Exhibit 13
<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .

MANAGEMENT'S REPORT

The financial statements, financial analyses and all other information,
were prepared by management, which is responsible for their integrity and
objectivity. Management believes the financial statements, which require the
use of certain estimates and judgments, fairly and accurately reflect the
financial position and operating results of Sears, Roebuck and Co. ("the
Company") in accordance with generally accepted accounting principles. All
financial information is consistent with the financial statements.
     Management maintains a system of internal controls which it believes
provides reasonable assurance that, in all material respects, assets are
maintained and accounted for in accordance with management's authorizations and
transactions are recorded accurately in the books and records. The concept of
reasonable assurance is based on the premise that the cost of internal controls
should not exceed the benefits derived. To assure the effectiveness of the
internal control system, the organizational structure provides for defined
lines of responsibility and delegation of authority. The Company's formally
stated and communicated policies demand of employees high ethical standards in
their conduct of its business. These policies address, among other things,
potential conflicts of interest; compliance with all domestic and foreign laws,
including those related to financial disclosure; and the confidentiality of
proprietary information. As a further enhancement of the above, the Company's
comprehensive internal audit program is designed for continual evaluation of
the adequacy and effectiveness of its internal controls
and measures adherence to established policies and procedures.
     Deloitte & Touche LLP, independent certified public accountants, have
audited the financial statements of the Company, and their report
is presented below. Their audit also includes a study and evaluation of
the Company's control environment, accounting systems and control procedures to
the extent necessary to conclude that the financial statements present fairly
the company's financial position and results of operations. The independent
accountants and internal auditors advise management of the results of their
audits, and make recommendations to improve the system of internal controls.
Management evaluates the audit recommendations and takes appropriate action.
     The Audit Committee of the Board of Directors is comprised entirely of
directors who are not employees of the Company. The committee reviews audit
plans, internal control reports, financial reports and related matters and
meets regularly with the Company's management, internal auditors and
independent accountants. The independent accountants
and the internal auditors advise the committee of any significant matters
resulting from their audits and have free access to the committee without
management being present.


/s/ Arthur C. Martinez
Arthur C. Martinez
Chairman and Chief Executive Officer

/s/ Alan J. Lacy
Alan J. Lacy
Executive Vice President and Chief Financial Officer

/s/ James A. Blanda
James A. Blanda
Vice President and Controller

INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
SEARS, ROEBUCK AND CO.
We have audited the accompanying Consolidated Balance Sheets of Sears, Roebuck
and Co. as of December 28, 1996 and December 30, 1995, and the related
Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for
each of the three years in the period ended December 28, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Sears, Roebuck
and Co. as of December 28, 1996 and December 30, 1995, and the results of its
operations and its cash flows for each of the three years in
the period ended December 28, 1996 in conformity with generally accepted
accounting principles.


/s/ Deloitte & Touche LLP
Deloitte & Touche  LLP
Chicago, Illinois
February 10, 1997

                                                                            
                            Sears annual report 1996                        p.19


<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .


CONSOLIDATED STATEMENTS OF INCOME



<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
millions, except per common share data                         1996     1995     1994
-------------------------------------------------------------------------------------
<S>                                                         <C>      <C>      <C>
REVENUES
Merchandise sales and services                              $33,812  $31,188  $29,608
Credit revenues                                               4,424    3,807    3,502
-------------------------------------------------------------------------------------
         Total revenues                                      38,236   34,995   33,110
-------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, buying and occupancy                          24,925   23,202   21,882
Selling and administrative                                    8,030    7,391    7,338
Depreciation and amortization                                   697      580      531
Provision for uncollectible accounts                          1,136      744      626
Interest                                                      1,365    1,373    1,279
-------------------------------------------------------------------------------------
         Total costs and expenses                            36,153   33,290   31,656
-------------------------------------------------------------------------------------
Operating income                                              2,083    1,705    1,454
Other income                                                     22       23       17
-------------------------------------------------------------------------------------
Income before income taxes                                    2,105    1,728    1,471
Income taxes                                                    834      703      614
-------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS                             1,271    1,025      857
Discontinued operations                                          --      776      402
-------------------------------------------------------------------------------------
Income before extraordinary gain                              1,271    1,801    1,259
Extraordinary gain related to early extinguishment of debt       --       --      195
-------------------------------------------------------------------------------------
NET INCOME                                                  $ 1,271  $ 1,801  $ 1,454
-------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
    Income from continuing operations,
      after allowing for dividends on preferred shares      $  3.12  $  2.53  $  2.13
    Discontinued operations                                      --     1.97     1.03
-------------------------------------------------------------------------------------
    Income before extraordinary gain                           3.12     4.50     3.16
    Extraordinary gain                                           --       --     0.50
-------------------------------------------------------------------------------------
    Net income                                              $  3.12  $  4.50  $  3.66
-------------------------------------------------------------------------------------
Average common and common equivalent shares outstanding       399.1    394.0    388.9
-------------------------------------------------------------------------------------
</TABLE>


See accompanying notes.



                                                                              
p.20                         Sears annual report 1996


<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .

ANALYSIS OF CONSOLIDATED OPERATIONS

Sears, Roebuck and Co. ("the Company") is a multi-line retailer providing a
wide array of merchandise and services in the United States, Canada
and Mexico. In 1996, the Company marked its first full year of operations
focused exclusively on retailing since 1931. In 1995, the Company divested
itself of its insurance and real estate subsidiaries as follows:

-  The Company's 80% ownership interest in The Allstate Corporation
   ("Allstate") was distributed to shareholders as a tax-free dividend in June
   1995. The distribution of Allstate reduced consolidated shareholders' equity
   by $8.98 billion.

-  The Homart Development Co. and affiliated entities ("Homart") were sold.

     The consolidated financial statements present the results of Allstate and
Homart as discontinued operations as discussed in note 2 to the consolidated 
financial statements.
     Operating results for the Company are reported for two business segments:
domestic operations and international operations. The domestic operations
segment includes the Company's operations in the United States and Puerto Rico.
The Company's domestic operations are comprised of the following:

-  Retail Stores consisting of:

   -  Full-line Stores, located principally in shopping malls, which sell
      apparel, home fashions and hardlines merchandise.

   -  Home Stores, located off-the-mall, comprised of Sears Hardware, Orchard
      Supply Hardware, Sears Dealer and HomeLife furniture stores and Commercial
      Sales.

   -  Auto Stores, all of which are considered off-the-mall stores, are
      separated into two divisions: the Sears Tire Group, which sells and 
      installs tires, batteries and related goods and services through Sears 
      Auto Centers, Tire America and NTW stores; and the Parts Group, which 
      includes the automotive parts stores of Western Auto and Parts America.

-  Home Services which provides product repair services, maintenance
   agreements, installed home improvements and carpet cleaning and pest control
   for the home.

-  Direct Response Marketing which provides specialty catalogs, credit
   protection insurance, clubs and services, and impulse and continuity
   merchandise.

-  Credit includes the results of the  Company's portfolio of receivables
   arising from products used to pay for purchases of merchandise and services
   from domestic operations. The domestic credit card receivables portfolio
   consists primarily of Sears Card, the largest proprietary credit card in the
   United States.

     International operations consists of similar merchandising and
service operations conducted in Canada through Sears Canada Inc.
("Sears Canada"), a 55.0% owned subsidiary, and in Mexico through
Sears Roebuck de Mexico, S.A. de C.V. ("Sears Mexico"), a 75.5% owned
subsidiary. On Dec. 9, 1996 Sears Canada issued approximately ten million
previously unissued common shares of stock. As the Company did not participate
in this offering, its ownership percentage was reduced from 61.1% to 55.0%. No
gain or loss was recorded on this transaction.
     Throughout the analyses of consolidated operations and financial
condition, certain prior year information has been reclassified to conform with
current year presentation.
     Consolidated revenues for 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
millions                                  1996     1995     1994
------------------------------------------------------------------
<S>                                      <C>      <C>      <C>
Domestic operations:                    
  Merchandise sales and services         $30,742  $28,173  $26,284
  Credit revenues                          4,106    3,455    3,177
------------------------------------------------------------------
Total domestic operations                 34,848   31,628   29,461
International operations                   3,388    3,367    3,649
------------------------------------------------------------------
      Total revenues                     $38,236  $34,995  $33,110
------------------------------------------------------------------
</TABLE>

     Consolidated revenues in 1996 increased $3.24 billion, or 9.3%,
resulting from continued growth in domestic operations. Domestic revenues rose
$3.22 billion, or 10.2%, primarily due to strong sales increases within
Full-line Stores, Home Stores and Auto Stores. The domestic credit portfolio
also contributed to the overall revenue growth. International operations
revenues were $3.39 billion, relatively flat as compared to prior year, as the
economic environment continues to be challenging for both Canada and Mexico. In
1995, consolidated revenues increased $1.89 billion, or 5.7%, from 1994.
Domestic revenues rose $2.17 billion, or 7.4%, primarily due to strong
merchandise sales and solid credit revenues increases. International revenues
declined $282 million, or 7.7%, due to adverse exchange rate changes and
difficult economic conditions in both Canada and Mexico.

DOMESTIC OPERATIONS
Supplementary domestic merchandising information:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------
millions, except number of stores                   1996     1995     1994
--------------------------------------------------------------------------
<S>                                              <C>      <C>      <C>
Full-line Stores revenues                        $21,657  $20,104  $18,910
Off-the-mall store revenues                        6,266    5,361    4,866
--------------------------------------------------------------------------
Total retail store revenues                       27,923   25,465   23,776
Service and other revenues                         2,819    2,708    2,508
--------------------------------------------------------------------------
Domestic merchandise sales and services          $30,742  $28,173  $26,284
--------------------------------------------------------------------------
Number of Full-line Stores                           821      806      800
Number of off-the-mall stores                      2,550    2,264    1,898
--------------------------------------------------------------------------
Total retail stores                                3,371    3,070    2,698
--------------------------------------------------------------------------
Retail store revenues per selling square foot(1) $   321  $   323  $   317
--------------------------------------------------------------------------
Comparable store sales increase                      5.8%     4.7%     8.3%
--------------------------------------------------------------------------
</TABLE>

(1)  Retail store selling square footage has been restated to conform with
     current year presentation.

                                                                       
                            Sears annual report 1996                   p.21


<PAGE>

S E A R S ,   R O E B U C K   A N D   C O .

ANALYSIS OF CONSOLIDATED OPERATIONS  (Continued)

     One of the primary objectives of the Company's strategy has been
to improve the sales productivity of its Full-line Stores. The success of
this strategy can be measured by the comparable store sales increases, which
have remained strong over the past three years. The strength of the comparable
store sales increases becomes even more evident considering the intense
competition in the retail industry during the period.
     Full-line Stores revenues increased 7.7% in 1996, which built
on a 6.3% increase in 1995. Full-line Stores revenues have increased
substantially since the Company's restructuring announced in 1993 and have
benefited from the remodeling and modernization of approximately 470 Full-line
Stores, an increase in apparel selling square feet as non-selling square feet
and space formerly occupied by furniture departments have been converted, and a
more targeted, customer-focused merchandise selection. In 1996, revenues also
benefited as 27 Full-line Stores were opened and 12 were closed. In 1995, 16
Full-line Stores were opened and 10 were closed.

