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.

RESEARCH AND DEVELOPMENT

The Company recognizes 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 that are central to the Company's core business strategy. Expenditures on research and development increased 21% or $66 million to $380 million in 2000 as compared to 1999. This followed a $11 million or 4% increase in 1999 as compared to 1998. Spending on R&D has remained at approximately 5% of net sales during each of the last three years. The overall increase in R&D spending over the last two years is directly related to increases in R&D headcount of approximately 13% over that time to support expanded product development efforts.

SELLING, GENERAL, AND ADMINISTRATIVE

Selling, general, and administrative expenditures increased 17% to $1,166 million in 2000 as compared to 1999 and decreased to 15% of net sales in 2000 from 16% in 1999. This increase in total expenditures resulted from higher spending for promotional and marketing activities, increased sales expenses resulting from higher net sales, and a 21% increase in combined sales, marketing, and general and administrative headcount from the end of 1999 to the end of 2000.

Selling, general, and administrative expenditures increased 10% to $996 million in 1999 as compared to 1998 and increased to 16% of net sales in 1999 from 15% in 1998. These increases are primarily the result of increased spending on marketing and promotional activities throughout 1999 and a 12% increase in combined sales, marketing, and general and administrative headcount from the end of 1998 to the end of 1999.

SPECIAL CHARGES

2000 RESTRUCTURING ACTIONS

During the first quarter of 2000, the Company initiated restructuring actions resulting in recognition of an $8 million restructuring charge. This charge was comprised of $3 million for the write-off of various operating assets and $5 million for severance payments to approximately 95 employees associated with consolidation of various domestic and international sales and marketing functions.

1999 RESTRUCTURING ACTIONS

During the fourth quarter of 1999, the Company initiated restructuring actions resulting in a charge to operations of $21 million. The net restructuring charge of $18 million recognized during the fourth quarter of 1999 reflects $3 million of excess reserves related to prior restructuring actions. The $21 million cost of these actions was comprised of $11 million for contract cancellation charges associated with the closure of the Company's outsourced data center and $10 million for contract cancellation charges related to supply and development