Revenue increased primarily due to strong sales of Server and Tools products, the Xbox 360 entertainment platform, and the 2010 Microsoft Office system, offset in part by a decline in sales of PCs to consumers. Revenue for the three months ended December 31, 2011 also included Skype revenue from the date of acquisition and a favorable foreign currency impact of $225 million
Operating income decreased reflecting higher operating expenses, offset in part by revenue growth. Key changes in operating expenses were:
• Cost of revenue increased $805 million or 17%, primarily reflecting higher volumes of Xbox 360 consoles sold and increased Xbox royalty costs, higher costs associated with providing Server and Tools products and services, payments made to Nokia related to joint strategic initiatives, and increased costs associated with our online offerings, including traffic acquisition costs.
• Research and development expenses increased $186 million or 9%, due mainly to higher headcount-related expenses.
• General and administrative expenses increased $175 million or 19%, due mainly to Puerto Rican excise taxes, higher headcount-related expenses, and increased legal costs.
Headcount-related expenses increased across the company reflecting annual increases in pay and bonuses, changes in our employee compensation program, and a 4% increase in headcount from December 31, 2010. Diluted earnings per share increased reflecting increased net income and the repurchase of 174 million shares during the 12 months ended December 31, 2011.