                         [Comparable Store Bar Graph]

     The 1996 increase in Full-line Stores revenues was paced by
substantial apparel sales increases over 1995. Sales gains were strongest
in women's ready-to-wear, children's and men's fashions, footwear and
cosmetics. The Company has undertaken several initiatives to grow the apparel
business. They include remodeling the Full-line Stores, offering more varied
national brand-name merchandise and developing private brand fashion
merchandise for select lines. Hardlines merchandise had solid revenue growth in
1996 led by sales of Craftsman  tools, hardware, and lawn and garden
merchandise. Also contributing to the hardlines sales increase were sales
growth in home appliances and home office merchandise.
     In 1995, the increase in Full-line Stores revenues was led by significant
gains in apparel sales. Sales increases were strongest in women's dresses,
juniors, cosmetics, jewelry and men's fashions. Hardlines merchandise had
improved revenues primarily from strong sales in home electronics, appliances
and home office merchandise. Sales of hardware and exercise equipment also
increased in 1995.
     While the Full-line Stores have made considerable productivity
improvements, the Company is providing for additional growth by expanding its
various off-the-mall store formats.
     Off-the-mall store revenues in 1996 increased 16.9% over 1995.
Home Stores contributed the largest portion of this revenue growth.
The increase was attributable to the expansion of the Sears Hardware stores (71
new stores) and the acquisition of 61 Orchard Supply Hardware stores. In
addition to new store openings, Sears Hardware had low-teen comparable store
sales increases in 1996. Sears Dealer stores and HomeLife furniture stores also
helped drive off-the-mall revenues by opening 120 and 12 new stores,
respectively.
     The automotive business also generated revenue growth in 1996. The Sears
Tire Group experienced strong revenue increases with the opening of 20 NTW and
6 Tire America stores in addition to 14 new Sears Auto Centers in 1996 and
mid-single-digit comparable store sales increases over 1995. Parts Group opened
67 new stores throughout 1996 and converted 50 Western Auto stores to the 
new parts format.
     In 1995, off-the-mall revenues increased 10.2% over 1994. The increase was
primarily due to revenue growth in Home Stores as the Company opened 98 new
Sears Dealer stores, 45 Sears Hardware stores and 26 HomeLife furniture stores.
Revenues at the Auto Stores also improved as the Company aggressively expanded
this business by opening 49 and acquiring 166 automotive parts stores. 
The Sears Tire Group experienced significant revenue growth with the opening of
15 NTW and 6 Tire America stores and 16 Sears Auto Centers in 1995.
     Because of their diverse products and design, the Company's various store
formats have different sales productivity (revenue per selling square foot). In
1996, the decrease in overall retail store revenues per selling square foot is
attributable to a change in the store mix.
     Services and other revenues, which are generated primarily by
the Home Services business, increased 4.1% in 1996 on top of an 8.0% increase 
in 1995. Home Services revenues improved on increased maintenance agreement 
sales and in-store installation sales which leveraged off the Company's strong 
retail sales performance, partially offset by a decline in installed home 
improvements due to termination of a licensee agreement. In 1995, services and 
other revenue increased primarily due to increases in maintenance agreement 
sales, which benefited from the strong hardlines sales.
     The domestic credit card receivables portfolio contributes significantly
to domestic operations' profitability. The key components that determine
profitability of the portfolio (before administrative expenses   
and income taxes) are net credit revenues (gross revenues less the funding cost
on securitized receivables), interest expense and the provision for
uncollectible accounts.

                                                                          
p.22                        Sears annual report 1996


<PAGE>

S E A R S ,   R O E B U C K   A N D   C O .

ANALYSIS OF CONSOLIDATED OPERATIONS  (Continued)

     Key domestic credit portfolio information:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
millions                                                           1996        1995       1994
----------------------------------------------------------------------------------------------
<S>                                                             <C>         <C>        <C>
Gross credit revenues (1)                                       $ 4,454       3,781      3,528
Funding cost on securitized receivables                         $  (348)       (326)      (351)
Net credit revenues                                             $ 4,106       3,455      3,177
Sears Card sales as a % of sales (2)                              60.2%        59.7       58.3
Gross credit card receivables                                   $26,731      23,742     21,306
Receivable balances sold at year end                             $6,330       4,549      3,946
Owned credit card receivables at year end                       $20,401      19,193     17,360
Average gross receivables                                       $24,303      21,667     20,094
Average owned receivables                                       $19,257      17,362     15,718
Average account balance (dollars)                                  $971         912        842
Net credit charge-offs to average                                                    
 gross credit card receivables (1)                                4.24%        3.15       2.96
Gross credit card receivables                                                        
 delinquent sixty days or more at year end                        5.43%        4.19       3.86
Allowance for uncollectible accounts                                                 
 as a percentage of gross credit card                                                
 receivables at year end                                          3.63%        3.87       4.32
Provision for uncollectible accounts (1)                        $ 1,081         682        578
----------------------------------------------------------------------------------------------
</TABLE>                                                                   

(1)  Prior year balances have been reclassified to present finance charges on
     charged-off accounts as a reduction of credit revenues.

(2)  For Full-line and HomeLife stores only.


     In 1996, gross credit revenues increased 17.8% reflecting higher gross
receivable balances resulting from strong merchandise sales and the positive
impact of uniform pricing. The ongoing uniform pricing initiative began in 1995
and will result in a uniform finance charge rate of 21% and standardization in
other fees and charges on most Sears Card receivables. The percentage of
merchandise sales and services transacted with the Sears Card in 1996 improved
to 60.2% from 59.7%. The Sears Card continues to have the dominant market share
of credit retail sales generated in the Full-line and off-the-mall stores. Gross
credit revenues for 1995 increased 7.2% due to higher gross receivable balances
driven by strong merchandise sales and a reduction in the minimum required
monthly payment rate.

     Key operating measures for domestic operations:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
millions                                                         1996   1995   1994
-----------------------------------------------------------------------------------
<S>                                                           <C>      <C>    <C>
Gross margin                                                   $8,122  7,265  6,919
  Percent of merchandise sales and services                     26.4%   25.8   26.3
Selling and administrative expense                             $7,232  6,613  6,535
  Percent of total revenues                                     20.8%   20.9   22.2
Interest expense                                               $1,191  1,183  1,120
Funding cost on securitized receivables                        $  348    326    351
  Total funding costs                                          $1,539  1,509  1,471
  Percent of total revenues                                      4.4%    4.8    5.0
Provision for uncollectible accounts                           $1,081    682    578
  Percent of total revenues                                      3.1%    2.2    2.0
Operating income                                               $2,094  1,729  1,400
  Percent of total revenues                                      6.0%    5.5    4.8
-----------------------------------------------------------------------------------
</TABLE>

     Gross margin as a percentage of merchandise sales and services improved to
26.4% in 1996 from 25.8% in 1995. The domestic gross margin rate benefited from
a shift in sales to higher margin apparel merchandise, improved logistics costs
and savings realized from merchandise sourcing initiatives. In 1995, gross      
margin as a percentage of merchandise sales and services declined to 25.8% from
26.3% in 1994. Gross margins were pressured by intense competition in the retail
marketplace throughout the year.
     Domestic operations selling and administrative expense as a percentage
of revenues in 1996 improved 10 basis points to 20.8% from 20.9% in 1995. This
improvement resulted from a decline in payroll and marketing costs
as a percentage of revenues. Partially offsetting these improvements was the
non-recurring impact on 1995 selling and administrative expense related to the
prior year $11 million net benefit from restructuring activities discussed
below.

                        [Domestic Operations Bar Graph]

     In 1995, selling and administrative expense as a percentage of revenues
improved 130 basis points to 20.9% from 22.2% in 1994. The improvement was
primarily attributable to the Company's cost control measures and revenue
growth. Payroll, store operating and general overhead costs declined as a
percentage of revenues in 1995.
     Included in domestic operations selling and administrative expense
in 1995 was a $51 million pretax restructuring charge related to the Company's
realignment initiative. This initiative better aligned the Company's structure
with its growth strategy, particularly the creation of separate tire and
auto parts divisions and the consolidation of certain distribution facilities.
Beginning in 1997, resulting after-tax savings from the restructuring are
expected to be $30 to $35 million annually.
     In 1995, the Company also reversed $62 million of pretax reserves,
previously established as part of its $2.65 billion restructuring announced in
1993, which were no longer needed based on the settlement of obligations and
the adjustment of the carrying values of certain properties to be disposed of 
in connection with that restructuring. This reserve adjustment was also 
included in domestic operations selling and administrative expense in 1995.


                                                                             
                            Sears annual report 1996                        p.23


<PAGE>
S E A R S ,  R O E B U C K   A N D   C O .   

ANALYSIS OF CONSOLIDATED OPERATIONS (Continued)

                       [Domestic Operations Bar Graph]

     Total domestic funding costs, comprised of interest expense and the cost
associated with securitized receivables, as a percentage of revenues improved
from 4.8% in 1995 to 4.4% in 1996. The improvement was attributable to the
strong domestic revenue performance coupled with only a 2.0% increase in
funding costs. The slight increase in total domestic funding costs reflects
higher funding requirements due to a larger receivable portfolio partially
offset by lower effective funding rates resulting from the refinancing of
long-term, higher rate debt.
     In 1995, funding costs as a percentage of revenues improved to 4.8% from 
5.0%. Total funding costs increased 2.6% to $1.51 billion. The 2.6% increase 
reflects the growth in gross credit card receivables partially offset by a 
lower effective funding rate resulting from the favorable interest rate 
environment in 1995.
     The reserve for uncollectible gross credit card receivables was
$971 million and $920 million at Dec. 28, 1996 and Dec. 30, 1995, respectively.
The domestic provision for uncollectible accounts increased
58.6% and net charge-offs increased 51.1% from 1995. These increases reflect
the 12.6% growth in gross domestic credit card receivables
from 1995 levels and the continuing industry-wide trend of increased
delinquencies and bankruptcies. The Company has responded to the aforementioned
trend by implementing an aggressive action plan which includes enhanced
collection efforts and increased investment in technology designed to improve
collection staff productivity.
     In 1995, the domestic provision for uncollectible accounts
was 17.9% above 1994, reflecting the growth in domestic credit card receivables
and the increase in net account charge-offs.
     The key measure of the improved profit performance of domestic operations
is the growth in operating income from 1994 through 1996. The improved
performance is attributable to the strong revenue growth and the reduction in
selling and administrative expense and funding costs as a percentage of
revenues partially offset by an increase in the provision for uncollectible
accounts.
     In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides consistent guidance for distinguishing transfers of
financial assets (securitizations) that are sales from transfers that are
secured borrowings and is effective for securitizations occurring after Dec.
31, 1996.
     SFAS No. 125 requires the Company to recognize gains on
securitizations which qualify as sales. The statement also indicates that
an allowance for uncollectible accounts should not be maintained for
receivables which are sold effective after Dec. 31, 1996. The Company expects
the allowance for doubtful accounts related to the domestic securitized
receivables, which is included in accounts payable and other liabilities as a
recourse obligation, to be depleted during 1997 and 1998.
     The Company anticipates an increase in net income of approximately $100 to
$150 million in 1997 resulting from the implementation of the new statement,
although the precise amount
will be dependent on a number of factors such as interest rates and
levels of securitization.

INTERNATIONAL OPERATIONS
Revenues in U.S. dollars remained unchanged from 1995. Sears Canada revenues
improved 2.6% in 1996 due to a modest recovery in consumer spending. Offsetting
this improvement was a decline in revenues of 11.8% at Sears Mexico resulting
primarily from decreased credit revenues.
     Gross margins as a percentage of merchandising revenues increased to 24.9%
in 1996 from 23.9% in 1995. Sears Canada gross margin
rates improved in 1996, reflecting decreased markdowns and a favorable
comparison against 1995 occupancy expense. This was partially offset
by a decline in gross margin rates at Sears Mexico.
     Selling and administrative expense as a percentage of total revenues
increased to 23.5% in 1996 from 23.1% in 1995. Selling and administrative
expenses at Sears Canada increased primarily due to a restructuring charge. On
July 23, 1996 Sears Canada announced a plan to eliminate certain positions and
close a warehouse and other support facilities as
part of its ongoing cost containment initiative. The Company recorded
a $27 million pretax restructuring charge (before minority interest)
related to this initiative. The restructuring initiatives are projected to
generate annualized pretax savings of $35 to $45 million (before minority
interest). Selling and administrative expense as a percentage of revenues
decreased at Sears Mexico in 1996 due to reduced promotion expenses and lower
benefit costs.
     International operating income as a percentage of revenues
improved 40 basis points, or $13 million, in 1996 due primarily to
the improved performance at Sears Canada.

                                                                          
p.24                         Sears annual report 1996


<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .

