##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

For Annual and Transition Reports pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934


|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 28, 2002


OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-416

SEARS, ROEBUCK AND CO.

(Exact Name of Registrant as Specified in Its Charter)


|                                                                                      |  |                                                
|------------------------------------------------------------------------------------- |  | -----------------------------------------------
|New York
(State of Incorporation)                                                     |  | 36-1750680
(I.R.S. Employer Identification No.)
|                                                                                      |  |                                                
|3333 Beverly Road, Hoffman Estates, Illinois
(Address of principal executive offices) |  | 60179
(Zip Code)                               

Registrants telephone number, including area code: (847) 286-2500

Securities registered pursuant to Section 12(b) of the Act:

|                                         |  |                                          
|---------------------------------------- |  | -----------------------------------------
|Title of each class                      |  | Name of Each Exchange on Which Registered
|                                         |  |                                          
|                                         |  | New York Stock Exchange                  
|Common Shares, par value $0.75 per share |  | Chicago Stock Exchange                   
|                                         |  | Pacific Stock Exchange                   

Securities registered pursuant to Section 12(g) of the Act:       None

On January 31, 2003, the Registrant had 316,815,592 common shares outstanding. The aggregate market value (based on the closing price of the Registrants common share as
reported in a summary of composite transactions in The Wall Street Journalfor stocks listed on the New York Stock Exchange on June 28, 2002) of the Registrants common
shares owned by non-affiliates (which are assumed to be shareholders other than (i) directors and executive officers of the Registrant and (ii) any person known by the
Registrant to beneficially own five percent or more of Registrants common shares), as of June 28, 2002 was approximately $13.2 billion.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Yes      x      No   o


Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes      x      No   o


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Documents Incorporated By Reference




Part III of this Form 10-K incorporates by reference certain information from the Registrants proxy statement relating to its Annual Meeting of Shareholders to be held on
May 8, 2003 (the 2003 Proxy Statement).


---

---





---

TABLE OF CONTENTS



|                                                                |                                                                                                       |  |  |  |  |  |  | 
|--------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                         
|                                                                | Item 1. Business                                                                                     
|                                                                | Item 1A. Executive Officers of the Registrant                                                        
|                                                                | Item 2. Properties                                                                                   
|                                                                | Item 3. Legal Proceedings                                                                            
|                                                                | Item 4. Submission of Matters to a Vote of Security Holders                                          
|PART II                                                        
|                                                                | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                        
|                                                                | Item 6. Selected Financial Data                                                                      
|                                                                | Item 7. Managements Discussion and Analysis                                                         
|                                                                | Item 7a. Quantitative and Qualitative Disclosures About Market Risk                                  
|                                                                | Item 8. Financial Statements and Supplementary Data                                                  
|                                                                | Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure
|PART III                                                       
|                                                                | Item 10. Directors and Executive Officers of the Registrant                                          
|                                                                | Item 11. Executive Compensation                                                                      
|                                                                | Item 12. Security Ownership of Certain Beneficial Owners and Management                              
|                                                                | Item 13. Certain Relationships and Related Transactions                                              
|                                                                | Item 14. Disclosure Controls and Procedures                                                          
|                                                                | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                             
|SIGNATURES                                                     
|CERTIFICATIONS                                                 
|INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
|EXHIBIT INDEX                                                  
|1st Amend to Reg.'s Assoc. Stock Ownership Plan                
|2nd Amend to Reg.'s Assoc. Stock Ownership Plan                
|3rd Amend to Reg.'s Assoc. Stock Ownership Plan                
|Registrant's Supplemental 401(k) Savings Plan                  
|Letter from Registrant to Gerald F. Kelly                      
|Letter from Registrant to Janine M. Bousquette                 
|Letter from Registrant to Mark S. Cosby                        
|Letter from Registrant to Greg A. Lee                          
|Computation of Ratio of Income to Fixed Charges                
|Subsidiaries of the Registrant                                 
|Consent of Deloitte & Touche LLP                               
|Power of Attorney                                              
|Chief Executive Officer Certification                          
|Chief Financial Officer Certification                          



---



##### Table of Contents






PART I




Item 1. Business

Sears, Roebuck and Co. (Sears, and together with its consolidated
subsidiaries, the Company) originated from an enterprise established in 1886
and incorporated under the laws of New York in 1906. Its principal executive
offices are located at 3333 Beverly Road, Hoffman Estates, Illinois. The
Company is a multi-line retailer that offers a wide array of merchandise and
related services. In addition, through its Credit and Financial Products
businesses, the Company offers its customers various credit, financial and
related insurance products. The Company is organized into four principal
business segments  Retail and Related Services, Credit and Financial Products,
Corporate and Other, and Sears Canada. The Company is among the largest
retailers of merchandise in North America.

In June 2002, the Company acquired Lands End, Inc. (Lands End).
Headquartered in Dodgeville, Wisconsin, Lands End is a leading direct merchant
of traditionally-styled casual clothing for men, women and children,
accessories, footwear, home products and soft luggage.

The Companys Annual Reports on Form 10-K, including this Form 10-K, as well as
the Companys Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
any amendments to such reports are available, free of charge, on the Companys
internet website, sears.com. These reports are available as soon as reasonably
practicable after such material is electronically filed with or furnished to
the Securities and Exchange Commission. The reference to the Companys website
address does not constitute incorporation by reference of the information
contained on the website, and the information contained on the website is not
part of this document.

The Companys business segments are defined as follows:

Retail and Related Services- consisting of:

Full-line Stores- 872 Full-line Stores, averaging approximately 90,000 net
selling square feet, located primarily in shopping malls across the nation and
offering:



| |  |  | Hardlines- A full assortment of appliances, electronics and home
improvement products, including tools, fitness and lawn and garden
equipment; products range from major national brands to exclusive
Sears brands such as Kenmore, Craftsman and WeatherBeater.                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Softlines- A complete selection of fashionable, quality apparel and
accessories for the whole family, fine jewelry and home fashions at
value prices; includes leading national brands as well as exclusive
Sears brands such as Lands End, Covington, Canyon River Blues,
Apostrophe and TKS Basics.
|
| |  |  | Sears Auto Centers- Offer major national brands of tires, Sears
exclusive DieHard brand and other brands of batteries and related
automotive services.                                                                                                                                                
|
| |  |  | sears.com- Sears online presence; offers a limited assortment of
hardlines and softlines merchandise and provides customers the option
of buying online and picking up their merchandise in Full-line Stores.                                                                                         

Specialty Stores- Approximately 1,300 Specialty Stores, located primarily in
free-standing, off-the-mall locations or high-traffic neighborhood shopping
centers.



| |  |  | Dealer Stores- 767 primarily independently-owned stores,
predominately located in smaller communities and averaging
5,300 net selling square feet, that offer appliances,
electronics, lawn and garden merchandise, hardware and
automobile batteries. Dealer Stores carry exclusive Sears
brands such as Craftsman, Kenmore and DieHard as well as a wide
assortment of national brands.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2



---



##### Table of Contents





| |  |  | Hardware Stores- 249 neighborhood Hardware Stores under the
Sears Hardware and Orchard Supply Hardware brands, ranging, on
average, from 21,000 to 41,000 net selling square feet, that
carry Craftsman tools and lawn and garden equipment, a wide
assortment of national brands and other home improvement
products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | National Tire & Battery
(NTB)- 225 stores that offer major
national brands of tires, DieHard and other brands of batteries
and related services.                                                                                                                                                                      
|
| |  |  | The Great Indoors- 20 stores specializing in home decorating
and remodeling, averaging approximately 100,000 net selling
square feet, dedicated to the four main rooms of the house:
kitchen, bedroom, bathroom and great room.                                                                                       
|
| |  |  | Commercial Sales- Primarily targets home builders, remodelers
and property managers for appliance purchases as well as
vocational schools, factory maintenance and service companies
for industrial tool purchases.                                                                                                   
|
| |  |  | Sears Outlet Stores- 38 stores averaging 28,000 net selling
square feet that offer appliances, electronics and lawn and
garden merchandise at a discount.                                                                                                                                                             

Direct to Customer- The Direct to Customer business includes Lands End online
and catalog operations as well as results of operations for Lands Ends 15
retail stores effective June 17, 2002. These stores, averaging 7,000 net
selling square feet, offer traditionally-styled casual clothing for men, women
and children primarily from overstock catalog and online offerings. Direct to
Customer also includes direct marketing of goods and services memberships,
merchandise through specialty catalogs and impulse and continuity merchandise.

Product Repair Services- Product repair, service contract protection and
installation services are provided for all major brands of home products
through a national network of approximately 10,000 service technicians. This
business also sells and services residential cooling and heating systems.

Credit and Financial Products

This segment manages the Companys domestic portfolio of credit card
receivables. The domestic credit card receivables portfolio consists primarily
of the proprietary Sears Card and Sears ChargePlus (collectively, Sears Card)
and Sears Gold MasterCard and The Great Indoors Gold MasterCard (collectively,
MasterCard) account balances. Sears Card receivables are generated primarily
from purchases of merchandise and services from the Companys domestic
operations. The MasterCard products are widely accepted by merchants outside
the Company. The MasterCard credit card receivables are generated from
purchases from the Company and other merchants, balance transfers, convenience
checks and cash advances. This segment also sells related financial products
such as credit protection and insurance products.

Sears National Bank (the Bank), a wholly-owned subsidiary of Sears based in
Arizona, is a limited purpose credit card bank engaging in credit card
operations, originating credit accounts in all 50 states. The Bank is subject
to certain restrictions under federal law applicable to credit card banks as
well as to Arizona credit card lending guidelines.

3



---



##### Table of Contents



Corporate and Other

Corporate and Other operations include activities that are of an overall
holding company nature, primarily consisting of administrative activities, the
costs of which are not allocated to the Companys businesses. This segment
also includes home improvement services (primarily siding and windows through
Sears Home Improvement Services) and Sears Termite and Pest Control which are
not related to the Companys retail operations. During 2001, the Company sold
the Sears Termite and Pest Control business.

Sears Canada

The Company conducts similar retail, credit and corporate operations in Canada
through Sears Canada Inc. (Sears Canada), a consolidated, 54.4% owned
subsidiary of Sears. Sears Canada retail operations are conducted through 123
department stores, 42 furniture and appliance stores, 141 dealer stores, 15
outlet stores, 52 automotive centers, approximately 2,200 catalog pick-up
locations, 110 travel offices and online through sears.ca.



---

Information regarding revenues, operating income, total assets and capital
expenditures of the Companys business segments for each of the three fiscal
years ended December 28, 2002, December 29, 2001 and December 30, 2000 is
contained in Note 16 of the Notes to Consolidated Financial Statements.
Information on the components of revenues is included in Managements
Discussion and Analysis.

Seasonality

Due to holiday buying patterns, merchandise sales traditionally are higher in
the fourth quarter than in the other quarterly periods, and the Company
typically earns a disproportionate share of operating income in the fourth
quarter.

Trademarks and Tradenames

The trade name SEARS is used by the Company. The name is the subject of
numerous United States and foreign trademark registrations. This trademark is
material to the Companys domestic operations and other related businesses.

Sears sells private label merchandise under a number of brand names which are
important to its domestic operations. The Companys LANDS END®, KENMORE®,
CRAFTSMAN® and DIEHARD® brands are among the most recognized private label
brands in retailing. These names are the subject of numerous United States and
foreign trademark registrations. Other important and well-recognized Company
trademarks and service marks include THE GREAT INDOORS®, NTB®, OSH ORCHARD
SUPPLY HARDWARE®, CANYON RIVER BLUES®, APOSTROPHE®,
TKS BASICS®, COVINGTON,
A&E FACTORY SERVICE and SEARS. WHERE
ELSE?SM. The Companys right to use all
of its trade names continues so long as it uses the names.

Competition

The domestic retail and credit businesses are highly competitive. The
principal factors that differentiate retail competitors include convenience of
shopping facilities, quality of merchandise, competitive prices, brand names
and availability of ancillary services such as credit, product delivery, repair
and installation. The principal competitive factors that affect the Companys
credit business are new product offerings, interest rates and credit and
payment terms. The Company believes its business model enables it to compete
effectively despite strong competitive pressures in recent years.

Employees

The Company employs approximately 241,000 people in the United States and
Puerto Rico, and 48,000 people in Canada, including part-time employees.

4



---



##### Table of Contents






Item 1A. Executive Officers of the Registrant

The following table sets forth the names of the executive officers of the
Company, their current positions and offices with the Company, the date they
first became officers of the Company and their current ages:

|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|-------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ---------- | ---- | --- |  |  | -- | 
|                     |  |                                                                                                                     |  | Date First |      |     |  | 
|                     |  |                                                                                                                     |  | Became     |      |     |  | 
|Name                 |  | Position                                                                                                            |  | Officer    |      | Age
|                     |  |                                                                                                                     |  |            |      |    
|Alan J. Lacy         |  | Chairman of the Board of Directors, President and Chief
Executive Officer                                           |  |            | 1994 |     |  |  | 49 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Janine M. Bousquette |  | Executive Vice President, Chief Customer and
Marketing Officer                                                      |  |            | 2002 |     |  |  | 42 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Kathryn Bufano       |  | Executive Vice President/General Manager, Softlines 
Sears Retail                                                  |  |            | 2002 |     |  |  | 50 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Mary E. Conway       |  | Executive Vice President/General Manager, Full-line
Store Operations  Sears Retail                                 |  |            | 1998 |     |  |  | 54 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Steven M. Cook       |  | Vice President  Deputy General Counsel and Acting
General Counsel                                                  |  |            | 2003 |     |  |  | 44 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Mark S. Cosby        |  | Executive Vice President, Sears, Roebuck and Co. and
President, Full-line Stores  Sears Retail                     |  |            | 2002 |     |  |  | 44 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|David F. Dyer        |  | President and CEO  Lands End and Executive Vice
President/General Manager Customer Direct, Sears,
Roebuck and Co. |  |            | 2002 |     |  |  | 53 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Mark C. Good         |  | Executive Vice President/General Manager, Product
Repair Services                                                   |  |            | 2002 |     |  |  | 46 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Lyle G. Heidemann    |  | Executive Vice President/General Manager, Hardlines 
Sears Retail                                                  |  |            | 1992 |     |  |  | 58 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Gerald F. Kelly      |  | Senior Vice President and Chief Information Officer                                                                 |  |            | 2002 |     |  |  | 55 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Sara A. LaPorta      |  | Senior Vice President, Strategy                                                                                     |  |            | 2002 |     |  |  | 42 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Greg A. Lee          |  | Senior Vice President, Human Resources                                                                              |  |            | 2001 |     |  |  | 53 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Paul J. Liska        |  | Executive Vice President and President, Credit and
Financial Products                                               |  |            | 2001 |     |  |  | 47 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|William G. Pagonis   |  | Senior Vice President, Supply Chain Management                                                                      |  |            | 1993 |     |  |  | 61 | 
|                     |  |                                                                                                                     |  |            |      |     |  |  |    | 
|Glenn R. Richter     |  | Senior Vice President and Chief Financial Officer                                                                   |  |            | 2000 |     |  |  | 41 | 

5



---



##### Table of Contents



Messrs. Lacy, Heidemann and Pagonis and Ms. Conway have held the positions set
forth in the above tables for at least the last five years or have served the
Company in various executive or administrative capacities for at least that length of time. The remaining executive officers have held the following
positions for such five-year period:

Ms. Bousquette joined Sears as Executive Vice President, Chief Customer and
Marketing Officer, in October 2002. Prior to joining Sears, she was Chief
Marketing Officer and Executive Vice President of eToys Inc., a
Web-based retailer, from 1999 to 2001. From 1995 to 1999, she was Vice
President, Marketing with Pepsi-Cola Division of PepsiCo, Inc., a snack and
beverage manufacturer and distributor, serving as Vice President of Marketing
for Trademark Pepsi Brands from 1997 to 1999.

Ms. Bufano joined Sears as Executive Vice President, Softlines in January 2002.
Prior to joining Sears, she was President and Chief Merchandising Officer of
The Dress Barn, Inc., a womens apparel retailer, since 2001. Prior to joining
The Dress Barn, Inc., she was Executive Vice President, Womens Apparel of
Macys East, a department store chain, since 1995.

Mr. Cook joined Sears in 1996 and was named Vice President and Deputy General
Counsel - Transactions and Securities in 1999. He became Vice President -
Deputy General Counsel and Acting General Counsel in January 2003. Prior to
joining Sears, Mr. Cook practiced law at Skadden, Arps, Slate, Meagher & Flom
(Illinois) and Affiliates from 1985 to 1996.

Mr. Cosby joined Sears as Executive Vice President, Sears, Roebuck and Co. and
President, Full-line Stores in November 2002. Prior to joining Sears, he was
Chief Operating Officer, KFC of TRICON Global Restaurants, Inc. (now Yum!
Brands, Inc.), a restaurant operating company, from 2001 to November 2002 and
Chief Development Officer from 1997 to 2001.

Mr. Dyer joined Sears as President and Chief Executive Officer, Lands End and
Executive Vice President and General Manager, Customer Direct, Sears, in June
2002 following the acquisition of Lands End. In December 2002, he also became
responsible for the activities of The Great Indoors. Prior to the acquisition,
he served as President and Chief Executive Officer of Lands End since 1998.
Mr. Dyer was an independent catalog/retail consultant for the Texas Pacific
Group, an investment firm, and the J. Crew Group, a clothing retailer, from
1997-1998.

Mr. Good joined Sears in 1997. He was appointed Executive Vice
President/General Manager, Product Repair Services in 2002. Prior to that, he
was President, Product Repair Services from 1999 to 2002, Vice President &
General Manager, Parts & Carry-In Service from 1998 to 1999 and Vice President
& General Manager, Parts from 1997 to 1998.

Mr. Kelly joined Sears as Senior Vice President and Chief Information Officer
in October 2002. Prior to joining Sears, he was Senior Vice President -
Logistics, Information Systems and Technology at Payless Shoesource, Inc., a
footwear retailer, from 1996 to 2001.

Ms. LaPorta joined Sears as Senior Vice President, Strategy in December 2002.
Prior to joining Sears, she was Vice President of The Boston Consulting Group,
an international strategy and general management consulting firm, from 1986 to
2002.

