communications services continue to expand globally and the overall Internet advertising industry continues to expand. In May 2007, we agreed to acquire aQuantive, Inc., a digital marketing company, for approximately $6 billion in cash. We expect to complete this transaction in August 2007. This acquisition will enable us to strengthen relationships with advertisers, agencies and publishers by enhancing our advertising platforms and services. The acquisition also provides us with increased depth in building and supporting next generation advertising solutions and environments such as cross media planning and video-on-demand. 

 

Microsoft Business Division    We expect revenue to continue to increase in fiscal year 2008 due to increased customer acceptance of the 2007 Microsoft Office system. We continue to develop plans to grow revenue in new areas such as unified communications, enterprise content management, collaboration tools, business intelligence, and through our existing portfolio of Microsoft Dynamics products. 

 

Entertainment and Devices Division    We expect revenue to increase due to the increased installed base of the Xbox 360 console and from the release of Halo 3, a new Xbox 360 game. Revenue from existing mobility and embedded devices is expected to increase due to unit volume increases of Windows Mobile software driven by increased market demand for phone-enabled devices and Windows Embedded operating systems. 

 

Operating Expenses 

 

Cost of Revenue 

 

 

Cost of revenue includes manufacturing and distribution costs for products sold and programs licensed, operating costs related to product support service centers and product distribution centers, costs incurred to support and maintain Internet-based products and services, warranty costs, inventory write-downs, and costs associated with the delivery of consulting services. Cost of revenue increased in fiscal year 2007 primarily driven by the Xbox 360 charge, increased Windows Vista product costs, increased OSB data center costs, and costs associated with the growth in consulting services. Cost of revenue increased in fiscal year 2006 mainly due to a $1.64 billion increase in EDD as a result of an increase in the number of total Xbox consoles sold and higher Xbox 360 unit costs. 

 

Research and Development 

 

 

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related costs associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Research and development costs increased during fiscal year 2007 primarily due to increased headcount-related costs which grew 8%, reflecting a 9% growth in headcount and an increase in salaries and benefits for existing headcount, partially offset by a decrease in stock-based compensation expense. Research and development costs increased during fiscal year 2006 primarily due to increased development costs associated with upcoming offerings and