EXPLANATORY NOTES FOR THE FINANCIAL STATEMENTS
Fiscal years ending on December 31, 2002
(In thousand of reais)

1. OPERATING CONTEXT

Livraria e Papelaria Saraiva S.A. has as main activity the trading of books, stationery articles, audio and video products, periodicals and multimedia products. The distribution is made through the web-based sales platform and through a chain of stores comprised by 31 units, of which 13 Mega Stores and 18 conventional stores.

2. PRESENTATION AND PREPARATION OF THE FINANCIAL STATEMENTS

The financial statements have been prepared based on the accounting practices set forth in the Brazilian corporate law and rules of the Brazilian Securities and Exchange Commission.

Description of the main accounting practices

a. Financial investments
Recorded at cost, plus earnings incurred up to the date of the balance sheets, which does not exceed the market value.

b. Rights and obligations
Adjusted according to the financial charges pursuant to the contracts and legislation in force, so as to reflect the amounts incurred up to the date of the balance sheets.

c. Provision for bad debts
Constituted in an amount deemed to be sufficient to meet any possible losses in the realization of receivables from customers and receivable checks. The credits deemed to be irrecoverable are directly taken to the income from the fiscal year.

d. Inventories
Evaluated at the average acquisition cost which does not exceed the market price.

e. Investments
Evaluated at the acquisition cost, deducted from provision for devaluation.

f. Fixed assets
Recorded at the acquisition, formation or construction cost. The depreciation is calculated by the straight line method at rates that take into consideration the useful life time of goods.

g. Deferred assets
Recorded at the acquisition or formation cost, refers to pre-operating expenditures with commercial assignment and expenses incurred before the initial operation of new stores. The amortization of such expenditures is carried out within the term of 5 years, or according to the provisions of lease agreements, from the initial commercial operation of such stores.

h. Income tax and social contribution
The taxes on profit or losses of the fiscal year include the current and deferred values.
The income tax and social contribution for the fiscal year are respectively calculated at the rate of 15% on the taxable profit, plus an addition of 10% and, at the rate of 9% on the adjusted accounting profit.
The deferred income tax and social contribution are presented in the current assets, and assets, according to Note No.8. They are recorded to reflect the future tax effects attributable on: temporary differences between the tax base for assets and liabilities and their corresponding accounting value; and, tax losses and negative bases for social contribution.
The deferred tax assets so constituted, considers the following aspects:
a) it is based on the expectation of realization of the future taxable profit considering the tax rates in force on the date of the balance sheets;
b) it is annually reviewed and adjusted in case any material change occurs to the expected taxable profits; and
c) pursuant to the procedures adopted by the parent company, the accounting record in the financial statements meet the requirements of CVM Normative Instruction No. 371 of June 27, 2002.

3. RECEIVABLES FROM CUSTOMERS

4. FIXED ASSETS

5. DEFFERED ASSETS

6. LOANS AND FINANCING

The composition of the long term per maturation year is as follows:

The financing obtained with BNDES - FINEM was intended to the project for investment in Mega Stores and modernization of conventional stores, and are guaranteed by the parent company, equivalent to 100% on the financed value. On the principal, annual interests apply at a rate between 3% and 3.5%, plus Long Term Interest Rate (TJLP).

7. RELATED PARTIES

The transactions among related parties included commercial operations of purchase and sale and loan with the parent company and were performed on an arms' length basis.

8. DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION

The deferred income tax and social contribution have the following origin:

 CVM Instruction 371 of 06/27/2002

The company, according to the procedures adopted by the parent company as regards the requirements of the Brazilian Securities and Exchange Commission - CVM, based: a) on the expectation of generation of future taxable profits and positive cash flows, brought to present values; and b) on the history of profitability and positive cash flows for the last five years; thus meeting the provisions and conditions established in CVM instruction 371/02, acknowledged and recorded in its financial statements the deferred tax assets formed on the long term liabilities, represented by legal actions challenging federal taxes and, on the balance of tax losses and negative bases for social contribution.

In case of final decision for the legal actions filed, the estimate of realization of the deferred tax assets are concentrated in the next six years, namely:

 9. PROVISION FOR CONTRIBUTIONS AND TAXES

The Company discusses in court the legality of some federal taxes related to PIS, COFINS, Income Tax and CSLL.

In relation to the Legal Actions challenging the correction of inflationary indexes carried out by Law 8,880/94 - Real Plan with reflexes on the amounts to pay for Income Tax and CSLL, an additional provision was constituted equivalent to R$ 2,447, already discounting the tax effects arising from a more conservative position in relation to the perspective of gain.

Pursuant to Art. 11 of MP 38/02, the Company liquidated in the fiscal year, a portion of its contingent liabilities represented by a Legal Action which sought the division of PIS debt into installments. The payment, with release of fine and interests, the latter calculated only on the period from February 1999 to July 2002, was made in the fiscal year in six equal, successive installments plus SELIC interest. The net effect led to the income of the fiscal year, already discounting the tax effects, represent the amount equivalent to R$ 1,715.

The composition of the provision is as follows:

10. STOCKHOLDERS' EQUITY

The capital stock, fully paid in, in the amount of R$ 51,210 (R$ 51,210 in 2001), is represented by 57,539,843 common shares with par value of R$ 0.89 (R$ 0.89 in 2001).

All shares are entitled to a minimum dividend of 25% of the adjusted net profit for each fiscal year.

11. FINANCIAL INSTRUMENTS

The financial instruments contained in the balance sheets, related to cash and banks, recoverable and deferred taxes, loans and financing, when compared with the amounts that could be obtained in their negotiation in an active market or, in their absence, with the present net value adjusted based on the interest rate in force in the market, materially approximate to their corresponding market values. The market value for financing of BNDES are identical to the accounting balance, since there are no similar instruments in the national market with comparable maturation and interest rates.

The Company did not realize operations with derivatives in the fiscal year.

12. NON-OPERATING INCOME

In August 24, 2002, the Company had one of its warehouses reached by fire. The facilities, as well as the entire operating assets, including the inventories were covered by insurance policy. The income assessed with the write-off of assets, considering the insurance coverage, was positive in R$ 2,035 and is registered in the non-operating result.

13. INSURANCE COVERAGE

On December 31, 2002, the Company had an insurance coverage against fire and several risks in relation to the fixed assets and to inventories, for amounts sufficient to cover eventual losses.

BOARD OF DIRECTORS

Jorge Eduardo Saraiva
Chairman

Henriqueta da Fonseca Saraiva
Vice-Chairman

Ruy Mendes Gonçalves
Member

DIRECTION

Ruy Mendes Gonçalves
President Director

José Luiz Machado Alvim de Próspero
Superintendent Director

Ledward Bueno de Camargo Júnior
Director of Purchases and Logistics

Davi Hernandes Garcia
Accountant
CRC-1SP146453/O-4