Windows Division revenue is largely correlated to the PC market worldwide, as approximately 75% of total Windows Division revenue comes from Windows operating system software purchased by original equipment manufacturers ("OEMs") which they pre-install on equipment they sell. The remaining approximately 25% of Windows Division revenue is generated by commercial and retail sales of Windows and PC hardware products and online advertising from Windows Live.

Windows Division revenue reflected relative performance in PC market segments. We estimate that sales of PCs to businesses grew approximately 5% and sales of PCs to consumers were flat. Excluding a decline in sales of netbooks, we estimate that sales of PCs to consumers grew approximately 8%. Taken together, the total PC market increased an estimated 1% to 3%. Windows Division revenue was positively impacted by higher inventory levels within our distribution channels and higher attach rates, offset in part by the effect of higher growth in emerging markets, where average selling prices are lower, relative to developed markets, and by lower recognition of previously deferred Windows XP revenue.

Windows Division operating income decreased slightly as a result of higher operating expenses, offset in part by increased revenue. Sales and marketing expenses increased $48 million or 8% reflecting increased advertising and marketing of Windows and Windows Live. Research and development expenses increased $37 million or 9% due mainly to product development costs associated with the next version of the Windows operating system and an increase in headcount-related costs. Cost of revenue increased $33 million or 7%, primarily driven by higher traffic acquisition, operation, and support costs.