per share. The Company also issued an option, in
connection with the lease to a consultant to purchase 25,000 shares of common
stock at $2.00 per share. The Company accounted for the fair value of the
warrant of approximately $216 as an increase to additional paid-in capital with
a corresponding increase to other assets. This asset is being amortized over
the term of the related operating lease, which is five years. The Company
recorded the fair value of the option of approximately $90 as general and
administrative expense.

In July 2001, the Company issued a warrant to purchase 100,000 shares of
Series F non-voting preferred stock at $9.38 per share to a Web portal company
in connection with an integration and distribution agreement. The fair market
value of the warrants of approximately $18 was recorded as sales and marketing
expense and an increase to additional paid-in capital.

The Company calculated the fair value of the warrants and nonemployee
stock options using the Black-Scholes valuation model with the following
assumptions: the term of the warrant or option; risk-free rates between 5.83%
to 6.37%; volatility of 80% for all periods; and dividend yield of 0.0%.

5. COMMITMENTS

LEASE COMMITMENTS

The Company leases its primary facilities under noncancelable-operating
leases. The Company also has capital leases with various expiration dates
through October 1, 2004. Future minimum lease payments under noncancelable
capital and operating leases as of December 31, 2001, are as follows:

CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ---------

2002....................................................... $ 1,763 $ 2,473
2003....................................................... 1,267 2,543
2004....................................................... 176 2,484
2005....................................................... -- 1,466
Thereafter................................................. -- --
------- -------
Total minimum payments..................................... 3,206 $ 8,966
=======
Less interest and unamortized discount..................... (804)
-------
Present value of net minimum lease payments................ 2,402
Less current portion of capital lease obligations.......... (1,345)
-------
Capital lease obligations, noncurrent...................... $ 1,057
=======

F-16

NETFLIX, INC.

Rent expense for the years ended December 31, 1999, 2000 and 2001 was
$783, $1,533 and $2,450, respectively. Rent expense is computed using the
straight-line method and the minimum operating lease payments required over the
lease term.

OTHER COMMITMENTS

In 2001, the Company entered into two strategic marketing alliances for
the primary purpose of generating new subscribers. The first alliance provides
that the Company will pay a specified bounty in cash for each referred
subscriber as well as an ongoing share of revenues for every new subscriber
referral for the two year term of the agreement. In addition, after a minimum
threshold of subscribers has been referred, the Company is obligated to issue
additional shares of Series F Preferred Stock for every subscriber referred.
Under the second alliance, the Company will pay a specified bounty for every
new referred subscriber in excess of a specified minimum. In addition, the
Company will share a portion of revenues for the term of the agreement for each
referred subscriber. Through December 31, 2001, the Company had paid $415 under
these agreements. Also, through December 31, 2001, no amounts of Series F
Preferred Stock had been earned or issued under the first alliance.

6. REDEEMABLE CONVERTIBLE PREFERRED STOCK

The redeemable convertible preferred stock at December 31, 2000 consists
of the following:

NUMBER OF REDEMPTION AND
NUMBER OF SHARES ISSUED LIQUIDATION TOTAL
SHARES AND DIVIDENDS VALUE LIQUIDATION
PAR VALUE AUTHORIZED OUTSTANDING PER SHARE PER SHARE VALUE
--------- ---------- ------------- --------- -------------- -----------

Series B........... $0.001 5,776,616 5,684,024 $0.0864 $1.08 $ 6,139
Series C........... 0.001 4,750,000 4,650,269 0.2616 3.27 15,205
Series D........... 0.001 4,650,000 4,649,927 0.5216 6.52 30,318
Series E........... 0.001 5,874,199 5,332,689 0.7500 9.38 50,021
---------- ---------- --------
21,050,815 20,316,909 $101,683
========== ========== ========

The redeemable convertible preferred stock at December 31, 2001 and March
31, 2002 consists of the following:

Series B........... $0.001 5,776,616 5,684,024 $0.0864 $1.08 $ 6,139
Series C........... 0.001 4,750,000 4,650,269 0.2616 3.27 15,205
Series D........... 0.001 4,650,000 4,649,927 0.5216 6.52 30,318
Series E........... 0.001 5,874,199 5,007,530 0.7500 9.38 46,971
Series E-1......... 0.001 5,874,199 325,159 0.7500 9.38 3,050
---------- ---------- --------
26,925,014 20,316,909 $101,683
========== ========== ========

F-17

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

The rights, preferences and privileges of the preferred stockholders are
as follows:

DIVIDENDS

The holders of redeemable convertible preferred stock are entitled to
receive annual dividends per share at the rates stated above. Such dividends,
which are in preference to any dividends on common stock, are payable whenever
funds are legally available and when declared by the Board of Directors. The
right of the holders of the redeemable convertible preferred stock to receive
dividends is not cumulative. No dividends on redeemable convertible preferred
stock have been declared from inception through March 31, 2002.

