Edgar Filing: TELESP HOLDING CO

-- Telesp-6K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of April, 2009

Commission File Number: 001-14475

TELESP HOLDING COMPANY

(Translation of registrant's name into English)

Rua Martiniano de Carvalho, 851 - 21 andar

São Paulo, S.P.

Federative Republic of Brazil

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F x Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes No x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes No x

Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes No x

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

TELESP HOLDING COMPANY

TABLE OF CONTENTS


Item
1.		Press Release entitled "Telecomunicações de São Paulo S.A. - Telesp - Financial Statement" dated on December 31, 2008.

Financial Statements

Telecomunicações de São Paulo S.A. -TELESP

December 31, 2008 and 2007

With Report of Independent Auditors

(A free translation of the original issued in Portuguese)

TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP

Financial statements

December 31, 2008 and 2007

Contents



Report of independent auditors		1

Audited financial statements

Balance sheets		3
Statements of income		5
Statements of shareholders´ equity		6
Statements of cash flows		7
Statements of added value		8
Notes to financial statements		9

Management report		81

Report of independent auditors

(A free translation of the original report issued in Portuguese)

Shareholders, Management and Board Members

Telecomunicações de São Paulo S.A. – TELESP

São Paulo - SP

1. We have audited the accompanying balance sheets (company and consolidated) of Telecomunicações de São Paulo S.A. – TELESP as of December 31, 2008, and the related statements of income, shareholders’ equity, cash flows and value added for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements.

2. We conducted our audit in accordance with generally accepted auditing standards in Brazil which comprised: (a) the planning of our work, taking into consideration the materiality of balances, the volume of transactions and the accounting and internal control systems of Telecomunicações de São Paulo S.A. – TELESP, (b) the examination, on a test basis, of the documentary evidence and accounting records supporting the amounts and disclosures in the financial statements, and (c) an assessment of the accounting practices used and significant estimates made by management of Telecomunicações de São Paulo S.A. – TELESP, as well as an evaluation of the overall financial statement presentation.

3. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Telecomunicações de São Paulo S.A. – TELESP at December 31, 2008, and the results of its operations, its shareholders’ equity, its cash flows and value added for the year then ended, in accordance with the accounting practices adopted in Brazil.

4. We have formerly audited the financial statements (company and consolidated) for the year ended December 31, 2007, comprising the balance sheet as of that date, and the related statements of operations, of shareholders’ equity and of changes in financial position for the year then ended, in addition to supplementary information including the statements of cash flows and of value added, on which we issued an unqualified report dated February 18, 2008. As mentioned in Note 3, the accounting practices adopted in Brazil were subjected to changes effective from January 1, 2008. The financial statements for the year ended December 31, 2007, presented in conjunction with 2008 financial statements, were prepared in accordance with the accounting practices effectively adopted in Brazil through December 31, 2007 and, as allowed by CPC Technical Pronouncement No. 13 – First Time Adoption of Law No. 11638/07 and Provisional Executive Act No. 449/08, do not include any adjustments for purposes of comparison between the years.

São Paulo, February 16, 2009.
ERNST & YOUNG
Auditores Independentes
CRC-2SP015199/O-6

Luiz Carlos Marques
Accountant CRC-1SP147693/O-5

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Balance sheets

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

		Company		Consolidated

	Note	2008	2007	2008	2007

Assets
Current assets		5,870,998	5,023,155	6,459,830	5,227,685

Cash and cash equivalents	5 and 34	1,597,606	845,805	1,741,006	933,275
Trade accounts receivable, net	6	2,853,548	2,700,775	3,152,831	2,832,050
Deferred and recoverable taxes	7	925,877	1,023,430	1,032,516	1,117,982
Inventories	8	114,735	99,690	164,410	125,004
Derivatives	34	80,214	25,423	95,747	25,423
Other	9	299,018	328,032	273,320	193,951


Noncurrent assets		13,639,320	13,609,201	13,532,179	13,722,960


Trade accounts receivable, net	6	-	-	61,563	-
Deferred and recoverable taxes	7	570,017	525,383	579,807	539,371
Escrow deposits	10	678,583	532,558	711,300	534,914
Other	9	109,363	214,489	156,312	152,212

Investments	11	1,353,640	731,640	301,830	177,557

Property, plant and equipment, net	12	9,115,239	9,611,982	9,868,933	10,260,126

Intangible assets, net	13	1,812,478	1,993,149	1,852,434	2,050,320

Deferred charges	14	-	-	-	8,460

Total assets		19,510,318	18,632,356	19,992,009	18,950,645

		Company		Consolidated

	Note	2008	2007	2008	2007

Liabilities and shareholders’ equity
Current liabilities		5,399,517	5,399,923	5,846,874	5,697,223

Loans and financing	15 and 34	454,188	751,586	502,503	793,783
Debentures	16 and 34	16,339	12,357	16,339	12,357
Trade accounts payable		2,030,787	1,680,058	2,314,698	1,846,232
Taxes payable	17	847,363	837,405	926,437	908,260
Dividends and interest payable to
shareholders	18	1,153,670	996,997	1,153,670	996,997
Payroll and related accruals	19	163,372	247,916	174,672	264,841
Reserve for contingencies	20	128,451	114,952	128,488	115,884
Derivatives obligations	34	15,200	279,312	15,200	279,312
Other	21	590,147	479,340	614,867	479,557


Non-current liabilities		4,065,109	3,327,191	4,099,443	3,348,180

Loans and financing	15 and 34	1,717,352	1,001,029	1,717,352	1,003,029
Debentures	16 and 34	1,500,000	1,500,000	1,500,000	1,500,000
Taxes payable	17	40,151	38,483	47,401	38,601
Reserve for contingencies	20	567,220	523,240	570,778	525,393
Reserve for post-retirement benefit plans	32	148,770	95,426	148,770	95,426
Derivatives obligations	34	22,148	103,885	22,148	103,885
Other	21	69,468	65,128	92,994	81,846



Shareholders’ equity	22	10,045,692	9,905,242	10,045,692	9,905,242
Capital		6,575,480	6,575,198	6,575,480	6,575,198
Special goodwill reserve		63,074	-	63,074	-
Capital reserves		2,670,488	2,670,488	2,670,488	2,670,488
Legal reserve		659,556	659,556	659,556	659,556
Adjustments for equity valuation		76,232	-	76,232	-
Cumulative translation adjustments		862	-	862	-


Total liabilities and shareholders’ equity		19,510,318	18,632,356	19,992,009	18,950,645

See accompanying notes.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Statements of income

Years ended December 31, 2008 and 2007

(In thousands of reais, except earnings per share)

(A free translation of the original report issued in Portuguese)

		Company		Consolidated

	Note	2008	2007	2008	2007

Gross operating revenue	23	21,736,101	20,427,630	23,020,780	21,183,809

Deductions from gross revenue	23	(6,918,739)	(6,399,884)	(7,041,795)	(6,456,247)


Net operating revenue	23	14,817,362	14,027,746	15,978,985	14,727,562

Cost of goods and services	24	(7,919,086)	(7,580,110)	(8,726,408)	(8,029,203)


Gross profit		6,898,276	6,447,636	7,252,577	6,698,359

Operating expenses		(3,251,744)	(2,844,785)	(3,523,027)	(3,050,981)

Selling	25	(2,440,773)	(2,384,151)	(2,600,556)	(2,462,457)
General and administrative	26	(602,625)	(765,074)	(755,522)	(838,613)
Equity pick-up in subsidiaries	11	(118,056)	3,633	8,262	(2,145)
Permanent asset disposal, net	27	(26,213)	82,666	(50,555)	81,653
Other operating income expenses,
net	28	(64,077)	218,141	(124,656)	170,581



Operating income before financial
expenses,net		3,646,532	3,602,851	3,729,550	3,647,378

Financial income	29	880,512	494,006	932,554	503,453
Financial expense	29	(1,718,379)	(1,437,775)	(1,776,440)	(1,452,385)



Income before income tax and social
contribution		2,808,665	2,659,082	2,885,664	2,698,446

Income tax and social contribution	30	(1,004,694)	(937,913)	(1,081,693)	(977,486)
Reversal of interest on shareholders’
equity		616,000	642,000	616,000	642,000


Net income for the year		2,419,971	2,363,169	2,419,971	2,362,960


Number of shares outstanding at the
balance sheet date – in thousands		505,841	505,841


Earnings per share - R$		4.7840	4.6718

See accompanying notes.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Statements of shareholders’ equity

Years ended December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

					Capital		Income
					reserves		reserves

					Donations
					and
		Special			subsidies			Adjustments	Cumulative		Total
		goodwill	Share	Treasury	for	Tax	Legal	for equity	translation	Retained	shareholders’
	Capital	reserve	premium	shares	investments	incentives	reserve	valuation	adjustments	earnings	equity


Balances at December 31, 2006	6,575,198		2,678,195	(17,719)	9,065	188	659,556	-	-	705,631	10,610,114


Donations and subsidies for investments	-	-	-	-	759	-	-	-	-		759
Unclaimed dividends and interest on
shareholders’ equity , net of taxes	-	-	-	-	-	-	-	-	-	209,769	209,769
Net income for the year	-	-	-	-	-	-	-	-	-	2,363,169	2,363,169
Appropriations:	-	-	-	-	-	-	-	-	-	-
Dividends	-	-	-	-	-	-	-	-	-	(2,636,569)	(2,636,569)
Interest on shareholders’ equity	-	-	-	-	-	-	-	-	-	(545,700)	(545,700)
Witholding tax on interest on
shareholders’ equity	-	-	-	-	-	-	-	-	-	(96,300)	(96,300)


Balances at December 31, 2007	6,575.198	-	2,678,195	(17,719)	9,824	188	659,556	-	-	-	9.905.242


Merged DABR – 11/30/2008	282	63,074	-	-	-	-	-	-	-	41	63,397
Unclaimed dividends and interest on
shareholders’ equity , net of taxes	-	-	-	-	-	-	-	-	-	163,392	163,392
Opening Balance of settings as law	-	-	-	-	-	-	-			2,705	2,705
No. 11638								-	-
Adjustments for equity valuation	-	-	-	-	-	-	-	76,232	-	-	76,232
Cumulative translation adjustments	-	-	-	-	-	-	-	-	862	-	862
Net income for the year	-	-	-	-	-	-	-	-	-	2,419,971	2,419,971
Appropriations:	-	-	-	-	-	-	-	-	-
Dividends	-	-	-	-	-	-	-	-	-	(1,970,109)	(1,970,109)
Interest on shareholders’ equity	-	-	-	-	-	-	-	-	-	(523,600)	(523,600)
Witholding tax on interest on
shareholders’ equity	-	-	-	-	-	-	-	-	-	(92,400)	(92,400)


Balances at December 31, 2008	6.575.480	63.074	2.678.195	(17.719)	9.824	188	659.556	76.232	862	-	10.045.692

See accompanying notes.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP

Supplementary statements of cash flows

Years ended December 31, 2008 and 2007

(A free translation of the original report issued in Portuguese)

	Company		Consolidated

	2008	2007	2008	2007

Cash flows from operations
Net income for the year	2,419,971	2,363,169	2,419,971	2,362,960

Expenses (revenues) not affecting cash	3,440,009	3,068,052	3,630,372	3,210,254

Depreciation and amortization	2,474,609	2,543,494	2.657.903	2,634,384
Monetary and exchange variations	193,794	(85,432)	209.574	(85,432)
(Gain) loss from equity pick-up in subsidiaries	118,056	(3,633)	(8.262)	2,145
Gain /(Loss) on permanent asset disposals	26,213	(82,641)	50.555	(83,956)
Amortization of goodwill	117,724	64,738	117.724	64,738
Provision for doubtful accounts	461,760	611,030	538.625	652,692
Pension and other post-retirement benefits plans, net of
funding	53,344	20,496	53.344	20,403
Others	(5,491)	-	10.909	5,280

(Increase) decrease in operating assets:	(1,162,515)	(541,054)	(1,117,253)	(614,033)

Trade accounts receivable	(614,533)	(91,600)	(830,435)	(206,524)
Other current assets	95,918	(263,607)	(60,544)	(268,263)
Other noncurrent assets	(643,900)	(185,847)	(226,274)	(139,246)

Increase (decrease) in operating liabilities:	57,693	(223,998)	196,790)	(181,396)

Payroll and related accruals	(98,603)	61,296	(104,228)	62,608
Accounts payable and accrued expenses	179,391	138,869	263,970	247,862
Taxes other than income taxes	19,407	(62,931)	30,907	(38,206)
Other current liabilities	105,685	(339,510)	126,453	(442,202)
Accrued interest	(9,721)	20,386	(9,490)	20,386
Income and social contribution taxes	(47,497)	(21,533)	(56,061)	(17,301)
Reserve for contingencies	57,479	(39,010)	57,989	(36,102)
Other noncurrent liabilities	(148,448)	18,435	(112,750)	21,559


Cash provided by operations	4,755,158	4,666,169	5,129,880	4,777,785

Cash flows generated from (used in) investing activities

Acquisition of subsidiary, net of cash acquired	-	(599,660)	-	(426,353)
Advance for future share acquisition	(30,000)	(110,339)	-	-
Acquisition of fixed and intangible assets, net of donations	(1,753,785)	(1,620,353)	(2,102,438)	(2,038,979)
Cash from sales of fixed assets and investment	15,548	146,747	27,364	147,693
Cash received on merger	435	-	435	-


Cash used in investing activities	(1,767,802)	(2,183,605)	(2,074,639)	(2,317,639)

Cash flows generated from (used in) financing activities

Loans repaid	(997,260)	(1,631,467)	(1,041,391)	(1,634,845)
New loans obtained	1,241,864	2,623,327	1,274,364	2,635,813
Net payment on derivatives contracts	(262,345)	(112,149)	(262,669)	(112,149)
Dividends and interest on shareholders’ equity paid	(2,217,814)	(2,628,726)	(2,217,814)	(2,628,726)


Cash used in financing activities	(2,235,555)	(1,749,015)	(2,247,510)	(1,739,907)


(Increase) decrease in cash and cash equivalents	751,801	733,549	807,731	720,239


Cash and cash equivalents at beginning of year	845,805	112,256	933,275	213,036
Cash and cash equivalents at end of year	1,597,606	845,805	1,741,006	933,275


Changes in cash during the year	751,801	733,549	807,731	720,239

See accompanying notes.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP

Statements of added value

Years ended December 31, 2008 and 2007

(A free translation of the original report issued in Portuguese)

	Company		Consolidated

	2008	2007	2008	2007


Revenues	20,471,026	19,595,263	22,016,525	20,539,986
Sale of goods products and services	20,371,173	19,326,806	21,957,551	20,303,064
Other income	561,613	879,487	597,599	889,614
Allowance for doubtful accounts	(461,760)	(611,030)	(538,625)	(652,692)

Input products acquired from third parties	(7,285,645)	(6,530,573)	(8,204,473)	(6,838,670)

Cost of goods and services	(5,097,180)	(4,686,673)	(5,550,391)	(4,910,840)
Materials, energy, services of third parties and others	(2,070,610)	(1,671,249)	(2,462,078)	(1,727,707)
Loss/Recovery of assets	(41,760)	(64,081)	(77,925)	(66,040)
Others	(76,095)	(108,570)	(114,079)	(134,083)


Gross added value	13,185,381	13,064,690	13,812,052	13,701,316

Retentions	(2,592,333)	(2,608,232)	(2,775,627)	(2,699,122)

Depreciation and amortization, including goodwill	(2,592,333)	(2,608,232)	(2,775,627)	(2,699,122)

Net added value produced	10,593,048	10,456,458	11,036,425	11,002,194

Added value received upon transfer	762,456	497,639	940,816	501,308

(Gain) loss from equity pick-up in subsidiaries	(118,056)	3,633	8,262	(2,145)
Financial income	880,512	494,006	932,554	503,453


Total added value to be distributed	11,355,504	10,954,097	11,977,241	11,503,502


Distribution of added value	(11,355,504)	(10,954,097)	(11,977,241)	(11,503,502)


