with the expansion of our international sites. These increases were offset by an increase of $2.0 million in license and development project costs related to our collaboration with SCE that are classified as cost of revenue in our consolidated statements of income, or were capitalized on our consolidated balance sheets and will be recognized on a percentage of completion basis. Our collaboration with SCE was not in effect during fiscal 2004.



We anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue.



Sales, General and Administrative

Sales, general and administrative expenses increased $3.6 million, or 2%, from fiscal 2005 to fiscal 2006 primarily due to a $13.8 million increase in salaries and benefits related to 122 additional personnel and a $6.1 million increase in legal expenses primarily due to certain insurance reimbursements that we received during fiscal 2005 that reduced this expense, and increased litigation activity during fiscal 2006 related to 3dfx Interactive, Inc., or 3dfx, and American Video Graphics, or AVG. In addition there were increases of $2.9 million in facility expense due primarily to the expansion of our international sites and $2.5 million in other general and administrative expenses, offset by a reduction in bad debt expense. These increases were offset by a $17.2 million decrease in advertising and promotion costs, primarily associated with a reduction in certain marketing programs, tradeshow expenses, new product launches and customer samples, other marketing costs, travel related and employee recruitment expenses, and by a $4.5 million decrease in depreciation and amortization.



Sales, general and administrative expenses increased $35.6 million, or 22%, from fiscal 2004 to fiscal 2005 primarily due to an $18.4 million increase in salaries and benefits related to 88 additional personnel and a $19.4 million increase in advertising and promotion costs for tradeshows and new product launches and other marketing costs, including travel and customer samples. These increases were offset by a decrease of $1.9 million in other expenses during the period, including a reduction in bad debt expense.



Operating Expenses



We anticipate that our operating expenses will increase in the first quarter of fiscal 2007. In addition to the headcount additions that we plan to make, we will be adding the operating costs related to the acquisition of ULi, which closed on February 20, 2006. We expect that these factors will result in an increase in operating expenses in the first quarter of fiscal 2007, as compared to the fourth quarter of fiscal 2006. In addition, the first quarter of fiscal 2007 will be the first time that we include stock-based employee compensation expense under Statement of