Revenue increased primarily due to strong sales of the Xbox 360 console and accessories, including Kinect, the 2010 Microsoft Office system, and Server and Tools products. This increase was offset in part by the recognition in the prior year of approximately $1.7 billion of revenue related to the Windows 7 Deferral. Changes in foreign currency exchange rates had an insignificant impact on revenue.
Operating income decreased reflecting higher operating expenses, offset in part by the change in revenue. Key changes in operating expenses were:
• Cost of revenue increased $1.2 billion or 33%, primarily reflecting increased volumes of Xbox 360 consoles and accessories sold and higher costs associated with our online offerings.
• General and administrative expenses decreased $238 million or 20%, due mainly to a decrease in legal charges and employee severance, offset in part by higher headcount-related expenses.
• Sales and marketing expenses increased $206 million or 6%, primarily reflecting increased advertising and marketing of the Xbox 360 platform, Windows Phone, and Windows and Windows Live.
• Research and development expenses increased $106 million or 5%, due mainly to higher headcount-related expenses.