Mr. Lee joined Sears as Senior Vice President, Human Resources in January 2001.
Prior to joining Sears, he was Senior Vice President, Human Resources of
Whirlpool Corporation, a manufacturer of major home appliances, since June
1998. Prior to joining Whirlpool, Mr. Lee served in the same capacity for The
St. Paul Companies, a property and casualty insurance company.

6



---



##### Table of Contents



Mr. Liska joined Sears as Executive Vice President and Chief Financial Officer
in 2001. He became Executive Vice President and President, Credit and
Financial Products in October 2002. Prior to joining Sears, Mr. Liska was
Executive Vice President and Chief Financial Officer of The St. Paul Companies
since 1997, and President and Chief Executive Officer of Specialty Foods
Corporation, a manufacturer of bread and bakery products, from 1994 until 1997.

Mr. Richter joined Sears as Vice President and Controller in 2000. He became
Senior Vice President, Finance in 2001 and held that position until October
2002. Mr. Richter has served as Senior Vice President and Chief Financial
Officer since October 2002. Prior to joining Sears, Mr. Richter was Senior
Vice President and Chief Financial Officer of Dade Behring International, a
manufacturer of medical testing systems, from 1998 to 2000, and Senior Vice
President and Corporate Controller since 1997.

7



---



##### Table of Contents






Item 2. Properties

The Companys principal executive offices are located on a 200-acre site owned
by the Company at the Prairie Stone office park, in Hoffman Estates, Illinois.
The complex consists of six interconnected office buildings totaling
approximately two million gross square feet of office space.

The following table sets forth information concerning stores operated by the
Companys domestic Retail operations.

|                                                     |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |       |       |      |  
|---------------------------------------------------- | ---- | --------------------------------------- | ----------------------------------- | ----- | ---------------- | --- | ---------------- | --- | ---------- | --- | -------- | --- | ------ | --- | -------- | --- | --- | --- | - | --- | -- | -- | - | --- | -- | -- |  | ----- | ----- | ---- | -
|                                                     |      |                                         |                                     |       | Full-line Stores |     | Specialty Stores |     | Lands End |     | Total   
|                                                     |      |                                         |                                     |       |                  |     |                  |     |            |     |         
|                                                     |      |                                         |                                     |       |                  |     |                  |     | NTB        |     | Hardware |     | Dealer |     | Other(a) |     |     |     |   |     |    |    |  
|                                                     |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |  
|Stores at December 28, 2002:                         |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|                                                     |      | Owned                                   |                                     |       | 519              |     |                  |     | 89         |     |          |     | 18     |     |          |     |    |     |   |     | 27 |    |   |     |   |    |  |       | 653   |     
|                                                     |      | Leased(b)                               |                                     |       | 353              |     |                  |     | 136        |     |          |     | 231    |     |          |     | 13  |     |   |     | 37 |    |   |     | 15 |    |  |       | 785   |     
|                                                     |      | Independently owned and operated Stores |                                     |       |                 |     |                  |     |           |     |          |     |       |     |          |     | 754 |     |   |     |   |    |   |     |   |    |  |       | 754   |     
|                                                     |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|                                                     |      | Total                                   |                                     |       | 872              | (c) |                  |     | 225        |     |          |     | 249    |     |          |     | 767 |     |   |     | 64 |    |   |     | 15 |    |  |       | 2,192 |     
|                                                     |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|Total Stores at Fiscal Year-end:                     |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|                                                     | 1999 |                                         |                                     | 858   |                  |     |                  | 310 |            |     |          | 267 |        |     |          | 738 |     |     |   | 40  |    |    |   |    |    |    |  | 2,213 |      
|                                                     |      |                                         | Stores opened during fiscal 2000    |       |                  | 11  |                  |     |            | 3   |          |     |        | 10  |          |     |     | 70  |   |     |    | 4  |   |     |    |   |  |       |       | 98   |  
|                                                     |      |                                         | Stores closed during fiscal 2000    |       |                  | (6  | )                |     |            | (84 | )        |     |        | (3  | )        |     |     | (18 | ) |     |    | (1 | ) |     |    |   |  |       |       | (112 | )
|                                                     | 2000 |                                         |                                     | 863   |                  |     |                  | 229 |            |     |          | 274 |        |     |          | 790 |     |     |   | 43  |    |    |   |    |    |    |  | 2,199 |      
|                                                     |      |                                         | Stores opened during fiscal 2001    |       |                  | 13  |                  |     |            | 1   |          |     |        | 4   |          |     |     | 33  |   |     |    | 14 |   |     |    |   |  |       |       | 65   |  
|                                                     |      |                                         | Stores closed during fiscal 2001    |       |                  | (9  | )                |     |            | (7  | )        |     |        | (30 | )        |     |     | (30 | ) |     |    | (3 | ) |     |    |   |  |       |       | (79  | )
|                                                     | 2001 |                                         |                                     | 867   |                  |     |                  | 223 |            |     |          | 248 |        |     |          | 793 |     |     |   | 54  |    |    |   |    |    |    |  | 2185  |      
|                                                     |      |                                         | Stores opened during fiscal 2002    |       |                  | 15  |                  |     |            | 2   |          |     |        | 3   |          |     |     | 13  |   |     |    | 10 |   |     |    |   |  |       |       | 43   |  
|                                                     |      |                                         | Stores acquired through acquisition |       |                  |    |                  |     |            |    |          |     |        |    |          |     |     |    |   |     |    |   |   |     |    | 15 |  |       |       | 15   |  
|                                                     |      |                                         | Stores closed during fiscal 2002    |       |                  | (10 | )                |     |            |    |          |     |        | (2  | )        |     |     | (39 | ) |     |    |   |   |     |    |   |  |       |       | (51  | )
|                                                     |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|                                                     |      | Stores at December 28, 2002             |                                     |       | 872              |     |                  |     | 225        |     |          |     | 249    |     |          |     | 767 |     |   |     | 64 |    |   |     | 15 |    |  |       | 2,192 |     
|                                                     |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|Gross Retail Area at Fiscal Year-end                 |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|square feet in millions                              |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|                                                     | 2002 |                                         |                                     | 127.2 |                  |     |                  | 2.6 |            |     |          | 9.3 |        |     |          | 6.4 |     |     |   | 4.4 |    |    |   | 0.1 |    |    |  | 150.0 |      
|                                                     | 2001 |                                         |                                     | 127.3 |                  |     |                  | 2.5 |            |     |          | 9.1 |        |     |          | 6.6 |     |     |   | 3.4 |    |    |   |    |    |    |  | 148.9 |      
|                                                     | 2000 |                                         |                                     | 126.7 |                  |     |                  | 2.7 |            |     |          | 9.3 |        |     |          | 6.5 |     |     |   | 2.1 |    |    |   |    |    |    |  | 147.3 |      
|Retail Net Selling Area at Fiscal Year-end           |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|square feet in millions                              |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|                                                     | 2002 |                                         |                                     | 78.8  |                  |     |                  | 0.3 |            |     |          | 6.8 |        |     |          | 4.1 |     |     |   | 3.3 |    |    |   | 0.1 |    |    |  | 93.4  |      
|                                                     | 2001 |                                         |                                     | 79.2  |                  |     |                  | 0.3 |            |     |          | 6.7 |        |     |          | 4.3 |     |     |   | 2.4 |    |    |   |    |    |    |  | 92.9  |      
|                                                     | 2000 |                                         |                                     | 77.7  |                  |     |                  | 0.3 |            |     |          | 7.2 |        |     |          | 4.3 |     |     |   | 1.4 |    |    |   |    |    |    |  | 90.9  |      
|Retail Store Revenues per Net Selling Square Foot(d) |      |                                         |                                     |       |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |      
|                                                     | 2002 |                                         | $                                   | 303   |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |       |      
|                                                     | 2001 |                                         | $                                   | 318   |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |       |      
|                                                     | 2000 |                                         | $                                   | 332   |                  |     |                  |     |            |     |          |     |        |     |          |     |     |     |   |     |    |    |   |     |    |    |  |       |      



---

|(a) |  | Consists of small-size appliance and electronic stores, retail outlet stores and The Great Indoors stores. Excludes Other facilities owned or leased as part of Full-line Store properties.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Many of the leases contain renewal options and contingent rentals (for additional information, see Note 8 of the Notes to Consolidated Financial Statements).                                
|   
|(c) |  | Includes Sears Auto Centers.                                                                                                                                                                 
|   
|(d) |  | Includes net commissions earned from licensed businesses operating within the Retail stores.                                                                                                 




8



---



##### Table of Contents



In addition, at December 28, 2002, there were 856 other sales offices and
service facilities, most of which are occupied under short-term leases or are
a part of other Sears facilities included in the above table. There were also
119 distribution facilities, most of which are leased for terms ranging from
one to 10 years.

Credit principally services its accounts at eight regional credit card
operations centers (RCCOCs) in the U.S., one unit in Puerto Rico, three
Credit Processing Centers, at the headquarters of the Bank in Tempe, Arizona
and at the Companys headquarters in Hoffman Estates. The Company owns one of
the RCCOCs, one of the Credit Processing Centers and leases seven of the
RCCOCs and two of the Credit Processing Centers. The Company leases the unit
in Puerto Rico.

As of December 28, 2002, Sears Canada operated 123 department stores, 42
furniture and appliance stores, 141 dealer stores, operated under independent
local ownership, 15 outlet stores, 52 automotive centers, approximately 2,200
catalog pick-up locations and 110 travel offices.




Item 3. Legal Proceedings

Pending against the Company and certain of its officers and directors are a
number of lawsuits, described below, that relate to the credit card business
and public statements about it. The Company believes that all of these claims
lack merit and is defending against them vigorously.



| |  | On October 18, 2002, a lawsuit was filed in the United States District
Court for the Northern District of Illinois against the Company and
certain current and former officers alleging that certain public
announcements by the Company concerning its credit card business
violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. Additional lawsuits of
the same tenor followed; with one exception, which is pending in the
United States District Court for the Northern District of California,
these cases are pending in the Northern District of Illinois. The
plaintiffs purport to represent classes of shareholders who purchased
the Companys common shares between January 17, 2002, and October 17,
2002. The Northern District of Illinois actions are being
consolidated into a single class action.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | On November 15, 2002, two lawsuits were filed in the United States
District Court for the Northern District of Illinois against the
Company, certain officers and directors, and alleged fiduciaries of
Sears 401(k) Savings Plan (the Plan), seeking damages and equitable
relief under the Employee Retirement Income Security Act (ERISA).
The plaintiffs purport to represent participants and beneficiaries of
the Plan, and allege breaches of fiduciary duties under ERISA in
connection with the Plans investment in the Companys common shares
and alleged communications made to Plan participants regarding the
Companys financial condition. A third complaint was filed on
December 16, 2002, making substantially the same claims. These
actions have been consolidated into a single class action.                                                       
| 
| |  | On October 23, 2002, a purported derivative suit was filed in the
Supreme Court of the State of New York against the Company (as a
nominal defendant) and certain current and former directors seeking
damages on behalf of the Company. The complaint purports to allege a
breach of fiduciary duty by the directors with respect to the
Companys management of its credit business. The Companys motion to
dismiss is currently pending. Two similar suits were subsequently
filed in the Circuit Court of Cook County, Illinois, and a third was
filed in the United States District Court for the Northern District of
Illinois. Motions have been or will be made to dismiss these actions,
or, in the alternative, to stay them, pending disposition of the
action in New York.                                                                                        

9



---



##### Table of Contents



The Company is subject to various other legal and governmental proceedings,
many involving litigation incidental to the businesses. Some matters contain
class action allegations, environmental and asbestos exposure allegations and
other consumer-based claims that involve compensatory, punitive or 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 management of the Company after consulting with legal counsel, and
taking into account insurance and reserves, the ultimate liability is not
expected to have a material adverse effect on annual results of operations,
financial position, liquidity or capital resources of the Company.




Item 4. Submission of Matters to a Vote of Security Holders

None

10



---



##### Table of Contents






PART II




Item 5. Market for Registrants Common Equity and Related Stockholder Matters

Description of Sears Common Shares

The summary contained herein of certain provisions of the Restated Certificate
of Incorporation, as amended (the Certificate of Incorporation), of Sears
does not purport to be complete and is qualified in its entirety by reference
to the provisions of such Certificate of Incorporation incorporated as Exhibit
3.(i) hereto and incorporated by reference herein.

The Certificate of Incorporation authorizes the issuance of 1,000,000,000
common shares, par value $0.75 per share, and 50,000,000 preferred shares, par
value $1.00 per share. As of the date hereof, there are no preferred shares
outstanding. Preferred shares may be issued in series with rights and
privileges as authorized by the Board of Directors.

Subject to the restrictions on dividends mentioned below and the rights of the
holders of any preferred shares which may hereafter be issued, each holder of
common shares is entitled to one vote per share, to vote cumulatively for the
election of directors, to dividends declared by the Board of Directors and,
upon liquidation, to share in the assets of Sears pro rata in accordance with
his, her or its holdings after payment of all liabilities and obligations.
The holders of common shares have no preemption, redemption, subscription or
conversion rights.

Sears Board of Directors is divided into three classes serving staggered
three-year terms. Because the Board is classified, shareholders wishing to
exercise cumulative voting rights to assure the election of one or more
directors must own approximately two to three times as many shares (depending
on the number of directors in the class and on the Board as a whole) as would
be required if the Board were not classified. Directors may be removed only
for cause upon the affirmative vote of at least 75% of the shares entitled to
vote. Such a vote is also required to alter, amend or repeal, or to adopt any
provision inconsistent with, Article 5 of the Certificate of Incorporation
concerning directors, or to fix the number of directors by shareholder vote.

There are no restrictions on repurchases or redemption of shares by Sears
which do not impair its capital, except that the indentures relating to
certain of Sears long-term debt and an agreement pursuant to which Sears has
provided a credit facility in support of certain tax increment revenue bonds
issued by the Village of Hoffman Estates, Illinois, in connection with the
construction of its headquarters facility, provide that Sears will not take
certain actions, including the declaration of cash dividends and the
repurchase of shares, which would cause Unencumbered Assets plus certain
Capitalized Rentals to drop below 150% of Liabilities plus such Capitalized
Rentals (as such terms are defined in the indentures and the agreement). The
amount by which such Unencumbered Assets plus Capitalized Rentals exceeds 150%
of such Liabilities plus Capitalized Rentals, as computed under certain of the
indenture provisions, is set forth in Note 9 of the Notes to Consolidated
Financial Statements.

Information regarding the principal market for Sears common shares, the number
of shareholders and the prices of, and dividends paid on, Sears common shares
is included below and under the heading Shareholders Equity  Dividend
Payments contained in Note 9 of the Notes to Consolidated Financial
Statements.

11



---



##### Table of Contents



Common Stock Market Information and Dividend Highlights

|                        |  |               |       |                |  |               |       |                |  |      |       |      |  |      |       |      |  |      |       |      |  |  |       |  |  |  |       |  |  |  |       |  |  |  |       |  |  |  |       | 
|----------------------- |  | ------------- | ----- | -------------- |  | ------------- | ----- | -------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ----- | 
|                        |  | First Quarter |       | Second Quarter |  | Third Quarter |       | Fourth Quarter |  | Year
|                        |  |               |       |                |  |               |       |                |  |     
|dollars                 |  | 2002          |       | 2001           |  | 2002          |       | 2001           |  | 2002 |       | 2001 |  | 2002 |       | 2001 |  | 2002 |       | 2001
|                        |  |               |       |                |  |               |       |                |  |      |       |      |  |      |       |      |  |      |       |     
|Stock price range       |  |               |       |                |  |               |       |                |  |      |       |      |  |      |       |      |  |      |       |      |  |  |       |  |  |  |       |  |  |  |       |  |  |  |       |  |  |  |       | 
|High                    |  |               | 54.29 |                |  | $             | 41.60 |                |  |      | 59.90 |      |  |      | 43.02 |      |  |      | 54.87 |      |  |  | 47.80 |  |  |  | 40.69 |  |  |  | 48.93 |  |  |  | 59.90 |  |  |  | 48.93 | 
|Low                     |  |               | 46.55 |                |  |               | 32.81 |                |  |      | 47.79 |      |  |      | 32.62 |      |  |      | 39.75 |      |  |  | 29.90 |  |  |  | 19.71 |  |  |  | 33.55 |  |  |  | 19.71 |  |  |  | 29.90 | 
|Close                   |  |               | 51.27 |                |  |               | 35.27 |                |  |      | 54.30 |      |  |      | 42.31 |      |  |      | 40.62 |      |  |  | 34.64 |  |  |  | 23.15 |  |  |  | 48.00 |  |  |  | 23.15 |  |  |  | 48.00 | 
|Cash dividends declared |  |               | 0.23  |                |  |               | 0.23  |                |  |      | 0.23  |      |  |      | 0.23  |      |  |      | 0.23  |      |  |  | 0.23  |  |  |  | 0.23  |  |  |  | 0.23  |  |  |  | 0.92  |  |  |  | 0.92  | 

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

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; and Dusseldorf, Germany.

The number of registered common shareholders at February 28, 2003 was 156,617.