ANALYSIS OF CONSOLIDATED OPERATIONS (Continued)

     In 1995, revenues in U.S. dollars declined 7.7% compared to
1994, largely reflecting unfavorable Mexican Peso exchange rates. In
local currencies, revenues at Sears Canada decreased 3.5% from 1994 as
continued slow economic conditions depressed sales. Revenues at Sears Mexico
declined 0.2% in constant pesos in 1995 as consumer demand was stifled under
government economic controls aimed at curbing inflation.
     Gross margins as a percentage of merchandising revenues declined
to 23.9% in 1995 from 24.3% in 1994. Sears Canada gross margin rates declined
in 1995 on higher markdown trends at the retail stores, lower initial margins
at catalog and higher occupancy costs due to a writedown of certain warehouse
facilities. Gross margin rates also declined at Sears Mexico in 1995 as
increased markdowns were taken in an effort to stimulate sales growth in
response to lower consumer spending.
     Selling and administrative expense as a percentage of total revenues
increased to 23.1% in 1995 from 22.0% in 1994. Selling and administrative
expenses at Sears Canada declined in total dollars in 1995, reflecting
continued cost control efforts, but increased as a percentage of revenues due
to year-over-year sales declines. Selling and administrative expense as a
percentage of revenues increased at Sears Mexico in 1995 as inflationary cost
increases outpaced sales growth in the post-devaluation economic environment.
     International operating income declined $78 million in 1995 as operating
performance suffered at Sears Canada and Sears Mexico in difficult economic
conditions.

INTEREST EXPENSE AND FUNDING COSTS
Since the Company uses securitizations of credit card receivables as
a significant funding source, total funding costs include interest expense, as
shown on the consolidated statements of income, and the funding cost of
securitized receivables. Total funding costs were as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------
millions                                       1996    1995    1994
-------------------------------------------------------------------
<S>                                          <C>     <C>     <C>
Interest expense                             $1,365  $1,373  $1,279
Funding cost of securitized receivables (1)     371     364     380
-------------------------------------------------------------------
    Total funding costs                      $1,736  $1,737  $1,659
-------------------------------------------------------------------
</TABLE>

(1)  Funding costs of securitized receivables are reported as a reduction of
     credit revenues in the consolidated statements of income.

     Consolidated funding costs were unchanged in 1996. Domestic funding
costs increased slightly due primarily to higher interest expense associated
with a larger credit card receivables portfolio offset by lower domestic
effective funding rates resulting from the refinancing of long-term higher rate
debt. Lower international effective financing rates offset the domestic
increase.
     The increase in funding costs in 1995 reflects a higher level of
debt required to fund increases in credit card receivables and a higher
interest rate environment in Mexico and Canada, partially offset by a lower
domestic effective funding rate which benefited from a favorable domestic
interest rate environment in 1995.

OTHER INCOME
Other income consists of:
<TABLE>
-----------------------------------------------------------         
millions                                   1996  1995  1994
-----------------------------------------------------------
<S>                                        <C>   <C>  <C>
Gain on sales of property and investments  $ 36  $ 35 $  22
Minority interest                           (8)   (4)  (14)
Interest income                              --    --    14
Miscellaneous                               (6)   (8)   (5)
-----------------------------------------------------------
Total                                      $ 22  $ 23 $  17
-----------------------------------------------------------
</TABLE>



Included in miscellaneous other income is the Company's share of the
results of Advantis, a joint venture between International Business Machines
("IBM") and the Company, which provides data and voice networking and
information processing services to the Company and others, and Prodigy. The
Company sold its 50% interest in Prodigy, a partnership with IBM, in June 1996.

INCOME TAX EXPENSE
Income tax expense as a percentage of pretax income was 39.6% in
1996, 40.7% in 1995 and 41.7% in 1994. The decrease in 1996 was primarily
attributable to a lower effective tax rate on international earnings. In
addition, both 1996 and 1995 effective tax rates benefited from the fact that
domestic pretax income has increased at a faster rate than non-deductible
expenses.

EXTRAORDINARY ITEMS
Results for 1994 included a $195 million extraordinary gain related
to the early extinguishment of debt associated with the Company's transfer of
Sears Tower and all related assets and liabilities to a third
party as trustee of a trust in November 1994. The elimination of the related
mortgages reduced corporate debt by $845 million and resulted
in annual interest savings of approximately $75 million.

INFLATION
Reported earnings have been impacted by inflation; however, there is
no simple way of identifying the amount of the impact. Competitive
and regulatory conditions permitting, the Company modifies the prices charged
for its goods and services in order to recognize cost changes
as incurred or as anticipated. By also attempting to control costs and
efficiently utilize resources, the Company strives to minimize the
effects of inflation on its operations.

                                                                        
                            Sears annual report 1996                   p.25


<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------
millions                                                                                            1996     1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>      <C>
ASSETS
Current Assets
    Cash and invested cash                                                                       $   660  $   606
    Credit card receivables                                                                       22,371   20,932
         Less: Allowance for uncollectible accounts                                                  808      826
-----------------------------------------------------------------------------------------------------------------
                                                                                                  21,563   20,106
    Other receivables                                                                                335      444
    Merchandise inventories                                                                        4,646    4,033
    Prepaid expenses and deferred charges                                                            348      360
    Deferred income taxes                                                                            895      892
-----------------------------------------------------------------------------------------------------------------
         Total current assets                                                                     28,447   26,441
Property and equipment
    Land                                                                                             445      387
    Buildings and improvements                                                                     5,080    4,382
    Furniture, fixtures and equipment                                                               4,279    3,775
    Capitalized leases                                                                               433      313
-----------------------------------------------------------------------------------------------------------------
                                                                                                  10,237    8,857
    Less accumulated depreciation                                                                  4,359    3,780
-----------------------------------------------------------------------------------------------------------------
         Total property and equipment, net                                                         5,878    5,077
Deferred income taxes                                                                                905      879
Other assets                                                                                         937      733
-----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                     $36,167  $33,130
-----------------------------------------------------------------------------------------------------------------
LIABILITIES
Current Liabilities
    Short-term borrowings                                                                        $ 3,533  $ 5,349
    Current portion of long-term debt and capitalized lease obligations                            2,737    1,730
    Accounts payable and other liabilities                                                         7,225    6,133
    Unearned revenues                                                                                840      887
    Other taxes                                                                                      615      508
-----------------------------------------------------------------------------------------------------------------
         Total current liabilities                                                                14,950   14,607
Long-term debt and capitalized lease obligations                                                  12,170   10,044
Postretirement benefits                                                                             2,748    2,825
Minority interest and other liabilities                                                            1,354    1,269
-----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                                 31,222   28,745
-----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred shares ($1 par value, 50 shares authorized)
  8.88% Preferred Shares, First Series (3.25 shares issued and outstanding as of Dec. 30, 1995)       --      325
Common shares ($.75 par value, 1,000 shares authorized, 391.4 and 390.5 shares outstanding)          323      322
Capital in excess of par value                                                                     3,618    3,634
Retained income                                                                                    3,330    2,444
Treasury stock--at cost                                                                           (1,655)  (1,634)
Minimum pension liability                                                                           (277)    (285)
Deferred ESOP expense                                                                               (230)    (253)
Cumulative translation adjustments                                                                  (164)    (168)
-----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                                                         4,945    4,385
-----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                       $36,167  $33,130
-----------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes.


p.26                       Sears annual report 1996


<PAGE>

S E A R S ,   R O E B U C K   A N D   C O .


ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
The Company's significant financial capacity and flexibility are exemplified by
the quality and liquidity of its assets and by its ability to access multiple 
sources of capital.
     The owned credit card receivables portfolio of $21.56 billion excludes
$6.60 billion of receivables sold through securitizations. Domestic and
international accounts represent $20.14 billion and $1.42 billion of the owned
portfolio, respectively. The portfolio is geographically diversified within the
U.S., Canada and Mexico. The Company grants retail consumer credit based on an
extensive use of proprietary and commercially available credit histories and
scoring models. The Company promptly recognizes uncollectible accounts and
emphasizes the maintenance of an adequate allowance for uncollectible accounts,
which is assessed using multiple modeling approaches based on the portfolio
risk characteristics. Domestic accounts are generally charged off automatically
at the beginning of the billing cycle for which a customer's balance is deemed
to be more than 209 days past due, except that accounts may be charged off 
sooner in the event of customer bankruptcy.
     Merchandising inventories are primarily valued on the last-in,
first-out or LIFO method. Inventories would have been $730 million higher if
valued on the first-in, first-out or FIFO method at Dec. 28, 1996. Inventories 
on a FIFO basis totaled $5.38 billion at Dec. 28, 1996 as compared to 
$4.74 billion at Dec. 30, 1995. The increase in inventory levels reflects the 
growth in new stores, both Full-line and off-the-mall.

1996 Assets
[PIE CHART]


Net Receivables  61%
Property & Equipment  16%
Inventory  13%
OTHER  10%


CAPITAL RESOURCES
Total net funding for the Company at Dec. 28, 1996 was $24.81 billion compared 
with $22.06 billion at Dec. 30, 1995, and was used primarily to fund the credit
card receivables portfolio. Net funding includes debt reflected on the balance 
sheet and investor certificates related to credit card receivables sold 
through securitizations. Funding related to credit card receivables grew during
the year, as gross credit card receivables increased, reflecting the strong
domestic operations performance. The Company's debt-to-equity ratio was 3.7 at 
Dec. 28, 1996 and 3.9 at Dec. 30, 1995.
     The Company accesses a variety of capital markets to preserve flexibility
and diversify its funding sources. The broad access to capital markets also
allows the Company to effectively manage liquidity and repricing risk.
Liquidity risk is the measure of the Company's ability to fund maturities and
provide for the operating needs of its businesses. Repricing risk is the impact
on net income due to changes in interest rates. The Company's cost of funds is
affected by a variety of general economic conditions, including the level and
volatility of interest rates. To aid in the management of repricing risk, the
Company uses off-balance sheet instruments, such as interest rate swaps and
caps. The Company has policies that centrally govern the use of such
off-balance sheet instruments.

Funding Sources at
Year-End 1996

     [PIE CHART]
Medium-Term Notes  36%
Securitization  28%
Senior Unsecured  20%
Unsecured
Commercial Paper  12%
Other  4%


   The current debt ratings of the Company appear in the table below.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                            Moody's                         Duff &          Fitch
                            Investors                       Phelps          Investors
                            Services,       Standard        Credit          Service
                            Inc.            & Poor's        Rating Co.      Inc.
-------------------------------------------------------------------------------------
<S>                         <C>             <C>             <C>             <C>
Unsecured long-term debt    A2              A-              A               A
Unsecured commercial paper  P-1             A-2             D-1             F-1
Term securitization         Aaa             AAA             AAA             AAA
-------------------------------------------------------------------------------------
</TABLE>



     The Company utilizes Sears Roebuck Acceptance Corp. ("SRAC"), a
wholly-owned subsidiary, to issue commercial paper, to maintain a continuously
offered medium-term note program, to issue intermediate-term notes and to issue
long-term underwritten debt. SRAC issued term debt securities totaling $4.35
billion in 1996. SRAC commercial paper outstandings were $3.32 billion and
$4.45 billion at Dec. 28, 1996 and Dec. 30, 1995, respectively. SRAC commercial
paper is supported by a $5.0 billion syndicated credit facility which expires
in 2001. In 1996, SRAC issued debt instruments as part of its on-going effort
to cost effectively fund the Company. The weighted average interest rate on
SRAC debt was 6.26% for 1996 compared to 6.31% for 1995. The following
issuances were placed during 1996:
-  $3.04 billion fixed-rate medium-term notes, weighted average coupon of
   6.6% and average term of 5.0 years

-  $412 million medium-term variable-rate notes, weighted average maturity of
   1.6 years

-  $800 million discrete underwritten notes, weighted average coupon of 6.58%
   and average term of 9.1 years

-  $95 million intermediate-term loans, variable-rate and weighted average
   maturity of 3.9 years

                                                                          
                            Sears annual report 1996                    p.27


<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .


CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
millions                                                                    1996     1995     1994
--------------------------------------------------------------------------------------------------
<S>                                                                       <C>      <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                              $  1,271 $  1,801 $  1,454
Adjustments to reconcile net income to net cash provided by
  (used in) operating activities
    Depreciation, amortization and other noncash items                       893      713      673
    Extraordinary gain related to early extinguishment of debt                --       --    (319)
    Provision for uncollectible accounts                                   1,136      744      626
    Gain on sales of property and investments                                (36)     (35)     (22)
    Change in (net of acquisitions):
       Deferred income taxes                                                 (31)      50      359
       Credit card receivables                                            (2,705)  (2,807)  (3,199)
       Merchandise inventories                                              (475)      30     (594)
       Other operating assets                                                111     (106)     638
       Other operating liabilities                                         1,025      801     (148)
    Discontinued operations                                                   --     (776)    (402)
--------------------------------------------------------------------------------------------------
         NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES               1,189      415     (934)
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of cash acquired                               (296)     (53)      --
Proceeds from sales of property and investments                               42       41       26
Purchases of property and equipment, net                                  (1,189)  (1,183)    (954)
Discontinued operations, net                                                  --      483      233
--------------------------------------------------------------------------------------------------
         NET CASH USED IN INVESTING ACTIVITIES                            (1,443)    (712)    (695)
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt                                               4,683    2,588    2,798
Repayments of long-term debt                                              (1,832)  (1,124)  (2,717)
Increase (decrease) in short-term borrowings, primarily 90 days or less   (1,814)    (637)   1,617
Repayments of ESOP note receivable                                            21       44       69
Preferred stock redemption                                                  (325)      --       --
Common shares purchased for employee stock plans                            (164)      --       --
Common shares issued for employee stock plans                                134       97       45
Dividends paid to shareholders                                              (394)    (607)    (698)
--------------------------------------------------------------------------------------------------
         NET CASH PROVIDED BY FINANCING ACTIVITIES                           309      361    1,114
--------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND INVESTED CASH                     (1)      (6)      (3)
--------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND INVESTED CASH                             54       58     (518)
--------------------------------------------------------------------------------------------------
CASH AND INVESTED CASH AT BEGINNING OF YEAR                                  606      548    1,066
--------------------------------------------------------------------------------------------------
CASH AND INVESTED CASH AT END OF YEAR                                   $    660 $    606 $    548
--------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes.

                                                                      
p.28                        Sears annual report 1996


<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION (Continued)

     The Company, through its subsidiary Sears Receivables Financing Group,
Inc., securitizes domestic credit card receivables to access intermediate-term
funding in a cost-effective manner. These securities are rated in the highest
category by the national rating agencies. In 1996, the Company issued
$2.09 billion of fixed-rate term securitizations at a weighted average coupon
of 6.74% and $525 million of variable-rate term securitizations. As of Dec. 28,
1996, there were $6.33 billion of investor certificates outstanding which were
backed by sold domestic credit card receivables.
     On Nov. 12, 1996, all the outstanding 8.88% Preferred Shares,
First Series were redeemed at a redemption price of $25 per depository share
plus accrued dividends to the redemption date.
     On Mar. 20, 1995, the Company exchanged all of its 28.8 million Series A
Mandatorily Exchangeable Preferred Shares ("PERCS") for 35.7 million common
shares of the Company. The exchange did not dilute earnings per share as
the PERCS were reflected in the Company's earnings per share calculation in
prior years.

CAPITAL SPENDING
The Company is approximately 60% through a five-year, $4 billion capital
expenditure program for renovating and updating Full-line Stores. In addition,
the Company plans to grow its off-the-mall businesses. Capital expenditures
during the past three years were as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------
millions                                          1996    1995  1994
--------------------------------------------------------------------
<S>                                             <C>     <C>     <C>
Full-line Stores, primarily
  remodeling and expansion efforts              $  848  $  868  $673
Off-the-mall stores                                181     111   106
Other - distribution centers/support functions     160     204   175
--------------------------------------------------------------------
Total capital expenditures                      $1,189  $1,183  $954
--------------------------------------------------------------------
</TABLE>

     The Company plans capital expenditures of $1.5 billion for 1997, which
include remodeling and expansion of approximately 85 existing and opening 15
to 25 new Full-line Stores, 40 to 50 hardware stores, 5 to 10 furniture stores
and 145 to 175 automotive stores. The Company may also pursue selective
strategic acquisitions as a means to accelerate growth.

OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash flows from operating activities consist primarily of net income adjusted
for certain noncash expense items including depreciation, the provision for
uncollectible accounts, changes in receivables, inventories and deferred taxes.
     Net cash provided by the Company's operating activities in 1996 improved
$774 million to $1.19 billion. The improvement was due to higher income from
continuing operations and an increase in noncash expenses (provision for
uncollectible accounts and depreciation) as compared to 1995.
     In 1995, net cash provided by the Company's operating activities totaled
$415 million, an improvement of $1.35 billion from 1994. The improvement was
due to an increase in other operating liabilities and lower levels of inventory
growth as compared to 1994, partially offset by an increase in other operating
assets.
     Net cash used in investing activities totaled $1.44 billion in
1996 compared to $712 million in 1995. The increase in net cash used resulted
from the acquisition of the Orchard Supply Hardware Stores Corporation in
September 1996 and the fact that cash was realized in 1995 from discontinued
operations. In 1996, cash used for property and equipment related to the
Company's Full-line Stores remodeling program and the expansion of its store
base was $1.19 billion as compared to $1.18 billion in 1995.
     In 1995, net cash used in investing activities increased $17 million over
1994 due to higher store remodeling capital expenditures and the acquisition of
Wheels, Inc. and Nationwise, Inc., partially offset by higher cash realized
from discontinued operations. The cash realized from discontinued operations 
in 1995 relates primarily to the proceeds from the sale of Homart.
     Net cash provided by financing activities in 1996 totaled $309 million as
compared to $361 million in 1995. Financing activities in 1996 were primarily
long-term borrowings to support the growth in credit card receivables. During
1996, the Company implemented a share repurchase program for the purpose of
acquiring up to ten million Sears common shares for distribution under employee
stock-based incentive plans. Through Dec. 28, 1996, 3.4 million common shares
had been acquired under the repurchase program. In November 1996, the Company
redeemed for cash all the outstanding 8.88% Preferred Shares, First Series.
Dividends paid to shareholders in 1996 included common dividends based on a
quarterly payout rate of $0.23 per common share. In the first nine months of
1995, the common share dividend payment was based on a quarterly payout rate of
$0.40 per common share reflective of the Company's structure prior to the
spin-off of Allstate. The payment of future common dividends is dependent upon
the Company's earnings and investment opportunities.
     In 1995, net cash provided by financing activities decreased $753 million
from 1994 primarily due to a shift in the funding mix for credit card 
receivables from on-book debt to securitization in 1995.


                            Sears annual report 1996                      p.29 


<PAGE>

S E A R S ,  R O E B U C K   A N D   C O .

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                             1996         1995         1994        1996          1995       1994
---------------------------------------------------------------------------------------------------------------------------
                                                                   dollars in millions              shares in thousands
<S>                                                       <C>          <C>         <C>         <C>       <C>          <C>
8.88% PREFERRED SHARES, FIRST SERIES                                                                     
Balance, beginning of year                                $   325      $    325    $   325       3,250     3,250        3,250
Retired during year                                          (325)          --          --      (3,250)      --           --
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                      $    --      $    325    $   325         --      3,250        3,250
---------------------------------------------------------------------------------------------------------------------------
SERIES A MANDATORILY EXCHANGEABLE                                                                        
  PREFERRED SHARES (PERCS)                                                                               
Balance, beginning of year                                $    --      $  1,236    $ 1,236         --      7,188       7,188
Issued during year                                             --           --         --          --        --          --
Exchanged to common shares during year                         --        (1,236)       --          --     (7,188)        --
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                      $    --      $     --    $ 1,236         --        --        7,188
---------------------------------------------------------------------------------------------------------------------------
COMMON SHARES                                                                                            
Balance, beginning of year                                $   322      $    294    $   294     429,683      392,310    391,752
Conversion of PERCS                                            --            27        --          --        35,673        --
Stock options exercised and other changes                       1             1        --          932        1,700        558
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                          323           322        294     430,615      429,683    392,310
---------------------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE                                                                           
Balance, beginning of year                                  3,634         2,385      2,354                
Stock options exercised and other changes                     (16)           40         31                
Conversion of PERCS                                            --         1,209        --                
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                        3,618         3,634      2,385                
---------------------------------------------------------------------------------------------------------------------------
RETAINED INCOME                                                                                          
Balance, beginning of year                                  2,444         8,918      8,163                
Net income                                                  1,271         1,801      1,454                
Preferred share dividends                                    (25)           (53)      (137)                
Common share dividends ($.92, $1.26 and $1.60 per share)    (360)          (475)      (562)                
Distribution of The Allstate Corporation shares                --        (7,747)       --                
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                        3,330         2,444      8,918                
---------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK-AT COST                                                                                   
Balance, beginning of year                                 (1,634)       (1,690)    (1,704)   (39,195)    (40,570)    (40,904)
Repurchased for employee stock plans                         (164)          --         --      (3,449)        --         --
Reissued under compensation plans and other changes           143            56         14      3,423       1,375         334
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                       (1,655)       (1,634)    (1,690)   (39,221)    (39,195)    (40,570)
---------------------------------------------------------------------------------------------------------------------------
MINIMUM PENSION LIABILITY                                                                                
Balance, beginning of year                                   (285)         --          --                
Net decrease (increase)                                         8          (285)       --                
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                         (277)         (285)       -- 
---------------------------------------------------------------------------------------------------------------------------
DEFERRED ESOP EXPENSE                                                                                    
Balance, beginning of year                                   (253)         (558)     (614)                
Reductions                                                     23           305        56                
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                         (230)         (253)     (558)                
---------------------------------------------------------------------------------------------------------------------------
UNREALIZED NET CAPITAL GAINS                                                                             
Balance, beginning of year                                     --            32     1,674
Net unrealized gain (loss) during the year                     --         1,176    (1,642) 
Distribution of The Allstate Corporation shares                --        (1,208)       --                
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                           --           --         32                
---------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS                                                                       
Balance, beginning of year                                   (168)         (141)      (64)                
Net unrealized gain (loss) during year                          4            (7)      (77)                
Distribution of The Allstate Corporation shares                --           (20)       --
---------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                         (164)         (168)     (141)                
---------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON SHAREHOLDERS' EQUITY                                                                        
  AND SHARES OUTSTANDING                                  $ 4,945      $  4,060   $ 9,240     391,394     390,488     351,740
---------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                $ 4,945      $  4,385   $10,801                
---------------------------------------------------------------------------------------------------------------------------
</TABLE>                                             


See accompanying notes.




p.30                       Sears annual report 1996


<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sears, Roebuck
and Co. (the "Company") and all significant domestic and international
companies in which the Company has more than a 50% equity ownership.
Investments in companies in which the Company has a 20% to 50% ownership are 
accounted for using the equity method. The Allstate Corporation ("Allstate") 
and Homart Development Co. and affiliated entities ("Homart") are presented 
as discontinued operations in 1995 and 1994.
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
     Although not a part of the financial statements, included with
the consolidated statements is a five-year summary of consolidated financial
data.
     Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform with current year presentation.

FISCAL YEAR
The Company's fiscal year ends on the last Saturday in December.
Fiscal year 1996 ended on Dec. 28, fiscal year 1995 ended on Dec. 30, and
fiscal year 1994 ended on Dec. 31.

MERCHANDISE SALES AND SERVICES
Revenues from merchandise sales and services are net of returns and allowances
and exclude sales tax. Included in merchandise sales and services are gross
revenues from licensees of $1.32, $1.25 and $1.17 billion for 1996, 1995 and
1994, respectively.

MAINTENANCE AGREEMENTS
The Company sells extended service contracts with terms of coverage between 12
and 36 months. Revenue and incremental direct acquisition costs from the sale
of these contracts are deferred and amortized on a straight-line basis over the
lives of the contracts. Costs related to servicing the contracts are expensed
as incurred.

STORE PRE-OPENING EXPENSES
Costs associated with the opening of new stores are expensed in the
year incurred.