Payroll and related charges	(574,355)	(699,627)	(629,360)	(767,999)

Salary	(411,952)	(397,343)	(456,348)	(451,923)
Benefits	(89,293)	(102,319)	(95,194)	(110,578)
Payroll tax (FGTS)	(38,652)	(36,634)	(40,896)	(39,940)
Others	(34,458)	(163,331)	(36,922)	(165,558)
Taxes, fees and contributions	(6,794,755)	(6,823,869)	(7,128,655)	(7,185,213)

Federal tax	(2,251,571)	(2,243,748)	(2,454,034)	(2,373,556)
State tax	(4,498,031)	(4,530,949)	(4,576,328)	(4,724,120)
Municipal tax	(45,153)	(49,172)	(98,293)	(87,537)
Interest on third parties capital	(1,405,834)	(987,200)	(1,636,959)	(1,104,058)

Interest	(409,762)	(329,359)	(418,664)	(335,382)
Rent and leasing operations	(308,205)	(278,278)	(481,238)	(384,568)
Others	(687,867)	(379,563)	(737,057)	(384,108)
Dividends and interest on shareholders’ equity	(2,419,971)	(2,363,169)	(2,419,971)	(2,362,960)

Interest on shareholders’ equity	(616,000)	(642,000)	(616,000)	(642,000)
Dividends	(1,803,971)	(1,721,169)	(1,803,971)	(1,720,960)
Other	(160,589)	(80,232)	(162,296)	(83,272)

Reserve for contingencies	(160,589)	(80,232)	(162,296)	(83,272)

See accompanying notes.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

1. Operations and background

a) Controling shareholders

Telecomunicações de São Paulo S.A. - Telesp (hereinafter Telesp or Company), is headquarted at Rua Martiniano de Carvalho, 851, in the capital of the State of São Paulo. Telesp belongs to the Telefónica Group, telecommunications industry leader in Spain and present in several European and Latin American countries. The Company is controlled by Telefónica S.A., which as of December 31, 2008, holds total indirect interest of 87.95% of which 85.57% are common shares and 89.13% are preferred shares.

b) Operations

The Company´s basic business purpose is the rendering of fixed wire telephone services in the state of São Paulo under Fixed Switch Telephone Service Concession Agreement - STFC granted by the National Communications Agency (ANATEL), which is in charge of regulating the telecommunications sector in Brazil (Note 1.c). The Company has also authorizations from ANATEL, directly or through its subsidiaries, to provide other telecommunications services, such as data communication to the business market and broadband internet services under the Speedy and Ajato brand and since the second half 2007, pay TV services (i) by satellite all over the country (Telefônica TV Digital) and (ii) using MMDS technology in the cities of São Paulo, Rio de Janeiro, Curitiba and Porto Alegre.

The Company is registered with the Brazilian Securities Commission (CVM) as a public held company and its shares are traded on the São Paulo Stock Exchange (BOVESPA). The Company is also registered with the US Securities and Exchange Commission (SEC) and its American Depository Shares (ADS’s) - level II are traded on the New York Stock Exchange (NYSE).

c) The STFC concession agreement

The Company is a concessionaire of the fixed switch telephone service (STFC) to render local and domestic long-distance calls originated in Region 3, which comprises the State of São Paulo, in Sectors 31, 32 and 34, established in the General Concession Plan (PGO).

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

1. Operations and background (Continued)

c) The STFC concession agreement

The current Concession Agreement’s renewal, dated December 22, 2005, in force since January 1, 2006, awarded as an onerous title, will be valid until December 31, 2025. However, the agreement can be reviewed on December 31, 2010, 2015 and 2020. Such condition allows ANATEL to set up new requirements and goals for univerzaliation and quality of telecommunication services, according to the conditions in force by that moment.

The Concession Agreement establishes that all assets owned by the Company and which are indispensable to the provision of the services described on such agreement are considered reversible assets and are deemed to be part of the concession assets. These assets will be automatically returned to ANATEL upon expiration of the concession agreement, according to the regulation in force by that moment. On December 31, 2008, the net book value of reversible assets is estimated at R$6,929,532 (R$7,187,898 in 2007), comprised of switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment.

Every two years, during the agreement’s new 20-year period, public regime companies will have to pay a renewal fee which will correspond to 2% of its prior-year SFTC revenue, net of taxes and social contributions. Exceptionally, the first payment of this biannual fee happened on April 30, 2007 by value of R$224,760, based on the 2006 STFC net revenues. The next payment is scheduled for April 30 of 2009 based on the 2008 net revenues (note 21).

d) The telecommunications services subsidiaries and associated companies

A. Telecom S.A.

A. Telecom S.A. is a closely held, wholly-owned by the Company. It is engaged primarily in providing the telecommunication and data services and customer internal telephony network maintenance. The principal services are as follows:

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

1. Operations and Background (Continued)

d) The telecommunications services subsidiaries and associated companies (Continued)

A. Telecom S.A. (Continued)

(i)	Digital Condominium: integrated solution equipment and services for voice transmission, data and images on commercial buildings;

(ii)	Installation, maintenance, exchange and extension of new points of internal telephony wire in companies and houses

(iii)	iTelefônica, provider of free internet access;

(iv)	Speedy Wi-Fi, broadband service for wireless internet access;

(v)	Speedy Corp, broadband provider developed specially to the corporate market;

(vi)	Integrated IT solution named “Posto Informático” allowing access to Internet, connection of private networks and rent of IT equipment.

(vii)	Satellite TV services (Direct to Home – DTH) in all the country. The DTH is a special type of subscription TV service, which uses satellites for direct distribution of TV and audio signals to subscribers.

Telefônica Sistema de Televisão S.A. (formerly Lightree Sistema de Televisão S.A.):

The corporate purpose of Telefônica Sistema de Televisão S.A. (“TST”) is to provide pay-TV services in the form of Multichannel Multipoint Distribution Service (MMDS), as well as telecommunication and internet-based services.

Telefônica Data S.A. (formerly Telefônica Empresas S.A.):

The corporate purpose of Telefônica Data S.A. is to provide and operate telecommunications services, as well as to prepare, implement and deploy projects involving integrated corporate solutions, telecommunication advisory services, technical assistance services, sale, lease and maintenance of telecommunication equipment and networks.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

1. Operations and Background (Continued)

d) The telecommunications services subsidiaries and associated companies (Continued)

Aliança Atlântica Holding B.V.:

A company formed under the laws of the Netherlands in Amsterdam, whose main asset is the participation of 0.61% in Portugal Telecom. As of December 31, 2008, the Company holds a 50% interest in Aliança Atlântica and Telefónica S.A. holds the remaining 50%.

Companhia AIX de Participações

This company is engaged in both direct and indirect development of activities related to the construction, conclusion and operation of underground fiber optic networks. Currently, Telesp holds 50% interest in this company.

Companhia ACT de Participações

Companhia ACT is engaged in providing technical assistance for the preparation of Rede Refibra project, by providing studies to make it more profitable, as well as inspect the activities in progress related to the project. Currently, Telesp holds 50% interest in this company.

2. Corporate events

a) Acquisition of Telefônica Televisão Participações S.A. (formerly Navytree Participações S.A)

On October 31, 2007, ANATEL concluded the regulatory analysis of the association between Abril Group and the Company signed on October 29, 2006, and approved such operation.

Accordingly, the Company acquired 100% of the capital of Telefonica Televisão Participações S.A.(TTP), a company that owns interests in companies providing subscription TV services. Telefonica Televisão holds the following ownership interests:

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

2. Corporate events (Continued)

a) Acquisition of Telefônica Televisão Participações S.A. (formerly Navytree Participações S.A) (Continued)

	Ownership Interests

	ON	PN
Telefônica Sistemas de Televisão S.A.	100.00%	100.00%
Comercial Cabo TV São Paulo S.A.	19.90%	100.00%
Lemontree Participações S.A.	-	100.00%
TVA Sul Paraná S.A.	49.00%	100.00%
GTR-T Participações e Empr.S.A.	-	100.00%

On February 29, 2008, the Company paid up a capital increase in Telefônica Televisão with shares held in A.Telecom. With this operation, A.Telecom became a wholly-owned subsidiary of TTP.

On July 25, 2008 the Company paid up a capital increase in Telefonica Televisão with shares held in Telefonica Data S.A. With this operation, T.Data became a wholly-owned subsidiary of TTP.

On October 31, 2007, Anatel concluded the process of regulation assessment of the association between Abril Group and the Company and approved the transaction. The process is being analyzed by CADE, in competition point of view.

b) Merger of Telefônica Data Brasil Participações Ltda. and Telefônica Televisão Participações S.A.

Pursuant to the Relevant Fact published on October 21, 2008, the Company’s Board of Directors approved, on that date, the proposed corporate reorganization involving the Company, Telefônica Data do Brasil Participações Ltda. (“DABR”) and Telefônica Televisão Participações S.A. (“TTP”), as approved at the General Shareholders’ Meeting held by Telesp on November 11, 2008.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

2. Corporate events (Continued)

The transaction included the following steps:

1^st Step: DABR was merged into Telesp and, as a result, the company and its shares ceased to exist. Telesp shares then owned by DABR were directly assigned to controlling shareholder SP Telecomunicações Participações Ltda. upon merger, with the rights applicable to outstanding shares issued by TELESP remaining unchanged. DABR’s net equity included goodwill from Telesp shares, in the amount of R$185,511, which was recorded at the acquisition date based on future profits. In accordance with Law No. 9532/1997, amortization of goodwill will provide Telesp with a tax benefit of R$63,074 to be capitalized by the controlling shareholder upon realization, pursuant to CVM Instruction No. 319/1999. Other shareholders have preemptive rights in the subscription of capital increases.

b) Merger of Telefônica Data Brasil Participações Ltda. and Telefônica Televisão Participações S.A. (Continued)

The following table shows DABR’s merged equity:

		DABR

Assets
Current assets		1,021
Permanent assets
Investments		63,074

Goodwill		185,511
Provision for safeguarding shareholders’ rights		(122,437)
Fixed assets		44

Liabilities
Current liabilities		(742)


Net equity		63,397


Capital increase		282
Capital reserve		63,074
Retained earnings (*)		41


Net equity		63,397


(*) change in equity from the date of the appraisal report to the date of the merger.

2^nd Step: TTP was merged into Telesp, and, as a result, the company and its shares ceased to exist. Goodwill generated by the acquisition of this company in 2007 was recorded based on expected future profits, in the amount of R$848,307, and will provide Telesp with a tax benefit of R$288,424.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

2.	Corporate events (Continued)

The following table shows TTP’s merged equity:

		TTP

	Assets
	Current assets	1,744
	Permanent assets
	Investments	1,108,872
	Liabilities
	Current liabilities	(3)


	Net equity (*)	1,110,613

(*) Net equity in the amount of R$1,110,613 represented the Company’s investment in TTP on the merger date.

b) Merger of Telefônica Data Brasil Participações Ltda. and Telefônica Televisão Participações S.A. (Continued)

For merger purposes, the net equities of TTP and DABR were measured at book value on September 30, 2008 and October 17, 2008, respectively, by an independent appraiser whose appointment was ratified at the General Shareholders’ Meeting held by Telesp on November 11, 2008. The merged companies had no unrecorded contingent liabilities that would have been assumed by Telesp as a result of this transaction. The transaction is not subject to approval by Brazilian or foreign regulatory entities or anti-trust agencies. No withdrawal rights were exercised since the subsidiaries had no minority interests.

Telesp’s management believes that this corporate reorganization meets the Company’s and its shareholders’ interests, and will allow increased synergies, optimized managerial risks and simpler administrative and corporate structures, reducing costs as well as generating tax benefits opportunities and cash flow improvement for the Company and its shareholders.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

3. Basis of presentation of the financial statements

The accompanying individual and consolidated financial statements as of December 31, 2008 and 2007 were prepared in accordance which accounting practices adopted in Brazil, with are based on accounting practices issued from Brazilian corporate law and accounting standards and procedures established by the Brazilian Securities Commission (CVM).

On January 1, 2008, Law No. 11638, of December 28, 2007 became effective, which substantially amends Chapter XV of Law No. 6404 (Corporation Law), which addresses the financial statements. On December 3, 2008, Provisional Exective Act (MP) No. 449 was published and produced some adjustments in Law No. 6404 and of Law No. 11638.

As permitted by CVM Resolution No. 565, which approved Technical Pronouncement No. 13, issued by the Brazilian Accounting Pronouncements Committee (CPC), the Company opted for the first-time adoption of Law No. 11638 and of MP No. 449/08 in its financial statements for the year ended December 31, 2008. Accordingly, there were changes in the accounting practices as compared to the year ended December 31, 2007.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

3. Base of presentation of the financial statements (Continued)

Changes in accounting practices taken into consideration when preparing or presenting the financial statements for the year ended December 31, 2008 and the initial balance sheet for December 31, 2008 were measured and recorded by the Company based on the following accounting pronouncements issued by the Brazilian Accounting Pronouncements Committee (CPC) and approved by the Brazilian Securities Commission (CVM):

Conceptual Framework for Preparation and Presentation of the Financial Statements, as approved by CVM Resolution No. 539;
CPC 01 Impairment of Assets;
CPC 02 Effects on Changes in Exchange Rates and Financial Statement Conversions;
CPC 03 Cash Flows Statements;
CPC 04 Intangible Assets;
CPC 05 Related Party Disclosures;
CPC 06 Capital Lease;
CPC 09 Statement of Value Added;
CPC 12 Present Value Adjustment;
CPC 13 First-time adoption of Law No. 11638/07 and Provisional Executive Act No. 449/08;
CPC 14 Financial Instruments: Recognition, Measurement and Disclosure.

The initial balance sheet as of December 31, 2007 (transition date) was prepared considering the required exceptions and some of the elective exemptions permitted by CPC Technical Pronouncement No. 13, with only the exempted classification of financial instruments being relevant. Although CPC Technical Pronouncement No.14 requires the financial instruments to be classified upon initial recognition, for the purpose of first-time adoption, CPC Technical Pronouncement No. 13 allows classification on the transition date, which was the option elected by the Company.

Pursuant to the requirements for the first-time adoption of the new accounting practices, the Company presents below, for fiscal year 2008, a brief description and the amounts impacting shareholders’ equity and net income, from the company and consolidated, as these relate to the changes introduced by Law No. 11638/08 and by Provisional Executive Act No. 449/08.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

3. Base of presentation of the financial statements (Continued)

a) Capital lease: CPC Technical Pronouncement No.06

Assets under lease agreements are classified either as finance leases or operating leases. Under a finance lease, a lessor transfers substantially all the risks and rewards incident to ownership to the lessee. All other leases are classified as operating leases.

In the capacity of lessor, the Company executed lease agreements for IT equipment (“Posto Informático”) that meet the criteria of finance leases. On the date the equipment is installed, income is recognized for the present value of lease payments and matched with accounts receivable. Investments made in the acquisition of equipment are recorded as “Inventories” and recognized as lease costs upon installation. The difference between gross and net investment value is recognized as unrealized financial income and the related financial expenses are posted to each period over the lease term reflecting a periodic interest rate on the outstanding liability balance.

b) Financial instruments: CPC Technical Pronouncement No. 14 and CVM Instruction No. 475

Financial assets and liabilities should be initially classified and measured based on the following categories:

Financial assets		Valuation method
Financial assets at fair value through profit or loss		Fair value
Investments held to maturity		Amortized cost
Loans and receivables		Amortized cost
Available for sale		Fair value

Financial liabilities

Financial liabilities at fair value through profit or		Fair value
loss
Financial liabilities not at fair value		Amortized cost

Financial assets and liabilities recognized on the balance sheet for December 31, 2008 are shown by category in Note 34.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

3. Base of presentation of the financial statements (Continued)

b) Financial instruments: CPC Technical Pronouncement No. 14 and CVM Instruction No. 475 (Continued)

Financial assets and liabilities should be initially measured at fair value. The fair value of financial assets and liabilities is determined based on (i) the price quoted in an active market or, if an active market does not exist, (ii) valuation techniques that allow estimating fair value on the transaction date, considering arm’s length transactions between knowledgeable and willing parties.