Options to purchase common shares of the Company have been granted to employees
and non-employee directors under various stock-based compensation plans. The
following table summarizes the number of stock options issued, the
weighted-average exercise price and the number of securities remaining to be
issued under all outstanding equity compensation plans as of December 28, 2002.

|                                                           |  |                               |            |                           |  |                                |       |  |  |  |            | 
|---------------------------------------------------------- |  | ----------------------------- | ---------- | ------------------------- |  | ------------------------------ | ----- |  |  |  | ---------- | 
|                                                           |  | Number of securities to be    |            | Weighted-average exercise |  | Number of securities remaining
|                                                           |  | issued upon exercise of       |            | price of outstanding      |  | available for future issuance 
|                                                           |  | outstanding options, warrants |            | options, warrants         |  | under equity compensation     
|Plan Category                                              |  | and rights                    |            | and rights                |  | plans(2)                      
|                                                           |  |                               |            |                           |  |                               
|Equity compensation plans
approved by security holders     |  |                               | 21,722,532 |                           |  | $                              | 40.73 |  |  |  | 8,125,490  | 
|Equity compensation plans not
approved by security holders |  |                               | 5,276,934  | (1)                       |  | $                              | 38.78 |  |  |  | 9,723,066  | 
|                                                           |  |                               |            |                           |  |                                |       |  |  |  |            | 
|Total                                                      |  |                               | 26,999,466 |                           |  | $                              | 40.35 |  |  |  | 17,848,556 | 
|                                                           |  |                               |            |                           |  |                                |       |  |  |  |            | 



---

|(1) |  | Sears has a history of promoting employee stock ownership through Company sponsorship of various plans and programs. The sole equity compensation
plan not previously submitted to the Companys shareholders for approval is the 2001 Broad Based Stock Option Plan. The Company adopted this plan in
2001 to further enable Sears to align the interests of shareholders with employees by motivating participants to achieve long-range goals while
simultaneously providing a program to attract and retain eligible associates. The plan provides for the grant of stock options to eligible associates
of Sears with the exception of senior management, which is excluded from participation. Stock options granted under the plan are nonqualified stock
options for tax purposes, expire 10 years from the date of grant and may contain conditions requiring participants to satisfy employment, performance or
certain other criteria. The exercise price of the options granted is equal to 100% of the fair market value of Sears stock on the date of the grant.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes the securities to be issued upon exercise of outstanding options, warrants and rights.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



---

12



---



##### Table of Contents






Item 6. Selected Financial Data

Five-Year Summary of Consolidated Financial Data

|                                                                                        |                                                        |         |         |       |   |      |         |      |  |      |         |      |  |   |         |      |  |   |         |       |  
|--------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------- | ------- | ----- | - | ---- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- |  | - | ------- | ----- | -
|millions,
except per common share and shareholders                                      |                                                        | 2002(1) |         | 2001  |   | 2000 |         | 1999 |  | 1998
|                                                                                        |                                                        |         |         |       |   |      |         |      |  |     
|OPERATING RESULTS                                                                       |                                                        |         |         |       |   |      |         |      |  |      |         |      |  |   |         |      |  |   |         |      
|Revenues(2)                                                                             |                                                        | $       | 41,366  |       |   | $    | 40,990  |      |  | $    | 40,848  |      |  | $ | 39,430  |      |  | $ | 39,919  |      
|Costs and expenses(2)                                                                   |                                                        |         | 39,285  |       |   |      | 39,812  |      |  |      | 38,661  |      |  |   | 37,017  |      |  |   | 38,064  |      
|Operating income                                                                        |                                                        |         | 2,081   |       |   |      | 1,178   |      |  |      | 2,187   |      |  |   | 2,413   |      |  |   | 1,855   |      
|Other income, net                                                                       |                                                        |         | 372     |       |   |      | 45      |      |  |      | 36      |      |  |   | 6       |      |  |   | 28      |      
|Income before income taxes, minority interest, accounting
change and extraordinary item |                                                        |         | 2,453   |       |   |      | 1,223   |      |  |      | 2,223   |      |  |   | 2,419   |      |  |   | 1,883   |      
|Income taxes                                                                            |                                                        |         | 858     |       |   |      | 467     |      |  |      | 831     |      |  |   | 904     |      |  |   | 766     |      
|Income before accounting change and extraordinary item                                  |                                                        |         | 1,584   |       |   |      | 735     |      |  |      | 1,343   |      |  |   | 1,453   |      |  |   | 1,072   |      
|Cumulative effect of change in accounting principle                                     |                                                        |         | (208    | )     |   |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      
|Extraordinary item                                                                      |                                                        |         |        |       |   |      |        |      |  |      |        |      |  |   |        |      |  |   | (24     | )    
|Net income                                                                              |                                                        | $       | 1,376   |       |   | $    | 735     |      |  | $    | 1,343   |      |  | $ | 1,453   |      |  | $ | 1,048   |      
|FINANCIAL POSITION                                                                      |                                                        |         |         |       |   |      |         |      |  |      |         |      |  |   |         |      |  |   |         |      
|Credit card receivables, net(3)                                                         |                                                        | $       | 30,759  |       |   | $    | 28,155  |      |  | $    | 17,317  |      |  | $ | 18,033  |      |  | $ | 17,972  |      
|Retained interest in transferred credit card receivables(3)                             |                                                        |         |        |       |   |      |        |      |  |      | 3,105   |      |  |   | 3,211   |      |  |   | 4,349   |      
|Merchandise inventories                                                                 |                                                        |         | 5,115   |       |   |      | 4,912   |      |  |      | 5,618   |      |  |   | 5,069   |      |  |   | 4,816   |      
|Property and equipment, net                                                             |                                                        |         | 6,910   |       |   |      | 6,824   |      |  |      | 6,653   |      |  |   | 6,450   |      |  |   | 6,380   |      
|Total assets(3)                                                                         |                                                        |         | 50,409  |       |   |      | 44,317  |      |  |      | 36,899  |      |  |   | 36,954  |      |  |   | 37,675  |      
|Short-term borrowings(3)                                                                |                                                        |         | 4,525   |       |   |      | 3,557   |      |  |      | 4,280   |      |  |   | 2,989   |      |  |   | 4,624   |      
|Long-term debt, including current portion(3)                                            |                                                        |         | 26,112  |       |   |      | 22,078  |      |  |      | 13,580  |      |  |   | 15,049  |      |  |   | 15,045  |      
|Total debt(3)                                                                           |                                                        |         | 30,637  |       |   |      | 25,635  |      |  |      | 17,860  |      |  |   | 18,038  |      |  |   | 19,669  |      
|Shareholders equity                                                                    |                                                        | $       | 6,753   |       |   | $    | 6,119   |      |  | $    | 6,769   |      |  | $ | 6,839   |      |  | $ | 6,066   |      
|SHAREHOLDERS AND PER SHARE DATA                                                         |                                                        |         |         |       |   |      |         |      |  |      |         |      |  |   |         |      |  |   |         |      
|Shareholders                                                                            |                                                        |         | 157,378 |       |   |      | 164,354 |      |  |      | 209,101 |      |  |   | 220,749 |      |  |   | 233,494 |      
|Average common and equivalent shares outstanding                                        |                                                        |         | 321     |       |   |      | 329     |      |  |      | 346     |      |  |   | 381     |      |  |   | 392     |      
|Earnings per common share - diluted                                                     |                                                        |         |         |       |   |      |         |      |  |      |         |      |  |   |         |      |  |   |         |      
|                                                                                        | Income before accounting change and extraordinary item | $       | 4.94    |       |   | $    | 2.24    |      |  | $    | 3.88    |      |  | $ | 3.81    |      |  | $ | 2.74    |      
|                                                                                        | Cumulative effect of change in accounting principle    |         |         | (0.65 | ) |      |         |     |  |      |         |     |  |   |         |     |  |   |         |      |  
|                                                                                        | Extraordinary item                                     |         |         |      |   |      |         |     |  |      |         |     |  |   |         |     |  |   |         | (0.06 | )
|                                                                                        | Net income                                             |         | $       | 4.29  |   |      | $       | 2.24 |  |      | $       | 3.88 |  |   | $       | 3.81 |  |   | $       | 2.68  |  
|Cash dividends declared per common share                                                |                                                        | $       | 0.92    |       |   | $    | 0.92    |      |  | $    | 0.92    |      |  | $ | 0.92    |      |  | $ | 0.92    |      
|Market price - per common share (high-low)                                              |                                                        |         | 59.90   | -     |   |      | 48.93   | -    |  |      | 43.50   | -    |  |   | 53.19   | -    |  |   | 65.00   | -    
|                                                                                        |                                                        |         | 19.71   |       |   |      | 29.90   |      |  |      | 25.25   |      |  |   | 26.69   |      |  |   | 39.06   |      
|                                                                                        |                                                        |         |         |       |   |      |         |      |  |      |         |      |  |   |         |      |  |   |         |      
|Closing market price at December 31                                                     |                                                        | $       | 23.15   |       |   | $    | 47.64   |      |  | $    | 34.75   |      |  | $ | 30.38   |      |  | $ | 42.50   |      
|                                                                                        |                                                        |         |         |       |   |      |         |      |  |      |         |      |  |   |         |      |  |   |         |      



---



|(1) |  | Includes results of operations of Lands End effective June 17, 2002, the date of acquisition. (See Note 2 of the Notes to Consolidated
Financial Statements.)                                                                                                                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | During 2002, the Company adopted the provisions of Emerging Issues Task Force Issue 01-9, Accounting for Consideration Given By A Vendor To
A Customer, resulting in the restatement of prior year revenues and cost and expenses to conform with current year presentation.                                                                                                                      
|   
|(3) |  | Impacted by a change in securitization accounting in 2001. The Company consolidated its securitization structure and recognized
approximately $8.1 billion of debt and credit card receivables and reclassified an additional $3.9 billion to credit card receivables from
retained interest in transferred credit card receivables. (See Note 3 of the Notes to Consolidated Financial Statements.)



---

Certain prior year information has been reclassified to conform with current year presentation.

13



---



##### Table of Contents






Item 7. Managements Discussion and Analysis

Managements Discussion and Analysis is designed to provide the reader of the
financial statements with a narrative on the Companys results of operations,
financial position and liquidity, risk management activities, significant
accounting policies and critical estimates, and the future impact of accounting
standards that have been issued but are not yet effective. Managements
Discussion and Analysis is presented in five sections: Consolidated Operations,
Segment Operations, Outlook, Analysis of Consolidated Financial Condition and
Accounting Policies. It is useful to read Managements Discussion and Analysis
in conjunction with the Consolidated Financial Statements and related notes
thereto contained elsewhere in this document.

All references to earnings per share relate to diluted earnings per common
share.

Acquisition of Lands End

On June 17, 2002, the Company acquired all outstanding shares of Lands End,
for approximately $1.8 billion. The results of Lands End operations have been
reflected in the consolidated financial statements since that date. See Note 2
of the Notes to Consolidated Financial Statements for further discussion.

CONSOLIDATED OPERATIONS

Total revenueswere $41.4 billion in 2002, compared with $41.0 billion in 2001
and $40.8 billion in 2000.



| |  |  | Revenues from merchandise sales and serviceswere $35.7 billion in
2002, a decrease of 0.2% from 2001, which in turn were 1.4% lower than
2000. Revenues in Full-line Stores were $23.0 billion, a decrease of
5.3% from 2001, which were down 2.9% from 2000. Declines in comparable
store sales in both years were attributable to disruptions caused by
the Full-line Store repositioning efforts, a highly competitive and
promotional retail environment and the effects of a softening economy.
Specialty Stores revenues were $5.1 billion in 2002, an increase of
7.6% from 2001, which were 2.9% higher than 2000. Specialty Stores
revenue increases in both years were driven primarily by the expansion
of The Great Indoors, as well as comparable store revenue increases in
Dealer Stores. Direct to Customer revenues increased to $1.2 billion
in 2002, principally due to the addition of Lands End which was
acquired in June 2002. The revenues of Lands End from the date of
acquisition were approximately $1.0 billion.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Credit and financial products revenueswere $5.7 billion in 2002,
an increase of 8.3% from 2001, which in turn were 14.5% higher than
2000. During 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.
Prior to April 2001, domestic securitized receivables were recorded as
off-balance sheet securitizations under previous accounting rules
thereby reducing reported amounts of revenues, expenses, assets and
liabilities. With the adoption of SFAS No. 140, all receivables are
now reflected on the consolidated balance sheet. Increases in credit
revenues in 2002 and 2001 were primarily due to the consolidation of
the domestic securitized receivables in April 2001 and the growth of
the domestic MasterCard product which was launched in June 2000.                                                                                                                                    

Costs and expenseswere $39.3 billion in 2002, compared with $39.8 billion in
2001 and $38.7 billion in 2000.



| |  |  | Cost of sales, buying and occupancyas a percentage of merchandise
sales and services was 71.8% in 2002, compared to 73.4% in 2001 and
2000. Correspondingly, gross margin rates were 28.2% in 2002 and 26.6%
in both 2001 and 2000. The improvements in retail gross margin rates
have resulted from the exit of certain lower margin and unprofitable
merchandise categories, improved inventory management and vendor
sourcing and the inclusion of Lands Ends results in 2002, whose
business has a higher gross margin rate.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



---



##### Table of Contents





| |  |  | Selling and administrativeexpenses as a percentage of total
revenues were 22.4% in 2002, compared to 21.7% in 2001 and 21.6% in
2000. During 2001, the Company implemented a series of productivity
initiatives resulting in lower corporate and store-level operating
costs. The addition of Lands End in 2002 as well as investments for expanding The Great Indoors and marketing of
the MasterCard product in 2002 and 2001 more than offset these
reductions.                                                                                                                                                                                                                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The provision for uncollectible accounts(provision) was $2.3
billion in 2002, compared to $1.9 billion in 2001 and $0.9 billion in
2000. The increase in the 2002 provision includes an increase of $300
million in the domestic allowance for uncollectible accounts as a
result of refining the allowance methodology to include current
accounts and credit card fees. In addition, the Company increased its
allowance for uncollectible accounts to reflect increased delinquencies
and bankruptcies resulting from weakness in the U.S. economy, the
seasoning of the domestic MasterCard portfolio and an increase in
domestic credit card receivable balances.                               
|
| |   |  | Reported amounts were affected by the Companys off-balance sheet
accounting treatment for securitized receivables prior to April 2001.
During 2001, the Company recorded a $522 million provision for previously
securitized receivables to establish an allowance for uncollectible
accounts related to $12 billion of securitized receivables reinstated on
the Companys balance sheet as a result of the adoption of SFAS No. 140.
From April 2001 forward, the Companys securitization transactions were
accounted for as secured borrowings and the Company ceased recording
securitization income, which was $40 million in 2001 and $128 million in
2000.                                    
|
| |  |  | Interestexpense was $1.1 billion in 2002, compared to $1.4 billion
in 2001 and $1.2 billion in 2000. Reported amounts were affected by the
Companys off-balance sheet accounting treatment for domestic
securitized receivables prior to April 2001. Including interest costs
on debt related to the off-balance sheet receivables, interest expense
would have been $1.1 billion in 2002, $1.5 billion in 2001 and $1.7
billion in 2000. The decreases in interest expense were due to the
increased use of variable rate financing in a lower interest rate
environment, partially offset by additional borrowings to finance the
Lands End acquisition and higher credit card receivables in 2002.
|
| |  |  | Special charges and impairmentsreflect costs incurred from
strategic actions implemented by the Company to restructure its
operations and costs due to asset impairments. Such charges amounted
to $111 million in 2002, $542 million in 2001 and $251 million in 2000.
The actions taken over the past three years are as follows:                                                                                                                                                                                                                                                                                                                                                                    
|

| |  |  | During 2002, Sears Canada converted its seven stores
operating under the Eatons banner to Sears Canada stores,
resulting in severance, asset impairment and other exit costs
amounting to $111 million. This restructuring enabled Sears
Canada to better leverage its buying and advertising efforts, and
Sears Canada brand equity.                                                                                                                                                                                                                                                                                                                                                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During 2001, special charges and impairments amounted to
$542 million. Such costs consisted of $151 million for the exit of
unprofitable and non-strategic Full-line Store business categories
(including cosmetics, installed floor coverings and custom window
treatments); $123 million for productivity initiatives designed to
reduce operating costs; $205 million for impairment and other
losses primarily resulting from the insolvency of Homelife (a
former operating division of Sears which was sold in 1998); and
$63 million for the cost of a civil legal settlement relating to
selling practices in 1994 and 1995 of certain automotive batteries
manufactured by Exide Technologies.
|
| |  |  | During 2000, the Company recorded a special charge of
$150 million related to the closing of 87 underperforming stores
($136 million recorded in special charges and impairments and $14
million in cost of sales). The Company also recorded an
impairment charge of $115 million to write down the Sears Termite
and Pest Control business to its fair value. This business was
sold in 2001.                                                                                                                                                                                                                                                                                                        

15



---



##### Table of Contents



Other incomewas $372 million in 2002, as compared to $45 million in 2001 and
$36 million in 2000. The increase in 2002 consists primarily of a $336 million
pretax gain on the sale of the Companys holdings in Advance Auto Parts, Inc.

Income taxesas a percentage of income before taxes, minority interest and
cumulative effect of change in accounting principle were 35.0% in 2002, 38.2%
in 2001 and 37.4% in 2000. The lower effective income tax rate in 2002 was
attributable to the favorable resolution of a state income tax audit and the
benefit of utilizing Canadian operating loss carryforwards at higher than
expected rates. The increase in 2001 from 2000 resulted from a revaluation of
Sears Canadas deferred tax asset. The Company expects its effective income
tax rate to approximate 37% in 2003.

During 2002, the Company adopted SFAS No. 142 Goodwill and Other Intangible
Assets, resulting in a charge of $208 million (net of income taxes and
minority interest), representing the cumulative effect of the change in
accounting for goodwillas of the beginning of 2002. The charge reflects
goodwill impairment primarily related to National Tire and Battery and Orchard
Supply Hardware, offset by the reversal of negative goodwill related to Sears
Canadas purchase of Eatons.