EARNINGS PER COMMON SHARE
Earnings per common share is computed based on the weighted average number of
common and common equivalent shares (dilutive stock options) outstanding and
after adjustment for dividends of $25 million
in 1996, and $29 million in both 1995 and 1994 on the 8.88% Preferred Shares,
First Series.
     In early 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending after Dec.
15, 1997, and changes the method in which earnings per share will be
determined. Adoption of this statement by the Company will not have a material
impact on earnings per share.

CASH AND INVESTED CASH
Cash and invested cash includes all highly liquid investments with maturities
of three months or less.

CREDIT CARD RECEIVABLES
Credit card receivables arise  primarily under open-end revolving credit
accounts used to finance purchases of merchandise and services offered
by the Company. These accounts have various billing and payment structures,
including varying minimum payment levels and finance charge rates. Based on
historical payment patterns, the full receivable balance will not be realized
within one year.
     Credit card receivables are shown net of an allowance for uncollectible
accounts. The Company provides an allowance for uncollectible accounts which is
determined based on a number of factors, including the risk characteristics of
the portfolio, historical charge-off patterns, and management judgement. When
receivables are securitized and sold with limited recourse, the portion of the
allowance for uncollectible accounts pertaining to such receivables is
transferred to a recourse liability at the date of sale.
     Uncollectible accounts are generally charged off against the allowance or
recourse liability automatically at the beginning of the billing cycle in which
the customer's balance is deemed to be more than 209 days past due, except that
accounts may be charged off sooner in the event of customer bankruptcy. Finance
charge revenue is recorded until such time an account is charged off and
finance charges on charged-off accounts are presented as a reduction of credit 
revenues.
     In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued. This statement
provides consistent guidance for distinguishing transfers of financial assets
(securitizations) that are sales from transfers that are secured borrowings 
and is effective for securitizations occurring after Dec. 31, 1996.
     SFAS No. 125 requires the Company to recognize gains on securitizations
which qualify as sales. The statement also indicates that an allowance for
uncollectible accounts should not be maintained for receivables which are sold
(securitized) effective after Dec. 31, 1996. The Company expects the allowance 
for doubtful accounts related to the domestic securitized (sold) receivables 
to be depleted during 1997 and 1998.
     The Company anticipates an increase in net income of approximately $100 to
$150 million in 1997 resulting from the implementation of the new statement, 
although the precise amount will be dependent on a number of factors such as
interest rates and levels of securitization.

                                                                            
                            Sears annual report 1996                      p.31


<PAGE>

S E A R S ,   R O E B U C K   A N D   C O .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MERCHANDISE INVENTORIES
Approximately 84% of merchandise inventories are valued at the lower
of cost (using the last-in, first-out or LIFO method) or market using the
retail method. To estimate the effects of inflation on inventories, the Company
utilizes internally developed price indices.
     The LIFO adjustment to cost of sales was a charge of $19 million
in 1996 and 1995 and a credit of $34 million in 1994. Partial liquidation of
merchandise inventories valued under the LIFO method resulted in credits of $15
and $3 million in 1995 and 1994. No layer liquidation credits resulted in 1996.
If the first-in, first-out (FIFO) method of inventory valuation had been used
instead of the LIFO method, merchandise inventories would have been $730 and
$711 million higher at Dec. 28, 1996 and Dec. 30, 1995, respectively.
     Merchandise inventories of international operations, the Parts Group,
certain Sears Tire Group formats and Puerto Rico, which represent approximately
16% of merchandise inventories, are recorded based on the FIFO method.

PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided principally by the straight-line method over
the estimated useful lives of the related assets, generally 5 to 10 years
for equipment and 40 to 50 years for real property. Accumulated depreciation
was $4.36 and $3.78 billion at Dec. 28, 1996 and Dec. 30, 1995, respectively.

GOODWILL
Included in other assets is the excess of purchase price over net assets
of businesses acquired ("goodwill") which is amortized using the straight-line
method over various periods not exceeding 40 years.

INCOME TAXES
The consolidated federal income tax return of the Company includes results of
the domestic operations of both the continuing businesses and discontinued 
operations. Tax liabilities and benefits are allocated as generated by the 
respective businesses, whether or not such benefits would be currently 
available on a separate return basis.

ADVERTISING
Costs for newspaper, television, radio and other media advertising are expensed
as incurred. Specialty catalog book preparation and other direct response
advertising costs (printing costs and advertising inserts) are charged to
expense over the expected period of future benefits. For specialty catalogs, 
amortization of costs occurs over the life of the catalog, not to exceed one 
year. For advertising inserts and other direct response advertising, the 
amortization period ranges from six months to five years depending on the 
period of future benefits. In 1996, the total cost of advertising charged to 
expense was $1.28 billion, compared with $1.22 billion in 1995, and 
$1.18 billion in 1994. The consolidated balance sheets include deferred 
direct-response advertising costs of $59 million at Dec. 28, 1996, $46 million 
at Dec. 30, 1995, and $37 million at Dec. 31, 1994, which are included in 
other assets.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance sheet financial instruments
to manage the interest rate and foreign currency risk associated with its
borrowings. The counterparties to these instruments are major financial
institutions with credit ratings primarily of AA.
     Interest rate swap agreements modify the interest characteristics of
a portion of the Company's debt. The differential to be paid or received
is accrued as interest rates change and recognized as an adjustment to interest
expense in the statement of income. The related accrued receivable or payable
is included in other assets or liabilities. The fair values of the swap
agreements are not recognized in the financial statements.
     Interest rate caps are used to lock in a maximum rate if rates rise, but
enable the Company to otherwise pay lower market rates. The cost of interest
rate caps is amortized to interest expense over the life of the caps. Payments
received due to the interest rate caps reduce interest expense. The unamortized
cost of the interest rate caps is included in other assets.

2. DISCONTINUED OPERATIONS
Income from discontinued operations was $776 million (net of income tax expense
of $249 million) in 1995 and $402 million (net of income tax benefit of $256
million) in 1994.
     On November 10, 1994, the Company announced its intention to distribute in
a tax-free dividend to the Company's common shareholders its 80% ownership
interest in The Allstate Corporation. The distribution was approved by
shareholders at a special meeting on March 31, 1995.
On June 20, 1995, the Company's Board of Directors approved the distribution to
Sears shareholders in a tax-free dividend. Sears shareholders of record on June
30, 1995 received, effective June 30, 1995, .93 shares of The Allstate 
Corporation for each Sears common share owned. This transaction resulted in a 
noncash dividend to Sears shareholders totaling $8.98 billion.
     In July 1995, the Company completed the sale of Homart's commercial office
building portfolio to an operating partnership composed of the Morgan Stanley
Real Estate Fund II, L.P. and Hines Interests Limited Partnership. In December
1995, the Company completed the sale of the retail shopping center and 
community development businesses of Homart to a wholly-owned subsidiary of 
General Growth Properties, Inc. No gain or loss to the Company resulted from 
these transactions.

<TABLE>
<CAPTION>
     The operating results of the discontinued operations are
summarized below:
--------------------------------------------------------------------------
millions                                                     1995     1994
--------------------------------------------------------------------------
<S>                                                       <C>      <C>
Allstate
    Revenues                                              $11,244  $21,464
    Net income                                                776      388
Homart
    Revenues                                              $   256  $   266
    Net income                                                 --       14
--------------------------------------------------------------------------
</TABLE>



                                                                         
p.32                       Sears annual report 1996


<PAGE>

S E A R S ,  R O E B U C K   A N D   C O .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. RESTRUCTURING
In 1996, international operations selling and administrative expenses included
a $27 million pretax restructuring charge (before minority interest) related to
Sears Canada cost containment initiatives that included elimination of certain
positions and the closing of a warehouse and other support facilities.
Beginning in 1997, the restructuring initiatives at Sears Canada are estimated
to generate annualized pretax savings of $35 to $45 million (before minority
interest).
     Included in domestic operations selling and administrative expenses in
1995 was a $51 million pretax restructuring charge associated with
the Company's organizational realignment. This initiative better aligns the
Company's structure with its growth strategy, particularly the creation of
separate tire and auto parts divisions and the consolidation of certain
distribution facilities. Beginning in 1997, resulting after-tax savings from
the restructuring are expected to be an estimated $30 to $35 million annually.
     In 1995, the Company also reversed $62 million of pretax reserves related
to the $2.65 billion domestic restructuring announced in 1993. The reserves
which were released are no longer needed due to the settlement of obligations
and the adjustment of the carrying values of certain properties to be disposed
of in connection with that restructuring.

4. INCOME TAXES

Income before income taxes was as follows:                              

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
millions                                               1996     1995      1994
--------------------------------------------------------------------------------
<S>                                                    <C>      <C>       <C>   
  
Domestic                                               $2,091   $1,727    $1,411
Foreign                                                    14        1        60
--------------------------------------------------------------------------------
Total                                                  $2,105   $1,728    $1,471
--------------------------------------------------------------------------------
</TABLE>
                                                                        
     Federal, state and foreign taxes were as follows:                       


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
millions                                               1996     1995      1994
--------------------------------------------------------------------------------
<S>                                                    <C>      <C>       <C>   
  
Federal income tax                                                      
    Current                                            $  720   $  571    $  324
    Deferred                                              (12)      31       171
State income tax                                                        
    Current                                               133       93        45
    Deferred                                               (8)      10        38
Foreign income tax                                                      
    Current                                                25       23        51
    Deferred                                              (24)     (25)      (15)
--------------------------------------------------------------------------------
Income tax provision                                   $  834   $  703    $  614
--------------------------------------------------------------------------------

</TABLE>
                                                                        
     A reconciliation of the statutory federal income                        
tax rate to the effective rate was as follows:                          

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                        1996     1995      1994
--------------------------------------------------------------------------------
<S>                                                    <C>      <C>       <C>   
  
Statutory federal income tax rate                       35.0%    35.0%     35.0%
State income taxes, net of federal income tax benefit    3.9      3.9       3.8
Other                                                     .7      1.8       2.9
--------------------------------------------------------------------------------
Effective income tax rate                               39.6%    40.7%     41.7%
--------------------------------------------------------------------------------

</TABLE>

     Deferred taxes based upon differences between the financial statement
and tax bases of assets and liabilities and available tax carryforwards 
consists of:                

<TABLE>
<CAPTION>
------------------------------------------------------------------------
millions                                                  1996     1995
------------------------------------------------------------------------
<S>                                                      <C>      <C>
Deferred tax assets:                                                    
  Unearned maintenance income                           $  445    $  430
  Allowance for uncollectible accounts                     437       377
  Self insurance reserves                                  169       150
  Postretirement benefit liability                       1,143     1,161
  Minimum pension liability                                155       183
  Other deferred tax assets                                670       680
------------------------------------------------------------------------
Gross deferred tax assets                                3,019     2,981
Less valuation allowance                                    --        --
------------------------------------------------------------------------
Net deferred tax assets                                  3,019     2,981
------------------------------------------------------------------------
Deferred tax liabilities:
  Property and equipment                                   336       389
  Prepaid pension                                          153       187
  LIFO                                                     131       125
  Other deferred tax liabilities                           599       509
------------------------------------------------------------------------
Gross deferred tax liabilities                           1,219     1,210
------------------------------------------------------------------------
Net deferred taxes                                      $1,800    $1,771
------------------------------------------------------------------------
</TABLE>



     Management believes that the realization of the net deferred tax
asset of $1.8 billion is more likely than not, based on the expectation
that the Company will generate the necessary taxable income in future periods.
     U.S. income and foreign withholding taxes were not provided
on certain unremitted earnings of international affiliates which the Company
considers to be permanent investments. The cumulative amount of unremitted
income for which income taxes have not been provided totaled $349 million at
Dec. 28, 1996. If these earnings were to be remitted, taxes of $106 million
would be due.
     Income taxes of $386, $616, and $470 million were paid in 1996, 1995, and
1994, respectively.


