revenue from higher margin products and services, including development arrangements and royalties from game console-related products, in the comparative periods.



    Fiscal Year 2010 vs. Fiscal Year 2009



Our gross margin increased to 35.4% in fiscal year 2010 from 34.3% for fiscal year 2009.  The improvement in gross margin was driven primarily by improved yields of our 55nm products, transition to 40nm products, as well as other manufacturing cost reductions, and more favorable product mix, particularly with increased sales of higher margin MCP products.  Furthermore, during the first quarter of fiscal year 2010 our gross margin benefited from the sell-through of inventory that had previously been written down in the fourth quarter of fiscal year 2009.  This did not have a significant impact on our gross margin for the remaining quarters in fiscal year 2010.  Offsetting these improvements, we recorded a charge to cost of revenue, net of insurance reimbursement in the amount of $95.9 million in fiscal year 2010 compared to $189.3 million in fiscal year 2009 related to weak die/packing material set that was used in certain versions of our previous generation chips.



GPU Business. The gross margin of our GPU business increased during fiscal year 2010 as compared to fiscal year 2009.  This increase was primarily driven by a shift in MCP product mix toward higher margin Intel-based and AMD-based platform products.  We also recorded greater benefits to cost of revenue for insurance reimbursement received and a reduction in the warranty charge arising from a weak die/packing material set in certain versions of our previous generation products as compared to prior year.  Additionally, improving yields of our 55nm products, a transition to 40nm products, and other manufacturing cost reductions achieved during fiscal year 2010 contributed to improvements in gross margin.  Offsetting these improvements were lower ASPs in our mainstream desktop GPU products as well as in our notebook GPU products that we believe were driven by pricing pressures in the marketplace over the comparable period.



PSB. The gross margin of our PSB decreased during fiscal year 2010 as compared to fiscal year 2009.  This decrease was primarily due to a decline in ASPs caused primarily by pricing pressure resulting from the relatively slow recovery of corporate spending during fiscal year 2010 following the economic recession that began during fiscal year 2009.



CPB.  The gross margin of our CPB decreased during fiscal year 2010 as compared to fiscal year 2009. This decrease was a result of declining revenue from higher margin products and services, including development arrangements and royalties from game console-related products, in the comparative periods.



Operating Expenses

 

 Research and Development



   Fiscal Year 2011 vs. Fiscal Year 2010



Research and development expenses decreased by $60.1 million, or 7%.  The majority of the decrease was caused by stock-based compensation charges recorded during fiscal year 2010 of $90.5 million related to a tender offer that closed in March 2009. Depreciation and amortization decreased by $8.9 million due to