REDEMPTION

The holders of redeemable convertible preferred stock have the option to
redeem their shares for cash during a 60-day period commencing June 12, 2004.

LIQUIDATION

After payment to holders of Series A, B, C, D, E and E-1 convertible
preferred stock, each share of common stock and preferred stock is entitled to
receive pro rata any remaining assets of the Company until such time as the
holders of Series A, B, C, D, E and E-1 convertible preferred stock receive
aggregate amounts totaling $1.50, $3.24, $9.81, $19.56, $28.14 and $28.14 per
share, respectively. Thereafter, all remaining proceeds are to be allocated to
the holders of common stock and Series F Preferred Stock on a pro rata basis.

CONVERSION

At December 31, 2000, each share of Series C, D and E redeemable
convertible preferred stock was convertible into one share of common stock.

At December 31, 2001, each share of Series B and E-1 redeemable
convertible preferred stock was convertible into one share of common stock.

In July 2001, the conversion rates for the Series C and D preferred stock
were adjusted in accordance with the anti-dilution provisions as set forth in
the Company's Certificate of Incorporation such that each share of the Series C
and D preferred stock converts into 1.3207 and 1.4209 shares of common stock,
respectively.

The original terms of the Series E preferred stock contained a special
anti-dilution provision that guaranteed a value of $14.07 per share in the
event of an initial public offering. The unrecorded measured value of this
contingent beneficial conversion feature was $30,120. This conversion feature
was cancelled in July 2001. At the same time the conversion rate for Series E
preferred stock was modified to 1.4387 shares of common stock for each share of
Series E preferred stock. In addition, in accordance with the antidilution
right included in the Certificate of Incorporation, the conversion rate for
Series E preferred stock was further changed, resulting in a conversion rate of
2.0441 shares of common stock for each share of Series E preferred stock. The
cancellation of the beneficial conversion feature and the modification of the
conversion rate of the Series E preferred stock had no financial accounting
effect because the holders of these shares received no net benefit.

F-18

NETFLIX, INC.

Conversion of each share of Series B, C and D preferred stock is
automatic upon closing of a public offering of the Company's common stock for
aggregate gross proceeds of at least $20 million. Conversion of each share of
Series E and E-1 redeemable convertible preferred stock is automatic upon
closing of a public offering of the Company's common stock for aggregate
proceeds of at least $40 million and a minimum price per share of $5.00. Series
B, C and D preferred stock may be automatically converted by an affirmative
vote of 75% of the then outstanding shares of each respective series. Each
share of Series E and E-1 redeemable convertible stock may be automatically
converted by a vote of 75% of the then outstanding shares of Series E and E-1
(voting together as a single class on an if-converted basis).

VOTING RIGHTS

The holders of each share of redeemable convertible preferred stock are
entitled to the number of votes equal to the number of shares of common stock
on an if-converted-basis. The holders of Series E and E-1 redeemable
convertible preferred stock do not have the right to vote with respect to such
shares for the election of directors of the Company. The holders of Series B, C
and D, redeemable convertible preferred stock voting as separate classes are
each entitled to elect one director of the Company's Board of Directors.

7. STOCKHOLDERS' EQUITY AND CONVERTIBLE PREFERRED STOCK

DIVIDENDS

The holders of Series A convertible preferred stock are entitled to
receive annual dividends per share of $0.05. Such dividends, which are in
preference to any dividends on common stock are payable whenever funds are
legally available and when declared by the Board of Directors. The right of the
holders of Series A convertible preferred stock to receive dividends is not
cumulative. No dividends on convertible preferred stock have been declared from
inception through March 31, 2002. Series F Non-Voting convertible preferred
stock is not entitled to any preferred dividends.

