Revenue increased, primarily due to higher revenue from Server and Tools as well as revenue from new products and services, including Windows 8, Surface, and the new Office, offset in part by the impact on revenue of a decline in the x86 PC market.
Operating income grew, primarily due to the $6.2 billion goodwill impairment charge related to our OSD business recorded during the prior year. Other key changes in cost of revenue and operating expenses were:
• Cost of revenue increased $2.7 billion or 16%, reflecting increased product costs associated with Surface and Windows 8, including an approximately $900 million charge for Surface RT inventory adjustments, higher headcount-related expenses, payments made to Nokia related to joint strategic initiatives, royalties on Xbox LIVE content, and retail stores expenses, offset in part by decreased costs associated with lower sales of Xbox 360 consoles and decreased traffic acquisition costs.
• Sales and marketing expenses increased $1.4 billion or 10%, reflecting advertising of Windows 8 and Surface.
• Research and development expenses increased $600 million or 6%, due mainly to higher headcount-related expenses, largely related to the Entertainment and Devices Division.
• General and administrative expenses increased $580 million or 13%, due to higher legal charges, primarily the EU fine of $733 million.