Net incomewas $1.4 billion in 2002, $0.7 billion in 2001, and $1.3 billion in
2000. The Companys results of operations were affected by certain
noncomparable charges and gains during those periods. The Company defines
noncomparable items as transactions that are: related to the implementation of
special initiatives of the Company (generally special charges and impairments);
unusual or infrequent in nature (e.g., significant one-time transactions and
gains/losses unrelated to core operations); or related to changes in
accounting. Management believes that results excluding noncomparable items are
useful indications of trends in core operations when reviewed in the context of
reported results. In order to facilitate an understanding of such
noncomparable items and their effect on the results of operations, the
following table is provided as a reconciliation of reported earnings to
earnings excluding noncomparable items:



|                                 |                                                                           |                 |       |            |   |                    |       |      |   |      |       |      |   |      |       |      |   |      |       |      |   |   |       |     |   |   |      |       |   |   |      |       |   |   |      |       |   | 
|-------------------------------- | ------------------------------------------------------------------------- | --------------- | ----- | ---------- | - | ------------------ | ----- | ---- | - | ---- | ----- | ---- | - | ---- | ----- | ---- | - | ---- | ----- | ---- | - | - | ----- | --- | - | - | ---- | ----- | - | - | ---- | ----- | - | - | ---- | ----- | - | 
|millions,
except per share data  |                                                                           | Pretax Earnings |       | Net Income |   | Earnings per Share
|                                 |                                                                           |                 |       |            |   |                   
|                                 |                                                                           |                 |       | 2002       |   | 2001               |       | 2000 |   | 2002 |       | 2001 |   | 2000 |       | 2002 |   | 2001 |       | 2000
|                                 |                                                                           |                 |       |            |   |                    |       |      |   |      |       |      |   |      |       |      |   |      |       |     
|As reported                      |                                                                           | $               | 2,453 |            |   | $                  | 1,223 |      |   | $    | 2,223 |      |   | $    | 1,376 |      |   | $    | 735   |      |   | $ | 1,343 |     |   | $ | 4.29 |       |   | $ | 2.24 |       |   | $ | 3.88 |      
|Special charges and impairments: |                                                                           |                 |       |            |   |                    |       |      |   |      |       |      |   |      |       |      |   |      |       |      |   |   |       |    
|                                 | Sears Canada  Eatons conversion
costs                                    |                 |       | 111        |   |                    |       |     |   |      |       |     |   |      |       | 40   |   |      |       |     |   |   |       |    |   |   |      | 0.13  |   |   |      |      |   |   |      |      |  
|                                 | Homelife closure                                                          |                 |       |           |   |                    |       | 185  |   |      |       |     |   |      |       |     |   |      |       | 116  |   |   |       |    |   |   |      |      |   |   |      | 0.35  |   |   |      |      |  
|                                 | Productivity initiatives                                                  |                 |       |           |   |                    |       | 123  |   |      |       |     |   |      |       |     |   |      |       | 79   |   |   |       |    |   |   |      |      |   |   |      | 0.24  |   |   |      |      |  
|                                 | Product category exits                                                    |                 |       |           |   |                    |       | 151  |   |      |       |     |   |      |       |     |   |      |       | 97   |   |   |       |    |   |   |      |      |   |   |      | 0.30  |   |   |      |      |  
|                                 | Sears Termite and Pest Control impairment                                 |                 |       |           |   |                    |       |     |   |      |       | 115  |   |      |       |     |   |      |       |     |   |   |       | 98  |   |   |      |      |   |   |      |      |   |   |      | 0.28  |  
|                                 | Store closings/staff reductions                                           |                 |       |           |   |                    |       |     |   |      |       | 150  |   |      |       |     |   |      |       |     |   |   |       | 99  |   |   |      |      |   |   |      |      |   |   |      | 0.29  |  
|                                 | Other                                                                     |                 |       |           |   |                    |       | 20   |   |      |       |     |   |      |       |     |   |      |       | 13   |   |   |       |    |   |   |      |      |   |   |      | 0.04  |   |   |      |      |  
|Effect of accounting changes:    |                                                                           |                 |       |            |   |                    |       |      |   |      |       |      |   |      |       |      |   |      |       |      |   |   |       |     |   |   |      |       |   |   |      |       |   |   |      |      
|                                 | Effect of change in accounting for
goodwill                               |                 |       |           |   |                    |       |     |   |      |       |     |   |      |       | 208  |   |      |       |     |   |   |       |    |   |   |      | 0.65  |   |   |      |      |   |   |      |      |  
|                                 | Effect of change in estimate for the
allowance for uncollectible accounts |                 |       | 300        |   |                    |       |     |   |      |       |     |   |      |       | 191  |   |      |       |     |   |   |       |    |   |   |      | 0.59  |   |   |      |      |   |   |      |      |  
|                                 | Provision for previously securitized
receivables                          |                 |       |           |   |                    |       | 522  |   |      |       |     |   |      |       |     |   |      |       | 331  |   |   |       |    |   |   |      |      |   |   |      | 1.01  |   |   |      |      |  
|                                 | Securitization income                                                     |                 |       |           |   |                    |       | (40  | ) |      |       | (128 | ) |      |       |     |   |      |       | (26  | ) |   |       | (82 | ) |   |      |      |   |   |      | (0.08 | ) |   |      | (0.24 | )
|Unusual/infrequent items:        |                                                                           |                 |       |            |   |                    |       |      |   |      |       |      |   |      |       |      |   |      |       |      |   |   |       |     |   |   |      |       |   |   |      |       |   |   |      |      
|                                 | Advance Auto Parts gain                                                   |                 |       | (336       | ) |                    |       |     |   |      |       |     |   |      |       | (237 | ) |      |       |     |   |   |       |    |   |   |      | (0.74 | ) |   |      |      |   |   |      |      |  
|                                 | Exide battery litigation settlement                                       |                 |       |           |   |                    |       | 63   |   |      |       |     |   |      |       |     |   |      |       | 40   |   |   |       |    |   |   |      |      |   |   |      | 0.12  |   |   |      |      |  
|                                 |                                                                           |                 |       |            |   |                    |       |      |   |      |       |      |   |      |       |      |   |      |       |      |   |   |       |     |   |   |      |       |   |   |      |       |   |   |      |      
|Excluding noncomparable items    |                                                                           | $               | 2,528 |            |   | $                  | 2,247 |      |   | $    | 2,360 |      |   | $    | 1,578 |      |   | $    | 1,385 |      |   | $ | 1,458 |     |   | $ | 4.92 |       |   | $ | 4.22 |       |   | $ | 4.21 |      
|                                 |                                                                           |                 |       |            |   |                    |       |      |   |      |       |      |   |      |       |      |   |      |       |      |   |   |       |     |   |   |      |       |   |   |      |       |   |   |      |      

16



---



##### Table of Contents



The moderate rate of inflation over the past three years has not had a
significant effect on the Companys revenues and profitability.

SEGMENT OPERATIONS

The Company is organized into four
principal business segments  Retail and
Related Services, Credit and Financial Products, Corporate and Other, and Sears
Canada. Following is a discussion of results of operations by business
segment. The Company reports its business segment results excluding the
effects of noncomparable items. As stated above, the Company believes this
presentation facilitates the understanding of the results and trends affecting
each segments core operations when reviewed in the context of reported
results. This presentation is consistent with how the Company reports results
internally to senior management and the Board of Directors.

Retail and Related Services

Retail and Related Services results, excluding noncomparable items, and key
statistics were as follows:

|                                                          |                                            |      |        |        |   |      |        |        |   |   |        |        |  
|--------------------------------------------------------- | ------------------------------------------ | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|millions,
except number of stores and Retail store        |                                            |      |        |        |   |      |        |        |   |   |        |       
|revenues
per net selling square foot                      |                                            | 2002 |        | 2001   |   | 2000
|                                                          |                                            |      |        |        |   |     
|Full-line Stores                                          |                                            | $    | 23,028 |        |   | $    | 24,314 |        |   | $ | 25,043 |       
|Specialty Stores                                          |                                            |      | 5,106  |        |   |      | 4,747  |        |   |   | 4,611  |       
|Direct to Customer                                        |                                            |      | 1,175  |        |   |      | 223    |        |   |   | 263    |       
|Product Repair Services                                   |                                            |      | 2,150  |        |   |      | 2,062  |        |   |   | 2,018  |       
|                                                          |                                            |      |        |        |   |      |        |        |   |   |        |       
|                                                          | Total Retail and Related Services revenues |      |        | 31,459 |   |      |        | 31,346 |   |   |        | 31,935 |  
|                                                          |                                            |      |        |        |   |      |        |        |   |   |        |       
|Cost of sales, buying and occupancy                       |                                            |      | 22,743 |        |   |      | 23,081 |        |   |   | 23,573 |       
|Selling and administrative                                |                                            |      | 6,816  |        |   |      | 6,628  |        |   |   | 6,687  |       
|Depreciation and amortization                             |                                            |      | 710    |        |   |      | 704    |        |   |   | 710    |       
|Interest                                                  |                                            |      | 35     |        |   |      | 32     |        |   |   | 25     |       
|                                                          |                                            |      |        |        |   |      |        |        |   |   |        |       
|                                                          | Total costs and expenses                   |      |        | 30,304 |   |      |        | 30,445 |   |   |        | 30,995 |  
|                                                          |                                            |      |        |        |   |      |        |        |   |   |        |       
|Operating income                                          |                                            | $    | 1,155  |        |   | $    | 901    |        |   | $ | 940    |       
|                                                          |                                            |      |        |        |   |      |        |        |   |   |        |       
|Number of Full-line Stores                                |                                            |      | 872    |        |   |      | 867    |        |   |   | 863    |       
|Number of Specialty Stores                                |                                            |      | 1,305  |        |   |      | 1,318  |        |   |   | 1,336  |       
|Lands End Retail Stores                                  |                                            |      | 15     |        |   |      |       |        |   |   |       |       
|                                                          |                                            |      |        |        |   |      |        |        |   |   |        |       
|Total Retail Stores                                       |                                            |      | 2,192  |        |   |      | 2,185  |        |   |   | 2,199  |       
|                                                          |                                            |      |        |        |   |      |        |        |   |   |        |       
|Retail store revenues per net selling square foot         |                                            | $    | 303    |        |   | $    | 318    |        |   | $ | 332    |       
|Comparable store sales percentage (decrease) increase (1) |                                            |      |        |        |   |      |        |        |   |   |        |       
|                                                          | Hardlines                                  |      |        | -4.1   | % |      |        | -1.3   | % |   |        | 3.9    | %
|                                                          | Softlines                                  |      |        | -12.2  | % |      |        | -6.8   | % |   |        | -1.3   | %
|                                                          | Full-line Stores                           |      |        | -6.7   | % |      |        | -3.0   | % |   |        | 2.1    | %
|                                                          | Specialty Stores                           |      |        | 0.9    | % |      |        | 2.5    | % |   |        | 3.6    | %
|                                                          | Total                                      |      |        | -5.6   | % |      |        | -2.3   | % |   |        | 2.3    | %



---

|(1) |  | For purposes of determining comparable store sales, a store is considered to be comparable at the
beginning of the 13th month after the store is opened.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



---

17



---



##### Table of Contents



2002 Compared with 2001

Retail and Related Services is the Companys core business, and generated over
$31 billion in annual revenue in 2002. In order to enhance the customer
experience and improve operating performance, the Company undertook a
repositioning of Full-line Stores in 2002 to improve merchandise presentation
and provide easier, more convenient shopping. The repositioning led to a
disruptive sales environment, contributing to comparable store sales declines.
However, significant progress was made towards the repositioning plan,
resulting in an increase in the overall profitability of the segment.

To enhance the customers in-store experience, the Company installed
centralized checkouts, simplified store signage, provided shopping carts and
standardized fixturing and store layouts. To improve merchandise offerings,
the Company reduced the number of brands and labels it carries as a result of
regularly reviewing every brand to determine customer relevancy and
profitability. In addition, the Company is focusing on classically-styled
apparel so as to clarify the merchandise offerings to its customers. The
Covington brand was rolled out in 2002 and is expected to be a $500 million
brand by year-end 2003. The Company exited unprofitable businesses, including
cosmetics, installed carpet and custom window treatments. The acquisition of
Lands End in June 2002 adds a nationally recognized apparel brand that fits
well with the Companys Hardlines customers, creates differentiation, and
improves the quality of the Softlines offerings. Lands End merchandise was
introduced in 183 stores in 2002, and a full rollout to all Full-line Stores is
expected by the fall of 2003.

Retail and Related Services revenues increased 0.4% in 2002, primarily due to
the acquisition of Lands End and the opening of seven new The Great Indoors
stores, offset by a decline of 5.6% in comparable store sales. Full-line
Stores revenues decreased 5.3%, and comparable store sales declined 6.7% as a
result of store-level disruptions caused by the repositioning effort, a highly
competitive and promotional retail environment and a weak U.S. economy. In
Hardlines, comparable store sales declined 4.1%, as sales of home appliances,
electronics and other big-ticket items slowed in the second half of 2002.
Hardline sales were also negatively impacted by the exit of certain lines
including bicycles and the editing of product offerings, such as home
computers. In Softlines, comparable store sales declined 12.2%. As discussed
above, the Company exited a number of Softline businesses and reduced the
number of brands it carries which negatively impacted 2002 revenues. The
Company expects improving comparable store revenue trends in its Full-line
Stores, primarily in the second half of 2003, due to the expected positive
impacts of its initiatives to improve merchandise offerings and enhance the
customer shopping experience.

Specialty Stores revenues increased 7.6% in 2002 due to the addition of seven
The Great Indoors stores and a comparable store sales increase of 0.9%.
Comparable store sales increases of 4.2% in Dealer Stores were partially offset
by comparable store sales declines of 4.1% in NTB and 0.3% in Hardware stores.
As stated above, the Company opened seven The Great Indoors stores in 2002,
bringing the total to 20 stores. To date, the results of The Great Indoors
stores have not met the expectations of management. As a result, the Company
has slowed the pace of The Great Indoors store openings and initiated actions
to improve the profitability and productivity of the format. The Company
expects to open one The Great Indoors store in 2003.

Direct to Customer revenues increased over the prior year primarily due to the
acquisition of Lands End, which contributed approximately $1.0 billion in
revenues in 2002. Product Repair Services revenues increased to $2.2 billion
in 2002 due to increased product repair revenues resulting from a vendor
product recall and a recent agreement to provide repair services for an
appliance manufacturer.

Retail and Related Services gross margin as a percentage of Retail and Related
Services revenues improved 130 basis points in 2002. The improvement occurred
as a result of the exit of unprofitable merchandise categories in Full-line
Stores, improved inventory management and strategic sourcing initiatives across
all formats and the inclusion of Lands End, which has a higher margin rate.

18



---



##### Table of Contents



Retail and Related Services selling and administrative expense as a percentage
of Retail and Related Services revenues increased 60 basis points in 2002 from
2001. While the Company continued to recognize expense savings from its
productivity initiatives in 2002, selling and administrative expense leverage
was unfavorably affected by decreases in Full-line Store revenues, the rollout
of the additional The Great Indoors stores and the inclusion of Lands End,
which has a higher expense rate.

Retail and Related Services operating income was $1,155 million in 2002, $254
million higher than 2001, due to the benefits of the Full-line Store
repositioning, strategic sourcing initiatives, margin rate improvements and the
inclusion of Lands End.

2001 Compared with 2000

In 2001, the Company began reviewing product offerings in an effort to remove
unprofitable merchandise offerings as well as eliminate merchandise lines that
were not relevant to our customers. Throughout the year, merchandise offerings
were edited substantially, particularly in the home office category, while some
businesses were exited, such as cosmetics and bicycles. As a result, total
Retail and Related Services revenues decreased 1.8% to $31.3 billion, and
comparable store sales decreased by 2.3%.

Full-line Stores revenues decreased 2.9% to $24.3 billion in 2001, as
comparable store sales decreased 3.0%, and four net new stores were added. In
Hardlines, increases in home appliances revenue were primarily due to increased
sales of the Companys newly launched energy efficient laundry products and
food storage products. Home office revenue declines can be attributed to
declines in computer and computer accessories sales, as these product offerings
were significantly edited during 2001 in an effort to improve gross margin.
Merchandise edits were also made within the home fitness category, in which
bicycle product offerings were removed and game room and other fitness product
categories were expanded. In Softlines, mattress product offerings were
successfully reintroduced in the Full-line Stores in the second quarter of 2001
which positively impacted sales. The Companys exit of the skin care and color
cosmetics business contributed to revenue declines in Softlines. Specialty
Store revenues increased 2.9% to $4.7 billion in 2001 from 2000. The increase
reflects the addition of nine The Great Indoors stores and overall comparable
store sales growth of 2.5%, which was led by increases in Dealer stores.

Direct to Customer revenues decreased from the prior year primarily due to
revenue declines in Customer Direct and Clubs and Services due to the
elimination of under-performing product offerings. Product Repair Services
revenues increased primarily due to improvements in product repair as well as
the heating and cooling business.

Retail and Related Services gross margin as a percentage of Retail and Related
Services revenues improved 20 basis points in 2001 compared with 2000. The
year ended December 29, 2001 included a LIFO charge of $25 million whereas 2000
included a LIFO credit of $29 million. Excluding the LIFO adjustments, the
gross margin rate improved 40 basis points, primarily reflecting margin
improvement within virtually all retail businesses except Full-line Stores.
The decline in Full-line Stores was primarily due to increased markdown
activity in 2001, partially offset by benefits achieved through strategic
sourcing initiatives.

Retail and Related Services selling and administrative expense as a percentage
of Retail and Related Services revenues increased 20 basis points in 2001 from
2000. While the Company began to recognize expense savings from its
productivity initiatives in the second half of 2001, selling and administrative
expense leverage was unfavorably affected by the decrease in sales throughout
2001.

Retail and Related Services operating income was $901 million in 2001, $39
million lower than 2000, as lower revenues and unfavorable expense leverage
were partially offset by higher gross margin rates.