LIQUIDATION

The liquidation value of one share of Series A convertible preferred
stock is $0.50, resulting in a total liquidation value of $2,222. After payment
to holders of Series A, B, C, D, E and E-1 convertible preferred stock, each
share of common stock and preferred stock is entitled to receive pro rata any
remaining assets of the Company until such time as the holders of Series A
convertible preferred stock receive aggregate amounts totaling $1.50 per share,
respectively. Thereafter, all remaining proceeds are to be allocated to the
holders of common stock and Series F Preferred Stock on a pro rata basis.

CONVERSION

Each share of Series A convertible preferred stock is convertible, at the
option of the holder, at any time, into one share of common stock. Series F
Preferred Stock may not be converted into common stock until the earlier of (1)
immediately prior to a change in control, or (2) such time as such shares have
been sold or transferred to a third party not affiliated with the initial
holders of Series F Preferred Stock. Conversion of each share of Series A
convertible preferred stock and Series F Preferred Stock is automatic upon
closing of a public offering of the Company's common stock for aggregate gross
proceeds of at least $20 million. Each share of

F-19

NETFLIX, INC.

Series A convertible preferred stock shall be automatically converted by a vote
of a majority of the then outstanding shares of Series A preferred stock.

VOTING RIGHTS

The holders of each share of Series A convertible preferred stock shall
be entitled to the number of votes equal to the number of shares of common
stock on an if-converted-basis. The holders of Series F Preferred Stock have no
voting rights.

EMPLOYEE STOCK PURCHASE PLAN

In February 2002, the Company adopted the 2002 Employee Stock Purchase
Plan. The Company reserved a total of 1,750,000 shares of common stock for
issuance under the 2002 Employee Stock Purchase Plan. In addition, the plan
provides for annual increases in the number of shares available for issuance
under the 2002 Employee Stock Purchase Plan on the first day of each fiscal
year, beginning with our fiscal year 2003, equal to the lesser of:

. 2% of the outstanding shares of our common stock on the first day of
the applicable fiscal year;

. 1,000,000 shares; and

. such other amount as our board may determine.

STOCK OPTION PLAN

As of December 31, 2001, the Company was authorized to issue up to
14,639,935 shares of common stock in connection with its 1997 stock option plan
for directors, employees and consultants. The 1997 stock option plan provides
for the issuance of stock purchase rights, incentive stock options or
non-statutory stock options.

In February 2002, the Company adopted the 2002 Stock Plan. The 2002 Stock
Plan provides for the grant of incentive stock options to employees and for the
grant of nonstatutory stock options and stock purchase rights to employees,
directors and consultants. The Company reserved a total of 2,000,000 shares of
common stock for issuance under the 2002 Stock Plan. Any remaining shares
reserved but not yet issued under the 1997 plan as of the effective date of an
initial public offering will be added to the total reserved shares under the
2002 Stock Plan. In addition, our 2002 Stock Plan provides for annual increases
in the number of shares available for issuance under our 2002 Stock Plan on the
first day of each fiscal year, beginning with our fiscal year 2003, equal to
the lesser of 5% of the outstanding shares of common stock on the first day of
the applicable fiscal year, 3,000,000 shares, and another amount as our board
of directors may determine.

Stock purchase rights are subject to a restricted stock purchase
agreement whereby the Company has the right to repurchase the stock at the
original issue price upon the voluntary or involuntary termination of the
purchaser's employment with the Company. The repurchase rights lapse at a rate
determined by the stock plan administrator but at a minimum rate of 25% per
year.

The exercise price for incentive stock options is at least 100% of the
stock's deemed fair value on the date of grant for employees owning less than
10% of the voting power of all classes of stock, and at least 110%

F-20

NETFLIX, INC.

of the deemed fair value on the date of grant for employees owning more than
10% of the voting power of all classes of stock. For nonstatutory stock
options, the exercise price is also at least 110% of the deemed fair value on
the date of grant for service providers owning more than 10% of the voting
power of all classes of stock and no less than 85% of the deemed fair value on
the date of grant for service providers owning less than 10% of the voting
power of all classes of stock.

Options generally expire in 10 years, however, they may be limited to 5
years if the optionee owns stock representing more than 10% of the Company.
Vesting periods are determined by the stock plan administrator and generally
provide for shares to vest ratably over three or four years.