Financial assets and liabilities are subsequently measured at fair value or amortized cost. Amortized cost corresponds to (i) the initial carrying amount of financial assets or liabilities (ii) less amortizations of principal and (iii) more or less interest accrued under the effective interest method.

The effects of subsequent measurement of financial assets and liabilities are directly posted to the net income for the year as financial income or expenses, except for financial assets available for sale, whose subsequent measurement is reflected under shareholders’ equity as adjustments for equity valuation (Note 11).

Derivative financial instruments are classified as financial assets or liabilities at fair value through profit and loss, except where they meet the criteria for hedge instruments.

Derivatives aimed at protecting specific market risks (foreign currency and interest rate risks) and considered to be effective are classified as fair value hedges. In this category both the derivative and the hedged item are adjusted to fair value at each balance sheet date.

c) Present value adjustment: CPC Technical Pronouncement No. 12

Some long-term assets and liabilities must be initially measured at the discounted present value. The Company adopted this concept for ICMS assets generated by the acquisition of fixed assets, to be realized over 48 months.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

3. Base of presentation of the financial statements (Continued)

d) Cumulative translation adjustments: CPC Technical Pronouncement No. 02

Foreign exchange gains and losses arising from the translation into reais of foreign investments accounted for under the equity method of accounting using a different functional currency must be recorded under the parent company’s shareholders’ equity as Cumulative Translation Adjustments. The Company has investments in Aliança Atlântica (jointly-owned subsidiary) head quartered in the Netherlands.

The effects of the first-time adoption of Law No. 11638/07 and Provisional Executive Act No. 449/08 on net income and shareholders’ equity for 2008 are shown below:

			Company /
	Net income		Consolidated

			Shareholders’
Effects of first-time adoption	Company	Consolidated	equity


Balances per 12/31/2008 financial
statements	2,419,971	2,419,971	10,045,692


Effects of Law No. 11638/07	(43,639)	(43,639)	79,511


Lease (lessor and lessee) (Note 3.a)	-	(33,981)	11,233
Adjustments for equity valuation	-	-	115,504
(Note 3.b)
Financial instruments (Note 3.b)	(11,357)	(11,236)	19,092
Discount to present value of long-term
assets (Note 3.c)	(1,056)	(2,946)	(31,997)
Cumulative translation adjustments	-	-	1,306
(Note 3.d)
Additions to property, plant and	289	304	(289)
equipment
Equity pick-up(*)	(35,735)	-	-
Other	-	-	(10)
Deferred taxes	4,220	4,220	(35,328)


Balances before adoption of Law
No. 11638/07	2,463,610	2,463,610	9,966,181

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

3. Base of presentation of the financial statements (Continued)

d) Cumulative translation adjustments: CPC Technical Pronouncement No. 02 (Continued)

(*) Breakdown of equity pick-up		Amount


Discount to present value of long-term assets		(1,890)
Additions to property, plant and equipment		15
Lease (lessor and lessee)		(33,981)
Financial instruments		121


Total		(35,735)

Additionally, due to the elimination of the non-operating income/expenses account by Provisional Executive No. 449/08, the Company reclassified R$8,376 and R$131,596 reported in the financial statements for the years ended December 31, 2008 and 2007, respectively, to other operating income/expenses accounts and net proceeds from the sale of fixed assets and investment, as well its disclosure in note.

The approval of the financial statements conclusion occurred in an Executive Committee Meeting on February 12, 2009.

Assets and liabilities are classified as “current” when their realization or liquidation will probably occur in the next twelve months. Otherwise, they will be classified as non-current assets and liabilities.

Accounting estimates are considered for the financial statements preparation process. Such estimates are based on objective and subjective factors according to management’s judgment for the appropriate amounts to be recorded in the financial statements.

Transactions which involve estimates mentioned above may result in different amounts when realized in subsequent periods due to inaccurate results regarding the estimate process. The Company revises its estimation and assumptions periodically.

The consolidated financial statements include the accounts and transactions of the following directly and indirectly wholly-owned subsidiaries and jointly controlled affiliates which are proportionally consolidated, according to the corporate participation described below:

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

3. Base of presentation of the financial statements (Continued)

d) Cumulative translation adjustments: CPC Technical Pronouncement No. 02 (Continued)

Subsidiaries	2008	2007


A.Telecom S.A.	100%	100%
Telefonica Data S.A.	100%	100%
Aliança Atlântica Holding B.V.	50%	50%
Companhia AIX de Participações	50%	50%
Companhia ACT de Participações	50%	50%
Telefônica Televisão Participações S.A.	-	100%
Telefônica Sistemas de Televisão S.A.	100%	100%

Due to the acquisition of Telefônica Televisão Participações (note 2.a), the Company’s consolidate results for the year ended as of December 31, 2007 include the consolidate results of TTP from October to December 2007.

In consolidation, all assets, liabilities, revenues and expenses resulting from intercompany transactions and equity holdings among the consolidated companies have been eliminated.

For the financial statements as of December 31, 2007, certain accounts were reclassified to allow adequacy and consistency thereof with the current period. However, the amounts of these reclassifications are immaterial in relation to the financial statements taken as whole.

4. Summary of principal accounting practices

a) Cash and cash equivalents: include cash, positive current account balances, and investments redeemable 90 days from the balance sheet dates basically comprising CDB (Bank Deposit Certificate) indexed to CDI (Interbank Deposit Certificate) with quick liquidity and unlikely change in market value.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

4. Summary of principal accounting practices (Continued)

b) Trade accounts receivable, net: are stated at the rendered service value according to the contracted conditions adjusted by the estimated amount of eventual losses. This caption also includes accounts receivable from services rendered but not billed at the balance sheet date. Allowance for doubtful account is recorded in order to cover eventual losses and and mainly considers the average default rate. This item, in the consolidated financial statements, includes finance lease receivables (lessor) as mentioned in Note 3.a.

c) Foreign currency transactions: transactions in foreign currencies are recorded at the prevailing exchange rate at the date of the transaction. Foreign currency denominated assets and liabilities are remeasured using the exchange rate at the balance sheet date. Exchange differences resulting from foreign currency transactions were recognized in financial income and financial expenses.

d) Inventories: are stated at average acquisition cost, net of allowance for reduction to realizable value. This corresponds to items for use, maintenance or resale, and the latter includes equipment for finance lease operations (Note 3.a)

e) Investments: wholly, jointly-owned subsidiaries and affiliated are accounted for under the equity method. Other corporate investments are considered to be available-for-sale financial assets valued at market value based on the latest stock exchange rate for the year (Note 3.b). On the consolidated financial statements, all the investments accounted for an equity method are consolidated. The subsidiaries are consolidated as of December 31, of each period.

f) Property, plant and equipment: this item is measured at acquisition and/or construction cost, less accumulated depreciation and any impairment losses, if applicable. Asset costs are capitalized until the asset becomes operational.

Costs incurred after the asset becomes operational are immediately expensed, under the accrual method of accounting. Expenses that represent asset improvement (expanded installed capacity or useful life) are capitalized.

Depreciation is calculated under the straight-line method based on the estimated useful lives of the assets and as determined by the Public Telecommunications Service regulations. The main depreciation rates are shown in Note 12.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

4. Summary of principal accounting practices (Continued)

g) Intangible assets: these are stated at acquisition and/or construction cost, less accumulated depreciation and any impairment losses, if applicable.

Intangible assets with finite lives are amortized on the straight-line basis over their estimated useful life. Intangible assets with indefinite useful lives are not amortized but tested for impairment annually or when there is an indication that their carrying amount may not be recovered.

Goodwill arising from the acquisition of investments and recorded based on future profits will be treated as intangible assets with indefinite useful lives. Until December 31, 2008, amortization of goodwill was based on results estimated for 10-year periods; goodwill will no longer be amortized starting January 1, 2009, being thus subjected to annual impairment testing (Note h).

h) Asset recoverability test: Management conducts annual reviews of the net book value of its assets in order to evaluate events or changes in economic, operating or technological circumstances that may indicate asset impairment or loss in its carrying amount. In cases where the net book value exceeds the realizable value an impairment provision is recognized to adjust the asset’s net book value to its realizable value.

i) Income tax and social contribution: corporate income tax and social contribution are accounted for on the accrual basis and are presented net of prepaid taxes, paid during the year. Deferred taxes assets and liabilities attributable to temporary differences and tax loss carry-forwards are recognized as deferred tax assets and liabilities, if applicable, on the assumption of future realization within the parameters established by CVM Deliberation 273/1998 and CVM Instruction No. 371/2002.

j) Reserves for contingencies, net: it is made based on management’s judgment and it is composed by several administrative and legal proceedings. It is recognized for those cases in which an unfavorable outcome is considered probable at the balance sheet date. This reserve is presented net of the corresponding escrow deposits and classified as labor, civil or tax contingency (Note 20).

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

4. Summary of principal accounting practices (Continued)

k) Revenue recognition: revenues related to Telecommunications services rendered are recorded on the accrual basis. Revenue unbilled from the date of the last billing until the date of the balance sheet is recognized in the month the service is rendered.

Revenue from the sales of cards for public phones is deferred and recognized in income as the cards are utilized based on comsumption estimates.

Income from equipment under lease agreements classified as finance leases is recognized upon equipment installation, when the risk is actually transferred. Income is recognized for the present value of lease payments (Note 3.a).

l) Concession agreement’s renewal fee: it is a fee which will be paid every two years, during the 20-year period that the concession agreement is in force, equivalent to 2% of its prior-year SFTC net revenue, according to the contract. Expenses are proportionally recognized during corresponding 24 months (Note 21).

m) Financial income (expense), net: represent interest, monetary and exchange variations arising from financial investments, debentures, loans and financing obtained and granted, as well as the results of derivative operations (hedge).

Declared interest on shareholders’ equity is included in these accounts, however for disclosure purposes; the amount declared in the year was reversed to retained earnings in equity.

n) Pension and other post-retirement benefit: the Company sponsors individual and multiemployer post-retirement and health assistance plans for its employees. Actuarial liabilities, with characteristics of defined benefit, were calculated using the projected unit credit method, as provided for by CVM Deliberation No. 371/2000. Other considerations related to such plans are described in Note 32.

o) Financial instruments: are measured at fair value or amortized cost in the December 31, 2008 financial statements, as described in Note 3.b. For the year ended December 31, 2007, loans, financing and derivative instruments are shown at contractually agreed rates.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

4. Summary of principal accounting practices (Continued)

p) Earnings per share: it is calculated based on net income for the year and the total number of shares outstanding at the balance sheet date. The difference between the Company’s and the consolidated net income for the year ended December 31, 2007, in the amount of R$209, refers to donations directly recorded as capital reserves at subsidiary A. Telecom S.A., accounted for under the equity method by the Company (Note 11).

5. Cash and cash equivalents

	Company		Consolidated

	2008	2007	2008	2007


Bank accounts	12,885	534,887	31,993	584,627
Short-term investments	1,584,721	310,918	1,709,013	348,648


Total	1,597,606	845,805	1,741,006	933,275

Short-term investments are basically CDB (Bank Deposits Certificate) and indexed under CDI (Certificate for Inter-bank Deposits) rate variation, which are readily liquid and maintained with reputable financial institutions.

6. Trade accounts receivable, net

	Company		Consolidated

	2008	2007	2008	2007

Billed amounts	2,269,588	2,169,386	2,608,012	2,212,396
Accrued unbilled amounts	1,233,242	1,214,858	1,374,080	1,353,244

Gross accounts receivable	3,502,830	3,384,244	3,982,092	3,565,640

Allowance for doubtful accounts	(649,282)	(683,469)	(767,698)	(733,590)


Total	2,853,548	2,700,775	3,214,394	2,832,050


Current	1,888,812	1,827,535	2,248,736	2,115,867
Past-due – 1 to 30 days	508,523	498,767	530,238	500,048
Past-due – 31 to 60 days	197,231	158,354	195,213	146,483
Past-due – 61 to 90 days	111,791	110,894	113,101	70,224
Past-due – 91 to 120 days	110,594	67,582	110,720	67,199
Past-due – more than 120 days	685,879	721,112	784,084	665,819

Total	3,502,830	3,384,244	3,982,092	3,565,640


Current	2,853,548	2,700,775	3,152,831	2,832,050
Non-current	-	-	61,563	-

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

6. Trade accounts receivable, net (Continued)

Subsidiary A.Telecom offers “Posto Informático”, a product that consists in the lease of IT equipment to small- and medium-sized companies for fixed installments received over the agreed term. Considering the related contractual conditions, the Company classified this product as “Finance Lease” in its December 31, 2008 financial statements (Note 3.a).

The Consolidated accounts receivable as of December 31, 2008. reflects the following effects:

		2008

Present value of minimum payments receivable		139,214
Unrealized financial income		20,154

Gross investment in finance lease receivables at year-end		159,368
Allowance for doubtful accounts		(26,159)

Financial Leases receivable, net		133,209

Current amount		77,651
Noncurrent amount		61,563

Aging list of financial leases receivable:

	Gross	Present
Year	investment	value


Falling due within one year	77,651	77,651
Falling due within five years	81,717	61,563


Total	159,368	139,214

There are neither unsecured residual values that produce benefits to the lessor nor contingent payments recognized as revenues during the year.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

7. Deferred and recoverable taxes

	Company		Consolidated

	2008	2007	2008	2007

Withholding taxes	63,171	38,328	77,371	47,657
Recoverable income tax and social contribution	10,538	147,648	36,754	150,991

Deferred taxes	1,022,787	956,874	1,027,879	996,348

Tax loss carry-forwards – Income tax	-	-	3,305	5,996
Tax loss carry-forwards – Social	-	-	1,787	1,949
contribution tax
Reserve for contingencies	340,850	302,103	340,850	302,377
Post-retirement benefit plans	50,581	32,445	50,581	32,445
Allowance for doubtful accounts	94,691	86,137	94,691	95,783
Allowance for reduction of inventory to
recoverable value	28,909	29,943	28,909	29,943
Merger tax credit (7.2)	132,515	100,504	132,515	100,504
Income tax and Social contribution on other
temporary differences	375,241	405,742	375,241	427,351

ICMS (state VAT) (*)	396,706	399,509	456,192	449,759
Other	2,692	6,454	14,127	12,598


Total	1,495,894	1,548,813	1,612,323	1,657,353

Current	925,877	1,023,430	1,032,516	1,117,982
Non-current	570,017	525,383	579,807	539,371

(*) Refers to credits on the acquisition of property, plant and equipment items, available for offset against VAT obligations in 48 months.

7.1. Deferred income and social contribution taxes

The Company recognized deferred income and social contribution tax assets considering the existence of taxable income in the last five fiscal years and the expected generation of future taxable profit discounted to present value based on a technical feasibility study, approved by the Board of Directors on December 19, 2008, as provided for in CVM Instruction No. 371/2002.

Company estimates the realization of the deferred taxes as of December 31, 2008 as follows:

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

7. Deferred and recoverable taxes (Continued)

7.1. Deferred income and social contribution taxes (Continued)

Year	Company	Consolidated


2009	499,985	502,119
2010	212,139	215,097
2011	135,675	135,675
2012	101,904	101,904
Thereafter	73,084	73,084


Total	1,022,787	1,027,879

The recoverable amounts above are based on projections subject to changes in the future.

Tax losses and temporary differences in the respective amounts of R$62,512 and R$35,379 were not recognized by the subsidiaries at December 31, 2008 in view of the unlikely generation of future taxable profits.

7.2. Merger tax credits

In October 2008, the merger of DABR into the Company through a corporate reorganization process mentioned in Note 2.b resulted in the recognition of merged tax credits arising from goodwill recorded by DABR in connection with the investment made in Telesp in 2006.

Additionally, the Company has tax credits arising from corporate reorganization processes following corporate investments acquired in prior years, as shown in the table below.