19



---



##### Table of Contents



Credit and Financial Products

Credit and Financial Products results, excluding noncomparable items, were as
follows:

|                                               |                                        |      |   |       |  |      |   |       |  |  |   |       | 
|---------------------------------------------- | -------------------------------------- | ---- | - | ----- |  | ---- | - | ----- |  |  | - | ----- | 
|millions                                       |                                        | 2002 |   | 2001  |  | 2000
|                                               |                                        |      |   |       |  |     
|                                               | Credit and Financial Products revenues |      | $ | 5,392 |  |      | $ | 5,216 |  |  | $ | 5,247 | 
|                                               |                                        |      |   |       |  |      |   |       |  |  |   |      
|                                               | Selling and administrative             |      |   | 955   |  |      |   | 833   |  |  |   | 810   | 
|                                               | Provision for uncollectible accounts   |      |   | 1,903 |  |      |   | 1,441 |  |  |   | 1,358 | 
|                                               | Depreciation and amortization          |      |   | 18    |  |      |   | 18    |  |  |   | 16    | 
|                                               | Interest                               |      |   | 1,014 |  |      |   | 1,395 |  |  |   | 1,550 | 
|                                               |                                        |      |   |       |  |      |   |       |  |  |   |      
|                                               | Total costs and expenses               |      |   | 3,890 |  |      |   | 3,687 |  |  |   | 3,734 | 
|                                               |                                        |      |   |       |  |      |   |       |  |  |   |      
|                                               | Operating income                       |      | $ | 1,502 |  |      | $ | 1,529 |  |  | $ | 1,513 | 
|                                               |                                        |      |   |       |  |      |   |       |  |  |   |      
|A summary of Credit information is as follows: |                                        |      |   |       |  |      |   |       |  |  |   |      

|                                                  |                 |  |      |       |      |  |      |       |   |  |      |       |  
|------------------------------------------------- | --------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                                                  |                 |  | 2002 |       | 2001 |  | 2000
|                                                  |                 |  |      |       |      |  |     
|Credit
share (1)                                  |                 |  | 44.0 | %     |      |  | 47.0 | %     |   |  | 47.4 | %    
|Average account balance as of year-end (dollars): |                 |  |      |       |      |  |      |       |   |  |      |      
|                                                  | Sears Card      |  | $    | 1,196 |      |  | $    | 1,142 |   |  | $    | 1,136 |  
|                                                  | MasterCard      |  | $    | 1,562 |      |  | $    | 1,112 |   |  | $    | 805   |  
|                                                  | Total portfolio |  | $    | 1,321 |      |  | $    | 1,136 |   |  | $    | 1,113 |  
|Portfolio yield:                                  |                 |  |      |       |      |  |      |       |   |  |      |      
|                                                  | Sears Card      |  |      | 19.48 | %    |  |      | 19.56 | % |  |      | 19.88 | %
|                                                  | MasterCard      |  |      | 15.53 | %    |  |      | 15.16 | % |  |      | 9.59  | %
|                                                  | Total portfolio |  |      | 18.29 | %    |  |      | 19.14 | % |  |      | 19.68 | %



---

|(1) |  | Credit share is the percentage of retail sales, excluding Direct to Customer, Orchard Supply Hardware and National Tire and Battery, paid for with a Sears
credit product (Sears Card or MasterCard).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|                                         |            |      |   |        |  |      |  |       |   |      |   |        |  |  |  |       |   |      |   |        |  |  |  |       |  
|---------------------------------------- | ---------- | ---- | - | ------ |  | ---- |  | ----- | - | ---- | - | ------ |  |  |  | ----- | - | ---- | - | ------ |  |  |  | ----- | -
|                                         |            |      |   |        |  | % of |  |       |   |      |   | % of   |  |  |  |       |   | % of
|millions                                 |            | 2002 |   | Total  |  | 2001 |  | Total |   | 2000 |   | Total 
|                                         |            |      |   |        |  |      |  |       |   |      |   |        | 
|Average managed credit card receivables: |            |      |   |        |  |      |  |       |   |      |   |        |  |  |  |       |   |      |   |        |  |  |  |      
|                                         | Sears Card |      | $ | 19,836 |  |      |  | 69.9  | % |      | $ | 23,819 |  |  |  | 90.5  | % |      | $ | 25,336 |  |  |  | 98.1  | %
|                                         | MasterCard |      |   | 8,536  |  |      |  | 30.1  | % |      |   | 2,499  |  |  |  | 9.5   | % |      |   | 494    |  |  |  | 1.9   | %
|                                         |            |      |   |        |  |      |  |       |   |      |   |        |  |  |  |       |   |      |   |        |  |  |  |      
|                                         | Total      |      | $ | 28,372 |  |      |  | 100.0 | % |      | $ | 26,318 |  |  |  | 100.0 | % |      | $ | 25,830 |  |  |  | 100.0 | %
|                                         |            |      |   |        |  |      |  |       |   |      |   |        |  |  |  |       |   |      |   |        |  |  |  |      
|Ending managed credit card receivables:  |            |      |   |        |  |      |  |       |   |      |   |        |  |  |  |       |   |      |   |        |  |  |  |      
|                                         | Sears Card |      | $ | 18,391 |  |      |  | 59.8  | % |      | $ | 22,321 |  |  |  | 80.9  | % |      | $ | 25,648 |  |  |  | 95.0  | %
|                                         | MasterCard |      |   | 12,375 |  |      |  | 40.2  | % |      |   | 5,278  |  |  |  | 19.1  | % |      |   | 1,353  |  |  |  | 5.0   | %
|                                         |            |      |   |        |  |      |  |       |   |      |   |        |  |  |  |       |   |      |   |        |  |  |  |      
|                                         | Total      |      | $ | 30,766 |  |      |  | 100.0 | % |      | $ | 27,599 |  |  |  | 100.0 | % |      | $ | 27,001 |  |  |  | 100.0 | %
|                                         |            |      |   |        |  |      |  |       |   |      |   |        |  |  |  |       |   |      |   |        |  |  |  |      

Portfolio Initiatives

During fiscal 2000, the Company embarked on a strategy to grow the credit
business and reverse the declining market share held by the Sears Card
portfolio. Sears Card usage had been declining in recent years, as aggressive
expansion by bank card competitors had reduced the relevance of the Sears Card
product to a segment of the Companys customers. During 2000, the Company
introduced a co-branded bank card product, the MasterCard, as a means to offer
a more relevant product to a subset of Sears customers, to win a greater share
of customers credit spend and to create long-term, higher-spend customer
relationships. In 2000, the Company substituted approximately seven million
Sears Card accounts with MasterCard accounts. These accounts were generally
the Companys highest credit quality customers who were generally not incurring
finance charges, either because

20



---



##### Table of Contents



cardholders were not using their cards, or were
using the cards only for convenience, generally making full
payments within the traditional grace period. An additional 18 million Sears
Card accounts, including some accounts that carried light revolving balances,
were substituted with MasterCard in 2001 and 2002, bringing the total number of
substituted accounts to approximately 25 million at year-end 2002, comprising
approximately 85% of the MasterCard balances.

During 2001 and 2002, the Company also marketed the MasterCard product to
non-current Sears customers through other channels, including direct mail
offerings, in-store promotions and by phone and the internet. The Company
issued approximately two million cards through such channels. These accounts
represent approximately 15% of the MasterCard balance as of December 28, 2002.

The MasterCard initiative has been successful in providing a product more
geared to Sears highest quality customers and has been successful in building
balances in the portfolio. Average managed credit card receivables have
increased from $25.8 billion at the end of 2000 to $28.4 billion at the end of
2002. Even though the MasterCard portfolio consists primarily of pre-existing
Sears Card customers, the substitutions stimulated new and different activity
that causes the MasterCard portfolio to behave differently from the Sears Card
portfolio. These anticipated behavioral changes cause the MasterCard portfolio
to perform like a young portfolio, even though the Company has long-term
relationships with many of the accountholders.

The source of credit card receivable balances is different between the two
portfolios. Credit card receivables in the Sears Card portfolio are primarily
generated by customers purchasing goods and services from the Companys retail
operations, whereas credit card receivables in the MasterCard portfolio can be
generated from customers internal and external purchases, balance transfers
from another credit card, convenience checks or cash advances.

2002 Compared with 2001

In 2002, Credit and Financial Products revenues increased 3.4% to $5.4 billion
compared to the prior year. The increase in revenues was primarily due to a
7.8% increase in average balances, partially offset by an 85 basis point
decline in portfolio yield. The decline in portfolio yield is primarily the
result of the shift of the portfolio composition from an average of 9.5%
MasterCard accounts in 2001 to 30.1% in 2002. The MasterCard product generally
carries a risk-based variable finance charge rate that is typically lower than
the finance charge rate on the Sears Card (see further discussion under
Account Management Programs). In addition, MasterCard accountholders
typically repay their accounts more quickly, which reduces the yield generated
on the portfolio. The increase in average per card balances was primarily
attributable to the growth of the MasterCard portfolio, which carries a higher
average credit line and outstanding balances, and has greater utility due to
its global acceptance and cash access features.

In mid-2002, the Company changed the terms of substantially all the Sears Cards
to move from a fixed rate finance charge to a variable rate finance charge.
The variable rate finance charge is based on the prime rate plus a fixed
spread. At the time of the change, the initial variable rate was designed to
provide finance charge rates approximately equal to the fixed finance charge
rates in place at that time. MasterCard finance charge rates are also
primarily variable, based on the prime rate plus a fixed spread. Finance
charge rate changes are effective the month following the month a change in the
prime rate occurs. During November 2002, the prime rate declined from 4.75% to
4.25%. Therefore, the finance charge rate applicable for billing cycles
beginning in December 2002 was 4.25%. The Company expects changes in yield to
be largely offset by changes in interest expense, as funding is primarily
through variable rate debt.

Interest expense decreased by $381 million in 2002 compared to the prior year.
The decrease was attributable to the Companys use of variable rate funding in
a lower interest rate environment, partially offset by higher funding levels to
support receivables growth as well as a widening of Company credit spreads over
applicable reference rates. As of December 28, 2002 and December 29, 2001,
approximately 83% and 85%, respectively, of the Companys funding portfolio was
variable rate debt. The Company allocates domestic debt and interest expense
to

21



---



##### Table of Contents



its Credit and Financial Products segment, assuming that the segment would
be capitalized at a 9 to 1 debt to equity ratio.

Credit and Financial Products selling and administrative expense increased
14.6% in 2002 from 2001 levels. The increase was primarily due to increases in
costs associated with the continued roll-out of the MasterCard product,
marketing, payroll and benefits expense and consumer fraud costs. These
increases were partially offset by increased reimbursement from Retail and
Related Services for zero-percent financing.

The provision increased by $462 million in 2002 compared to 2001. The Company
increased its allowance for uncollectible accounts to reflect increased
delinquencies and higher expected charge-offs resulting from a difficult
economy, the seasoning of the MasterCard portfolio and an increase in the
domestic credit card receivable balances. See Discussion of Portfolio
Quality below.

Credit and Financial Products operating income decreased by $27 million in 2002
over 2001, primarily due to increases in the provision and selling and
administrative costs, partially offset by lower funding costs and increased
revenues.

2001 Compared with 2000

In 2001, Credit and Financial Products revenues decreased 0.6% to $5.2 billion
compared to the prior year. The decrease in revenues was primarily due to a 54
basis point decrease in portfolio yield, partially offset by an increase in
average per card balances.

Interest expense decreased by $155 million in 2001 compared to the prior year.
The decrease primarily reflects the Companys increased use of variable rate
financing in a declining interest rate environment. At year-end 2001 and 2000,
85% and 33%, respectively, of the Companys funding portfolio was variable
rate. The shift to more variable rate funding was in response to the growth of
variable rate receivables within the credit card portfolio (primarily the
MasterCard product) and the Companys intention to convert the Sears Card
finance charges from fixed rate to variable rate in 2002.

Credit and Financial Products selling and administrative expense increased 2.8%
in 2001 from 2000 levels. The increase was primarily due to an increase in
consumer fraud costs, payroll and benefits, customer notification expenses and
costs associated with the continued roll-out of the MasterCard product. These
increases were partially offset by decreases in outsourcing expenses as well as
increased reimbursement from Retail and Related Services for zero-percent
financing.

The provision increased by $83 million in 2001 compared to 2000. The provision
increase primarily reflects an increase in receivable balances in 2001 due to
the growth of the MasterCard. See Discussion of Portfolio Quality below.

Credit and Financial Products operating income increased by $16 million in 2001
over 2000, primarily reflecting lower funding costs partially offset by
decreased revenues, increased selling and administrative costs and the
increased provision.

Discussion of Portfolio Quality

The quality of the Companys credit card portfolio at any time reflects, among
other factors, the credit worthiness of the individual accountholders, the
general economic conditions, the success of the Companys account management
and collection activities and the life cycle stage of the portfolio. The
Companys financial results are sensitive to changes in delinquencies and net
charge-offs of the Companys credit card receivable portfolio. During periods
of economic weakness, delinquencies and net charge-offs are more likely to
increase.

22



---



##### Table of Contents



The substitution program discussed under Portfolio Initiatives above has
positively impacted the overall quality of the credit portfolio, as the
substitution program has targeted the Companys highest credit quality
accounts. Portfolio growth during this period is primarily attributable to
substitution programs. The average account balance for the MasterCard product
has increased considerably during the period, from $805 in 2000 to $1,562 in
2002. Such balance growth is due to the expanded utility of the product, as
customers can use the MasterCard at other merchants, and is a result of its
balance transfer and cash access features. While the expanded utility and
higher balances have generated additional revenues, the Company has experienced
an increase in charge-off rates with
increased bankruptcies contributing to charge-offs. The increase in
charge-offs is primarily related to the continuing soft economic environment
that prevailed during 2002 and the seasoning of the MasterCard portfolio. In
addition, as discussed above under Portfolio Initiatives, the MasterCard
substitutions stimulated different types of balance growth than have
historically existed in the portfolio. Portions of that balance growth,
particularly on accounts that utilized the cash access features of the
MasterCard, have a higher charge-off rate than historical portfolio levels.

The Company has taken actions to mitigate the deteriorating delinquency and
charge-off results, including raising the risk criteria required for
application approval, reducing marketing efforts in channels outside of the
Sears stores and decreasing initial credit lines. The Company has also made
major investments in collection technology and training, improving both the
productivity and effectiveness of the collection process. In addition, during
2002 and early 2003, the Company adjusted the risk criteria across a number of
activities including balance transfer and convenience check strategies and
MasterCard substitution thresholds. The Company has also revoked lines of
credit and accelerated credit line decreases on certain delinquent and/or
inactive accounts.

As of year-end 2002, 2001 and 2000, MasterCard accounts represented
approximately 40%, 19% and 5%, respectively, of total ending managed credit
card receivables. The Company expects that such percentages will grow slightly
in 2003, as continued growth in MasterCard credit card receivables will offset
expected declines in Sears Card receivables. The age of the MasterCard
portfolio is an important factor related to the delinquency and loss levels
because delinquencies and charge-offs typically increase as young portfolios
mature (referred to as seasoning). Consequently, as the MasterCard portfolio
matures, the delinquency and charge-off rates are expected to increase in 2003.
The Company expects the total portfolio net charge-offs to average
6.5% - 7.0%
in 2003.

Delinquencies

The entire balance of an account, including any balances related to
zero-percent sales in that account (see discussion under Account Management
Programs), is considered delinquent if the minimum payment is not received by
the payment due date. The aging methodology is based on the number of
completed billing cycles during which a customer has failed to make a required
payment. Delinquencies not only have the potential to reduce earnings by
increasing the allowance for uncollectible accounts and related provision
expense, but they also result in additional operating costs dedicated to
resolving the delinquencies. As further discussed in Account Management
Programs, the Company contractually charges off accounts at 240 days, whereas
most bank card issuers charge off at 180 days. As a result, the Companys
delinquency rates are not directly comparable to participants in the bank card
industry.

23



---



##### Table of Contents



The Company has traditionally reported 60-plus day delinquencies. As such, the
following chart summarizes the 60-plus day delinquencies for the past two
years.

Delinquency Rates

During 2002, 60-plus day delinquency rates for the portfolio increased by 11
basis points as compared to 2001. Because the MasterCard portfolio has a lower
delinquency rate than the Sears Card portfolio, the growth in the MasterCard
portfolio coupled with the decline in the Sears Card portfolio resulted in only
an 11 basis point increase in the total portfolio delinquency rate as compared
to 2001 despite the fact that the delinquency rates for both the Sears Card and
MasterCard portfolios experienced larger increases. The 60-plus day
delinquency rate for the Sears Card portfolio increased to 10.34% at December
28, 2002, compared to 8.91% at December 29, 2001 and 7.94% at December 30,
2000. The 60-plus day delinquency rate for the MasterCard portfolio increased
to 3.76% at December 28, 2002, compared to 1.97% at December 29, 2001 and 0.38%
at December 30, 2000. The Sears Card delinquency rate increase reflects the
migration of higher credit quality customers to MasterCard and the effects of
the soft economic environment. The increase in the MasterCard portfolio
delinquency rate reflects the seasoning of the portfolio as well as the soft
economic environment.

Charge-offs

Net charge-offs consist of the principal amount of losses (excluding accrued
finance charges and credit card fees) less current period recoveries. The
Company charges off credit card receivable balances automatically when a
customers number of missed monthly payments outstanding reaches eight.
Accounts may be charged off sooner in the event of customer bankruptcy. The
Company has a re-aging policy to cure delinquent accounts when the customer has
demonstrated a pattern of meeting payment requirements by making two
consecutive monthly payments. Accounts cannot be re-aged more than once in a
twelve-month period. The amount of balances re-aged decreased in 2002
to 2.0% of ending portfolio balances as
compared to 2.4% in 2001 and 2.5% in 2000.