Generally, the Company's Board of Directors grants options at an exercise
price of not less than the deemed fair value of the Company's common stock at
the date of grant. In 2001, the Company offered its employees the right to
exchange certain employee stock options. The exchange resulted in the
cancellation of employee stock options to purchase 2.7 million shares of common
stock with varying exercise prices in exchange for 2.7 million employee stock
options with an exercise price of $1.00. The option exchange resulted in
variable award accounting treatment for all of the exchanged options. Variable
award accounting will continue until all options subject to variable accounting
are exercised, cancelled or expired.

SFAS No. 123 requires the disclosure of net loss as if the Company had
adopted the fair value method for its stock-based compensation arrangements for
employees since the inception of the Company. Had compensation cost been
determined consistent with SFAS No. 123, the Company's net loss and net loss
per share would have been as follows:

YEAR ENDED DECEMBER 31,
----------------------------
1999 2000 2001
-------- -------- --------

Net loss:
As reported................................... $(29,845) $(57,363) $(38,618)
Pro forma..................................... (29,949) (58,274) (39,569)
Basic and diluted net loss per share:
As reported................................... (7.13) (13.52) (7.05)
Pro forma..................................... (7.16) (13.73) (7.22)

The fair value of each option was estimated on the date of grant using
the minimum-value method with the following weighted-average assumptions: no
dividend yield; volatility of 0%; risk-free interest rate of 5.40%, 6.24% and
4.14% for the years ended 1999, 2000 and 2001, respectively; and expected life
of 3.5 years for all periods.

F-21

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

A summary of the activities related to the Company's options for the
years ended December 31, 1999, 2000 and 2001 and for the three months ended
March 31, 2002 is as follows:

OPTIONS OUTSTANDING
---------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
----------- ---------- ---------

Balances as of January 1, 1999........ 883,179 4,167,971 $0.084
Authorized......................... 1,746,683 --
Granted............................ (2,001,063) 2,001,063 1.213
Exercised.......................... -- (3,971,361) 0.090
Canceled........................... 603,834 (603,834) 0.450
Repurchased........................ 600,450 --
----------- ---------- ------

Balances as of December 31, 1999...... 1,833,083 1,593,839 1.347
Authorized......................... 1,761,852 -- --
Granted............................ (2,548,397) 2,548,397 3.126
Exercised.......................... -- (243,009) 1.743
Canceled........................... 481,425 (481,425) 2.515
Repurchased........................ 79,960 -- 1.770
----------- ---------- ------

Balances as of December 31, 2000...... 1,607,923 3,417,802 2.481
Authorized......................... 9,400,000 -- --
Granted............................ (10,372,978) 10,372,978 1.068
Exercised.......................... -- (90,137) 1.382
Canceled........................... 4,701,477 (4,701,477) 2.445
Repurchased........................ 16,876 --
----------- ---------- ------

Balances as of December 31, 2001...... 5,353,298 8,999,166 0.994
Authorized......................... 2,000,000 -- --
Granted............................ (4,262,000) 4,262,000 1.000
Exercised.......................... -- (90,013) 1.000
Canceled........................... 309,297 (309,297) 1.000
----------- ---------- ------

Balances as of March 31, 2002......... 3,400,595 12,861,856 $0.999
=========== ========== ======
Options exercisable as of December 31:
1999........................... 117,746 $0.421
2000........................... 557,053 $1.250
2001........................... 2,754,755 $0.979

The weighted-average fair value of options granted in fiscal 1999, 2000,
and 2001 was $4.66, $8.55 and $0.14, respectively.

F-22

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

As of December 31, 2001, the range of exercise prices and
weighted-average remaining contractual life of outstanding options were as
follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS LIFE (YEARS) PRICES OPTIONS PRICES
---------------- --------- ------------ --------- --------- ---------

$0.055 to $0.110 167,137 6.22 $0.059 167,012 $0.059
$1.000 8,769,800 9.26 1.00 2,525,754 1.00
$2.000 to $2.250 47,229 8.55 2.00 46,989 2.00
$4.500 15,000 8.25 4.50 15,000 4.50
--------- ---------
8,999,166 2,754,755
========= =========

8. INCOME TAXES

Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34% to pretax loss as a result of the following:

YEAR ENDED DECEMBER 31,
----------------------------
1999 2000 2001
-------- -------- --------

Expected tax benefit at U.S. federal statutory rate of 34%..................... $(10,147) $(19,503) $(13,130)
Current year net operating losses for which no tax benefit is recognized....... 7,800 16,574 11,330
Stock based compensation....................................................... 1,496 2,957 1,864
Other.......................................................................... 851 (28) (64)
-------- -------- --------
Total income tax expense.................................................... $ -- $ -- $ --
======== ======== ========