                            Sears annual report 1996                       p.33


<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. BENEFIT PLANS
Expenses for retirement and savings-related benefit plans were as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
millions                                                   1996        1995        1994
----------------------------------------------------------------------------------------
<S>                                                        <C>         <C>         <C> 
Savings and Profit Sharing Fund of Sears Employees
    Defined contribution                                   $ 64        $ 61        $ 61
    ESOP benefit                                            (33)        (19)         (4)
Pension plans                                                99          38         (61)
Retiree insurance benefits                                   76         185         232
Other plans                                                   8          10           8
----------------------------------------------------------------------------------------
Total                                                      $214        $275        $236
----------------------------------------------------------------------------------------
</TABLE>

PROFIT SHARING FUND
Most domestic employees are eligible to become members of The Savings and
Profit Sharing Fund of Sears Employees ("the Fund"). The Company contribution
is based on 6% of consolidated income, as defined, for the participating
companies. Company contributions are limited to 70% of eligible employee
contributions.
     The Fund includes an Employee Stock Ownership Plan ("the ESOP") to prefund
a portion of the Company's anticipated contribution through 2004. The Company
loaned the ESOP $800 million at an interest rate of 9.2% which it used to
purchase 25.9 million of Sears common shares. The loan is repaid with dividends
on ESOP shares and Company contributions.
     In conjunction with the 1995 Allstate spin-off, The Savings and Profit
Sharing Fund of Sears Employees, which includes the ESOP, was split into two
separate plans, a plan for employees of the Company and its affiliates other
than Allstate and a plan for Allstate employees. The ESOP was split with 50% of
the unallocated shares in the ESOP and 50% of the ESOP debt transferred to the
Allstate plan. In connection with this transfer, Allstate purchased from the
Company 50% of the Company's remaining loan to the ESOP at a purchase price of
$327 million.
     The ESOP benefit included in the benefit plan expense table was computed as
follows:
        
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
millions                                             1996      1995      1994
-------------------------------------------------------------------------------
<S>                                                  <C>       <C>       <C> 
Interest expense recognized by ESOP                  $ 29      $ 45      $ 64
Less dividends accrued on ESOP shares                 (21)      (31)      (43)
Cost of shares allocated to                                              
  employees and plan expenses                          23        28        56
-------------------------------------------------------------------------------
                                                       31        42        77
-------------------------------------------------------------------------------
ESOP expense attributable to                                             
  discontinued operations                              --        --       (24)
Reduction of defined contribution due to ESOP         (64)      (61)      (57)
-------------------------------------------------------------------------------
ESOP benefit                                         $(33)     $(19)     $ (4)
-------------------------------------------------------------------------------
</TABLE>

     The Company contributed $28, $62 and $91 million to the ESOP in 1996, 1995
and 1994, respectively. At Dec. 28, 1996, total committed to be released,
allocated and unallocated ESOP shares were 1.5, 9.3 and 15.1 million,
respectively. All ESOP shares are considered outstanding in the calculation of
earnings per share.

PENSION PLANS
Substantially all domestic full-time and certain part-time employees
are eligible to participate in noncontributory defined benefit plans
after meeting age and service requirements. Substantially all Canadian
employees are eligible to participate in contributory defined benefit plans.
Pension benefits are based on length of service, compensation and, in certain
plans, Social Security or other benefits. Funding for the various plans is
determined using various actuarial cost methods, and amounted to $172, $76 and
$81 million for 1996, 1995 and 1994, respectively.
     Pension expense (benefit) was comprised of the following:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------
millions                                           1996       1995       1994
------------------------------------------------------------------------------
<S>                                               <C>        <C>        <C> 
Benefits earned during the period                 $  72      $  68      $  81  
Interest on projected benefit obligation            189        181        196  
Actual return on plan assets                       (322)      (383)        12  
Net amortization and deferral                       160        172       (350) 
------------------------------------------------------------------------------
Pension expense (benefit)                         $  99      $  38      $ (61) 
------------------------------------------------------------------------------
</TABLE>

     The Company uses October 31 as the measurement date for purposes of
determining pension plan assets and obligations. The weighted average discount
rate and rate of increase in compensation used in determining the actuarial
present value of the projected benefit obligations were 7.75% and 4.25% in
1996, 7.75% and 3.75% in 1995 and 9.0% and 4.0% in 1994. The expected long-term
rate of return on plan assets used in determining net periodic pension cost was
9.5% in 1996, 1995 and 1994.
     The plans' funded status was as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                          1996                     1995
-----------------------------------------------------------------------------------
                                   Assets  Accumulated       Assets   Accumulated 
                                   exceed     benefits       exceed      benefits
                              accumulated       exceed  accumulated        exceed 
millions                         benefits       assets     benefits        assets
-----------------------------------------------------------------------------------
<S>                                  <C>        <C>            <C>         <C>
Actuarial present value of                      
  benefit obligations                      
  Vested benefit obligation          $478       $1,787         $419        $1,743    
-----------------------------------------------------------------------------------
Accumulated benefit obligation       $479       $1,984         $420        $1,975    
-----------------------------------------------------------------------------------
Projected benefit obligation                                                         
  (PBO)                              $554       $2,123         $469        $2,241    
Plan assets at fair value,                                                           
  primarily publicly traded                                                          
  stocks and bonds                    714        1,776          635         1,626    
-----------------------------------------------------------------------------------
PBO less than (in excess of)                                                         
  plan assets                         160         (347)         166          (615)   
Unrecognized net loss                  37          636           30           734    
Unrecognized prior                                                                   
  service cost                          1          (65)          --            54    
Unrecognized transitional                                                            
  asset                               (17)          --          (25)           --    
Minimum pension liability              --         (432)          --          (522)   
-----------------------------------------------------------------------------------
Prepaid (accrued) pension                                                            
  cost in the Balance Sheet at                                                       
  year end                           $181       $ (208)        $171        $ (349)   
-----------------------------------------------------------------------------------
</TABLE>                                               
                                                       
                                                       
p.34                        Sears annual report 1996      

<PAGE>

S E A R S ,   R O E B U C K   A N D   C O .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     The provisions of Statement of Financial Accounting Standards ("SFAS") No.
87 "Employers' Accounting For Pensions" require the recognition of a minimum
pension liability for each defined benefit plan for which the accumulated
benefit obligation exceeds plan assets. The amount of minimum pension liability
was $432 million at Dec. 28, 1996 and $522 million at Dec. 30, 1995. The
Company also had an intangible asset of $54 million at Dec. 30, 1995 for
unrecognized prior service cost. In 1996, no such intangible asset existed. The
minimum pension liability in excess of unrecognized prior service cost is
recorded as a reduction to shareholders' equity, net of tax, of $277 million at
Dec. 28, 1996 and $285 million at Dec. 30, 1995.

RETIREE INSURANCE BENEFITS 

The Company provides certain health care and life insurance benefits for
retired employees. Generally, qualified employees may become eligible for these
benefits if they retire in accordance with the Company's established retirement
policy and are continuously insured under the Company's group plans or other
approved plans for 10 or more years immediately prior to retirement.    
        The Company shares the cost of the retiree medical benefits with
retirees based on years of service. Through 1995, the Company's share is
subject to a 5% limit on annual medical inflation after retirement. Beginning
in 1996, the Company's share of these costs were capped at 1995 levels for
employees who retired before 1996. For employees who retire after 1995, the
Company's share of these benefit costs will be capped based on the Company
contribution calculated during the first year of retirement. The effect of this
plan change reduces postretirement benefit expense commencing in 1996. The
Company's postretirement benefit plans are not funded. The Company has the
right to modify or terminate these plans.
        Postretirement benefit expense was comprised of the following: 
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
millions                                                                       1996    1995    1994
---------------------------------------------------------------------------------------------------
<S>                                                                             <C>     <C>     <C>
Benefits earned during the period                                              $ 18   $  24    $ 35
Interest on accumulated postretirement
  benefit obligation                                                            125     188     197
Net amortization and deferral                                                   (67)    (27)     --
---------------------------------------------------------------------------------------------------
Postretirement benefit expense                                                 $ 76    $185    $232
---------------------------------------------------------------------------------------------------

</TABLE>

        The plans' funded status was as follows:

<TABLE>
<CAPTION>                                                                                  
---------------------------------------------------------------------------------------------------
millions                                                                               1996    1995
---------------------------------------------------------------------------------------------------
<S>                                                                                    <C>     <C>
Accumulated postretirement benefit obligation
  Retirees                                                                           $1,495  $1,646
  Fully eligible active plan participants                                               107     114
  Other active plan participants                                                        114     161
---------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation                                         1,716   1,921
  Unrecognized gain                                                                     441     301
  Unrecognized prior service cost                                                       591     603
---------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost in the Balance
  Sheet at year end                                                                  $2,748  $2,825
---------------------------------------------------------------------------------------------------
</TABLE>


        The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% in 1996 and 1995.
        The weighted average health care cost trend rate used in measuring
the postretirement benefit expense is 11.0% for 1997, gradually declining to
6.0% in 2007 and remaining at that level thereafter. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation by $38 million and would increase
the annual postretirement benefit expense by $5 million.

6. BORROWINGS

        Short-term borrowings consisted of:

<TABLE>
<CAPTION>
---------------------------------------------------------------------
millions                                                 1996    1995
---------------------------------------------------------------------
<S>                                                    <C>     <C>
Commercial paper                                       $3,208  $4,961
Bank loans                                                 97     101
Agreements with bank trust departments                     82     137
Other loans (principally foreign)                         146     150
---------------------------------------------------------------------
Total short-term borrowings                            $3,533  $5,349
Weighted average interest rate at year end               6.4%    7.2%
Weighted average interest rate at year end, including
  effects of swaps and caps                              7.3%    7.8%
---------------------------------------------------------------------
</TABLE>
        At Dec. 28, 1996, the Company had credit agreements totaling $5.61
billion. SRAC's credit facilities totaled $5 billion in syndicated credit
agreements. Sears Canada had credit agreements totaling $609 million. These
syndicated and uniform credit agreements provide for loans at prevailing
interest rates and mature at various dates through June 2001. The Company pays
commitment fees in connection with these credit agreements.
        The Company had interest rate swap agreements which established fixed
rates on $996 million and $1.41 billion of short-term variable rate debt at Dec.
28, 1996 and Dec. 30, 1995, resulting in weighted average interest rates of 8.5%
and 8.0%, respectively. The weighted average maturity of agreements in effect on
Dec. 28, 1996 was approximately eleven years. Due to interest rate caps, the
Company had maximum weighted average interest rates of 9.0% on $200 million of
debt at Dec. 28, 1996 and at Dec. 30, 1995. The maturity of cap agreements in
effect on Dec. 28, 1996 is approximately one year.

                                                                           P. 35
                            Sears annual report 1996


<PAGE>

S E A R S ,   R O E B U C K   A N D   C O .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

        Long-term debt was as follows:
<TABLE>
<Caption
     millions
     ----------------------------------------------------------------------
             Issue                                            1996     1995
     ----------------------------------------------------------------------
     <S>                                                   <C>      <C>
     SEARS, ROEBUCK AND CO.
       6.25% to 9.5% Notes, due 1997 to 2004               $ 1,550  $ 1,950
       8.2% Extendable Notes, due 1999                          31       31
       6% Debentures, $300 million face value, due 2000,
         effective rate 14.8%                                  233      218
       9.375% Debentures, due 2011                             300      300
       4.85% to 10.0% Medium-Term Notes,
         due through 2021                                    3,236    3,737
       Capitalized lease obligations                           211      127
     SEARS ROEBUCK ACCEPTANCE CORP.
       5.66% to 6.07% Term Loans, due 1997 to 2001             715      895
       6.13% and 6.90% Notes, due 2000 to 2006               1,298      499
       5.40% to 7.19% Medium-Term Notes, due 1997 to 2006    4,834    1,383
     SEARS DC CORP.
       7.67% to 9.26% Medium-Term Notes,
         due through 2012                                      779    1,229
     SEARS OVERSEAS FINANCE N.V. (GUARANTEED BY
       SEARS, ROEBUCK AND CO.)
       Zero Coupon Bonds, $500 million face value,
         due 1998, effective rate 12.0%                        421      376
     SEARS CANADA INC.
       8.25% to 11.70% Debentures, due 1997 to 2001            420      348
       Notes, mortgages, bonds and capitalized leases          135      139
     SEARS CANADA RECEIVABLES TRUST
       3.25% to 9.18% Receivables Trusts,
         due 1997 to 2006                                      541      325
     SEARS ACCEPTANCE CO. LTD.
       15 1/8% Secured Debentures, due 1996                     --       49
     SEARS ROEBUCK DE MEXICO, S.A. DE C.V.
       16% Bank Notes, due 1996                                 --       78
       Notes payable to bank due 1998                           50       --
     OTHER SUBSIDIARIES
       Notes, mortgage and capitalized leases                  153       90
     ----------------------------------------------------------------------
                                                            14,907   11,774
     Less current maturities                                 2,737    1,730
     ----------------------------------------------------------------------
     Total long-term debt                                  $12,170  $10,044
     ----------------------------------------------------------------------
</TABLE>

        As of Dec. 28, 1996, long-term debt maturities for the next five years
were as follows:

<TABLE>
<CAPTION>
------------------------
                millions
------------------------
<S>               <C>
1997              $2,737
1998               2,598
1999               1,748
2000               1,826
2001               2,260
------------------------
</TABLE>



        The Company paid interest of $1.3 billion for the years ended
Dec. 28, 1996 and Dec. 30, 1995, and $1.2 billion for year ended Dec. 31, 1994.
Interest capitalized was $5, $4 and $1 million for the years ended Dec. 28,
1996, Dec. 30, 1995, and Dec. 31, 1994, respectively.