The Company’s accounting records for corporate and fiscal purposes include specific (merged) goodwill and reserve accounts, and the related amortization, reversal of provision and tax credit realization are as follows:

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

7. Deferred and recoverable taxes (Continued)

7.2. Merged tax credits (Continued)

		2008		2007

			Spanish/	Spanish/
Company/Consolidated	DABR		Figueira	Figueira


Balance sheet

Goodwill, net of accumulated amortization	176,236		213,514	295,600
Provision for safeguarding shareholders’ rights, net	(116,316)		(140,919)	(195,096)
of reversals

Net amount – tax credit	59,920		72,595	100,504


Statement of income

Goodwill amortization for the year	(9,276)		(82,086)	(82,086)
Reversal of provision for safeguarding shareholders’	6,122		54,177	54,177
rights for the year
Tax credit for the year	3,154		27,909	27,909

Effect on net income for the year	-		-	-

For calculation of the tax credits resulting from acquisition, income and social contribution tax rates are 25% and 9%, respectively.

As shown above, goodwill amortization, net of provision reversal and of the corresponding tax credit, had no impact on P&L.

For presentation purposes, the net amount of R$132,515 (R$92,863 under non-current assets and R$39,652 under current assets), basically representing merger tax credit, was classified in the balance sheet as deferred and recoverable taxes. Goodwill amortization and provision reversal are recognized in the accounting records as operating income and expenses, and the related tax credit is recognized as provision for income and social contribution taxes.

The tax benefit generated by the amortization of DABR goodwill will be reversed to the Company’s controlling shareholder, SP Telecomunicações Holding Ltda., through a capital increase with the issuance of the Company’s shares. Other shareholders will be entitled to preemptive rights in the subscription of capital increases that may occur.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

8.	Inventories

		Company		Consolidated

		2008	2007	2008	2007

	Consumption materials	128,948	115,011	129,600	115,217
	Resale items (*)	57,192	59,078	106,734	87,786
	Public telephone cards	13,461	13,447	13,461	13,447
	Scraps	161	222	161	222
	Allowance for reduction to net
	recoverable value
	and obsolescence	(85,027)	(88,068)	(85,546)	(91,668)

	Total current	114,735	99,690	164,410	125,004

(*) Includes the inventory of IT equipaments (note 4.d)

The allowance for reduction to recoverable value and obsolescence takes into account timely analyses carried out by the Company.

9.	Other assets

		Company		Consolidated

		2008	2007	2008	2007

	Advances to employees	7,685	6,187	8,207	7,313
	Advances to suppliers	16,814	20,688	33,567	20,852
	Prepaid expenses	66,157	80,596	66,699	81,710
	Receivables from Barramar S.A. (a)	-	-	62,526	60,116
	Related Parties receivables (Note 31) (b)	228,372	368,284	153,285	100,731
	Amounts linked to National Treasury	11,289	10,495	11,289	10,495
	securities
	Other assets	78,064	56,271	94,059	64,946


	Total	408,381	542,521	429,632	346,163


	Current	299,018	328,032	273,320	193,951

	Non current	109,363	214,489	156,312	152,212

(a) Refers to receivables from Barramar S.A. recorded by the Company net of allowance for losses.

(b) Refer to current and non current amounts.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

10. Escrow deposits

	Company		Consolidated

	2008	2007	2008	2007


Civil litigation	246,456	161,250	246,500	161,287
Tax litigation	223,465	244,627	254,571	246,863
Labor claims	165,221	75,985	165,306	76,068
Freeze of assets by court order	43,441	50,696	44,923	50,696


Total non-current	678,583	532,558	711,300	534,914

The amounts presented above refer to escrow deposits for those cases in which an unfavorable outcome is considered possible or remote.

Those deposits related to provisions are presented in Note 20.

11. Investments

	Company		Consolidated

	2008	2007	2008	2007

Investments carried under the equity method	1,109,513	635,336	-	-

Aliança Atlântica Holding B.V.	64,143	57,234	-	-
A. Telecom S.A.	610,769	432,016	-	-
Companhia AIX de Participações	58,895	56,057	-	-
Companhia ACT de Participações	16	23	-	-
Telefônica Empresas S.A.	206,445	12,951	-	-
Telefônica Televisão Participações S.A.	-	77,055	-	-
Telefônica Sistemas de Televisão S.A.	169,245	-	-	-

Investments in associates	36,313	-	36,313	28,051

GTR Participações e Empreendimentos S.A.	1,476	-	1,476	2,047
Lemontree Participações S.A.	9,608	-	9,608	6,130
Comercial Cabo TV São Paulo S.A.	21,215	-	21,215	13,345
TVA Sul Paraná S.A.	4,014	-	4,014	6,529

Other Investments (*)	207,814	96,304	265,517	149,506

Portugal Telecom	157,823	75,362	210,431	126,509
Portugal Multimédia	14,436	6,704	19,531	8,759
Other investments	35,555	14,238	35,555	14,238


Total	1,353,640	731,640	301,830	177,557

(*) In 2008, other investments are measured at market value, as mentioned in Note 4.e, and in 2007 these are stated at cost.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

11. Investments (Continued)

The main accounting information of subsidiaries and jointly-controlled subsidiaries at December 31, 2008 and 2007 was as follows:

			2008				2007

		Capital
		reserves/
		Adjustme	Retained				Retained
		nts for	earnings				earnings
	Paid-in	equity	(accumulate	Net	Paid-in	Capital	(accumulated	Net
	capital	valuation	d losses)	equity	capital	reserves	losses)	equity


Aliança Atlântica	130,095	(17,259)	15,450	128,286	104,343	-	10,125	114,468
A. Telecom	589,969	1,197	19,603	610,769	414,969	209	16,838	432,016
Companhia AIX	460,929	-	(343,138)	117,791	460,929	-	(348,815)	112,114
Companhia ACT	1	-	31	32	1	-	45	46
Telefônica Data	460,025	1,139	(254,719)	206,445	210,025	1,137	(198,211)	12,951
TTP	-	-	-	-	82,544	-	(5,489)	77,055
TST	255,847	-	(86,602)	169,245	-	-	-	-

Shares – thousand		2008			2007

	Subscribed		%	Subscribed		%
	and paid-in	Company	ownership	and paid-in	Company	ownership
Quantity of shares	shares	shares	interest	shares	shares	interest


Aliança Atlântica	88	44	50%	88	44	50%
A. Telecom	947,258	947,258	100%	673,820	673,820	100%
Companhia AIX	298,562	149,281	50%	298,562	149,281	50%
Companhia ACT	1	0,5	50%	1	0,5	50%
Telefonica Data	473,372	473,372	100%	215,640	215,640	100%
TTP	-	-	-	84,544	84,544	100%
TST	107,923	107,923	100%	-	-	-

Investments in affiliates accounted for under the equity method derive from TTP, which was merged by the Company, as mentioned in Note 2.b. Significant information on these affiliate companies, are as follows:

			Quantity of shares (thousand)

								% ownership
			Total shares			Company shares		interest

	Net								Voting
Affiliates	equity	Ordinary	Preferred	Total	Ordinary	Preferred	Total	Total	shares

GTR Participações e
Empreendimentos	2,214	878	1,757	2,635	-	1,757	1,757	66.7%	0.0%
S.A
Lemontree	14,412	124,839	249,682	374,521	-	249,682	249,682	66.7%	0.0%
Participações S.A.
Comercial Cabo TV
São Paulo S.A.	35,387	12,282	12,282	24,564	2,444	12,282	14,726	59.9%	19.9%
TVA Sul Paraná S.A.	5,388	13,656	13,656	27,312	6,691	13,656	20,347	74.5%	49.0%

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

11. Investments (Continued)

The Company and Consolidated equity method in subsidiaries and affiliates is as follows:

	Company		Consolidated

	2008	2007	2008	2007


Aliança Atlântica (a)	5,184	963	-	(4,161)
A. Telecom	1,459	68,559	-	-
Companhia AIX de Participações	2,838	(7,639)	-	-
Companhia ACT de Participações	3	(3)	-	-
Telefonica Data S.A.	(56,447)	(52,758)	-	-
Telefônica Televisão Participações S.A.	155	(5,489)	-	-
Telefônica Sistemas de Televisão S.A.	(79,510)	-	-	-
GTR Participações e Empreendimentos
S.A	(571)	-	(571)	78
Lemontree Participações S.A.	3,479	-	3,479	495
Comercial Cabo TV São Paulo S.A.	7,869	-	7,869	1,152
TVA Sul Paraná S.A.	(2,515)	-	(2,515)	291


	(118,056)	3,633	8,262	(2,145)

(a) The net income posted by Aliança Atlântica in 2007 refers to equity method on foreign exchange fluctuation of net equity for that year. In 2008 the foreign exchange fluctuation is recorded as Cumulative Translation Adjustment under Net Equity (Note 3.d).

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

12. Property, plant and equipment - net

Company

2008

2007

Annual

depreciation

Accumulated

Net book

Accumulated

Net book

rate %

Cost

depreciation

value

Cost

depreciation

value

Property, plant and equipment

in service

41,606,822

(33,037,815)

8,569,007

40,423,161

(31,099,432)

9,323,729

Switching and transmission

equipment

12.50

17,491,901

(15,257,495)

2,234,406

16,947,453

(14,393,743)

2,553,710

Transmission equipment,

overhead, underground and

building cables, teleprinters,

PABX, energy equipment

and furniture

10.00

12,457,496

(10,078,157)

2,379,339

12,195,350

(9,574,331)

2,621,019

Transmission equipment -

modems

66.67

1,320,881

(952,581)

368,300

1,112,425

(819,292)

293,133

Underground and undersea

cables, poles and

towers

5.00 to 6.67

621,140

(407,765)

213,375

616,363

(377,256)

239,107

Subscriber, public and booth

equipment

12.50

2,182,992

(1,742,651)

440,341

2,104,393

(1,571,930)

532,463

IT equipment

20.00

589,324

(505,389)

83,935

571,623

(486,853)

84,770

Buildings and underground

cables

4.00

6,594,697

(4,013,956)

2,580,741

6,533,607

(3,800,216)

2,733,391

Vehicles

20.00

52,149

(37,455)

14,694

59,471

(39,136)

20,335

Land

228,117

228,455

Other

4.00 to 20.00

68,125

(42,366)

25,759

54,021

(36,675)

17,346

Property, plant and equipment

in progress

546,232

288,253

Total

42,153,054

(33,037,815)

9,115,239

40,711,414

(31,099,432)

9,611,982

Average annual depreciation

rates - %

10.27

10.08

Assets fully depreciated

20,865,539

18,357,081

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

12. Property, plant and equipment - net (Continued)

Consolidated

2008

2007

Annual

depreciation

Accumulated

Net book

Accumulated

Net book

rate%

Cost

depreciation

value

Cost

depreciation

value

Property, plant and

equipment in service

42,876,998

(33,604,274)

9,272,724

41,417,128

(31,516,613)

9,900,515

Switching and transmission

equipment

12.50

17,529,850

(15,268,465)

2,261,385

16,968,629

(14,402,569)

2,566,060

Transmission equipment,

overhead, underground

and building cables,

teleprinters, PABX, energy

equipment and furniture

10.00

12,690,391

(10,121,251)

2,569,140

12,340,271

(9,598,798)

2,741,473

Transmission equipment -

modems

66.67

1,381,539

(973,066)

408,473

1,264,062

(844,834)

419,228

Underground and undersea

cables, poles and towers

5.00 to 6.67

634,323

(411,669)

222,654

630,139

(380,619)

249,520

Subscriber, public and

booth equipment

12.50

2,245,185

(1,780,556)

464,629

2,166,427

(1,601,088)

565,339

IT equipment

20.00

651,826

(547,170)

104,656

677,165

(526,313)

150,852

Buildings and underground

cables

4.00

6,596,896

(4,015,696)

2,581,200

6,535,806

(3,801,899)

2,733,907

TV equipment

8.00 to 33.33

712,437

(354,922)

357,515

412,402

(242,198)

170,204

Vehicles

20.00

53,568

(38,572)

14,996

60,801

(40,209)

20,592

Land

228,117

228,455

Other

4.00 to 20.00

152,866

(92,907)

59,959

132,971

(78,086)

54,885

Provision for losses

(11,807)

(5,706)

Property, plant and

equipment in progress

608,016

365,317

Total

43,473,207

(33,604,274)

9,868,933

41,776,739

(31,516,613)

10,260,126

Average annual depreciation

rates - %

10.64

10.23

Assets fully depreciated

21,204,279

18,413,172

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

13. Intangible assets, net

Company

2008

2007

Annual

depreciation

Accumulated Net book

Accumulated

Net book

rate %

Cost

depreciation

value

Cost

depreciation

value

Software

20.00

2,349,867

(1,594,563)

755,304

2,119,150

(1,324,055)

795,095

Customer Portifolio (a)

10.00

72,561

(43,537)

29,024

72,561

(36,281)

36,280

Other

10.00 to 20.00

184,563

(149,900)

34,663

158,508

(119,841)

38,667

Companhia Aix de Participações (b)

(17,470)

17,470

(17,470)

8,735

(8,735)

TS Tecnologia da Informação Ltda.

945

945

Spanish and Figueira goodwill

(merged from TDBH) (c)

301,276

(161,319)

139,957

301,276

(107,142)

194,134

Santo Genovese Participações

119,820

(47,928)

71,892

119,820

(35,945)

83,875

Ltda. (d)

Telefonica Televisão Participações

848,308

(67,615)

780,693

860,203

(7,315)

852,888

S.A. (e)

Total

3,859,870

(2,047,392)

1,812,478

3,614,993

(1,621,844)

1,993,149

Average annual depreciation rates

19.93

19.80

Assets fully depreciated

995,877

663,741

Consolidated

2008

2007

Annual

depreciation

Accumulated

Net book

Accumulated

Net book

rate %

Cost

depreciation

value

Cost

depreciation

value

Software

20.00

2,520,983

(1,732,047)

788,936

2,280,556

(1,443,857)

836,699

Customer Portifolio (a)

10.00

72,561

(43,537)

29,024

72,561

(36,281)

36,280

Other

10.00 to 20.00

195,443

(154,605)

40,838

169,475

(123,975)

45,500

Ajato Telecomunicações Ltda.

149

TS Tecnologia da Informação Ltda.

945

945

Spanish and Figueira goodwill

(merged from TDBH) (c)

301,276

(161,319)

139,957

301,276

(107,143)

194,133

Santo Genovese Participações

119,820

(47,928)

71,892

119,820

(35,945)

83,875

Ltda. (d)

Telefonica Televisão Participações

848,308

(67,615)

780,693

860,203

(7,315)

852,888

S.A. (e)

Total

4,059,485

(2,207,051)

1,852,434

3,804,836

(1,754,516)

2,050,320

Average annual depreciation rates

19.97

19.81

Assets fully depreciated

1,114,804

676,059

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

13. Intangible assets, net (Continued)

(a) Acquisition of IP network customer portfolio from Telefônica Data in December 2002. This was stated as Deferred Assets until 2007.

(b) The negative goodwill on the acquisition of shares of Companhia AIX de Participações, recorded at the parent company, was allocated to Deferred Income in the consolidated financial statements, as defined in article 26 of CVM Instruction No. 247/96. Amortization was completed in 2008 based on estimated future profits.

(c) Goodwill on the spin-off of Figueira, which was merged into the Company following the merger of Telefônica Data Brasil Holding S.A. (TDBH) in 2006.

(d) Goodwill on the acquisition of control over Santo Genovese Participações Ltda. (controlling shareholder of Atrium Telecomunicações Ltda.), on December 24, 2004, has been amortized on the straight-line basis over 10 years, based on expected future profits.

(e) Goodwill on the acquisition of TTP (see Note 2.b) is based on expected future profits and is made up of total acquisition cost, R$913,747, less the book value of the investment at the time, R$53,544. In 2008, a price adjustment of R$11,895 brought goodwill down to R$848,308.

