prices and lower gross margins. In response to these downward pressures, the Company expects that it will continue to take pricing actions with respect to its products. Gross margins could also be affected by the Company's ability to effectively manage quality problems and warranty costs and to stimulate demand for certain of its products. The Company's operating strategy and pricing take into account anticipated changes in foreign currency exchange rates over time; however, the Company's results of operations can be significantly affected in the short term by fluctuations in exchange rates. 

Gross margin increased from 10% to 19% of net sales during 1997 compared to 1996, primarily because margins were unusually low in 1996 as a result of inventory write-downs, cancellation of component orders, and higher than usual costs associated with certain product quality problems. Further, margins in 1996 were adversely affected by aggressive pricing actions in Japan in response to extreme competitive actions by other companies, as well as price reductions in the United States and Europe across all product lines in order to stimulate demand. 

RESEARCH AND DEVELOPMENT 

Expenditures on research and development declined $182 million or 38% in 1998 compared to 1997 and declined to 5% of net sales in 1998 compared to 7% in 1997. These declines are principally due to continued restructuring actions over the last two years intended to focus the Company's research and development efforts on those projects perceived as critical to the Company's future success. These restructuring actions have led to significant reductions in research and development related headcount and the cancellation of many research and development projects. The $119 million decrease in research and development expenditures in 1997 compared to 1996 was also primarily the result of restructuring related actions. 

The Company recognizes that focused investments in research and development are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products. The Company anticipates that research and development expenditures will increase slightly in terms of absolute dollars but decrease as a percentage of net sales during fiscal 1999. The foregoing statements are forward looking. The Company's actual results could differ because of several factors, including those set forth below in the subsection entitled "Factors That May Affect Future Results and Financial Condition". 

SELLING, GENERAL, AND ADMINISTRATIVE 

Selling, general, and administrative expenditures declined $378 million or 29% in 1998 compared to 1997 and declined to 15% of net sales in 1998 from 18% of net sales in 1997. These decreases, and those experienced in 1997 as compared to 1996, are primarily the result of continuing restructuring actions that have resulted in reductions in headcount, closing of facilities, and write-down and disposal of operating assets during 1996, 1997, and 1998. Declining revenue has also led to a decrease in variable selling, general, and administrative expenses during both 1997 and 1998. Additionally,