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2000 and
2001, are presented below:

AS OF DECEMBER 31,
------------------
2000 2001
-------- --------

Deferred tax assets:
Net operating loss carryforward............... $ 26,824 $ 32,626
Accruals and reserves......................... 6,993 13,885
Other......................................... 1 20
-------- --------
Gross deferred tax assets................. 33,818 46,531
Less valuation allowance......................... (33,818) (46,531)
-------- --------
Net deferred tax assets................... $ -- $ --
======== ========

Management has established a valuation allowance for the portion of
deferred tax assets for which realization is uncertain. The total valuation
allowance for the years ended December 31, 2000 and 2001 increased $18,219 and
$12,713, respectively.

F-23

NETFLIX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(INFORMATION AS OF MARCH 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2001 AND 2002 IS UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER DVD DATA)

As of December 31, 2001, the Company had net operating loss carry
forwards for federal and California income tax purposes of approximately
$83,699 and $56,260, respectively, to reduce future income subject to income
tax. The federal net operating loss carry forward will expire beginning in 2012
to 2021 and the California net operating loss carry forwards expire beginning
in 2002 to 2011, if not utilized.

The Tax Reform Act of 1986, imposes restrictions on the utilization of
net operating loss carryforwards and tax credit carryforwards in the event of
an "ownership change," as defined by the Internal Revenue Code. The Company's
ability to utilize its net operating loss carry forwards is subject to
restrictions pursuant to these provisions.

9. EMPLOYEE BENEFIT PLAN

The Company maintains a 401(k) savings plan covering substantially all of
its employees. Eligible employees may contribute through payroll deductions.
The Company matches employee contributions at the discretion of the Company's
Board of Directors. During the years ended December 31, 1999, 2000 and 2001,
the Company has matched a total of $0, $0 and $304, respectively.

10. RESTRUCTURING CHARGES

During 2001, the Company recorded a restructuring charge of $671,000
relating to severance payments made to 45 employees terminated in an effort to
streamline the Company's processes and reduce expenses. Substantially all
liabilities related to this restructuring charge were paid as of December 31,
2001.

F-24

[INSIDE BACK COVER]

================================================================================

Through and including , 2002 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters with respect to their unsold allotments or subscriptions.

[LOGO] NETFLIX.COM, INC.

COMMON STOCK

-------------

PROSPECTUS

-------------

MERRILL LYNCH & CO.

THOMAS WEISEL PARTNERS LLC

U.S. BANCORP PIPER JAFFRAY

, 2002

================================================================================

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Netflix in connection with
the sale and distribution of common stock being registered. All amounts are
estimates except the SEC registration fee, NASD filing fee and Nasdaq National
Market listing fee.

SEC registration fee....................................... $ 0(1)
NASD filing fee............................................ 12,000
Nasdaq National Market listing fee......................... *
Blue Sky fees and expenses................................. *
Printing and engraving costs............................... *
Legal fees and expenses.................................... *
Accounting fees and expenses............................... *
Transfer Agent and Registrar fees.......................... *
Insurance premiums......................................... *
Miscellaneous expenses..................................... *
-------
Total............................................... $ *
=======

--------

(1)Filing fee previously paid in connection with Registration Statement on Form
S-1 withdrawn by Netflix on July 21, 2000.

* To be provided by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 ("Section 145") of the General Corporation Law of the State
of Delaware, as the same exists or may hereafter be amended (the "General
Corporation Law") provides that a Delaware corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal.

Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against such person and incurred by
such person in any such capacity, arising out of such person's status as such,
whether or not the corporation would otherwise have the power to indemnify such
person against such liability under Section 145.

Registrant's Amended and Restated Certificate of Incorporation and Bylaws
provide that Registrant will indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
Registrant or any predecessor of Registrant, or serves or served at any other
corporation, partnership, joint venture, trust or other enterprise as a
director, officer, employee or agent at the request of Registrant or any
predecessor of Registrant.

II-1

Registrant's Bylaws provide for mandatory indemnification to the fullest
extent permitted by General Corporation Law against all expense, liability and
loss including attorney's fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlements, provided that Registrant shall not
be required to indemnify unless the proceeding in which indemnification is
sought was authorized in advance by our board of directors.