7. LEASE AND SERVICE AGREEMENTS
The Company leases certain stores, office facilities, warehouses, computers and
transportation equipment.
        Operating and capital lease obligations are based upon contractual 
minimum rates and, for certain stores, amounts in excess of these minimum rates
are payable based upon specified percentages of sales. Certain leases include
renewal or purchase options. Operating lease rentals were $365, $357 and $341
million, including contingent rentals of $66, $66 and $62 million, for the
years ended Dec. 28, 1996, Dec. 30, 1995 and Dec. 31, 1994, respectively.
        Minimum lease obligations, excluding taxes, insurance and
other expenses payable directly by the Company, for leases in effect as
of Dec. 28, 1996, were:

<TABLE>
<CAPTION>
-----------------------------------------------------------------
                                               Capital  Operating
millions                                        leases     leases
-----------------------------------------------------------------
<S>                                               <C>      <C> 
1997                                              $ 56     $  279
1998                                                52        259
1999                                                49        231
2000                                                47        207
2001                                                44        189
After 2001                                         611      1,006
-----------------------------------------------------------------
Minimum payments                                  $859     $2,171
-----------------------------------------------------------------
Executory costs (principally taxes)                 26
Imputed interest                                   493
-----------------------------------------------------------------
Present value of minimum lease payments,
  principally long-term                           $340
-----------------------------------------------------------------
</TABLE>


        The Company has a minority interest in Advantis, which began operations
in December 1992. Advantis is a joint venture between International Business
Machines ("IBM") and the Company which provides data and voice networking and
information processing services to the Company and others. Total expenses
incurred by the Company for these services during the years 1996, 1995 and 1994
were $327, $270 and $311 million, respectively. The Company has committed to
purchase services of at least $216 million annually through 2004.

8. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving off-balance sheet financial instruments. The fair value estimates of
financial instruments presented are not necessarily indicative of the amounts
the Company might pay or receive in actual market transactions. Potential taxes
and other transaction costs have also not been considered in estimating fair
value. As a number of the Company's significant assets (including merchandise
inventories, property and equipment, and deferred income taxes) and liabilities
are not considered financial instruments, the following disclosures do not
reflect the fair value of the Company as a whole.

p. 36
                            Sears annual report 1996


<PAGE>
S E A R S ,   R O E B U C K   A N D   C O .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     For financial instruments which are short-term in nature, such as other
receivables, short-term borrowings, accounts payable and other liabilities,
carrying value approximates fair value. The fair value of other financial
instruments is as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------
                                      1996               1995
---------------------------------------------------------------------
                                Carrying   Fair   Carrying   Fair
     millions                    Value     Value   Value    Value
---------------------------------------------------------------------
     <S>                         <C>      <C>       <C>      <C>      
     Credit card receivables     $21,563  $22,185   $20,106  $20,763
     Long-term debt (excluding
       capitalized leases)        14,554   14,867    11,461   12,212
---------------------------------------------------------------------
</TABLE>



     Credit card receivables are valued by discounting estimated future cash
flows. The estimated cash flows reflect the historical cardholder payment
experience and are discounted at market rate.
     Long-term debt is valued based on quoted market prices when available or
discounted cash flows, using interest rates currently available to the Company
on similar borrowings.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company is a party to off-balance sheet financial instruments to
manage interest rate and foreign currency risk. These financial instruments
involve, to varying degrees, elements of market, credit, exchange and interest
rate risk in excess of amounts recognized in the balance sheet. The Company
does not require collateral or other security to support the financial
instruments with credit risk, unless noted otherwise.

Debt-related
The Company had the following off-balance sheet financial instruments related
to its outstanding borrowings at Dec. 28, 1996 and Dec. 30, 1995:

                                                               

                                                                     

<TABLE>
<CAPTION>                                             December 28, 1996
------------------------------------------------------------------------
                                          Contract or
                                             Notional   Fair      Carrying
millions                                       Amount   Value     Value
------------------------------------------------------------------------- 
<S>                                             <C>     <C>         <C>
Interest rate swap agreements:
   Pay floating rate, receive fixed rate         $805     $16       $ --
   Pay fixed rate, receive floating rate          996    (394)        --
Interest rate cap agreement                       200      --         --
Foreign currency hedge agreements                 110      (4)        --
-------------------------------------------------------------------------
</TABLE>



                                                               

                                                                     

<TABLE>
<CAPTION>
                                                     December 30, 1995
------------------------------------------------------------------------
                                       Contract or
                                          Notional    Fair   Carrying
millions                                    Amount   Value      Value
------------------------------------------------------------------------
<S>                                         <C>      <C>     <C>       
Interest rate swap agreements:
  Pay floating rate, receive fixed rate      $805     $35       $--
  Pay fixed rate, receive floating rate     1,411    (504)       --
Interest rate cap agreement                   200      --        --
Foreign currency hedge agreements             110      --        --
------------------------------------------------------------------------
</TABLE>


        The Company uses interest rate swaps and caps to manage the interest
rate risk associated with its borrowings and to manage the Company's allocation
of fixed and variable rate debt. For pay floating rate, receive fixed rate
swaps, the Company paid a weighted average rate of 5.50% and received a weighted
average rate of 6.80% in 1996. For pay fixed rate, receive floating rate swaps,
the Company paid a weighted average rate of 8.02% and received a weighted
average rate of 5.44% in 1996. The fair values of interest rate swaps and caps
are based on prices quoted from dealers. If a counterparty fails to meet the
terms of a swap or cap agreement, the Company's exposure is limited to the net
amount that would have been received, if any, over the agreement's remaining
life.
     Maturity dates of the off-balance sheet financial instruments outstanding
at Dec. 28, 1996 were as follows:

<TABLE>
<CAPTION>
                                         Notional amount
------------------------------------------------------------
                                                        Over
millions                          1 year  2-5 years  5 years
------------------------------------------------------------
<S>                                <C>     <C>        <C>        
Interest rate swap agreements      $127    $1,078     $596
Interest rate cap agreement         200        --       --
Foreign currency hedge agreements   100        10       --
------------------------------------------------------------
</TABLE>



Credit-related
The Company had outstanding domestic securitized credit card receivables
sold with limited recourse of $6.33 and $4.55 billion at Dec. 28, 1996 and Dec.
30, 1995, respectively. The Company's credit risk exposure was contractually
limited to $522 million at Dec. 28, 1996. The Company had estimated accrued
liabilities associated with this credit exposure included in the balance sheet
of $230 and $176 million at Dec. 28, 1996 and Dec. 30, 1995, respectively. A
portion of the securitized receivables is collateralized by personal property.

Other

The Company had a financial guaranty of $84 million at Dec. 28, 1996.
This guaranty represents a commitment by the Company to guarantee the
performance of certain municipal bonds issued in connection with the Company's
headquarters building. No amounts were accrued in the balance sheet for any
potential loss associated with this guaranty at Dec. 28, 1996 and Dec. 30, 1995.

                                                                            
                            Sears annual report 1996                          37


<PAGE>

S E A R S ,   R O E B U C K   A N D   C O .
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants credit to customers throughout North America.
The five states in which the Company had the largest amount of gross credit
card receivables, including those sold with recourse, were as follows:

<TABLE>
<CAPTION>
-----------------------------------
millions               1996    1995
-----------------------------------
<S>                  <C>     <C>
California           $2,680  $2,337
Texas                 2,191   1,912
Florida               1,982   1,785
New York              1,552   1,358
Pennsylvania          1,478   1,364
-----------------------------------
</TABLE>

10. LEGAL PROCEEDINGS
Various legal and governmental proceedings are pending against the Company,
many involving routine litigation incidental to the businesses. Other matters
contain allegations which are nonroutine and involve compensatory, punitive or
antitrust treble damage claims in very large amounts, as well as other types of
relief.
        The consequences of these matters are not presently determinable but,
in the opinion of the management of the Company after consulting with legal
counsel, the ultimate liability in excess of reserves currently recorded is not
expected to have a material effect on annual results of operations, financial
position, liquidity or capital resources of the Company.

11. ACQUISITION OF BUSINESS
During September 1996, the Company acquired the outstanding stock of Orchard
Supply Hardware Stores Corporation ("Orchard") for $309 million. As of Dec. 28,
1996, Orchard operated 65 hardware superstores in California. The acquisition
was recorded using the purchase method of accounting and resulted in goodwill
of approximately $220 million, which is included in other assets. Orchard's
results of operations are not material to the Company's consolidated results
of operations.

12. EXTRAORDINARY GAIN
On Nov. 7, 1994, the Company transferred Sears Tower and all related assets and
liabilities to a third party as trustee of a trust and was released from the
related non-recourse mortgages encumbering the building. In connection with
this transaction, the Company recorded an after-tax extraordinary gain of $195
million ($319 million pretax) related to
the early extinguishment of debt.

13. SHAREHOLDERS' EQUITY

DIVIDEND PAYMENTS
Certain indentures relating to the long-term debt of Sears, Roebuck and Co.,
which represent the most restrictive contractual limitation on the payment of
dividends, provide that the Company cannot take specified actions, including
the declaration of cash dividends, which would cause its consolidated
unencumbered assets, as defined, to fall below 150% of its consolidated
liabilities, as defined. At Dec. 28, 1996, approximately $1.9 billion could be
paid in dividends to shareholders under the most restrictive indentures.

PREFERRED SHARES
The 8.88% Preferred Shares, First Series ("8.88% Preferred Shares")
were issued in the form of 13 million depository shares having cumulative
dividends of $2.22 annually and a liquidation preference of $25 per depository
share plus accrued dividends. The Company redeemed all the 8.88% Preferred
Shares on November 12, 1996, at a redemption price of $25 per depository share
plus accrued dividends to the redemption date.
        The Series A Mandatorily Exchangeable Preferred Shares were issued in
the form of 28.75 million depository shares having an annual, cumulative
dividend of $3.75 per depository share. The Company exchanged the PERCS for
common shares on Mar. 20, 1995. Holders of depository shares received 1.24
common shares for each depository share. The total number of common shares
delivered upon exchange was 35.7 million.

