Microsoft 2008 Annual Report Download - page 24

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Fiscal year 2008 compared with fiscal year 2007
Corporate-level expenses increased during fiscal year 2008, reflecting increased costs for legal settlements and
legal contingencies and a 12% increase in headcount-related expenses. We incurred $1.8 billion of legal charges
during the year primarily related to the European Commission fine of $1.4 billion (€899 million) as compared with
$511 million of legal charges during the prior year. The increase in headcount-related expenses reflects an
increase in headcount during the year.
Fiscal year 2007 compared with fiscal year 2006
Corporate-level expenses increased primarily driven by increased headcount-related expenses offset by
decreased costs for legal settlements and legal contingencies. Headcount-related expenses increased 25%,
driven by an increase in headcount and an increase in salaries and benefits for existing headcount. We incurred
$511 million in legal charges during fiscal year 2007, primarily related to antitrust and unfair competition consumer
class actions, intellectual property claims, and an extension payment to Sun Microsystems, Inc. under our Limited
Patent Covenant and Standstill Agreement. We incurred $1.3 billion in legal charges during fiscal year 2006 which
included settlement expense of $361 million related to our settlement with RealNetworks, Inc. as well as other
intellectual property and antitrust matters, a $351 million (€281 million) fine imposed by the European
Commission in July 2006 related to its 2004 decision in its competition law investigation of Microsoft, and an
extension payment to Sun Microsystems, Inc.
Operating Expenses
Cost of Revenue
(In millions, except percentages) 2008 2007 2006
Percentage
Change 2008
versus 2007
Percentage
Change 2007
versus 2006
Cost of revenue $11,598 $10,693 $7,650 8% 40%
As a percent of revenue 19 % 21 % 17% (2)ppt 4ppt
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 valuation adjustments, costs associated
with the delivery of consulting services, and the amortization of capitalized research and development costs
associated with software products that have reached technological feasibility. Cost of revenue increased in fiscal
year 2008, reflecting increased data center and equipment costs, online content expenses, and increased costs
associated with the growth in our consulting services, partially offset by decreased Xbox 360 costs. Xbox 360
costs decreased because of the $1.1 billion charge in fiscal year 2007 (which primarily related to the expansion of
our Xbox 360 warranty coverage), partially offset by increased Xbox 360 product costs, reflecting growth in unit
console sales. Cost of revenue increased in fiscal year 2007, primarily driven by the Xbox 360 warranty charge,
increased Windows Vista product costs, increased OSB data center costs, and costs associated with the growth
in consulting services.
Research and Development
(In millions, except percentages) 2008 2007 2006
Percentage
Change 2008
versus 2007
Percentage
Change 2007
versus 2006
Research and development $8,164 $7,121 $6,584 15 % 8%
As a percent of revenue 14% 14% 15% – ppt (1)ppt