Registrant's directors and officers are covered by insurance maintained
by Registrant against specified liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act of 1933, as
amended. In addition, the Registrant has entered into contracts with its
directors and officers providing indemnification of such directors and officers
by the Registrant to the fullest extent permitted by law, subject to certain
limited exceptions.

The Purchase Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of Registrant and its officers and directors, and by
Registrant of the underwriters, for certain liabilities arising under the
Securities Act or otherwise in connection with this offering.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following is a summary of Registrant's transactions within the last
three years, involving sales of Registrant's securities that were not
registered under the Securities Act:

(a) On June 22, 1999 and October 31, 1999, Registrant issued and
sold an aggregate of 4,649,927 shares of Series D preferred stock to a
total of 10 private investors for $6.52 per share, or an aggregate of
$30,317,524. The foregoing purchase and sale was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis
that the transaction did not involve a public offering.

(b) On April 13 and April 17, 2000, Registrant issued and sold (i)
an aggregate of 5,332,689 shares of Series E non-voting preferred stock
at a price per share of $9.38, and (ii) warrants to purchase up to an
aggregate of 533,003 shares of Series E non-voting preferred stock each
with an exercise price of $14.07 per share, at a price per warrant share
of $0.01, to a total of 16 private investors for an aggregate of
$50,025,619. The foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to Section 4(2) thereof on
the basis that the transactions did not involve a public offering.

(c) On May 19, 2000, Registrant issued and sold a warrant to
purchase 23,007 shares of common stock to a private investor at an
exercise price of $6.52 per share, in connection with a lease agreement.
The foregoing purchase and sale was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.

(d) On October 26, 2000, Registrant issued 436,393 shares of
Series F non-voting preferred stock to a movie studio in connection with
a revenue sharing agreement. The foregoing was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis
that the transaction did not involve a public offering.

(e) On October 31, 2000, Registrant issued a warrant to purchase
60,000 shares of common stock to a private investor at an exercise price
of $2.00 per share, in connection with a real estate lease. The foregoing
was exempt from registration under the Securities Act pursuant to Section
4(2) thereof on the basis that the transaction did not involve a public
offering.

(f) On February 22, 2001, Registrant issued an aggregate of
860,121 shares of Series F non-voting preferred stock to certain movie
studios, in connection with certain revenue share agreements. The
foregoing was exempt from registration under the Securities Act pursuant
to Section 4(2) thereof on the basis that the transaction did not involve
a public offering.

(g) On April 2, 2001, Registrant issued 436,393 shares of Series F
non-voting preferred stock to a movie studio, in connection with a
revenue share agreement. The foregoing was exempt from

II-2

registration under the Securities Act pursuant to Section 4(2) thereof on
the basis that the transaction did not involve a public offering.

(h) On June 1, 2001, Registrant issued and sold a warrant to
purchase 255,000 shares of common stock to a private investor at an
exercise price of $1.00 per share, in connection with an equipment lease
agreement. The foregoing purchase and sale was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis
that the transaction did not involve a public offering.

(i) On June 5, 2001, Registrant issued and sold a warrant to
purchase 100,000 shares of Series F Preferred Stock to a private investor
at an exercise price of $9.38 per share, in connection with an
integration and distribution agreement. The foregoing purchase and sale
was exempt from registration under the Securities Act pursuant to Section
4(2) thereof on the basis that the transaction did not involve a public
offering.

(j) On July 10, 2001, Registrant issued and sold (i) an aggregate
of $13 million of subordinated promissory notes, and (ii) warrants to
purchase an aggregate of 20,456,866 shares of common stock each with an
exercise price of $1.00 per share, at a price per warrant share of $0.01,
to a total of 23 private investors for an aggregate of $13,020,456.88.
The foregoing purchases and sales were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transactions did not involve a public offering.

(k) On August 21, 2001, Registrant issued 416,440 shares of Series
F non-voting preferred stock to a consumer electronics retailer, in
connection with a strategic marketing agreement. The foregoing was exempt
from registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public
offering.

(l) On March 4, 2002, Registrant issued 423,415 shares of Series F
non-voting preferred stock to a movie studio in connection with a revenue
sharing agreement. The foregoing was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.

