Cost of services increased 21.5% to R$4,399.3 million in 2000 from R$3,620.0 million in 1999, which in turn represented a 25.8% increase from R$2,786.0 million in 1998. Our cost of services consists of line costs, other costs or services (such as personnel and third party expenses) and SG&A.

Line costs. Active management of carrier relations and telecommunications expenses, including investments to increase the number of points of presence and urban rings, has allowed us to reduce line costs as a percentage of revenue to 47.8% in 2000 from 49.5% in 1999. This was achieved even though the local fixed-line operators increased their standard rates during the year. Points of presence are facilities where our long-distance lines terminate and connect to the local fixed line operators' network. As more points of presence become operational via interconnection with the local fixed-line providers, we benefit from reduced interconnection costs. Where a point of presence is not installed, we have to pay additional interconnection costs to transport traffic from existing interconnection points to the point closest to the customer. The increase of data revenues also contributed to this improvement as data revenues have a lower associated line cost. We also pay facilities fees to rent circuits from other telecommunication companies in order to support interconnection with the end-user customers, mainly for data communication services. We introduced services and products that directly connect customers to our network in 2000 and 1999 and thus further reduced the line costs related to these services.

Line costs relate directly to the provision of telecommunications services and include the cost of interconnection charges paid to the fixed-line and cellular phone companies for the local interconnection to our customers. These fees are charged per minute of usage based on the origination or termination of calls. We are also required to pay a supplemental per-minute charge (Parecla Adicional de Transição, or PAT) until June 30, 2001.

Line costs for 1999 were not readily comparable to 1998 due to the previously mentioned change in the way that voice revenues were shared between us and the local phone companies prior to April 1998. As a result, there were no domestic line costs prior to April of 1998. See "Item 4. Information on the Company - B. Business Overview - Division of Revenues and Access Fees".

Other cost of services. Other costs of services consist of personnel expenses for network maintenance and expenses related to third party services and materials for installation of new clients. Other cost of services increased 12% in 2000 to R$391.7 million compared to R$349.6 million in 1999. We were successful in controlling these costs by selectively utilizing outsourcing to achieve efficiencies in the maintenance of our network. We have also benefited from the modernization of the network and the resulting economies. However, as the total network increased in 2000, there was a corresponding increase in outsourced network maintenance costs.

Other costs of services increased 2.4% to R$349.6 million in 1999 from R$341.3 million in 1998. The growth was largely attributable to the growth in revenue and the related installation of new clients.

Sales, general and administrative expenses. Our sales, general and administrative expenses, or SG&A, increased substantially to R$1,396.9 million or 20.8% of net revenue in 2000 compared to R$782.4 million or 15.1% of net revenue in 1999. This increase was primarily due to a R$260.3 million increase in bad debt expense to R$362.9 million in 2000 or 5.4% of net revenue from R$102.6 million or 2% of net revenue in 1999. During 2000, we started directly billing all Embratel customers throughout Brazil. Prior to 2000 the fixed-line and cellular phone companies billed the majority of our customers.

As we began billing these customers directly, we encountered significant problems with the quality of the customer information provided by the fixed-line companies and experienced inadequacies with our new billing system. This caused problems in the billing and subsequent collection of accounts and led to the increase in bad debt expenses. The other factor contributing to the growth in SG&A was the actual costs of billing and related customer services. We established call centers to service customer complaints and handle in-bound and out-bound service requests. The combined billing and customer service costs resulted in an increase of R$178 million in SG&A for the year.

Excluding the increase in bad debt expense and the increase in billing and the related customer service costs, SG&A would have been R$958.9 million or 14.3% of net revenue in 2000. Other than these two factors, management has taken measures to control SG&A and is constantly seeking innovative ways to reduce costs such as outsourcing and automation. However, we believe that the collection problems will continue to put pressure on SG&A in 2001. The billing and related customer care costs will also continue at this higher level.

In 2001 increased regulatory taxes such as the Fund for Universalization of Telecommunications Services, known as FUTS, which is 1% of net telecommunications revenues and the Fund for the Technological Development of Telecommunications, known as FUNTTEL, or 0.5% of net telecommunications revenues, will be reported as new SG&A costs.

SG&A for 2000 included a management fee expense to WorldCom of R$66.9 million compared to R$41.9 million in 1999. In 1999, a portion of the management fee was recorded as "Other Operating Income & Expense" in accordance with Brazilian Corporate Law, as the management fee is classified as SG&A, once the contract is formally registered as a contract with the Central Bank of Brazil. The management fee will be reduced in 2001 and following years, according to the terms of the agreement. Please see note 22 to our consolidated financial statements for a description of the terms of the management agreement.

SG&A increased to R$782.4 million in 1999 from R$533.3 million in 1998. This was due to costs incurred to prepare for the competition, which included the launch of advertising and the increase in sales and marketing. The marketing sales force increased by 40% in 1999 in response to the new competitive operating environment offset by reductions in the number of employees involved in administrative and operational activities. Bad debt expense in 1998 was R$67.5 million, or 1.7% of net revenue.