Changes in intangible assets - Consolidated		2008


Balance in 2007		2,050,320

Software acquisitions		266,395
Goodwill acquisitions – Ajato		149
Price adjustment of TTP		(11,895)
Amortization		(452,535)


Balance in 2008		1,852,434

14. Deferred assets

In accordance with Provisional Executive Act No. 449/08, deferred assets cease to exist with all the items being valued and reclassified as Intangible Assets. Deferred expenses of subsidiaries AIX Participações and ACT Participações were written off to retained earnings on the opening balance for the year ended December 31, 2008, and the 2007 comparative amounts were R$8,460.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

15. Loans and financing

Company/Consolidated				*Balance in 2008 ()**

		Annual			Long-
	Currency	interest rate	Maturity	Current	term	Total



Loans and financing - BNDES	URTJLP	TJLP+3.73%	Until 2015	19,283	1,689,521	1,708,804
Mediocrédito	US$	1.75%	2014	7,594	27,831	35,425
Untied Loan – JBIC	JPY	Libor + 1.25%	2009	129,173	-	129,173

Resolution 2770	JPY	0.50% to 5.78%	2009	213,339	-	213,339

Resolution 2770	EUR	5.74%	2009	84,799	-	84,799


Total parent Company				454,188	1,717,352	2,171,540



Resolution 2770	JPY	1.00%	2009	48,315	-	48,315



Total consolidated				502,503	1,717,352	2,219,855


(*) Amounts presented at fair value, when applicable, as mentioned in Note 4.o.


Company/Consolidated					Balance in 2007

		Annual			Long-
	Currency	interest rate	Maturity	Current	term	Total



Loans and financing - BNDES	URTJLP	TJLP+3.73%	Until 2015	9,031	800,314	809,345
Mediocrédito	US$	1.75%	2014	5,576	29,302	34,878
Resolution 2770	US$	1.00% to 4.8%	2008	260,275	-	260,275
Resolution 2770	JPY	0.80% to 8.00%	2008	386,091	-	386,091
Resolution 2770	JPY	0.50% to 5.78%	2008	-	92,845	92,845
Resolution 2770	EUR	5.15%	2008	10,569	-	10,569
Untied Loan – JBIC	JPY	Libor + 1.25%	Until 2009	80,044	78,568	158,612


Total parent Company				751,586	1,001,029	1,752,615



Finame	URTJLP	TJLP+8%	2008	2,400	-	2,400
Compror	R$	CDI + 1%	2008	23,244	-	23,244
CDI + 2% to
Working capital loan	R$	CDI + 2% to 2.5%	Until 2009	16,553	2,000	18,553



Total consolidated				793,783	1,003,029	1,796,812

The loan from Japan Bank for International Cooperation – JBIC and BNDES include restrictive covenants related to the maintenance of certain financial indices, which to date have been met.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

15. Loans and financing (Continued)

Loans and financing with Mediocrédito are guaranteed by the Federal Government.

The loan obtained from BNDES is secured by SP Telecomunicações Participações Ltda.

Consolidated long-term debt maturities

Year		Amounts


2010		204,204
2011		344,510
2012		343,972
2013		343,420
Thereafter		481,246


Total		1,717,352

16. Debentures

Company and Consolidated

Balance in 2008

Annual

interest

Long-

Currency

rate

Maturity

Current

term

Total

Debentures

CDI rate + 0.35%

Until 2010

16,339

1,500,000

1,516,339

Total

16,339

1,500,000

1,516,339

Company and Consolidated

Balance in 2007

Annual

interest

Long-

Currency

rate

Maturity

Current

term

Total

Debentures

CDI rate + 0.35%

Until 2010

12,357

1,500,000

1,512,357

Total

12,357

1,500,000

1,512,357

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

16. Debentures (Continued)

Debenture conditions were renegotiated on September 1, 2007, date of end of the first Remuneration period and beginning of the second Remuneration period. This period ends on the debentures maturity date; namely September 1, 2010. Debentures are entitled to interest yield, payable on a quarterly basis.

17. Taxes payable

	Company		Consolidated

	2008	2007	2008	2007

Taxes on income (a)
Income tax	-	-	-	2,587
Social contribution tax	-	-	-	694

Deferred taxes
Income tax	118,132	114,636	118,132	114,636
Social contribution tax	12,431	27,074	12,431	27,074

Indirect taxes
ICMS (state VAT)	635,353	617,632	683,447	667,961
PIS and COFINS (taxes on	75,286	68,892	102,023	76,838
revenue)
Legal liabilities (b)	26,674	23,310	26,674	23,310
Other (c)	19,638	24,344	31,131	33,761


Total	887,514	875,888	973,838	946,861


Current	847,363	837,405	926,437	908,260
Non-current	40,151	38,483	47,401	38,601

(a) Income and social contribution taxes payable are presented net of payments on an estimate basis (Note 7).

(b) Legal obligations account records tax liabilities, net of judicial deposits, which are being questioned in court.

(c) The item “Others” includes R$139,511 of FUST payable as of December 31, 2008 (R$113,275 as of December 31, 2007), net of judicial deposits of R$126,832 (R$97,567 as of December 31, 2007).

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

18. Dividends and interest payable to shareholders

	Company/Consolidated

	2008	2007


Interest on shareholders’ equity	437,720	274,976

Telefónica Internacional S.A.	234,441	118,912
SP Telecomunicações Holding Ltda.	77,036	36,371
Telefônica Data do Brasil Ltda.	-	2,702
Minority shareholders	126,243	116,991

Dividends - Minority shareholders	320,841	371,083
Dividends subject to shareholders’
approval (note22.e)	395,109	350,938


Total	1,153,670	996,997

Most of the interest on shareholders’ equity and total dividends payable to minority shareholders refer to available amounts declared, but not claimed yet.

19.	Payroll and related charges

		Company		Consolidated

		2008	2007	2008	2007


	Salaries and fees	18,250	20,165	19,723	22,929
	Payroll charges	73,589	81,122	79,641	89,127
	Accrued benefits	4,878	7,413	5,087	7,704
	Employee profit sharing	65,269	64,725	68,835	70,590
	Organizational restructuring
	program (a)	1,386	74,491	1,386	74,491


	Total	163,372	247,916	174,672	264,841

(a) Refers to the Company’s organizational restructuring program realized in 2008.

20. Reserves for contingencies, net

The Company, as an entity and also as the successor to the merged companies, and its subsidiaries are involved in labor, tax and civil lawsuits filed with different courts. The Company’s management, based on the opinion of its legal counsel, recognized reserves for those cases in which an unfavorable outcome is considered probable. The table below shows the breakdown of reserves by nature and activities during 2008:

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

20. Reserves for contingencies, net (Continued)

		Nature

Consolidated	Labor	Tax	Civil	Total


Balances as of 12/31/2007	456,188	232,152	123,894	812,234

Additions	39,800	7,738	151,075	198,613
Transfers	-	(50,313)	50,313	-
Write-offs	(84,353)	(25,571)	(89,701)	(199,625)
Monetary restatement	85,497	3,950	19,852	109,299

Balances as of 12/31/2008	497,132	167,956	255,433	920,521

Escrow deposits	(133,554)	(59,431)	(28,270)	(221,255)


Net balances as of 12/31/2008	363,578	108,525	227,163	699,266


Current	50,577	-	77,911	128,488
Non-current	313,001	108,525	149,252	570,778

20.1. Labor contingencies and reserves

	Amount involved

Risk - Consolidated	2008	2007


Probable	497,132	456,188
Possible	66,608	-


Total	563,740	456,188

These contingencies involve several lawsuits, mainly related to wage differences, wage equivalence, overtime, employment relationship with employees of outsourced companies and job hazard premium, among others.

The Company made escrow deposits in the amount of R$133,554 for the reserves mentioned above.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

20. Reserves for contingencies, net (Continued)

20.2. Tax contingencies and reserves

	Amount involved

Risk - Consolidated	2008	2007


Probable	167,956	232,152
Possible	2,864,127	2,706,417


Total	3,032,083	2,938,569

The principal tax contingencies according to the risk, are as follows:

Claims by the National Institute of Social Security (INSS) referring to:

a) Several legal proceedings for the collection of Seguro de Acidente de Trabalho (Workers Accident Insurance Compensation, or SAT) and joint liability for social security contributions alleged not to have been paid by its subcontractors of approximately R$330,850. In view of a decision handed down by the Federal Supreme Court recognizing the statute barring period of five years, the Company’s management decided to reverse in 2008 the provision recognized for the amounts covered by the barring period. However due the likelihood of a possible loss, a provision of R$ 98,285 for part of the total amount was maintained.

b) Discussion relating to certain amounts paid under the Company’s collective labor agreements, as a result of inflationary adjustments arising out of Planos Bresser and Verão , in the amount of approximately R$145,751 In view of a decision handed down by the Federal Supreme Court recognizing the statute barring period of five years, the Company’s management decided to reverse the provision recognized for the amounts covered by the barring period. However due the likelihood of a possible loss, a provision of R$ 2,915 for part of the total amount was maintained.

c) Notification demanding social security contributions, SAT and amounts for third parties (National Institute for Agrarian Reform and Colonization (INCRA) and Brazilian Mini and Small Business Support Agency (SEBRAE)) for the payment of various salary amounts for the period from January 1999 to December 2000, in the amount of approximately of R$62,137. These lawsuits are in the 1st lower court and at the last administrative level, respectively. No provision was made for the balance, for which the likelihood of loss is deemed possible.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

20. Reserves for contingencies, net (Continued)

20.2. Tax contingencies and reserves (Continued)

d) Notification demanding social security contributions for joint liability in 1993, in the amount of approximately R$202,836, considered as a possible risk until December 2008, when the Company obtained a favorable decision on this suit, which was then closed.

e) Legal proceedings imposed fines amounting to R$161,982 for distribution of dividends when the Company was allegedly in debt to INSS. No provision was made for the balance, for which the likelihood of loss is deemed possible. This matter is at the 2nd administrative level.

Claims by the Finance Secretary of the State of São Paulo referring to:

f) Assessments on 2001, related to ICMS (State VAT) allegedly due on international long-distance calls for the period from November, 1996 to December, 1999 amounting to R$452,139. One suit is at the last administrative stage and two suits are the first judicial stage. Considering the risk of a possible loss, no provisions were recognized.

g) Infraction notice related to the use of credits in the period from January to April 2002, in the amount of R$34,001, for which the risk is considered possible. The claim is at the 2nd administrative level. Considering the risk level, no provision was made.

h) Infraction notice related to the non-reversal of ICMS credits in proportion to sales and exempt and non-taxed services in the period from January 1999 to June 2000 and from July 2000 to December 2003, in addition to an ICMS credit unduly used in March 1999. The total amount involved is R$127,900. The risk is considered possible by legal counsel. The claims are at the 2nd and first administrative level, respectively. Considering the risk level, no provision was made.

i) Infraction notice issued by the São Paulo State Tax Department related to nonpayment of ICMS, from January 2001 to December 2005, on amounts received for equipment lease (modem), totaling R$158,587. The suit is at the second administrative level. Considering the risk of a possible loss, no provisions were recognized.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

20. Reserves for contingencies, net (Continued)

20.2. Tax contingencies and reserves (Continued)

j) Infraction notices related to nonpayment of ICMS in the period from August 2004 to December 2005, for non-inclusion of revenues from rendering of several supplemental services and value added, in the amount of R$286,673, upon determination of the tax basis. Related risk is assessed as possible by legal counsel. The claim is at the 2nd administrative level. Considering the risk level, no provision was made.

k) Infraction notice drawn up by the São Paulo State Finance Office on June 14, 2007, referring to co-billing operations from May to December 2004, due to: (i) non presentation of the totality of the files provided for in Administrative Ruling CAT No. 49/03; (ii) untimely compliance with notices referring to filing of electronic files; (iii) lack of or irregular recording on the Shipment records; and (iv) unpaid of tax concerning to a portion of the communication services rendered. The amount involved is R$8,324, already considering payment of the notice item one in the terms of Law No. 6374/89 and of Decree No. 51960/07 (PPI), related to non-payment of taxes. Part of the infractions results from the not filed information by other operating companies. The likelihood of loss is assessed as possible. The claim is at the 1st administrative level. Considering the risk involved, the Company did not record a provision.

Litigation at the Federal and Municipal Levels:

l) FINSOCIAL, currently COFINS, was a tax on gross operating revenues, originally established at a rate of 0.5% and gradually and subsequently raised to 2.0% . Such rate increases were judicially challenged with success by several companies, which led to the creation of taxable credits, caused by higher payments, which were offset by CTBC (company merged into the Company in November 1999) against current payments of related taxes, the COFINS. Claiming that those offsets made by CTBC were improper, the Federal Government made an assessment in the amount of R$19,837. In October 2008, the Company obtained a final favorable decision on one of the suits, totaling R$14,799. The other suits, in the amount of R$5,038, are still on trial and await a decision by the second and last administrative stage. Despite the likelihood of a possible loss, a provision of R$ 5,038 for the total amount was maintained.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

20. Reserves for contingencies, net (Continued)

20.2. Tax contingencies and reserves (Continued)

m) The City of São Paulo assessed the Company, alleging differences in the payment of the municipal tax on services (ISS), by the imputation of fines of 20% not paid by the Company, in the amount of R$29,567. The claim is at the 2nd court level. The risk is considered possible. Considering the risk level, no provision was made.

n) On December 15, 2005, ANATEL edited Abridgment nº 01 (subsequently changed to Abridgment nº 07), where it confirmed its opinion not to exclude interconnection expenses from FUST basis, modifying its previous position. The Abridgment has retroactive application, since January, 2001. Thus, through ABRAFIX – Brazilian Fixed Telecommunication Companies Association, on January 9, 2006, the Company petitioned a Security Mandate in order to assure the possibility of excluding interconnection expenses from FUST basis and/or not to be subject to the retrospective payment of differences identified as a result of adopting the noncumulative system by operation of Anatel Abridgement No. 7/2005. The total amount involved is R$332,344. Out of this amount, R$184,050 refers to differences identified as a result of adopting the noncumulative system during the retrospective period (2001 to 2005) and R$148,294 refers to differences identified for the period 2006 to date, which is being deposited with the court on a monthly basis. Despite the likelihood of a possible loss, a provision has been recognized only for the court deposits. The suit is at the second judicial stage.

There are other contingencies that have also been accrued, for which the involved amount is R$61,718; which the risk is considered probable by management.

20.3 Civil contingencies and reserves

	Amount involved

Risk - Consolidated	2008	2007


Probable	255,433	123,894
Possible	452,616	904,286


Total	708,049	1,028,180

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

20. Reserves for contingencies, net (Continued)

20.3 Civil contingencies and reserves (Continued)

The principal civil contingencies according to the risk, are as follows:

Community Telephone Plan - PCT. These contingencies are related to civil contingencies in that the Company is involved in public class action lawsuits related to the Community Telephone Plan (PCT), claiming the possible right for indemnity for purchasers of the expansion plans who did not receive shares for their financial investment, in the municipalities of Diadema, São Caetano do Sul, São Bernardo do Campo and Ribeirão Pires involving a total amount of approximately R$343,974. Since June, 2008 the risks involved are considered remote by the lawyers responsible for this case. The claim is in the 2nd court.
There is a collective claim by ASTEL – Sistel Participants Association in São Paulo State, against the Company Suit brought by members of the Sistel Association in the State of São Paulo questioning the changes in the health care plan for the Company’s retirees (PAMA). The suit is at the initial stage and there has been no judgment of dismissal. The Company’s management, based on its legal counsel opinion, considers this proceeding as possible risk, with an estimated amount of R$322,325. According to the risk, no provision was recorded.
Enforcement proceedings brought by WCR against Telesp. On June 9, 2000, WCR do Brasil Serviços Ltda. proposed enforcement proceedings following ordinary procedural steps against the Company, claiming the collection of the alleged difference between the amounts calculated by Telesp regarding the use of the “0900 Service” and the amounts transferred to that company. The duly updated proceeding amount is R$76,234. On October 1, 2004 the decision handed down by the 13th Civil Court of the central jurisdiction of São Paulo was published, by which the proceeding was deemed valid. On December 14, 2004, an appeal against the decision was filed, which was distributed to the 26th Panel of Judges of São Paulo. On May 26, 2006, the appeal against the decision was judged partially valid, and the content was maintained. The process is in a higher court. Since the risk level was considered as probable, provision was made.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

20. Reserves for contingencies, net (Continued)

20.3 Civil contingencies and reserves (Continued)

Suits for additional shares. These refer to suits involving the Company and addressing the right to receive additional shares calculated pursuant to the regulation issued by the Telecommunications Ministry with regard to network expansion plans after 1996. These suits are at various stages: first stage, Supreme Court and Federal Superior Court of Appeals. Considering the risk of a probable loss, a provision of R$18,039 was made.
As of December 31, 2008, the Company has a provision of R$64,835 for fines relating to Several Administrative Proceedings filed by ANATEL against Telesp, considered by the legal advisors as a probable risk of loss.
Contingencies, especially assessed as possible risks, involve matters relating to several legal suits, mainly: unacknowledged title to telephone lines, indemnity for material and personal damages, among others, for approximately R$130,291.