24



---



##### Table of Contents



Gross charge-offs reflect the uncollectible principal of a customer account.
Uncollectible finance charges and fees are recorded as a reduction of revenue.
Recoveries reflect the amounts collected on previously charged off credit card
receivable accounts. The Companys charge-off activity for the managed
portfolio is summarized below:

|                                               |            |      |     |       |   |      |     |       |   |   |     |       |  
|---------------------------------------------- | ---------- | ---- | --- | ----- | - | ---- | --- | ----- | - | - | --- | ----- | -
|millions                                       |            | 2002 |     | 2001  |   | 2000
|                                               |            |      |     |       |   |     
|Gross charge-offs                              |            |      |     |       |   |      |     |       |   |   |     |      
|                                               | Sears Card |      | $   | 1,648 |   |      | $   | 1,786 |   |   | $   | 1,800 |  
|                                               | MasterCard |      |     | 301   |   |      |     | 42    |   |   |     | 1     |  
|                                               |            |      |     |       |   |      |     |       |   |   |     |      
|                                               | Total      |      |     | 1,949 |   |      |     | 1,828 |   |   |     | 1,801 |  
|Recoveries                                     |            |      |     |       |   |      |     |       |   |   |     |      
|                                               | Sears Card |      |     | (400  | ) |      |     | (427  | ) |   |     | (478  | )
|                                               | MasterCard |      |     | (11   | ) |      |     | (1    | ) |   |     |      |  
|                                               |            |      |     |       |   |      |     |       |   |   |     |      
|                                               | Total      |      |     | (411  | ) |      |     | (428  | ) |   |     | (478  | )
|Net charge-offs                                |            |      |     |       |   |      |     |       |   |   |     |      
|                                               | Sears Card |      |     | 1,248 |   |      |     | 1,359 |   |   |     | 1,322 |  
|                                               | MasterCard |      |     | 290   |   |      |     | 41    |   |   |     | 1     |  
|                                               |            |      |     |       |   |      |     |       |   |   |     |       |  
|                                               | Total      |      | $   | 1,538 |   |      | $   | 1,400 |   |   | $   | 1,323 |  
|                                               |            |      |     |       |   |      |     |       |   |   |     |      
|Bankruptcy filings                             |            | $    | 900 |       |   | $    | 805 |       |   | $ | 698 |      
|Net charge-offs as a % of average receivables: |            |      |     |       |   |      |     |       |   |   |     |      
|                                               | Sears Card |      |     | 6.29  | % |      |     | 5.71  | % |   |     | 5.22  | %
|                                               | MasterCard |      |     | 3.40  | % |      |     | 1.64  | % |   |     | 0.20  | %
|                                               | Total      |      |     | 5.42  | % |      |     | 5.32  | % |   |     | 5.12  | %

Net charge-offs as a percent of average balances increased to 5.42% in 2002, up
10 basis points and 30 basis points from 2001 and 2000, respectively. The
MasterCard net charge-off rate increase reflects the seasoning of the portfolio
and increased charge-offs related to balance transfers, cash advances and
higher average credit lines on the MasterCard accounts. The Sears Card
increase reflects the migration of higher quality accounts from Sears Card to
MasterCard. The charge-off rate for both portfolios was also affected by the
economic environment as both contractual and bankruptcy charge-offs increased.
On a unit basis, bankruptcy filings were up 3.6% for the year, which compares
favorably with an industry rate of 5.9%. Bankruptcy filings dollars increased
$95 million in 2002 over prior year levels primarily due to the MasterCard
portfolio. Because the MasterCard accounts have a higher average balance, the
dollar value of the bankruptcy filings has increased, and is expected to
increase again in 2003, as the MasterCard portfolio matures. As was the case
with delinquencies, the total net charge-off rate benefited from the change in
mix of the portfolio due to the fact that MasterCard, which currently has a
lower net charge-off rate than the Sears Card, has become an increased
percentage of the total portfolio and has not yet reached a seasoned charge-off
rate. The net charge-off rate experienced over the past two years is
summarized below:

25



---



##### Table of Contents



Net Charge-Off%

Provision and Allowance for Uncollectible Accounts

The Company maintains an allowance for uncollectible accounts at an amount
estimated to be adequate to absorb probable losses, net of recoveries, inherent
in the existing portfolio. The Company provides for the estimated balance of
uncollectible finance charges and credit card fees in its allowance for
uncollectible accounts. The amount of the allowance necessary is determined
primarily based on a migration analysis of current and past due accounts and
the current and projected level of bankruptcies. In evaluating the adequacy of
the allowance, management also considers recent trends in delinquencies,
recoveries, bankruptcies and charge-offs as well as economic conditions and
other portfolio data. Management believes that the allowance for uncollectible
accounts is adequate to cover anticipated losses in the reported credit card
receivable portfolio under current conditions. The following table summarizes
the activity in the domestic allowance for uncollectible accounts for the
periods indicated:

|                                                 |                                                  |      |        |      |  |      |        |      |   |   |       |      |  
|------------------------------------------------ | ------------------------------------------------ | ---- | ------ | ---- |  | ---- | ------ | ---- | - | - | ----- | ---- | -
|millions                                         |                                                  | 2002 |        | 2001 |  | 2000
|                                                 |                                                  |      |        |      |  |     
|Balance, beginning of year                       |                                                  | $    | 1,115  |      |  | $    | 649    |      |   | $ | 725   |     
|Provision excluding noncomparable items          |                                                  |      | 1,903  |      |  |      | 1,441  |      |   |   | 1,358 |     
|Noncomparable items:                             |                                                  |      |        |      |  |      |        |      |   |   |       |     
|                                                 | Change in estimate                               |      |        | 300  |  |      |        |     |   |   |       |     |  
|                                                 | Securitization adjustment                        |      |        |     |  |      |        | (153 | ) |   |       | (522 | )
|                                                 | Provision for previously securitized receivables |      |        |     |  |      |        | 522  |   |   |       |     |  
|                                                 |                                                  |      |        |      |  |      |        |      |   |   |       |     
|Domestic provision including noncomparable items |                                                  |      | 2,203  |      |  |      | 1,810  |      |   |   | 836   |     
|Net
charge-offs (1)                              |                                                  |      | (1,538 | )    |  |      | (1,247 | )    |   |   | (801  | )   
|Transfer to Securitization Master Trust          |                                                  |      |       |      |  |      | (83    | )    |   |   | (111  | )   
|Reduction
for accounts sold (2)                  |                                                  |      |       |      |  |      | (14    | )    |   |   |      |     
|                                                 |                                                  |      |        |      |  |      |        |      |   |   |       |     
|Allowance for uncollectible accounts             |                                                  | $    | 1,780  |      |  | $    | 1,115  |      |   | $ | 649   |     
|                                                 |                                                  |      |        |      |  |      |        |      |   |   |       |     
|Allowance as percent of ending owned balances    |                                                  |      | 5.79   | %    |  |      | 4.04   | %    |   |   | 4.03  | %   



---

|(1) |  | Excludes securitization adjustments of $153 million and $522 million in 2001 and 2000, respectively.            
|--- |  | ----------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In the fourth quarter of 2001, the Company sold receivables related to its Home Improvement Services businesses.




In 2002, the Company increased its allowance for uncollectible accounts as a
percentage of credit card receivables

26



---



##### Table of Contents



to 5.79% from 4.04% in 2001 and 4.03% in
2000. In the second quarter of 2002, the Company refined its
methodology for determining the uncollectible portion of current accounts and
credit card fee balances, resulting in an increase to the allowance for
uncollectible accounts in the amount of $300 million. In accordance with
Accounting Principles Board Opinion No. 20, Accounting Changes, the effect of
this change in accounting was recorded as a change in accounting estimate. In
addition, the Company increased its domestic allowance for uncollectible
accounts by $365 million in 2002 to reflect increased delinquencies and
bankruptcies resulting from a soft economy, the seasoning of the MasterCard
portfolio and an increase in receivable balances.

Account Management Programs

The Company has historically utilized certain account management programs
designed to support retail promotions and maximize collections. Such programs,
some of which are not typical among bank card issuers, include the use of (a)
no minimum payment/zero-percent financing for up to 12 months for the Companys
retail customers, (b) percentage off promotions, (c) a 240-day contractual
delinquency period, (d) a renewal or workout program for late stage
delinquencies, (e) a re-aging policy and (f) an annual percentage rate (APR)
structure. The following is a description of these programs:



| | a. |  | No minimum payment/zero-percent
financing - The Company utilizes
zero-percent credit promotions as part of its retail promotional
strategy. Under the terms of the zero-percent credit promotions,
qualifying purchases from the Retail and Related Services segment
financed by the Companys credit products do not accrue interest for a
period ranging from three to twelve months. As the purpose of these
promotions is to benefit retail sales, the Retail and Related Services
segment reimburses the Credit and Financial Products segment for
carrying such zero-percent balances at a 10% annualized rate, recorded
as operating expense in Retail and Related Services with an offsetting
benefit to Credit and Financial Products operating expense. Receivable
balances attributable to such programs approximate 6.6%, 6.7% and 7.5%
of total managed domestic credit card receivables at year-end 2002,
2001 and 2000, respectively. Accountholders who use such programs are
generally higher credit quality customers. The no minimum payment terms
on promotional items require timely payments on all non-promotional
credit purchases; otherwise the entire account balance becomes
delinquent and subject to standard finance charges.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Percentage off promotions - The Company utilizes credit sales as
part of its retail promotional strategy. During these promotional
events, customers who make purchases from the Retail and Related
Services segment that are paid for with a Sears credit product receive
a discount on their purchases (e.g., 10% off all purchases on a Sears
Card). As the primary purpose of these promotions is to drive retail
sales, the Retail and Related Services segment absorbs the costs of
these promotions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | c. |  | 240-day contractual delinquency
period - The Company charges off
credit card receivable balances automatically when a customers number
of missed monthly payments outstanding reaches eight. Accounts are
charged off sooner in the event of customer bankruptcy. For regulated
bank card issuers, accounts are charged off after 180 days of
contractual delinquency (i.e., after a contractually due payment is not
paid within 180 days). The Companys extended delinquency period is
designed to deliver additional economic returns to shareholders while
at the same time working with accountholders to resolve the delinquency
and maintain a retail relationship. The Company has consistently
applied the practice for several years and the 180-239 day
delinquencies are included in determining the allowance for
uncollectible accounts.                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | d. |  | Renewal or workout programs - For accounts more than 150 days past
due, the Company provides a term-out or renewal program to qualified
accountholders. These programs provide for a fixed amortization
schedule over a 50 or 52-month term, with credit lines reduced to zero
and not re-extended at time of pay-off. As with the renewal program,
the Company will provide a fixed amortization schedule for consumers
involved in a qualified, non-profit, debt counseling program. Under
this approved debt counseling program, credit lines are reduced to zero
and not re-extended at the time of pay-off. Accounts in a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

27



---



##### Table of Contents





| |    |  | workout program are considered current upon receipt of the first agreed upon
payment and remain current as long as they abide by the terms of the
program. Workout programs are offered by other retail
and bank card issuers and are considered by accountholders to be
preferable to a reported charge-off. Credit card receivable balances
under such programs were approximately 3.8%, 4.0% and 3.8% of total
domestic credit card balances at year-end 2002, 2001 and 2000,
respectively, with the majority involved in a qualified, non-profit, debt
counseling program. As the workout programs are considered in
determining the allowance for uncollectible accounts, reported results
reflect the costs of expected losses inherent in such programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | e. |  | Re-aging policy - The Company has a re-aging policy to cure
delinquent accounts when the customer has demonstrated a pattern of
meeting payment requirements by making two consecutive monthly
payments. Accounts cannot be re-aged more than once in a twelve-month
period. The amount of balances re-aged decreased in 2002 to
approximately 2.0% of ending portfolio balances as compared to 2.4% in
2001 and 2.5% in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | f. |  | APR structure - Almost all of the Sears Card portfolio APR is
variable priced at prime rate + 17.15%. This translates into an APR of
21.4% based on a prime rate of 4.25%. Sears Card accounts that are
more than two cycles past due move into performance pricing in which
the APR is adjusted to prime rate + 20.15% (APR of 24.4% based on a
prime rate of 4.25%). The MasterCard portfolio has APR price points
ranging from 11.24% (prime rate + 6.99%) to 21.9% (fixed). As
discussed earlier, the majority of the credit card receivable portfolio
is variable priced and is adjusted as the prime rate changes. Accounts
are priced using risk and activation models with lower risk accounts
generally receiving the lower rates. The Company has been acquiring
MasterCard accounts nationally through in-store channels since March
2002. Rates on MasterCard accounts acquired in-store range from 13.9%
to 21.9% fixed. As with the Sears Card portfolio, accounts that are
more than two cycles past due move into performance pricing.
Performance pricing ranges from 23.5% to 24.0%. All accounts in
performance pricing will return to their original APR if six
consecutive monthly payments are made.

Corporate and Other

Corporate and Other segment results were as follows:

|                                    |                          |      |      |      |  |      |      |     |  |   |      |     | 
|----------------------------------- | ------------------------ | ---- | ---- | ---- |  | ---- | ---- | --- |  | - | ---- | --- | 
|millions                            |                          | 2002 |      | 2001 |  | 2000
|                                    |                          |      |      |      |  |     
|Home Improvement Services revenues  |                          | $    | 326  |      |  | $    | 378  |     |  | $ | 353  |    
|                                    |                          |      |      |      |  |      |      |     |  |   |      |    
|Cost of sales, buying and occupancy |                          |      | 121  |      |  |      | 159  |     |  |   | 144  |    
|Selling and administrative          |                          |      | 442  |      |  |      | 473  |     |  |   | 407  |    
|Depreciation and amortization       |                          |      | 55   |      |  |      | 58   |     |  |   | 53   |    
|                                    |                          |      |      |      |  |      |      |     |  |   |      |    
|                                    | Total costs and expenses |      |      | 618  |  |      |      | 690 |  |   |      | 604 | 
|                                    |                          |      |      |      |  |      |      |     |  |   |      |    
|Operating loss                      |                          | $    | (292 | )    |  | $    | (312 | )   |  | $ | (251 | )  
|                                    |                          |      |      |      |  |      |      |     |  |   |      |    

Revenues from the home improvement services businesses included in the
Corporate and Other segment decreased by 13.8% to $326 million in 2002
primarily due to the disposition of Sears Termite and Pest Control, Inc. on
October 1, 2001. Segment operating loss improved by $20 million, reflecting
the benefits of productivity initiatives.

Revenues from the home improvement services businesses included in the
Corporate and Other segment increased by 7.1% in 2001 to $378 million primarily
due to strong performance by the siding and windows business. Segment operating
loss was $61 million higher due to increased home office expenses. The
increase primarily reflected consulting expenses related to the development of
the Companys strategic initiatives.

On October 1, 2001, the Company completed the sale of certain assets of its
wholly-owned subsidiary, Sears

28



---



##### Table of Contents



Termite and Pest Control, Inc., to the
ServiceMaster Company. Under the terms of the transaction, the Company will
provide certain transition services and may share in the cost of remediating
termite damage claims in excess of defined amounts, if any, for a limited
period of time. This transaction did not materially affect results of
operations or the consolidated financial position of the Company.

Sears Canada

Sears Canada results were as follows:

|                                                      |                          |      |       |       |  |      |       |       |  |   |       |       | 
|----------------------------------------------------- | ------------------------ | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|millions,
except revenues per net selling square foot |                          | 2002 |       | 2001  |  | 2000
|                                                      |                          |      |       |       |  |     
|Merchandise sales and services                        |                          | $    | 3,913 |       |  | $    | 4,031 |       |  | $ | 3,989 |      
|Credit revenues                                       |                          |      | 276   |       |  |      | 294   |       |  |   | 293   |      
|                                                      |                          |      |       |       |  |      |       |       |  |   |       |      
|                                                      | Total revenues           |      |       | 4,189 |  |      |       | 4,325 |  |   |       | 4,282 | 
|                                                      |                          |      |       |       |  |      |       |       |  |   |       |      
|Cost of sales, buying and occupancy                   |                          |      | 2,782 |       |  |      | 2,994 |       |  |   | 2,901 |      
|Selling and administrative                            |                          |      | 1,036 |       |  |      | 997   |       |  |   | 1,038 |      
|Provision for uncollectible accounts                  |                          |      | 58    |       |  |      | 56    |       |  |   | 48    |      
|Depreciation and amortization                         |                          |      | 92    |       |  |      | 83    |       |  |   | 60    |      
|Interest                                              |                          |      | 94    |       |  |      | 111   |       |  |   | 113   |      
|                                                      |                          |      |       |       |  |      |       |       |  |   |       |      
|                                                      | Total costs and expenses |      |       | 4,062 |  |      |       | 4,241 |  |   |       | 4,160 | 
|                                                      |                          |      |       |       |  |      |       |       |  |   |       |      
|Operating income                                      |                          | $    | 127   |       |  | $    | 84    |       |  | $ | 122   |      
|                                                      |                          |      |       |       |  |      |       |       |  |   |       |      
|Revenues per net selling square foot                  |                          | $    | 180   |       |  | $    | 190   |       |  | $ | 193   |      
|Comparable store sales percentage (decrease) increase |                          |      | -4.3  | %     |  |      | -0.4  | %     |  |   | 5.0   | %    

2002 Compared with 2001

Similar to the domestic segments, Sears Canada focused on improving its
business model in 2002 in order to increase profitability in the current
challenging environment. During 2002, the Company completed its conversion of
the remaining Eatons stores to Sears Canada Stores.

Total Sears Canada revenues were $4.2 billion in 2002, a 3.1% decrease compared
to 2001. Sears Canadas total merchandise sales decreased by 2.9% while same
store sales decreased by 4.3%. The decline in revenue reflects reduced
promotional activity as well as disruption caused by store renovations. Sales
in most merchandise categories declined from the previous year, with the
decline in electronics being most significant. Sales in major appliances,
however, were positive compared to 2001 due to the growth brought about by
strong housing starts.

Credit revenues were down 6.1% compared to the prior year primarily due to
customers carrying lower charge account receivable balances. Within Sears
Canada credit operations, the net charge-off rate increased to 4.5% in 2002
from 4.1% in 2001. Canada experienced similar economic conditions as the U.S.
and as a result, charge-offs increased.

Sears Canada gross margin rate as a percentage of merchandise sales and
services revenues improved by 320 basis points in 2002 reflecting improved
inventory levels, leading to lower liquidation losses and a reduction in the
level of unprofitable promotional activity.

Sears Canada selling and administrative expense as a percentage of total
revenues increased 160 basis points in 2002, despite operating expense
reductions in several areas such as payroll and benefits. The increase
resulted from higher performance based incentive expense as a result of its
improved profitability.

Sears Canada depreciation and amortization increased by $9 million or 10.8% due
to the absence of the amortization of negative goodwill, which was written off
upon adoption of SFAS No. 142. Interest expense

29



---



##### Table of Contents



declined $17 million or 15.3%
compared to the prior year due to lower funding needs.

Sears Canada operating income improved by $43 million, or 51.2%, primarily due
to improved margin rates.

2001 Compared with 2000

The Canadian economy exhibited recessionary characteristics in 2001, resulting
in a very soft and challenging retail environment. In response to the adverse
market conditions, Sears Canada focused on enhancing productivity by reducing
inventory, operating expenses and capital expenditures throughout 2001.