SHARE REPURCHASE PROGRAM
On March 13, 1996, the Board of Directors approved a common share repurchase
program for the purpose of acquiring shares for distribution under employee
stock-based incentive plans. The Company plans to acquire up to ten million
Sears common shares on the open market. Through Dec. 28, 1996, 3.4 million
common shares have been acquired under the repurchase program.

     
p. 38                       Sears annual report 1996


<PAGE>

S E A R S ,   R O E B U C K   A N D   C O .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

STOCK OPTION PLANS
In October 1995, SFAS No. 123, "Accounting For Stock-Based Compensation," was
issued and is effective for financial statements for fiscal years beginning
after December 1995. As permitted by the statement, the Company will continue
to measure compensation cost for stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to
Employees." Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's stock option plans
been determined consistent with the fair value method outlined in SFAS No. 123,
the impact on the Company's net income and earnings per common share would not
have been material.
        Options to purchase common stock of the Company have been granted to
employees under various plans at prices equal to the fair market value of the
stock on the dates the options were granted. Options are generally exercisable
in not more than four equal, annual installments beginning one year after the
date of grant, and generally expire in 10 or 12 years.
        The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following assumptions were
used during the respective years to estimate the fair value of options granted:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                                               1996        1995
-------------------------------------------------------------------------------
<S>                                                         <C>         <C>
Dividend yield                                                1.86%       3.08%
Expected volatility                                             28%         28%
Risk-free interest rate                                       6.23%       6.43%
Expected life of options                                    6 years     6 years
-------------------------------------------------------------------------------

</TABLE>
        Changes in stock options were as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                        1996                                  1995
------------------------------------------------------------------------------------------------------------------
                                                                    Weighted                              Weighted
                                                                     Average                               Average
                                                                    Exercise                              Exercise
thousands of shares                                Shares              Price             Shares              Price
------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                <C>                <C>                <C>
Beginning balance                                  18,721             $22.83             11,523             $40.08
Granted                                               750              48.65              3,018              27.52
Exercised                                          (4,358)             19.71             (3,121)             25.14
Canceled or expired                                  (724)             25.12             (1,319)             30.13
Adjustment due to
 Allstate distribution                                 --                 --              8,620              21.84
------------------------------------------------------------------------------------------------------------------
Ending balance                                     14,389             $25.00             18,721             $22.83
------------------------------------------------------------------------------------------------------------------
Reserved for future
  grant at year end                                16,655                                16,795
Exercisable                                         6,560             $22.65              6,812             $19.43
------------------------------------------------------------------------------------------------------------------
Weighted average fair value
 of options granted
 during the year                                                      $16.33                                $10.63
------------------------------------------------------------------------------------------------------------------

</TABLE>

        The following table summarizes information about fixed stock options
outstanding at Dec. 28, 1996:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                           Options Outstanding                              Options Exercisable
------------------------------------------------------------------------------------------------------------------
           Number                           Weighted-Avg.
           Range of                             Remaining       Weighted-Avg.            Number      Weighted-Avg.
           Exercise        Outstanding   Contractual Life           Exercise        Exercisable           Exercise
           Prices          at 12/28/96           in Years              Price        at 12/28/96              Price
------------------------------------------------------------------------------------------------------------------
   <S>                          <C>                  <C>               <C>                <C>                <C>
   $10.00 to $20.00              1,941                6.7              15.64              1,441              15.30
    20.01 to  30.00             10,443                7.8              24.23              4,699              24.08
    30.01 to  40.00              1,269               10.5              31.91                420              31.91
    40.01 to  52.00                736                9.2              48.69                 --                 --
------------------------------------------------------------------------------------------------------------------
   $10.00 to $52.00             14,389                N/A                N/A              6,560                N/A
------------------------------------------------------------------------------------------------------------------
</TABLE>



        In 1995, the number and exercise price of outstanding stock options were
adjusted for the dilutive effect of the spin-off of Allstate.

14. SUMMARY OF SEGMENT DATA
The Company operates primarily in the retailing industry. A summary
by segment is as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
millions                                                        1996        1995       1994
-------------------------------------------------------------------------------------------
<S>                                                          <C>         <C>        <C>
REVENUES
Domestic operations                                          $34,848     $31,628    $29,461
International operations                                       3,388       3,367      3,649
-------------------------------------------------------------------------------------------
Total                                                        $38,236     $34,995    $33,110
--------------------------------------------------------------------------------------------                         
              
INCOME (LOSS) BEFORE INCOME TAXES
Domestic operations                                          $ 2,106     $ 1,739     $1,425
International operations                                          (1)        (11)        46
--------------------------------------------------------------------------------------------                         
              
Total                                                        $ 2,105     $ 1,728     $1,471
--------------------------------------------------------------------------------------------                         
              
NET INCOME (LOSS)                                                                            
Domestic operations                                          $ 1,276     $ 1,055     $  864
International operations                                          (5)        (30)        (7)
Discontinued operations                                           --         776        402
Extraordinary gain                                                --          --        195
--------------------------------------------------------------------------------------------          
Total                                                        $ 1,271     $ 1,801     $1,454
--------------------------------------------------------------------------------------------          
ASSETS
Domestic operations                                          $33,228     $30,519    $27,554
International operations                                       2,939       2,611      2,527
Net assets of discontinued operations                             --          --      7,231
--------------------------------------------------------------------------------------------          
Total                                                        $36,167     $33,130    $37,312
--------------------------------------------------------------------------------------------

</TABLE>



                                                                                
                            Sears annual report 1996                       p. 39


<PAGE>

S E A R S ,   R O E B U C K   A N D   C O .


Five-Year Summary of Consolidated Financial Data
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
millions, except per common share and shareholder data       1996          1995          1994           1993          1992
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>           <C>            <C>           <C>
OPERATING RESULTS
Revenues                                                   $ 38,236       $ 34,995      $ 33,110       $ 30,518      $ 33,007
Costs and expenses                                           34,788         31,917        30,377         28,356        31,816 
Restructuring                                                    --             --            --             --         2,782 
Interest                                                      1,365          1,373         1,279          1,318         1,389 
Operating income (loss)                                       2,083          1,705         1,454            844        (2,980) 
Other income                                                     22             23            17            110           129 
Income (loss) before income taxes (benefit)                   2,105          1,728         1,471            954        (2,851) 
Income taxes (benefit)                                          834            703           614            329        (1,039) 
Income (loss) from continuing operations                      1,271          1,025           857            625        (1,812) 
Income (loss) from discontinued operations                       --            776           402          1,960          (247) 
Extraordinary gain (loss)                                        --             --           195           (211)          --  
Cumulative effect of accounting changes                          --             --            --             --        (1,873) 
Net income (loss)                                             1,271          1,801         1,454          2,374        (3,932) 
 
FINANCIAL POSITION 
Credit card receivables                                    $ 21,563       $ 20,106      $ 18,201       $ 15,906      $ 13,878 
Property and equipment, net                                   5,878          5,077         4,253          4,401         4,574 
Merchandise inventories                                       4,646          4,033         4,044          3,518         4,048 
Net assets of discontinued operations                            --             --         7,231          8,701        10,731 
Total assets                                                 36,167         33,130        37,312         37,911        39,540 
Short-term borrowings                                         3,533          5,349         6,190          4,636         4,469 
Long-term debt                                               14,907         11,774         9,985         10,790        12,432 
    Total debt                                               18,440         17,123        16,175         15,426        16,901 
    Percent of debt to equity                                   373%           391%          453%           521%         N/M  
Shareholders' equity                                       $  4,945       $  4,385      $ 10,801       $ 11,664      $ 10,773 
 
SHAREHOLDERS' COMMON STOCK INVESTMENT 
Book value per common share (year end)                     $  12.63       $  10.40      $  29.78       $  32.32      $  30.21 
Shareholders                                                243,986        256,624       262,387        291,320       337,892 
Average common and equivalent shares outstanding                399            394           389            383           370 
Earnings (loss) per common share                                                                                          
    Income (loss) from continuing operations               $   3.12       $   2.53      $   2.13       $   1.56      $  (4.98) 
    Income (loss) from discontinued operations                   --           1.97          1.03           5.12         (0.67) 
    Extraordinary gain (loss)                                    --             --          0.50          (0.55)          --  
    Cumulative effect of accounting changes                      --             --            --             --         (5.07) 
    Net income (loss)                                          3.12           4.50          3.66           6.13        (10.72) 
Cash dividends declared per common share                   $    .92       $   1.26      $   1.60       $   1.60      $   2.00 
Cash dividend payout percent                                   29.5%          28.0%         43.7%          26.1%        N/M   
Market price - common stock (high-low)                     53 7/8-38 1/4     60-30      55 1/8-42 1/8  60 1/8-39 7/8    48-37
-----------------------------------------------------------------------------------------------------------------------
Closing market price at December 31                              46          39            46            52          45   
-----------------------------------------------------------------------------------------------------------------------
Price/earnings ratio (high-low)                              17- 12       16-12         15-12          10-7         N/M   
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


Operating results and financial position reflect as discontinued operations
the following entities and the year of disposition: Allstate - 1995, Homart -
1995, Dean Witter, Discover & Co. - 1993, Coldwell Banker residential services
businesses - 1993.

The cumulative effect of accounting changes in 1992 reflects the adoption of
SFAS No. 106 "Employers Accounting for Postretirement Benefits Other Than
Pensions."

The percent of debt to equity is calculated using equity from continuing
operations.

The 1995 price/earnings ratio was calculated on a continuing operations
basis.

Stock prices have not been restated to reflect the Allstate and Dean Witter
distributions.

N/M--Not meaningful.


p.40                        Sears annual report 1996

<PAGE>

S E A R S ,  R O E B U C K   A N D   C O .

QUARTERLY RESULTS (Unaudited)


<TABLE>
<CAPTION>
                                          First Quarter     Second Quarter     Third Quarter     Fourth Quarter        Year
---------------------------------------------------------------------------------------------------------------------------------
millions, except per common share data     1996     1995     1996     1995     1996     1995     1996     1995     1996     1995
---------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Revenues                                 $7,995   $7,463   $9,132   $8,226   $9,067   $8,440  $12,042  $10,866  $38,236  $34,995
---------------------------------------------------------------------------------------------------------------------------------
Operating income                            246      209      436      345      446      374      955      777    2,083    1,705
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations           151      124      274      218      279      228      567      455    1,271    1,025
Discontinued operations                      --      435       --      341       --       --       --       --       --      776
  Net income                               $151     $559     $274     $559     $279     $228     $567     $455   $1,271   $1,801
---------------------------------------------------------------------------------------------------------------------------------
Earnings per common share
Income from continuing operations          0.36     0.30     0.67     0.54     0.68     0.56     1.42     1.13     3.12     2.53
Discontinued operations                      --     1.11       --     0.87       --       --       --       --       --     1.97
  Net income                              $0.36    $1.41    $0.67    $1.41    $0.68    $0.56    $1.42    $1.13    $3.12    $4.50
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


The fourth quarter pretax LIFO adjustments were credits of $27 and $5 million
in 1996 and 1995, compared with charges of $46 and $24 million for the first
nine months of the respective years.

Total of quarterly earnings per common share may not equal the annual amount
as net income per common share is calculated independently for each quarter.


COMMON STOCK MARKET INFORMATION AND DIVIDEND HIGHLIGHTS (Unaudited)


<TABLE>
<CAPTION>

                             First Quarter     Second Quarter     Third Quarter     Fourth Quarter         Year      
-------------------------------------------------------------------------------------------------------------------
dollars                      1996     1995     1996      1995     1996     1995     1996      1995    1996     1995  
-------------------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>      <C>       <C>      <C>      <C>      <C>       <C>     <C>     <C> 
Stock price range                                                                                                    
  High                       51 7/8   54 1/8   53 7/8    60       49 1/8   37 5/8   51 3/4    40 3/4  53 7/8   60
  Low                        38 1/4   44 1/8   46 1/4    51 1/4   39 7/8    30       44       32 1/2  38 1/4   30
  Close                      48 3/4   53 3/8   48 5/8    59 1/2   44 3/4   36 7/8   47 3/8      39    47 3/8   39
Cash dividends declared      .23      .40      .23       .40      .23      .23      .23       .23     .92     1.26   
-------------------------------------------------------------------------------------------------------------------
</TABLE>                           


Stock price ranges are for the New York Stock Exchange (trading symbol - S),
which is the principal market for the Company's common stock.

The 1995 third-quarter prices reflect the when-issued price for the Company's
common stock due to the Allstate spin-off.

Stock prices prior to July 1, 1995 have not been restated to reflect the
Allstate distribution.

The number of registered common shareholders at Feb. 28, 1997 was 242,246.

In addition to the New York Stock Exchange, the Company's common stock is
listed on the following exchanges: Chicago; Pacific, San Francisco; London,
England; Amsterdam, The Netherlands; Swiss, EBS.


                                                                              
                            Sears annual report 1996                        p.41