21. Other liabilities

	Company		Consolidated

	2008	2007	2008	2007


Consignments on behalf of third parties	216,512	172,668	198,050	162,041

Amounts charged to users	93,247	86,378	70,884	70,615
Withholdings	122,191	84,587	126,092	89,723
Other	1,074	1,703	1,074	1,703

Liabilities to related parties (Note 31)	69,517	62,520	81,072	44,920
Advances from customers	59,903	65,080	69,906	71,675
Amounts to be refunded to subscribers	53,669	48,814	48,593	49,817
Concession renewal fee (Note 1.c)	102,863	-	102,863	-
Accounts payable – sale of share fractions (a)	113,377	114,315	113,377	114,315
Accounts payable for the acquisition of Telefônica Televisão
Participações S.A. (b)	-	23,790	-	23,790
Negative goodwill AIX	-	-	-	8,735
Other	43,774	57,281	94,000	86,110


Total	659,615	544,468	707,861	561,403


Current	590,147	479,340	614,867	479,557
Noncurrent	69,468	65,128	92,994	81,846

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

21. Other liabilities (Continued)

(a) Amounts resulting from the auction of share fractions after the reverse spin-off process in 2005, and TDBH acquisition process in 2006.

(b) The amount to be paid on December 31, 2007 to the Grupo Abril for the TTP acquisition correspond to R$293,790, of which R$270,000 is retained in financial application in the name of the Company. The presentation is by net value.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007 (In thousands of reais)

(A free translation of the original report issued in Portuguese)

22. Shareholders’ equity

a) Capital

Paid-in capital is of R$6,575,480 at December 31, 2008 (R$6,575,198 as of December 31, 2007). Subscribed and paid-in capital is represented by shares without par value, as follows:

	2008	2007


Total Capital in shares
Common shares	168,819,870	168,819,870
Preferred shares	337,417,402	337,417,402

Total	506,237,272	506,237,272

Treasury shares
Common shares	(210,579)	(210,578)
Preferred shares	(185,213)	(185,213)

Total	(395,792)	(395,791)

Outstanding shares
Common shares	168,609,291	168,609,292
Preferred shares	337,232,189	337,232,189

Total	505,841,480	505,841,481


Book value per outstanding share in R$	19.86	19.58

The Company is authorized to increase its capital up to the limit of 700,000,000 (seven hundred million) shares, common or preferred. The capital increase and consequent issue of new shares are to be approved by the Board of Directors, with observance of the authorized capital limit.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

22. Shareholders’ equity (Continued)

a) Capital (Continued)

Capital increases do not necessarily have to observe the proportion between the numbers of shares of each type. However, the number of preferred shares, nonvoting or with restricted voting, must not exceed 2/3 of the total shares issued.

Preferred shares are nonvoting, but have priority in the reimbursement of capital and are entitled to dividends 10% higher than those paid on common shares, as per article 7 of the Company’s bylaws and clause II, paragraph 1, article 17, of Law No. 6,404/76.

b) Capital reserves

Share premium

This reserve represents the amount exceeding book value of the shares arising from the issuance or capitalization on the date of issue.

Donations and subsidies for investment

These represent amounts in assets donated by subscribers for the expansion of the telecommunications services plant until 2007. After 2008, these donations will be classified as deferred revenues under liabilities.

Treasury shares

These correspond to the Company’s treasury stock which resulted from merger with TDBH occurred in 2006, part of which refer to exercise of withdrawing rights and the remaining to the share auctions carried out by the Company. The average cost of acquisition was R$44.77. At December 31, 2008, the market value of treasury stock was R$16,258 (R$18,164 at December 31, 2007).

c) Income reserves

Legal reserve

According to article 193 of Law No. 6,404/76, the Company chose not to set up the legal reserve, as such balance added to the capital reserve balance exceeded capital by 30%.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

22. Shareholders’ equity (Continued)

d) Special goodwill reserve

This represents the tax benefit generated by the merger of DABR (Note 2.b) which will be capitalized on an annual basis on behalf of the controlling shareholder as the tax credit becomes realized, according to CVM Instruction No. 319/99.

e) Dividends

According to its by-laws, the Company is required to pay dividends at each year ending December 31, of a minimum of 25% of adjusted net income, provided earnings are available for distribution.

Dividends are calculated in accordance with the Company’s by-laws and with the Brazilian Corporation Law. The Company presents the calculation of dividends and interest on shareholders’ equity for 2008 and 2007 as follows:

Minimum mandatory dividends calculated based on adjusted net
income	2008	2007

Net income for the year	2,419,971	2,363,169
Allocation to legal reserve	-	-


Adjusted net income for the year	2,419,971	2,363,169


Minimum mandatory dividends – 25% of adjusted net income	604,993	590,792

Retained earnings
Retained earnings from prior years	-	705,631
Adjusted net income for the year	2,419,971	2,363,169
Interest on shareholders’ equity / Prescribed dividends	163,392	209,770
Merger of DABR	41	-
Adjustments of Law No. 11638/07	2,705	-


Profit available for distribution	2,586,109	3,278,570


Interest on shareholders’ equity (gross)	616,000	642,000
Interim dividends	1,575,000	2,285,632


Balance of profit available for distribution	395,109	350,938


Proposed dividends	395,109	350,938


Retained earnings at year-end	-	-

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

22. Shareholders’ equity (Continued)

e) Dividends (Continued)

		2008			2007

Amounts in R$ per share (a)	Gross		Net	Gross		Net


Interest on shareholders’
equity - common	1.141661		0.970411	1.189848		1.011370
Interest on shareholders’
equity – preferred	1.255827		1.067453	1.308832		1.112507

				2008

Amounts in R$ per share (a)				Common		Preferred


Interest on shareholders’ equity – net of				0.315068		0.346575
income tax
Interim dividends declared in March 2008				0.650409		0.715450
Interim dividends declared in May 2008				0.898872		0.988760
Interim dividends declared in November 2008				2.020146		2.222161
Interest on shareholders’ equity – net of
income tax				0.655343		0.720877


				4.539838		4.993823


				2007

Amounts in R$ per share (a)				Common		Preferred


Interest on shareholders’ equity – net of
income tax				1.011370		1.112507
Interim dividends declared in March 2007				1.307779		1.438557
Interim dividends declared in November 2007				2.928286		3.221115


				5.247435		5.772179

(a) Do not include the amount of dividends to be declared.

The balance of retained earnings as of December 31, 2008, in the amount of R$395,109 (R$350,938 at December 31, 2007), was classified as dividends payable in accordance with management’s proposal for allocation of net income for the year, subject to approval by the Ordinary Shareholders’ Meeting, and to payment by the end of fiscal year 2009.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

22. Shareholders’ equity (Continued)

f) Interest on shareholders’ equity

As proposed by Management, in 2008 and 2007, interest on shareholders’ equity was credited to shareholders in accordance with article 9 of Law No. 9,249/95, net of withholding tax, as follows:

	2008	2007


Gross interest on shareholders’ equity	616,000	642,000

Common shares	192,495	200,619
Preferred shares	423,505	441,381

Withholding income tax	(92,400)	(96,300)


Interest on shareholders’ equity, net of income tax
included in dividends	523,600	545,700

Tax-exempt shareholders received interest on shareholders’ equity in full, not subject to withholding tax.

g) Payment of dividends and interest on shareholders’ equity

On March 26, 2008, the Ordinary Shareholders’ Meeting approved dividend distribution in the amount of R$350,938 as defined in the allocation of net income for 2007 proposed by management. These dividends were credited to holders of common and preferred shares included in the Company’s records by the end of March 26, 2008, and have been paid as of June 23, 2008.

On May 20, 2008, the Board of Directors approved the payment of interim dividends in the amount of R$485,000 based on the financial statements for March 31, 2008, and interest on shareholders’ equity for fiscal year 2008 in the amount of R$200,000, or R$ 170,000 net of withholding taxes, to holders of common and preferred shares included in the Company’s records by the end of May 20, 2008. These dividends have been paid as of June 23, 2008.

On November 24, 2008, the Board of Directors approved the distribution of interim dividends in the amount of R$1,090,000, based on retained earnings shown on the balance sheet as of September 30, 2008, to holders of common and preferred shares included in the Company’s records by the end of November 24, 2008. These dividends have been paid as of December 10, 2008.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

22. Shareholders’ equity (Continued)

g) Payment of dividends and interest on shareholders’ equity (Continued)

On December 9, 2008, the Board of Directors approved the credit of interest on shareholders’ equity for fiscal year 2008 in the amount of R$416,000, or R$353,600 net of withholding taxes, to holders of common and preferred shares included in the Company’s records by the end of December 30, 2008. The payment will be made in 2009 on a date to be decided at the Ordinary Shareholders’ Meeting.

h) Unclaimed dividends

Dividends and interest on shareholders’ equity are barred by statute of limitation after 03 (three) years, as from the date of beginning of payment thereof if not claimed by shareholders, according to article 287, clause II, item a. of Law No. 6,404, dated December 15, 1976.

i) Adjustment for equity valuation and cumulative translation adjustment

Adjustment for equity valuation

This represents net gains and losses from changes in the fair value of financial assets classified as available-for-sale (Notes 4 and 11).

Cumulative translation adjustment

This represents foreign exchange fluctuations derived from the translation of net equity of foreign investments.

Adjustment for equity valuation

Portugal Telecom		55,389
Zon Multimédia		6,775
Other investments		14,068

Total		76,232


Cumulative translation adjustment
Aliança Atlântica		862

Total		862

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

23. Net operating revenue

	Company		Consolidated

	2008	2007	2008	2007


Monthly subscription charges	5,599,514	5,760,511	5,486,797	5,646,362
Activation fees	114,315	119,743	114,283	119,629
Local service	2,504,587	2,732,412	2,562,869	2,808,251

LDN – Domestic long-distance	3,719,509	3,133,264	3,808,790	3,220,787
LDI – International long-
distance	124,305	113,423	140,389	133,870
Interconnection services	4,286,927	3,949,426	4,372,033	4,063,688
Network usage services	465,788	405,278	465,788	405,278
Public telephones	444,910	551,059	444,910	551,059
Data transmission	3,402,321	2,725,895	3,759,457	2,995,718
Network access	416,770	349,494	384,344	318,609
TV Service	-	-	379,019	54,564
Other (i)	657,155	587,125	1,102,101	865,994


Gross operating revenue	21,736,101	20,427,630	23,020,780	21,183,809

Taxes on gross revenue	(5,553,811)	(5,299,061)	(5,978,565)	(5,575,502)

ICMS (State VAT)	(4,746,024)	(4,528,022)	(5,017,815)	(4,721,551)
PIS and COFINS (taxes on			(917,546)	(811,549)
revenue)	(779,605)	(741,091)
ISS (Municipal service tax)	(28,182)	(29,948)	(43,204)	(42,402)

Discounts	(1,364,928)	(1,100,823)	(1,063,230)	(880,745)


Net operating revenue	14,817,362	14,027,746	15,978,985	14,727,562

The group of accounts “Other”, under Gross operating revenues, includes revenue from finance lease payments of customers premises equipments, as described in Note 4.k

Tariff adjustments affecting recorded revenue

Tariff adjustment for wireline to wireline services effective as of July 24, 2008. Tariffs increased by 3.01% for Local and National Long Distance (LDN) services. Local network tariffs (TU-RL) also increased by 3.01% as of July 24, 2008.

Tariff adjustment of 3.01% for wireline to mobile services (VC1, VC2 and VC3), also is effective as of July 24, 2008.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

23. Net operating revenue

Tariff adjustments affecting recorded revenue (Continued)

Tariff adjustment of 2.21% for Basic Plans (Local and LDN) was effective as of July 20, 2007. Local network tariffs (TU-RL) also increased by 2.21% as of July 20, 2008.

Tariff adjustment of 3.29% for wireline to mobile services (VC1, VC2 and VC3) was effective as of July 20, 2007.

24. Cost of services provided

	Company		Consolidated

	2008	2007	2008	2007


Depreciation and amortization	(2,229,050)	(2,276,004)	(2,390,633)	(2,347,943)
Personnel	(161,947)	(176,384)	(198,990)	(224,578)
Organizational Restructuring
Program	(21,403)	(63,238)	(21,403)	(63,238)
Materials	(30,507)	(30,571)	(132,023)	(31,651)
Network interconnection	(3,810,851)	(3,570,560)	(3,855,345)	(3,617,118)
Outside services	(1,255,595)	(1,093,281)	(1,525,450)	(1,240,328)
Other	(409,733)	(370,072)	(602,564)	(504,347)


Total	(7,919,086)	(7,580,110)	(8,726,408)	(8,029,203)

25. Selling expenses

	Company		Consolidated

	2008	2007	2008	2007


Depreciation and amortization	(168,604)	(174,447)	(168,875)	(174,560)
Personnel	(349,480)	(322,954)	(368,611)	(341,006)
Organizational Restructuring Program	(7,526)	(9,123)	(7,526)	(9,123)
Materials	(61,718)	(89,161)	(61,944)	(89,362)
Outside services	(1,347,438)	(1,141,125)	(1,374,596)	(1,154,183)
Allowance for doubtful accounts	(461,760)	(611,030)	(538,625)	(652,692)
Other	(44,247)	(36,311)	(80,379)	(41,531)


Total	(2,440,773)	(2,384,151)	(2,600,556)	(2,462,457)

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

26. General and administrative expenses

	Company		Consolidated

	2008	2007	2008	2007


Depreciation and amortization	(76,955)	(93,043)	(98,395)	(111,881)
Personnel	(138,860)	(153,700)	(143,774)	(167,731)
Organizational Restructuring
Program	(6,591)	(81,577)	(8,537)	(81,577)
Materials	(8,508)	(13,410)	(8,776)	(15,112)
Outside services	(326,431)	(375,206)	(430,826)	(402,791)
Other	(45,280)	(48,138)	(65,214)	(59,521)


Total	(602,625)	(765,074)	(755,522)	(838,613)

27. Permanent asset disposal, net

	Company		Consolidated

	2008	2007	2008	2007

Proceeds from sale of property, plant and
equipment and investments	15,548	146,747	27,370	147,693
Cost of sale of property, plant and
equipment and investments	(41,761)	(64,081)	(77,925)	(66,040)


Total	(26,213)	82,666	(50,555)	81,653

Gains on permanent assets disposals in 2007 mainly refers to sale of real property located in Barra Funda district for R$134,555, with residual value of R$46,044.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

28. Other operating income (expenses), net

	Company		Consolidated

	2008	2007	2008	2007

Income	554,801	741,474	578,966	750,656

Technical and administrative services	49,420	50,835	44,118	47,057
Income from supplies	17,791	72,838	20,880	72,838
Dividends	25,439	16,799	30,473	21,826
Fines on telecommunication services	162,804	130,669	174,774	133,625
Recovered expenses	50,703	113,191	52,238	117,645
Reversal of provision for contingencies (*)	103,824	208,322	106,894	209,227
Rent of infrastructure	45,894	37,857	45,894	37,857
Amortization of negative goodwill – AIX	8,735	8,735	8,735	8,735
Unidentified billing	49,441	39,424	49,519	39,424
Other income	40,750	62,804	45,441	62,422

Expenses	(618,878)	(523,333)	(703,622)	(580,075)

Allowance for reduction to recoverable
value of inventories	(2,941)	(5,135)	(3,743)	(5,700)
Amortization of goodwill	(126,459)	(73,473)	(126,459)	(73,473)
Donations and sponsorships	(36,520)	(39,215)	(36,520)	(39,504)
Taxes other than income taxes	(259,135)	(245,447)	(310,985)	(274,090)
Provision for contingencies	(161,106)	(91,617)	(162,814)	(94,657)
Pension and other post-retirement benefits	(20,064)	(23,033)	(20,064)	(23,033)
Other	(12,653)	(45,413)	(43,037)	(69,618)


Total	(64,077)	218,141	(124,656)	170,581

(*) In 2007, the Company partially reversed the provision of INSS, which refers to “Plano Bresser”, “Verão” and “SAT” (see note 20.2a and 20.2. b) due the statute barring period of five years instead in an amount of R$ 105,682, of which R$4,648 was reversed in the financial results of 2007.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

29. Financial income (expenses)

	Company		Consolidated

	2008	2007	2008	2007


Financial income	880,512	494,006	932,554	503,453

Income from short-term investments	151,358	72,596	161,927	80,988
Gains on derivative transactions	566,827	218,733	588,919	218,733
Interest receivable	39,660	50,008	53,341	50,508
Monetary/exchange variations
receivable	120,312	148,319	122,856	148,447
Other financial income	2,355	4,350	5,511	4,777

Financial expenses	(1,718,379)	(1,437,775)	(1,776,440)	(1,452,385)

Interest on shareholders’ equity	(616,000)	(642,000)	(616,000)	(642,000)
Interest payable	(410,288)	(330,974)	(419,190)	(336,997)
Losses on derivative transactions	(428,588)	(371,697)	(435,472)	(371,750)
Expenses on financial transactions	(54,632)	(91,927)	(69,090)	(99,731)
Monetary/exchange variations
payable	(208,871)	(1,177)	(236,688)	(1,907)


Total	(837,867)	(943,769)	(843,886)	(948,932)

In 2008 includes the financial results of long-term assets brought at present value and adjustments of financial instrument at market value.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

30. Income and social contribution taxes

The Company recognizes income tax and social contribution monthly on the accrual basis and pays the taxes on an estimated basis, in accordance with the trial balance for suspension or reduction. The taxes calculated on income until the month of the financial statements are recorded in liabilities or assets, as applicable.