Total Sears Canada revenues were $4.3 billion in 2001, a 1.0% increase over
2000. Sears Canadas total merchandise sales increased by 1.1% while same
store sales decreased by 0.4%. Full-line and Specialty formats posted sales
gains, partially offset by a decline in Catalog sales. Sears Canadas store
revenue per selling square foot declined in 2001, reflecting disappointing
sales results at the Eatons stores.

Credit revenues were flat compared to the prior year. Within Sears Canada
credit operations, the net charge-off rate increased to 4.1% in 2001 from 4.0%
in 2000 and as a result the provision for uncollectible accounts increased by
$8 million.

Sears Canada gross margin rate as a percentage of merchandise sales and
services revenues declined by 160 basis points in 2001 reflecting increased
markdown activity as well as higher buying and occupancy expenses associated
with the Eatons stores.

Sears Canada selling and administrative expense as a percentage of total
revenues improved 110 basis points in 2001, primarily due to the fact that 2000
included costs associated with the integration and relaunch of Eatons.

Sears Canada depreciation and amortization increased by $23 million, or 38.3%,
due to the additional Eatons stores. Interest expense was relatively flat with
the prior year.

Sears Canada operating income declined by $38 million, or 31.1%, primarily due
to pressures on margins caused by the very competitive promotional environment.

OUTLOOK

The Companys preliminary outlook for the full year of 2003 is for a comparable
earnings per share percentage increase in the low- to mid-single digits. This
outlook for 2003 results from the assumptions that there will be limited change
in the current economic environment, including a cautious consumer, only modest
overall retail sector growth, slight increase in unemployment and a continued
intense competitive environment. It is likely, however, that first quarter
earnings will decline from 2002 levels due to the expected decrease in credit
income and the effect of a later Easter holiday selling season on retail
results. The Retail and Related Services segment is expected to grow operating
income in the mid-teens as the Company continues to revitalize the Full-line
Stores. This improvement, however, is expected to be somewhat offset by a
mid-single digit decline in Credit and Financial Products. Sears Canada is
expected to continue to post increased year-over-year profitability and the
Corporate and Other segment is anticipated to remain relatively flat with
productivity savings being offset by higher benefit and insurance costs.

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

Net cash used in operating activities was $0.5 billion as compared to net cash
provided by operating activities of $2.3 billion and $2.7 billion in 2001 and
2000, respectively. The cash used in 2002 resulted from the growth of the

30



---



##### Table of Contents



credit card receivables portfolio. Investments in credit card receivables are
reported as reductions of operating cash flows in the Companys financial
statements. During 2002, the Company invested $2.6 billion in credit card
receivables.

As of December 28, 2002, the Companys current assets exceeded current
liabilities by $21.4 billion. This working capital surplus primarily results
from the $32.6 billion of credit card receivables outstanding at the end of the
year. The liquidity of these assets provides significant financial capacity and
flexibility to access multiple sources of capital.

Net cash used in investment activities during 2002 was $2.3 billion. This
compares with cash used in investment activities of $1.1 billion and $1.0
billion in 2001 and 2000, respectively. The increase in cash used for
investment activities in 2002 as compared with the prior years is the result of
the $1.8 billion acquisition of Lands End, partially offset by proceeds from
the disposition of holdings in Advance Auto Parts.

The Company has an ongoing capital expenditure program to renovate and update
its Full-line Stores. In addition, the Company has added Full-line and
Specialty Stores. Total capital expenditures for property, plant and equipment
for the past three years were as follows:

|                                                             |  |      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|millions                                                     |  | 2002 |       | 2001 |  | 2000
|                                                             |  |      |       |      |  |     
|Full-line Stores, primarily remodeling and expansion efforts |  | $    | 636   |      |  | $    | 531   |  |  | $ | 428   | 
|Specialty Stores                                             |  |      | 113   |      |  |      | 318   |  |  |   | 198   | 
|Other domestic - distribution/support                        |  |      | 169   |      |  |      | 191   |  |  |   | 205   | 
|Sears Canada                                                 |  |      | 117   |      |  |      | 86    |  |  |   | 253   | 
|                                                             |  |      |       |      |  |      |       |  |  |   |       | 
|Total capital expenditures                                   |  | $    | 1,035 |      |  | $    | 1,126 |  |  | $ | 1,084 | 
|                                                             |  |      |       |      |  |      |       |  |  |   |       | 

The Company plans capital expenditures of $1.1 billion for 2003. The 2003
domestic capital plan contemplates the opening of four Full-line Stores, one
The Great Indoors store and a new off-mall Full-line Store as well as the
remodeling of approximately 60 Full-line Stores. In addition, the 2003
domestic capital plan includes continued investment in strategic efforts such
as the continued roll-out of Lands End in the Full-line Stores. The Company
may also from time to time consider selective transactions to create value and
improve performance, which may include acquisitions, dispositions,
restructurings, joint ventures and partnerships.

Financing Activities

The Companys financing activities include net borrowings, dividend payments
and share issuances and repurchases. Net cash provided by financing activities
totaled $3.7 billion in 2002, as compared to net cash used in financing
activities of $1.0 billion and $1.5 billion in 2001 and 2000, respectively.

The Companys total debt balances as of year-end were as follows:

|                                     |  |      |        |            |  |      |       |            |  |   |        |   |  |  |       |  
|------------------------------------ |  | ---- | ------ | ---------- |  | ---- | ----- | ---------- |  | - | ------ | - |  |  | ----- | -
|millions                             |  | 2002 |        | % of Total |  | 2001 |       | % of Total
|                                     |  |      |        |            |  |      |       |           
|Short-term borrowings                |  | $    | 4,525  |            |  |      | 15.1  | %          |  | $ | 3,557  |   |  |  | 13.8  | %
|Long-term
debt (1)                   |  |      | 25,503 |            |  |      | 84.9  | %          |  |   | 22,197 |   |  |  | 86.2  | %
|                                     |  |      |        |            |  |      |       |            |  |   |        |   |  |  |       |  
|Total borrowings                     |  | $    | 30,028 |            |  |      | 100.0 | %          |  | $ | 25,754 |   |  |  | 100.0 | %
|                                     |  |      |        |            |  |      |       |            |  |   |        |   |  |  |       |  
|SFAS 133 hedge accounting adjustment |  |      | 609    |            |  |      |       |            |  |   | (119   | ) |  |  |       |  
|                                     |  |      |        |            |  |      |       |            |  |   |        |   |  |  |       |  
|Total debt                           |  | $    | 30,637 |            |  |      |       |            |  | $ | 25,635 |   |  |  |       |  
|                                     |  |      |        |            |  |      |       |            |  |   |        |   |  |  |       |  



---

|(1) |  | Includes capitalized lease obligations and current portion of long-term debt.
|--- |  | -----------------------------------------------------------------------------

---

The increase in total borrowings of $4.3 billion reflects borrowings used to
finance the Lands End acquisition of

31



---



##### Table of Contents



approximately $1.8 billion and borrowings
used to finance domestic credit card receivables growth of approximately $2.6
billion (based on the Companys assumed 9 to 1 debt to equity ratio for the
Credit and Financial Products segment).

The Company uses interest rate derivatives to synthetically convert fixed rate
debt to variable rate debt. The interest rate derivatives qualify as fair
value hedges in accordance with SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, and as such are recorded on the balance
sheet at market value with an offsetting entry to the underlying hedged item,
which is debt. Due to declining interest rates in 2002, the market valuation
increased favorably by $0.7 billion.

The Company utilizes wholly-owned financing subsidiaries to execute its
financing activities. Sears Roebuck Acceptance Corp. (SRAC) issues
commercial paper, maintains medium-term note programs and issues intermediate
and long-term underwritten debt. SRFG, Inc. (SRFG), along with other
subsidiaries, securitize domestic credit card receivables to access
cost-effective funding.

On December 28, 2002, the Company had $4.5 billion of short-term borrowings
outstanding as follows:

|  |  |                                                                                                                                                                                                                                                                                                                  
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SRAC unsecured commercial paper of $2.9 billion. As of
December 28, 2002, SRAC commercial paper was supported by a $4.4
billion syndicated credit agreement which was replaced with a $3.5
billion facility on February 24, 2003;                                                                                
|  |  |                                                                                                                                                                                                                                                                                                                  
| |  | $1.5 billion through SRFGs asset-backed commercial paper
obtained through multiple conduit arrangements. This program, with
total access to $3.2 billion, had an original expiration date in
March 2003. $2.8 billion of this program was renewed on February
28, 2003, with an expiration in February 2004; and
|  |  |                                                                                                                                                                                                                                                                                                                  
| |  | Sears Canada commercial paper of $0.1 billion which was
supported by a $0.5 billion credit agreement due to expire in
November 2003.                                                                                                                                                                             

The Companys total long-term debt increased $3.3 billion in 2002, from $22.2
billion at December 29, 2001 to $25.5 billion at December 28, 2002. During
2002, the Company issued the following long-term debt:

|  |  |                                                                                                                                                                                                                                        
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                                                                        
| |  | $1.9 billion of discrete underwritten notes with a
weighted-average coupon of 6.90% and a weighted- average term of
24.9 years;                                                                                                        
|  |  |                                                                                                                                                                                                                                        
| |  | $0.3 billion of fixed-rate medium-term notes with a
weighted-average coupon of 6.69% and a weighted-average term of 6.4
years; and                                                                                                     
|  |  |                                                                                                                                                                                                                                        
| |  | $4.4 billion of floating-rate term securitizations. As of
December 28, 2002, $22.9 billion of domestic credit card receivables
included on the balance sheet were segregated in master trusts
related to its securitization activities.

During 2002, the Company repaid $3.3 billion of previously issued long-term
debt.

Under the Companys ongoing stock repurchase program, the Company repurchased
common stock with a value of $0.4 billion in 2002, $0.6 billion in 2001 and
$1.2 billion in 2000. At December 28, 2002, there was $1.25 billion remaining
on the Companys authorized share repurchase program. Cash dividends paid
remained constant at $0.3 billion for 2002, 2001 and 2000, respectively.

Liquidity

The Companys principal sources of liquidity are operating cash flows and
various capital market borrowings. The

32



---



##### Table of Contents



Company has financial capacity and
flexibility due to its access to the capital markets and the quality and
liquidity of its assets, principally its credit card receivables. This access
to capital markets also allows the Company to effectively manage liquidity and
interest rate risk. Liquidity risk is the measure of the Companys ability to
fund maturities and provide for the operating needs of its businesses.
Interest rate risk is the effect on net income from changes in interest rates.
The Companys policy is to manage interest rate risk through the strategic use
of fixed and variable rate debt and interest rate derivatives. The Company
does not use derivatives for trading purposes. The Companys cost of funds is
affected by a variety of general economic conditions, including overall
interest rate environment, as well as the Companys debt ratings and
fluctuations of its credit spread over applicable reference rates.

The Company accesses a variety of capital markets to diversify its funding
sources, which increases its funding flexibility. Capital market borrowings
are used primarily to support the Companys Credit business. Ongoing
access to the capital markets is critical to the Credit business and the
Company regularly reviews a range of strategic alternatives for addressing
funding needs. Due to current economic and geopolitical uncertainties and
market conditions, the Company could face interruptions in systematically
accessing the public debt markets. However, the Company believes it has a
sufficient range of alternatives to obtain the financing necessary to maintain
its current level of operations, capital expenditures and dividends should such
interruptions occur. As of December 28, 2002, the following were available to
the Company:

|  |  |                                                                                                                                                                                                                                                                                                                                                                                   
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Cash and marketable securities of $2.0 billion;                                                                                                                                                                                                                                                                                                                                   
|  |  |                                                                                                                                                                                                                                                                                                                                                                                   
| |  | An asset-backed commercial paper conduit program with access
up to $3.2 billion and an original expiration date in March 2003.
$2.8 billion of this program was renewed on February 28, 2003, with
an expiration date of February 2004;                                                                                                                                           
|  |  |                                                                                                                                                                                                                                                                                                                                                                                   
| |  | A $4.4 billion syndicated credit facility in support of the
unsecured commercial paper program with an expiration date in April
2003. This program was replaced on February 24, 2003 with an
unsecured, 364-day revolving credit facility in the amount of $3.5
billion. The new facility includes the option to extend the
repayment of borrowings, if any, to February 2005; and
|  |  |                                                                                                                                                                                                                                                                                                                                                                                   
| |  | A $0.5 billion committed credit facility for Sears Canada due
to expire in November 2003.                                                                                                                                                                                                                                                                                         

The Companys total long-term debt of $25.5 billion is due to be repaid as
follows: $4.8 billion in 2003; $3.2 billion in 2004; $4.0 billion in 2005;
$2.6 billion in 2006 and $10.8 billion thereafter. The Company has not
identified any reasonably possible circumstances that would trigger any early
payment or acceleration provisions in the debt portfolio. Debt obligations due
to mature in the next year are expected to be satisfied with a combination of
short-term borrowings, new long-term debt issuances and operating cash flows.

The Company issued, from December 29, 2002 through March 7, 2003, $1.6 billion
of long-term debt, consisting of $452 million of medium-term notes sold to
institutional investors, $905 million of medium-term notes sold to retail
investors and a $250 million discrete underwritten note.

The ratings of the Companys domestic debt securities as of February 28, 2003,
appear in the table below:

|                                                                        |  |                |  |              |  |             
|----------------------------------------------------------------------- |  | -------------- |  | ------------ |  | ------------
|                                                                        |  | Standard &     |  |              |  | Moodys     
|                                                                        |  | Poors Ratings |  | Fitch        |  | Investors   
|                                                                        |  | Services       |  | Ratings      |  | Service     
|                                                                        |  |                |  |              |  |             
|Unsecured long-term debt
Unsecured commercial paper
Term securitization |  | BBB+
A-2
AAA   |  | BBB+
F-2
AAA |  | Baa1
P-2
Aaa

33



---



##### Table of Contents



Contractual Obligations and Commercial Commitments

To facilitate an understanding of the Companys contractual obligations and
commercial commitments, the following data is provided:

|                                   |  |       |        |        |  |                        |       |           |  |         |       |  |  |   |       |       |  |   |        | 
|---------------------------------- |  | ----- | ------ | ------ |  | ---------------------- | ----- | --------- |  | ------- | ----- |  |  | - | ----- | ----- |  | - | ------ | 
|millions                           |  |       |        |        |  | Payments Due by Period
|                                   |  |       |        |        |  |                       
|                                   |  |       |        |        |  | Within                 |       |           |  |         |       |  |  |   |       | After
|                                   |  | Total |        | 1 Year |  | 2-3 Years              |       | 4-5 Years |  | 5 Years
|                                   |  |       |        |        |  |                        |       |           |  |        
|Contractual Obligations            |  |       |        |        |  |                        |       |           |  |         |       |  |  |   |       |       |  |   |        | 
|Long-Term Debt (1)                 |  | $     | 25,107 |        |  | $                      | 4,785 |           |  | $       | 7,177 |  |  | $ | 4,245 |       |  | $ | 8,900  | 
|Short-Term Debt                    |  |       | 4,525  |        |  |                        | 4,525 |           |  |         |      |  |  |   |      |       |  |   |       | 
|Capital Lease Obligations          |  |       | 458    |        |  |                        | 23    |           |  |         | 43    |  |  |   | 39    |       |  |   | 353    | 
|Operating Leases                   |  |       | 2,293  |        |  |                        | 335   |           |  |         | 540   |  |  |   | 372   |       |  |   | 1,046  | 
|                                   |  |       |        |        |  |                        |       |           |  |         |       |  |  |   |       |       |  |   |        | 
|Total Contractual Cash Obligations |  | $     | 32,383 |        |  | $                      | 9,668 |           |  | $       | 7,760 |  |  | $ | 4,656 |       |  | $ | 10,299 | 
|                                   |  |       |        |        |  |                        |       |           |  |         |       |  |  |   |       |       |  |   |        | 



---

|(1) |  | Excludes $62 million of premium/discount on long-term debt.
|--- |  | -----------------------------------------------------------

---

|                             |                              |  |  |  |           |         |     |        |        |           |                                            |           |  |         |    |    |  |   |       |    |  |   |    |    | 
|---------------------------- | ---------------------------- |  |  |  | --------- | ------- | --- | ------ | ------ | --------- | ------------------------------------------ | --------- |  | ------- | -- | -- |  | - | ----- | -- |  | - | -- | -- | 
|                             |                              |  |  |  |           |         |     |        |        |           | Amount of Commitment Expiration Per Period
|                             |                              |  |  |  |           |         |     |        |        |           |                                           
|millions                     |                              |  |  |  | Total     |         |     |        |        |           |                                            |           |  |         |    |    |  |  
|                             |                              |  |  |  |           | Amounts |     |        | Within |           |                                            |           |  |         |    |    |  |   | After
|                             |                              |  |  |  | Committed |         |     | 1 Year |        | 2-3 Years |                                            | 4-5 Years |  | 5 Years
|                             |                              |  |  |  |           |         |     |        |        |           |                                            |           |  |        
|Other Commercial Commitments |                              |  |  |  |           |         |     |        |        |           |                                            |           |  |         |    |    |  |   |       |    |  |   |    |   
|Standby Letters of Credit    |                              |  |  |  |           | $       | 340 |        |        | $         | 308                                        |           |  | $       | 1  |    |  | $ | 1     |    |  | $ | 30 |   
|Guarantees                   |                              |  |  |  |           |         | 84  |        |        |           | 17                                         |           |  |         | 34 |    |  |   | 33    |    |  |   |   |   
|Import Letters of Credit     |                              |  |  |  |           |         | 146 |        |        |           | 146                                        |           |  |         |   |    |  |   |      |    |  |   |   |   
|                             |                              |  |  |  |           |         |     |        |        |           |                                            |           |  |         |    |    |  |   |       |    |  |   |    |   
|                             | Total Commercial Commitments |  |  |  |           |         | $   | 570    |        |           | $                                          | 471       |  |         | $  | 35 |  |   | $     | 34 |  |   | $  | 30 | 
|                             |                              |  |  |  |           |         |     |        |        |           |                                            |           |  |         |    |    |  |   |       |    |  |   |    |   

As of December 28, 2002, the Company had domestic unused lines of credit of
approximately $294 billion committed to its credit card customers. While this
amount represented the remaining available lines of credit to customers, the
Company has not experienced, and does not anticipate, that all of its customers
will exercise their entire available lines of credit at any given time. The
Company generally has the right to increase, reduce, cancel, alter or amend the
terms of these available lines of credit at any time.

