accrual of $8.1 million (net of expected insurance proceeds for reimbursement of legal defense costs of $0.9 million) related to the proposed settlement costs of the Chavez vs. Netflix, Inc. lawsuit. As a percentage of revenues, the increase in general and administrative expenses was primarily due to a greater increase in general and administrative expenses than increase in revenues.

We expect our general and administrative expenses will continue to increase in absolute dollars in 2007 in order to support our growing operations.

Gain on disposal of DVDs

The increase in gain on disposal of DVDs in absolute dollars in 2006 as compared to 2005 was primarily attributable to an increase in volume of DVDs sold, offset in part by an increase in the cost of DVD sales.

The decrease in gain on disposal of DVDs in absolute dollars in 2005 as compared to 2004 was primarily attributable to an increase in the cost of DVD sales.

The increase in interest and other income in 2006 as compared to 2005 was primarily due to higher interest income earned on our cash and cash equivalents due to increased interest rates as well as higher average cash balances resulting from a net increase in cash flows and net proceeds of $101.1 million from the secondary public offering of our common stock in May 2006.

The increase in interest and other income in 2005 as compared to 2004 was primarily due to higher interest income earned on our cash and cash equivalents due to increased interest rates as well as higher average cash balances.

Provision for (benefit from) Income Taxes

In 2006 our effective tax rate differed from the federal statutory rate of 35% principally due to state income taxes and benefits related to stock-based compensation. In 2005, we recorded an income tax benefit of $33.7 million on pretax income of $8.3 million. Our 2005 income tax benefit includes a tax benefit for the reduction in the valuation allowance of $34.9 million. We continuously monitor the circumstances impacting the expected realization of our deferred tax assets. In the fourth quarter of 2005 we reduced the valuation allowance after determining that substantially all deferred tax assets are more likely than not to be realizable due to expected future income. In 2004, we recorded an income tax provision of $0.2 million on a pre-tax income of $21.8 million. Our effective tax rates for 2004 and 2005 differ from the federal statutory rate of 35% primarily due to changes in the valuation allowance and benefits related to stock based compensation.

We currently anticipate that our effective tax rate will be approximately 40% in 2007.

Liquidity and Capital Resources

As of December 31, 2006, we had cash and cash equivalents of $400.4 million. On May 3, 2006, we issued 3.5 million shares of common stock upon the closing of a secondary public offering for net proceeds of $101.1 million. We intend to use the net proceeds from the sale of the common stock for general corporate purposes, including working capital.

We have generated net cash from operations during each quarter since the second quarter of 2001. Many factors will impact our ability to continue to generate and grow cash from our