Reconciliation of reported income tax expense and combined statutory tax rates

Reconciliation of the reported tax charges and the amounts calculated by applying 34% (income tax of 25% and social contribution tax of 9%) in 2008 and 2007 is shown in the table below:

	Company		Consolidated

	2008	2007	2008	2007


Income before taxes	2,808,665	2,659,082	2,885,664	2,698,446


Income tax and social contribution taxes
Income tax and Social contribution tax
expense	(954,946)	(904,088)	(981,126)	(917,471)
Permanent differences
Equity pick-up	(40,139)	1,235	2,809	(729)
Unclaimed interest on shareholders’
equity	(8,919)	(31,310)	(8,919)	(31,310)
Reversal of subsidiaries’ tax credits	-	-	(39,020)	-
Subsidiaries’ temporary differences	-	-	(35,379)	-
Nondeductible expenses, gifts,
incentives and dividends received	(24,578)	(35,171)	(43,961)	(59,397)

Other
Incentives (cultural, food and
transportation)	23,888	31,421	23,903	31,421

Total (income tax + social contribution
tax)	(1,004,694)	(937,913)	(1,081,693)	(977,486)

The components of deferred income and social contribution tax assets and liabilities on temporary differences are shown in Notes 7 and 17 respectively.

Total current income and social contribution taxes consolidated payable at December 31, 2008 amounts to R$1,071,609 (R$924,196 as of December 31, 2007).

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

31. Transactions with related parties

The principal balances with related parties are as follows:

					Telecomu
					n. de Chile	Telefónica	Telefónica
	Atento		Tiws		Transm.	de	de	Terra
	Brasil		Brasil	Telefônica	Regionale	Argentina	España	Networks
Consolidated	S.A.	VIVO	Ltda.	S.A.	s S.A.	S.A.	S.A.	Brasil S.A.


Assets
Current assets	24,803	255,656	2,564	1,987	16,544	3,477	3,248	24,690

Trade accounts receivable	23,346	252,524	2,364	-	498	3,477	3,248	24,398
Other assets	1,457	3,132	200	1,987	16,046	-	-	292

Noncurrent assets	-	1,109	1,507	16	887	-	-	1,826

Other assets	-	1,109	1,507	16	887	-	-	1,826


Total assets	24,803	256,765	4,071	2,003	17,431	3,477	3,248	26,516


Liabilities
Current liabilities	52,820	239,529	64,025	2,317	152	379	970	5,110

Trade accounts payable	47,144	239,528	63,979	-	152	379	970	5,091
Interest on shareholders’ equity	-	-	-	-	-	-	-	-
Other liabilities	5,676	1	46	2,317	-	-	-	19

Noncurrent liabilities	-	55	23,917	-	-	-	-	1

Other liabilities	-	55	23,917	-	-	-	-	1


Total liabilities	52,820	239,584	87,942	2,317	152	379	970	5,111


Statement of income
Revenue	38,871	257,398	4,187	-	1,279	5,641	5,710	61,027

Telecommunications services	36,834	257,398	3,661	-	1,279	5,641	5,710	60,935
Financial income	-	-	-	-	-	-	-	-
Other operating revenue	2,037	-	526	-	-	-	-	92

Costs and expenses	(514,045)	(1,957,421)	(57,737)	(2,122)	(541)	(1,256)	(3,051)	(16,663)

Cost of services provided	(85,399)	(1,954,648)	(56,725)	(2,122)	(541)	(1,256)	(3,051)	(15,907)
Selling	(418,021)	(2,080)	-	-	-	-	-	(710)
General and administrative	(10,034)	(693)	-	-	-	-	-	-
Other operating expense	(591)	-	(1,012)	-	-	-	-	(46)

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

31. Transactions with related parties (Continued)

	Telefônica
	Serviços
	Empresari				Telefônica
	ais do	Telefónica		Colômbia	Pesquisa e
	Brasil Ltda.	Internacional	SP Telecom	Telecomunicações	Desenv.
Consolidated		S.A.		(Telecon)	Ltda.	Other	Total 2008	2007


ASSETS
Current assets	11,971	62,853		19,058	100	21,386	448,337	291,439

Trade accounts receivable	1,315	-	-	-	-	6,745	317,915	216,541
Other assets	10,656	62,853	-	19,058	100	14,641	130,422	74,898

Noncurrent assets	1,135	14,767	-	466	87	1,063	22,863	25,833

Other assets	1,135	14,767	-	466	87	1,063	22,863	25,833


Total Assets	13,106	77,620	-	19,524	187	22,449	471,200	317,272


LIABILITIES
Current liabilities	14,949	268,627	77,036	776	20,282	19,205	766,177	502,248

Trade accounts payable	14,665	-	-	776	20,205	12,614	405,503	308,539
Interest on shareholders’ equity	-	234,441	77,036	-	-	-	311,477	155,282
Other Liabilities	284	34,186	-	-	77	6,591	49,197	38,427

Noncurrent liabilities	2,164	-	-	1,382	3	4,353	31,875	6,493

Intercompany payables	2,164	-	-	1,382	3	4,353	31,875	6,493


Total Liabilities	17,113	268,627	77,036	2,158	20,285	23,558	798,052	508,741


STATEMENT OF INCOME
Revenue	3,915	2,799	-	91	87	3,539	384,544	323,726

Telecommunications services	2,264	-	-	-	-	1,400	375,122	314,599
Financial income	-	2,799	-	91	-	2,139	5,029	6,812
Other operating revenues	1,651	-	-	-	87	-	4,393	2,315

Costs and expenses	(75,985)	(11,493)	(5,895)	-	(11,629)	(40,167)	(2,698,005)	(2,319,307)

Cost of services provided	(75,985)	-	-	-	(3,132)	(40,167)	(2,238,933)	(1,848,568)
Selling	-	-	-	-	(7,732)	-	(428,543)	(338,379)
General and administrative	-	(11,493)	-	-	(765)	-	(22,985)	(129,592)
Other operating expense	-	-	(5,895)	-	-	-	(7,544)	(2,768)

Transactions with related parties were carried out at arm’s length.

Trade accounts receivable include receivables for telecommunications services. principally Vivo S.A., Atento Brasil S.A., Terra Networks Brasil S.A. and Telefónica de España S.A., particularly for long-distance services and Tiws Brasil Ltda, due the contract of rendering services of rights of use of undersea fiber optic.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

31. Transactions with related parties (Continued)

Other intercompany receivables in current and non-current assets comprise credits from Telefónica Internacional S.A., Telefônica Serviços Empresariais do Brasil Ltda., Telefônica Del Peru and other group companies, corresponding to services rendered, advisory fees, expenses with salaries and other expenses paid by the Company to be refunded by the related companies.

Trade accounts payable include services provided primarily by Atento Brasil S.A., Vivo S.A., TIWS Brasil, Terra Networks Brasil S.A., Telefônica Pesquisa e Desenvolvimento do Brasil Ltda., and for international long-distance services provided principally by Telefónica de España S.A. We also highlight the rendering of administrative services in the accounting, financial, human resources, property, logistics and IT areas payable to Telefônica Serviços Empresariais do Brasil Ltda.

Other intercompany payables in current and non-current liabilities are comprised mainly of management and technical services payable to Telefónica Internacional S.A., software development and maintenance services payable to Telefônica Pesquisa e Desenvolvimento do Brasil Ltda., and reimbursements payable to Telefônica Serviços Empresariais do Brasil Ltda.

Revenue from telecommunications services comprises mainly billings to Vivo S.A., Terra Networks Brasil S.A. and Atento Brasil S.A.

Other operating revenues are basically from network infrastructure leased to Vivo S.A. and Atento Brasil S.A.

Cost of services provided refers mainly to interconnection and traffic services (mobile terminal) expenses, provided by Vivo S.A. and subsidiaries, call center management services provided by Atento Brasil S.A.

Selling expenses refer mainly to marketing services by Atento Brasil S.A. and commissions paid to cellular telephone operators with Vivo S.A.

General and administrative expenses refer to administrative management services provided by Telefônica Serviços Empresariais do Brasil Ltda., and management and technical services payable to Telefónica Internacional S.A.

Management fees

Compensation paid by the Company to its Management and Statutory Officers was approximately R$11,248 (R$20,900 in 2007). Of this amount, R$8,737 (R$14,200 in 2007) refers to salaries and fringe benefits, and R$2,511 (R$6,700 in 2007) to bonuses.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

32. Post-retirement benefit plans

Telesp individually sponsors a defined benefit retirement plan (PBS Telesp Plan), administered by Visão Prev, which covers approximately 0.54% of the Company’s employees. In addition to the supplemental pension benefit, a multiemployer plan (PBS-A) and health care plan (PAMA) are provided to retired employees and their dependents (administered by Fundação Sistel), at shared costs. Contributions to the PBS Telesp Plan are determined based on actuarial valuations prepared by independent actuaries, in accordance with the rules in force in Brazil. The funding procedure is the capitalization method and the sponsor’s contribution is 10.52% of payroll of employees covered by the plan, of which 9.02% is allocated to fund the PBS Telesp Plan and 1.5% to the PAMA Plan.

For other Telesp employees, there is an individual defined contribution plan - Visão Telesp Benefit Plan. The Visão Telesp Plan is funded by contributions made by the participants (employees) and by the sponsor which are credited to participants’ individual accounts. Telesp is responsible for bearing all plans administrative and maintenance expenses, including participant’s death and disability risks. The Company’s contributions to the Visão Telesp Plan are equal to those of the employees, varying from 2% to 9% of the contribution salary, based on the percentage chosen by the participant.

Additionally, the Company supplements the retirement benefits of certain employees of the former CTB - Companhia Telefônica Brasileira.

During 2008, the Company made contributions to the PBS Telesp Plan in the amount of R$28 (R$47 in 2007) and to Plano Visão Telesp in the amount of R$20,297 (R$26,457 in 2007).

A. Telecom sponsors two private pension plans for defined contribution; namely, one similar to that of Telesp, denominated Visão Assist Benefits Plan, which is granted to approximately 30% of its employees and another, denominated Visão A. Telecom Benefits Plan, whose basic and additional contributions by sponsor correspond to 30% of basic and additional contribution by participants. The contributions of A. Telecom to these plans totaled R$313 (R$637 in 2007).

Telefonica Data S.A. individually sponsors a defined contribution plan similar to that of the Company, the Visão Telefônica Empresas Benefit Plan. Total contributions to this plan amounted to R$646 (R$881 in 2007).

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

32. Post-retirement benefit plans (Continued)

The actuarial valuation of the plans was made in December 2008 and 2007 based on the record of plan members as of August 2008 and 2007, respectively, and the financial information as of October 31, 2008 was updated to December 31, 2008 and August 2007, respectively, and the projected unit credit method was adopted. Actuarial gains or losses for each year were immediately recognized in each of the periods. The plans assets relate to October 31, 2008 and December, 31 2007. For multiemployer plans (PAMA and PSB-A), apportionment of the plan assets was made based on the sponsoring entity’s actuarial liabilities in relation to the plans’ total actuarial liabilities.

Actuarial liabilities recorded by the Company as of December 31, 2008 and 2007 is as follows:

Plan	2008	2007

CTB	26,482	20,790
PAMA	122,288	74,636

Total Consolidated	148,770	95,426

a) Reconciliation of assets and liabilities

			2008

					Visão
					Telesp /
		PAMA	PBS-A		Assist/
	CTB	(i)	(i)	PBS	TEmpresas


Total actuarial liabilities	26,482	190,541	1,068,380	91,583	28,875
Fair value of assets	-	68,253	1,463,441	92,168	93,273

Liabilities (assets), net	26,482	122,288	(395,061)	(585)	(64,398)


Unrecorded surpluses (ii)	-	-	395,061	585	64,398

Recorded balance	26,482	122,288	-	-	-

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

32. Post-retirement benefit plans (Continued)

a) Reconciliation of assets and liabilities (Continued)

			2007

					Visão
					Telesp /
		PAMA	PBS-A		Assist/
	CTB	(i)	(i)	PBS	TEmpresas


Total actuarial liabilities	20,790	137,634	905,636	76,802	22,561
Fair value of assets	-	62,998	1,468,827	99,133	70,247

Liabilities (assets), net	20,790	74,636	(563,191)	(22,331)	(47,686)


Unrecorded surpluses (ii)	-	-	563,191	22,331	47,686

Recorded balance	20,790	74,636	-	-	-

(i) Refers to the proportional share of Telesp in the assets and liabilities of the PAMA and PBS-A multiemployer plans.