(m) On , 2002, Registrant issued an aggregate of
shares of Series F non-voting preferred stock to certain movie studios
holding Series F non-voting preferred stock of Registrant pursuant to
certain anti-dilution provisions for the benefit of such studios. The
foregoing were exempt from registration under the Securities Act pursuant
to Section 4(2) thereof on the basis that the transaction did not involve
a public offering.

(n) As of , Registrant has issued and sold an aggregate of
shares of common stock upon exercise of options issued to
certain employees and consultants under Registrant's amended and restated
1997 Stock Plan for an aggregate consideration of $ . The foregoing
purchases and sales were exempt from registration under the Securities
Act pursuant to Rule 701 of the Securities Act.

Except as indicated above, none of the foregoing transactions involved
any underwriters, underwriting discounts or commissions, or any public
offering, and Registrant believes that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients in such transactions represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients either received adequate information about
Registrant or had access, through their relationships with Registrant, to such
information.

II-3

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------ -----------

1.1** Form of Purchase Agreement.

3.1 Amended and Restated Certificate of Incorporation of Registrant, as amended.

3.2* Proposed Amended and Restated Certificate of Incorporation of Registrant.

3.3* Amended and Restated Bylaws of Registrant.

3.4 Proposed Amended and Restated Bylaws of Registrant.

4.1 Form of Registrant's Common Stock Certificate.

5.1* Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.

10.1* Form of Indemnification Agreement between Registrant and each of its directors and officers.

10.2* 2002 Employee Stock Purchase Plan.

10.3* Amended and Restated 1997 Stock Plan.

10.4* 2002 Stock Plan.

10.5* Amended and Restated Stockholders' Rights Agreement dated July 10, 2001.

10.6* Amended and Restated Agreement Concerning the Right to Participate dated June 22, 1999.

10.7* Office Lease dated October 27, 2000 between Registrant and BR3 Partners.

10.8* Lease Agreement dated August 11, 1999 between Registrant and Lincoln-Recp Old Oakland
Opco, LLC; First Amendment to Lease Agreement dated December 3, 1999; Second
Amendment to Lease Agreement dated January 4, 2000; Third Amendment to Lease Agreement
dated June 12, 2001 between Registrant and Joseph Sully.

10.9* Offer letter dated April 19, 1999 with W. Barry McCarthy, Jr., Chief Financial Officer of
Registrant.

10.10* Offer letter dated March 25, 1999 with Tom Dillon, Vice President of Operations of Registrant.

10.11* Offer letter dated March 13, 2000 with Leslie J. Kilgore, Vice President of Marketing of
Registrant.

10.12*+ Letter Agreement dated as of May 1, 2000 between Registrant and Columbia TriStar Home
Entertainment, Inc.

10.13*+ Revenue Sharing Output License Terms between Registrant and Warner Home Video.

23.1 Consent of KPMG LLP.

23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (contained in
Exhibit 5.1).

24.1* Power of Attorney.

--------

* Previously filed.

** To be filed by amendment.

+ Confidential treatment requested on portions of this exhibit. An unredacted
version of this exhibit has been filed separately with the Securities and
Exchange Commission.

(B) FINANCIAL STATEMENT SCHEDULES

Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes thereto.

II-4

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Purchase Agreement certificates in
such denominations and registered in such names as required by the Underwriters
to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a director, officer, or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.

II-5

SIGNATURES

Pursuant to the requirements of the Securities Act, Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Gatos, State of
California, on the 16th day of April, 2002.

NETFLIX, INC.

By: /S/ REED HASTINGS

-----------------------------------
Reed Hastings
CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ REED HASTINGS President, Chief Executive Officer April 16, 2002
--------------------------- and Director (principal executive
Reed Hastings officer)

W. BARRY MCCARTHY, JR.* Chief Financial Officer (principal April 16, 2002
--------------------------- financial and accounting officer)
W. Barry McCarthy, Jr.

TIMOTHY M. HALEY* Director April 16, 2002
---------------------------
Timothy M. Haley

JAY C. HOAG* Director April 16, 2002
---------------------------
Jay C. Hoag

A. ROBERT PISANO* Director April 16, 2002
---------------------------
A. Robert Pisano

MICHAEL N. SCHUH* Director April 16, 2002
---------------------------
Michael N. Schuh

*By: /S/ REED HASTINGS
---------------------------
Reed Hastings
ATTORNEY-IN-FACT

II-6

EXHIBIT INDEX