(ii) Surplus was not recorded by the sponsors as assets in view of limitations imposed by accounting standards (CVM Resolution No. 371) and by Resolution No. 26 of the Private Pension Management Council.

b) Total expenses recognized in income

			2008

					Visão
					Telesp/Assi
		PAMA	PBS-A		st/TEmpres
	CTB	(i)	(i) (ii)	PBS	as


Current service cost	-	187	-	124	2,846
Interest cost	2,073	14,532	93,587	7,926	2,258
Expected return on plan assets	-	(5,794)	(156,392)	(10,701)	(7,688)
Employee contributions	-	-	-	(34)	(161)

	2,073	8,925	(62,805)	(2,685)	(2,745)

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

32. Post-retirement benefit plans (Continued)

b) Total expenses recognized in income (Continued)

			2007

					Visão
		PAMA	PBS-A		Telesp/Assist/
	CTB	(i)	(i) (ii)	PBS	TEmpresas


Current service cost	-	-	-	93	3,590
Interest cost	2,229	11,159	86,729	6,818	2,568
Expected return on plan
assets	-	(6,087)	(167,404)	(9,374)	(6,598)
Employee contributions	-	-	-	(63)	(149)

	2,229	5,072	(80,675)	(2,526)	(589)

c) Change in net actuarial liabilities (assets)

					Visão Telesp/
					Assist/
	CTB	PAMA	PBS-A	PBS	TEmpresas


Liabilities recorded in the balance sheet on
December 31,2006	23,326	51,604	-	-	-
Expenses in 2007	2,229	5,072	(80,675)	(2,526)	(589)
Contribution of the Companies in 2007	(3,378)	(5)	-	(37)	(2,195)
(Gain)/Loss generated in the period	(1,387)	17,965	(59,580)	(6,008)	(15,131)
Overfunding not recorded in the balance sheet	-	-	140,255	8,571	17,915

Liabilities recorded in the balance sheet on
December 31,2007	20,790	74,636	-	-	-

Expenses in 2008	2,073	8,925	(62,805)	(2,685)	(2,745)
Contribution of the Companies in 2008	(3,323)	(5)	-	(328)	(2,200)
(Gain)/Loss generated in the period	6,942	38,732	230,936	24,759	(11,767)
Overfunding not recorded in the balance sheet	-	-	(168,131)	(21,746)	16,712

Liabilities recorded in the balance sheet in
31/12/2008	26,482	122,288	-	-	-

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

32. Post-retirement benefit plans (Continued)

d) Change in actuarial liabilities

					Visão
					Telesp/
					Assist/
	CTB	PAMA	PBS-A	PBS	TEmpresas


Actuarial liabilities – 12/31/2006	23,326	111,135	882,270	69,317	26,938
Cost of current service	-	-	-	93	3,590
Interest in actuarial liabilities	2,229	11,159	86,729	6,818	2,568
Benefits paid during the year	(3,378)	(6,919)	(73,066)	(5,353)	(1,444)
Actuarial (gains)/losses in the year	(1,387)	22,259	9,703	5,927	(9,091)


Actuarial liabilities 12/31/2007	20,790	137,634	905,636	76,802	22,561


Cost of current service	-	187	-	124	2,846
Interest in actuarial liabilities	2,073	14,532	93,587	7,926	2,258
Benefits paid during the year	(3,323)	(7,426)	(83,746)	(6,025)	(764)
Actuarial (gains)/losses in the year	6,942	45,614	152,903	12,756	1,974


Actuarial liabilities 12/31/2008	26,482	190,541	1,068,380	91,583	28,875

e) Change in plan assets

					Visão
					Telesp/
				Visão	Assist/
	CTB	PAMA	PBS-A	Assist.	TEmpresas


Fair value of plan assets at 12/31/2006	-	59,531	1,305,207	83,077	56,709
Benefits paid in the year	(3,378)	(6,919)	(73,066)	(5,353)	(1,444)
Sponsor’s contributions in the year	3,378	5	257	67	2,217
Return on plan assets in the year	-	6,087	167,404	9,374	6,598
Gains/(losses) on assets	-	4,294	69,025	11,967	6,168


Fair value of plan assets at 12/31/2007	-	62,998	1,468,827	99,132	70,248


Benefits paid in the year	(3,323)	(7,426)	(83,746)	(6,025)	(764)
Sponsor’s contributions in the year	3,323	5	-	340	2,406
Return on plan assets in the year	-	5,794	156,393	10,701	7,689
Gains/(losses) on assets	-	6,882	(78,033)	(11,980)	13,694


Fair value of plan assets at 12/31/2008	-	68,253	1,463,441	92,168	93,273

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

32. Post-retirement benefit plans (Continued)

f) Expenses estimated for 2009

					Visão
					Telesp/Assist
	CTB	PAMA	PBS-A	PBS	/TEmpresas

Cost of current service	-	157	-	156	3,752
Interest cost	2,503	18,973	104,319	8,935	2,736
Expected return on assets	-	(7,064)	(169,599)	(9,976)	(10,381)
Employee contributions	-	-	-	(21)	(384)

Total expenses (reversals) for 2008	2,503	12,066	(65,280)	(906)	(4,277)

g) Actuarial assumptions

		2008

	PBS/Visão
	Telesp/Visão Assist/
	Visão TEmpresas/
	CTB	PAMA	PBS-A

Rate used for present value discount of actuarial liabilities	10.14% p.a	10.14% p.a	10.14% p.a
	11.15% p.a for all
Expected return rate on plan assets	plans	10.88% p.a	11.91% p.a
	PBS: 6.44% p.a
Future salary increase rate	Visão: 7.10% p.a	Not applicable	Not applicable
Long-term inflation rate	4.90% p.a	4.90% p.a	4.90% p.a
Medical cost increase rate	Not applicable	8.04% p.a	Not applicable
Increase in use of medical services for each additional year of age	Not applicable l	4.00% p.a	Not applicable
Benefit growth rate	4.90% p.a	Not applicable	4.90% p.a
Capacity factor – salaries	98.00%	-	-
Capacity factor – benefits	98.00%	-	-
	AT-83 segregated by	AT-83 segregated	AT-83 segregated
Mortality table	sex	by sex	by sex
Disability mortality table	IAPB-57	IAPB-57	IAPB-57
Disability table	Mercer Disability	Mercer Disability	Not applicable
	0.15 / (time of
Turnover table	service+ 1).starting at
	50 years old	-	-
		5% to reach 52
		years and 10 to
		participate, 3% for
Expected age established for the use of medical services		each subsequent
		year, 100% in
		eligibility for
	-	normal retirement	-
	First age of one of the
Retirement age		Not applicable	Not applicable
	benefits
% of active married participants on retirement date	95%	Not applicable	Not applicable
	Wives are 4 years
Age difference between participants and spouses	younger than the	Not applicable	Not applicable
	husband
Number of assisted participants/beneficiaries CTB	-	3.445	5.254
Number of active participants of PBS-Telesp	36	-	-
Number of retired participants of PBS-Telesp	337	-	-
Number of dependent groups of retirees of PBS-Telesp	30	-	-
Number of active participants of Visão Telesp plan (including
self-sponsored)	5.467	-	-
Number of active participants of Visão Assist plan	37	-	-
Number of active participants of Visão Telefonica Empresas plan	192	-	-

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

32. Post-retirement benefit plans (Continued)

g) Actuarial assumptions (Continued)

		2007

	PBS/Visão
	Telesp/Visão
	Assist/ Visão
	TEmpresas/ CTB	PAMA	PBS-A


Rate used for present value discount of actuarial liabilities	10.77% p.a.	10.77% p.a.	10.77% p.a.
	10.99% p.a for plans
	managed by Visão
	Telesp. 10.98% for
	plans managed by
	Visão TEmpresas.
Expected return rate on plan assets		9.61% p.a.	10.92% p.a.
	11.00% for plans
	managed by Visão
	Assist. 11.15% p.a
	for plans managed
	by PBS-Telesp.
Future salary increase rate	6.59% p.a	Not applicable	Not applicable
Long-term inflation rate	4.50% p.a	4.50% p.a	4.50% p.a
Medical cost increase rate	Not applicable	7.64% p.a	Not applicable
Increase in use of medical services for each additional year
of age	Not applicable	4.00% p.a	Not applicable
Benefit growth rate	4.50% p.a	Not applicable	4.50% p.a
Capacity factor – salaries	98.00%	-	-
Capacity factor – benefits	98.00%	-	-
	AT-83 segregated	AT-83 segregated	AT-83 segregated
Mortality table	by sex	by sex	by sex
Disability mortality table	IAPB-57	IAPB-57	IAPB-57
Disability table	Mercer Disability	Mercer Disability	Not applicable
	0.15 / (time of
Turnover table	service+ 1).starting
	at 50 years old	-	-
	First age o fone of
Retirement age		Not applicable	Not applicable
	the benefits
% of active married participants on retirement date	95%	Not applicable	Not applicable
	Wives are 4 years
Age difference between participants and spouses	younger than the	Not applicable	Not applicable
	husband
Number of assisted participants/beneficiaries CTB plan	-	3.401	5.285
Number of active participants of PBS-Telesp	39	-	-
Number of retired participants of PBS-Telesp / CTB plan	334	-	-
Number of dependent groups of retirees of PBS-Telesp /
CTB Plan	31	-	-
Number of active participants of Visão Telesp plan
(including self-sponsored)	6.357	-	-
Number of active participants of Visão Assist plan	96	-	-
Number of active participants of Visão Telefonica Empresas
plan	211	-	-

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

33. Insurance (unaudited)

The Company and its subsidiaries’ polices as well as that of the Telefónica Group includes the maintenance of insurance coverage for all assets and liabilities involving significant amounts and high risks based on management’s judgment and following Telefónica S.A.’s corporate program guidelines. In this context Telecomunicações de São Paulo S.A. – Telesp complies with the Brazilian legislation for contracting insurance coverage.

The major insurances contracted by the Company are shown below:

Type		Insurance coverage


Operational risks (with loss of profits)		US$10,788,108 mil
Optional civil responsability - vehicles		R$1.000
ANATEL guarantee insurance		R$10.463,8

34. Financial instruments

The table below shows a breakdown of financial assets and liabilities as of December 31, 2008. The effects of the first-time adoption of CPC Technical Pronouncement No. 14 are described in Note 3.b.

			Consolidated

	Measured at
	fair value
	through
	profit or	Available	Amortized		Total Book	Total
Financial assets	loss	for sale	cost	Hedge	Value	Fair Value

*Current assets*
Cash and cash equivalents (Note
5)	31,993	-	-	-	31,993	31,993
Short-term investments (Note 5)	1,709,013	-	-	-	1,709,013	1,709,013
Derivatives	7	-	-	95,740	95,747	95,747

*Noncurrent assets*
Interests in other companies	-	265,378	-	-	265,378	265,378

Amounts linked to the National	-	-	11,289	-	11,289	11,289
Treasury
Derivatives	6	-	-	-	6	6


Total financial assets	1,741,019	265,378	11,289	95,740	2,113,426	2,113,426

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

34. Financial instruments (Continued)

			Consolidated

	Measured at
	fair value
	through			Total
	profit or	Amortized		Book	Total Fair
Financial liabilities	loss	cost	Hedge	Value	Value

*Current liabilities*
Loans, financing (Note 15)	-	502,503	-	502,503	502,503
Debentures (Note 16)	-	16,339	-	16,339	16,339
Derivatives	462	-	14,738	15,200	15,200

*Noncurrent liabilities*
Loans and financing (Note 15)	-	1,717,352	-	1,717,352	1,717,352
Debentures (Note 16)	-	1,500,000	-	1,500,000	1,500,000
Derivatives	230	-	21,918	22,148	22,148


Total financial liabilities	692	3,736,194	36,656	3,773,542	3,781,574

The Company and its subsidiaries made a valuation of their financial assets and liabilities in relation to market values based on available information and appropriate valuation methodologies. However the interpretation of market information as well as the selection of methodologies requires considerable judgment and reasonable estimates in order to produce adequate realizable values. As a result the estimates presented do not necessarily indicate the amounts which might be realized in the current market. The use of different market approaches and/or methodologies for the estimates may have a significant effect on the estimated realizable values.

Interests in other companies

The Company has direct and indirect interests in other companies resulting from the privatization process. These investments, measured at market value, consider the latest quotation available in December 2008 and 2007.

The table below shows the composition of investments in other companies at market value as of December 31, 2008 and 2007:

		Consolidated

	%
	Partic.	2008	*2007 ()**


Portugal Telecom	1.21	210,431	248,299
Zon Multimédia	0.52	19,531	40,324
Other Investiments		35,416	44,535

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

Total

265,378

333,158

(*) In 2007 the values of investments for the financial statements are registered at the acquisition cost and above is presented at market value.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

34. Financial instruments (Continued)

Risk management policy

The Company is exposed to several market risks as a result of its commercial operations, debts obtained to finance its activities and debt-related financial instruments.

The principal market risk factors that affect the Company’s business are detailed below:

a) Exchange rate risk

This risk arises from the possibility that the Company may incur losses due to exchange rate fluctuations which would increase the balances of loans financing and purchase commitments denominated in foreign currency and the related financial expenses. In order to minimize the risk of financial liabilities in foreign currency, the Company enters into hedge contracts (swaps) with financial institutions.

The Company’s indebtedness and the result of loan financing and purchase commitment liabilities denominated in foreign currency are significantly affected by the foreign exchange rate risk. As of December 31 2008, 13.68% (28.50% on December 31, 2007) of the debt was denominated in foreign currency (U.S. dollar and yen); the debt was covered by asset positions on currency hedge transactions (swaps for CDI).

b) Interest rate risk

This risk arises from the possibility that the Company may incur losses due to internal and external interest rate fluctuations affecting the Company’s results (debentures and JBIC) and the short positions of derivatives at floating interest rates to cover the risks of foreign currency-denominated debts.

The debt to the BNDES is indexed to the TJLP (Long-Term Interest Rate determined on a quarterly basis by the National Monetary Council), which has been stable since July 2007 (6.25% per annum).

In order to minimize its exposure to the local variable interest rate (CDI), the Company invests its excess cash, amounting to R$1,709,013 (R$348,648 at December 31, 2007), substantially in short-term investments (Bank Deposit Certificates) based on the CDI rate variation. The book values of these instruments approximate market values, since they may be redeemed in the short term.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

34. Financial instruments (Continued)

Risk management policy (Continued)

b) Interest rate risk (Continued)

As of December 31, 2008 the Company also contracted CDI + 0.35% of CDI percentage swap with identical flows of those of debentures (note 16).

c) Debt acceleration risk

As of December 31, 2008, the Company’s loan and financing agreements contain restrictive clauses (covenants), typically applicable to such agreements, relating to cash generation, debt ratios and other restrictions. The Company has complied with these restrictive clauses in full, and such covenants do not restrict its ability to conduct its ordinary course of business.

d) Credit risk

This risk arises from the possibility that the Company may incur losses due to the difficulty in receiving amounts billed to its customers. The credit risk on accounts receivable is dispersed. The Company constantly monitors the level of accounts receivable and limits the risk of past-due accounts, interrupting access to telephone lines in case the customer does not pay the related bills in 30 days. Exceptions are made for telecommunication services that must be maintained for security or national defense reasons.

As of December 31, 2008, the Company’s customer portfolio had no subscribers whose receivables were individually higher than 1% of the total accounts receivable from services.

The Company is also subject to credit risk related to temporary cash investments and receivables from swap transactions. The Company reduces this exposure by dispersing it among first line financial institutions.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

34. Financial instruments (Continued)

Derivatives

Risk management policy

All the Company’s derivative instruments have the objective of providing hedge against the risk of variation in foreign exchange and external and internal interest rates arising from financial debts, according to the company’s risk management policy. As such, any changes in risk factors generate an opposite effect on the hedged end. There are no derivative instruments for speculative purposes and liabilities in foreign exchange are hedged.

The Company has internal controls over its derivative instruments, which, according to management, are adequate to control the risks associated with each market strategy. The Company’s results derived from its derivative financial instruments indicate that the risks have been adequately managed.

Fair value of derivative financial instruments

The discounted cash flow method was used to determine the market value of loans, financing, debentures and derivative instruments (currency and interest rate swap) considering expected settlement of liabilities or realization of assets at the market rates prevailing at balance sheet date.

Fair values are calculated by projecting future operating flows, using BM&F Bovespa curves, and discounting to present value through market DI rates for swaps, as informed by BM&F Bovespa.

The market values of currency coupon swaps vs. CDI were obtained through market currency rates in force at the balance sheet date and projected market rates were obtained from currency coupon curves. The coupon for positions indexed to foreign currencies was determined using the 360-calendar-day straight-line convention; the coupon for positions indexed to CDI was determined using the 252-workday exponential convention.

The consolidated derivative financial instruments shown below are registered with CETIP.

All of them are classified as swaps and do not require margin deposits.

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

Notes to the financial statements (Continued)

December 31, 2008 and 2007

(In thousands of reais)

(A free translation of the original report issued in Portuguese)

34. Financial instruments (Continued)

Accumulated effect

Notional Value

Fair value

2008

Amount

Index

receivable /

Amount

(received)

payable /

Description

2008

2007

2008

2007

(*)

(paid) (*)

Swap Contracts

Assets

Foreign Currency (a)

407.945