ACCOUNTING POLICIES

Adoption of New Accounting Standards

As is more completely disclosed in Note 17 of the Notes to Consolidated
Financial Statements, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, in 2002. Upon adoption of SFAS No. 142, goodwill
amortization ceased. Intangible assets as of the date of adoption were
evaluated to determine if they have finite or indefinite useful lives.
Intangible assets determined to have finite lives are amortized over those
lives, and intangible assets that have indefinite useful lives are not
amortized. Goodwill and intangible assets with an indefinite useful life are
now subject to a fair-value based impairment test performed, at a minimum, on
an annual basis. In addition, a transitional goodwill impairment test was
required as of the adoption date.

Upon adoption of SFAS No. 142, a $208 million charge, net of tax and minority
interest, was recognized in the first quarter of 2002 to record the impairment
of certain goodwill, primarily related to NTB and Orchard Supply

34



---



##### Table of Contents



Hardware, as well as the removal of negative goodwill related to Sears Canada, and was
classified as a cumulative
effect of a change in accounting principle. SFAS No. 142 does not permit the
restatement of previously issued financial statements, but does require the
disclosure of prior results adjusted to exclude amortization expense related to
goodwill and intangible assets that are no longer being amortized. Earnings
per share for 2001 and 2000, adjusted to exclude amounts no longer being
amortized under the provisions of SFAS No. 142, were $2.26 and $3.91,
respectively.

Critical Accounting Policies

The preparation of financial statements requires the Company to estimate the
effect of various matters that are inherently uncertain as of the date of the
financial statements. Each of these required estimates varies in regard to the
level of judgment involved and its potential impact on the Companys reported
financial results. Estimates are deemed critical when a different estimate
could have reasonably been used or where changes in the estimate are reasonably
likely to occur from period to period, and would materially impact the
Companys financial condition, changes in financial condition or results of
operations. The Companys significant accounting policies are discussed in
Note 1 of the Notes to Consolidated Financial Statements; critical estimates
inherent in these accounting policies are discussed in the following
paragraphs.

Allowance for uncollectible accounts

The Company records an allowance for uncollectible accounts to reflect
managements best estimate of losses inherent in its portfolio of credit card
receivables as of the balance sheet date. This allowance is established
through a charge to the provision and represents amounts of current and past
due credit card receivable balances (principal, finance charge and credit card
fee balances) which management estimates will not be collected. The Company
calculates the allowance for uncollectible accounts using a model that
considers the current condition of the portfolio and factors such as bankruptcy
filings, historical charge-off patterns, recovery rates and other portfolio
data. The Companys calculation is then reviewed by management to assess
whether, based on economic events, additional analyses are required to
appropriately estimate losses inherent in the portfolio. Management believes
that the allowance for uncollectible accounts is adequate to cover anticipated
losses in the reported credit card receivable portfolio under current
conditions; however, significant deterioration in any of the above-noted
factors, or in the overall health of the economy, could materially change these
expectations.

Inventory valuation

Approximately 89% of merchandise inventories are valued at the lower of cost or
market, with cost determined using the retail inventory method (RIM) under
the last-in, first-out (LIFO) cost flow assumption. Inherent in the RIM
calculation are certain significant management judgments and estimates
including, among others, merchandise markon, markups, markdowns and shrinkage,
which significantly impact the ending inventory valuation at cost as well as
resulting gross margins. The methodologies utilized by the Company in its
application of the RIM are consistent for all periods presented. Such
methodologies include the development of the cost-to-retail ratios, the
groupings of homogenous classes of merchandise, the development of shrinkage
reserves, the accounting for price changes and the computations inherent in the
LIFO adjustment. Management believes that the Companys RIM and application of
LIFO provides an inventory valuation which reasonably approximates cost using a
last in, first out assumption and results in carrying inventory at the lower of
cost or market.

Revenue recognition

In-store revenues from merchandise sales and services, including delivery fees,
are reported net of estimated returns and allowances and are recognized when
the related goods are shipped and all significant obligations of the Company
have been satisfied. The reserve for returns and allowances is calculated as a
percentage of sales based on historical return percentages. Commissions earned
on sales made by licensed businesses are also included as a component of
merchandise sales and services.

35



---



##### Table of Contents



During 2002, the Company adopted the provisions of Emerging Issues Task Force
(EITF) Issue 01-9, Accounting For Consideration Given By A Vendor to A
Customer. This EITF statement established requirements for the recognition,
measurement and display of certain sales incentives and impacted the Companys
presentation of rebates
provided to customers. As a result of adopting EITF Issue 01-9, net sales and cost
of sales decreased by $88 million in 2002 and $89 million in each 2001 and
2000.

The Company direct markets merchandise through catalogs and online via
websites. Revenue is recognized for these items when the merchandise is
delivered to a customer unless the terms of the sale are FOB shipping point, in
which the revenue is recognized upon shipment. The Company also direct markets
insurance (credit protection, life and health) and clubs and services
memberships. Deferred revenue is recorded when the member is billed (upon
expiration of any free trial period), and revenue is recognized over the
insurance or membership period. Membership revenue associated with clubs and
service memberships is recognized on a straight-line basis.

Revenues from product installation and repair services are recognized as the
services are provided. Additionally, the Company sells extended service
contracts with terms of coverage between 12 and 60 months. Revenues from the
sale of these contracts are deferred and amortized over the lives of the
contracts while the service costs are expensed as incurred. Incremental costs
directly related to the acquisition of such contracts are deferred and charged
to expense in proportion to the revenue recognized.

The Company recognizes finance charges and fee income on credit card
receivables according to the contractual provisions of the credit agreements
and is recorded until an account is charged off, at which time uncollected
finance charge and fee revenue are recorded as a reduction of credit revenues.

Vendor allowances

The Company receives allowances from its vendors through a variety of programs
and arrangements, including
co-operative advertising and markdown reimbursement programs. Given the
promotional nature of the Companys business, the allowances are generally
intended to offset the Companys costs of promoting, advertising and selling
the vendors products in its stores. Vendor allowances are recognized as a
reduction of cost of goods sold or related selling expense when the purpose for
which the vendor funds were intended to be used has been fulfilled.
Co-operative advertising allowances are reported as a reduction of advertising
expense in the period in which the advertising occurred. Markdown
reimbursements are credited to cost of goods sold during the period in which
the related promotional markdown was taken. Accordingly, a reduction or
increase in vendor allowances has an inverse impact on cost of sales and/or
selling and administrative expenses.

The FASBs EITF Issue 02-16, Accounting By A Customer (Including A
Reseller) For Cash Consideration Received From A Vendor addressed the
accounting treatment for vendor allowances. The Company has not completed the
process of evaluating the impact of EITF Issue 02-16, however, the Company
does not expect that its adoption in 2003 will have a material impact on its
financial position or results of operations.

Self-insurance reserves

The Company purchases third-party insurance for workers compensation,
automobile, product and general liability claims that exceed a certain level.
However, the Company is responsible for the payment of claims under these
insured limits. In estimating the obligation associated with incurred losses,
the Company utilizes loss development factors prepared by independent
third-party actuaries. These development factors utilize historical data to
project the future development of incurred losses. Loss estimates are adjusted
based upon actual claims settlements and reported claims.

36



---



##### Table of Contents



Defined benefit retirement plans

The plan obligations and related assets of defined benefit retirement plans are
presented in Note 10 of the Notes to Consolidated Financial Statements. Plan
assets, which consist primarily of marketable equity and debt instruments, are
valued using market quotations. Plan obligations and the annual pension
expense are determined by independent
actuaries and through the use of a number of assumptions. Key assumptions in
measuring the plan obligations include the discount rate, the rate of salary
increases and the estimated future return on plan assets. In determining the
discount rate, the Company utilizes the yield on high-quality, fixed-income
investments currently available with maturities corresponding to the
anticipated timing of the benefit payments. Salary increase assumptions are
based upon historical experience and anticipated future management actions.
Asset returns are based upon the anticipated average rate of earnings expected
on the invested funds of the plans. At December 28, 2002, the weighted-average
actuarial assumption of the Companys domestic plans were: discount rate 7%;
long-term rate of return on plan assets 9.0%; and assumed salary increases
4.25%.

The Company has made certain other estimates that, while not involving the same
degree of judgment, are important to understanding the Companys financial
statements. These estimates are in the areas of assessing recoverability of
long-lived assets (including intangible assets), and in establishing reserves
in connection with restructuring initiatives and other special charges. On an
ongoing basis, management evaluates its estimates and judgments in these areas
based on its substantial historical experience and other relevant factors.
Managements estimates as of the date of the financial statements reflect its
best judgment giving consideration to all currently available facts and
circumstances. As such, these estimates may require adjustment in the future,
as additional facts become known or as circumstances change.

The Companys management has discussed the development and selection of these
critical accounting policies with the Audit Committee of the Companys Board of
Directors and the Audit Committee has reviewed the Companys disclosure
relating to it in this Management Discussion and Analysis.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Annual Report on Form 10-K and in other public
announcements by the Company, including in the Chairmans letter accompanying
the report, are forward-looking statements that are subject to risks and
uncertainties that may cause the Companys actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements.
Forward-looking statements include information concerning the Companys future
financial performance, business strategy, plans, goals and objectives.
Statements preceded by, followed by or that otherwise include the words
believes, expects, anticipates, intends, estimates, plans,
forecasts, is likely to, projected and similar expressions or future or
conditional verbs such as will, should, would, may and could are
generally forward-looking in nature and not historical facts.

Following are some of the risks and uncertainties that could affect our
financial condition or results of operations, and could cause actual results,
performance or achievements to differ from the future results, performance or
achievements expressed or implied by these forward-looking statements:
competitive conditions in the retail and credit card businesses; changes in
consumer confidence and spending; delinquency and charge-off trends in the
credit card receivables portfolio; consumer debt levels and the level of
consumer bankruptcies; the success of initiatives to address increased
delinquencies and credit losses and improve profitability in the MasterCard
portfolio; the success of the Full-line Store strategy and other strategies;
the possibility that the Company will identify new business and strategic
options for one or more of its business segments, potentially including
selective acquisitions, dispositions, restructurings, joint ventures and
partnerships; the Companys ability to integrate and operate Lands End
successfully; the outcome of pending legal proceedings; anticipated cash flow;
social and political conditions such as war, political unrest and terrorism or
natural disasters; the possibility of negative investment returns in the
Companys pension plan; changes in interest rates; the volatility in financial
markets; changes in the Companys debt ratings, credit spreads and cost of
funds; the possibility of interruptions in

37



---



##### Table of Contents



systematically accessing the public
debt markets; general economic conditions and normal business uncertainty. In
addition, Sears typically earns a disproportionate share of its operating
income in the fourth quarter due to seasonal buying patterns, which are
difficult to forecast with certainty. Additional discussion of these and other
risks and uncertainties is contained elsewhere under Managements Discussion
and Analysis and Quantitative and Qualitative Disclosures About Market Risk.

While the Company believes that its forecasts and assumptions are reasonable,
it cautions that actual results may differ materially. The Company intends
the forward-looking statements to speak only as of the time first made and
does not undertake to update or revise them as more information becomes
available.




Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The primary market risk exposure faced by the Company is interest rate risk
which arises from the Companys debt obligations, credit card assets and
derivative financial instruments. The Companys policy is to manage interest
rate risk through the use of fixed and variable rate debt and interest rate
derivatives. All debt securities and derivative instruments are considered
non-trading.

At year-end 2002 and 2001, 83% and 85%, respectively, of the Companys funding
portfolio was variable rate (including current maturities of fixed rate
long-term debt that will reprice in the next 12 months and fixed rate debt
synthetically converted to variable rate through the use of derivative
financial instruments). Based on the size of the Companys variable rate
funding portfolio at year-end 2002 and 2001, which totaled $24.8 billion and
$21.8 billion, respectively, an immediate 100 basis point change in interest
rates would have affected pretax funding costs by approximately $248 million
and $218 million in 2002 and 2001, respectively. These estimates assume that
the funding portfolio remains constant for an annual period and the interest
rate change occurs at the beginning of the period. These estimates also do not
take into account the effect on net interest margin of changes in revenue
resulting from either changes in terms of the assets or in the index applicable
to the variable rate receivables.

The objective of variable rate funding is to reduce net interest margin risk by
better aligning the Companys funding with its credit card assets. However,
the Company is exposed to basis risk on any differences in the variable rate on
the Companys debt, primarily LIBOR-based, and the prime-based variable rate
finance charge on the Companys credit card portfolio. The Companys level of
variable rate funding is in response to the growth of the variable rate
receivables within the Companys domestic credit card portfolio (primarily the
MasterCard product) and the Companys conversion of the Sears Card finance
charges from fixed rate to variable rate in July 2002. The Companys ability
to increase the finance charge yield of its variable rate credit card assets
may be limited at some point by competitive conditions.

The Company actively manages the risk of nonpayment by its derivative
counterparties by limiting its exposure to individual counterparties based on
credit ratings, value at risk and maturities. The counterparties to these
instruments are major financial institutions with credit ratings of single-A
or better. In certain cases, counterparty risk is also managed through the
use of collateral in the form of cash or U.S. government securities. The
following table summarizes notional amounts, fair values and weighted-average
remaining life of domestic derivative instruments:

| |                 |        |            |   |                |                  |  |  |     |  | 
| | --------------- | ------ | ---------- | - | -------------- | ---------------- |  |  | --- |  | 
| |                 |        |            |   |                | Weighted-Average | 
| | Notional Amount |        | Fair Value |   | Remaining
Life |                 
| | (millions)      |        | (millions) |   | (years)        |                 
| |                 |        |            |   |                |                 
| | $               | 10,742 |            | $ | 690            |                  |  |  | 3.5 |  | 
| |                 |        |            |   |                |                  |  |  |     |  | 

No more than 18 percent of the notional amount of the derivatives portfolio
was contracted with any one counterparty.

38



---



##### Table of Contents






Item 8. Financial Statements and Supplementary Data

The consolidated financial statements of the Company, including the notes to
all such statements, and other information are included in this report
beginning on page F-1.




Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure

None






PART III




Item 10. Directors and Executive Officers of the Registrant

Information regarding directors and executive officers of Sears is
incorporated herein by reference to the descriptions under Item 1: Election
of Directors and Section 16(a) Beneficial Ownership Reporting Compliance of
the 2003 Proxy Statement and to Item 1A of this Report under the caption
Executive Officers of the Registrant.




Item 11. Executive Compensation

Information regarding executive compensation is incorporated by reference to
the material under the captions Item 1: Election of Directors, Directors
Compensation and Benefits, Executive Compensation, Stock Options,
Long-Term Performance Incentive Program, Pension Plan, Officers
Agreements and Compensation Committee Interlocks and Insider Participation
of the 2003 Proxy Statement.




Item 12. Security Ownership of Certain Beneficial Owners and Management

Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference to the material under the
heading Beneficial Ownership of the 2003 Proxy Statement.

See also Part II, Item 5 for a discussion of securities authorized for
issuance under equity compensation plans.




Item 13. Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions is
incorporated herein by reference to the material under the heading Certain
Transactions of the 2003 Proxy Statement.

39



---



##### Table of Contents






Item 14. Disclosure Controls and Procedures

The Companys management, including Alan J. Lacy, Chairman of the Board of
Directors, President and Chief Executive Officer (principal executive officer)
and Glenn R. Richter, Senior Vice President and Chief Financial Officer
(principal financial officer), have evaluated the effectiveness of the
Companys disclosure controls and procedures, as such term is defined in
Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934,
as amended, within 90 days of the filing date of this Annual Report on Form
10-K. Based upon their evaluation, the principal executive officer and
principal financial officer concluded that the Companys disclosure controls
and procedures are effective. There were no significant changes in the
Companys internal controls or in other factors that could significantly
affect these controls, since the date the controls were evaluated.




Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)1 and 2 - An Index to Financial Statements and Financial
Statement Schedules has been filed as a part of this Report
beginning on page F-1 hereof.

(a)3 - Exhibits:



| |  | An Exhibit Index has been filed as a part of this Report
beginning on page E-1 hereof and is incorporated herein by
reference.
| |  | --------------------------------------------------------------------------------------------------------------------------------

(b)  - Reports on Form 8-K:



| |  | A Current Report on Form 8-K dated October 4, 2002 was filed with the
Securities and Exchange Commission on October 4, 2002 to report, the filing
of a press release concerning organizational changes.        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | A Current Report on Form 8-K dated October 7, 2002 was filed with the
Securities and Exchange Commission on October 7, 2002 to report, the filing
of a press release concerning the outlook for the Registrant.
|
| |  | A Current Report on Form 8-K dated October 17, 2002 was filed with the
Securities and Exchange Commission on October 18, 2002 to report, the
release of third quarter earnings of the Registrant.              

40



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended (the Exchange Act) the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

| |  |     |  |                                                 
| |  | --- |  | ------------------------------------------------
| |  |     |  | SEARS, ROEBUCK AND CO.
  (Registrant)           
| |  |     |  |                                                 
| |  |     |  | *Thomas E. Bergmann                             
| |  |     |  |                                                 
| |  | By: |  | Thomas E. Bergmann
Vice President and Controller
| |  |     |  |                                                 
| |  |     |  | March 12, 2003                                  

Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                    |  |                                        |  |      |   |  |  |               
|------------------- |  | -------------------------------------- |  | ---- | - |  |  | --------------
|Signature           |  | Title                                  |  | Date
|                    |  |                                        |  |     
|                    |  |                                        |  |      |   |  |  |               
|*Alan J. Lacy       |  | Chairman of the Board of Directors,    |  |      | ) |  |  |               
|                    |  | President and Chief Executive          |  |      | ) |  |  |               
|Alan J. Lacy        |  | Officer                                |  |      | ) |  |  |               
|                    |  |                                        |  |      |   |  |  |               
|*Glenn R. Richter   |  | Senior Vice President and Chief        |  |      | ) |  |  |               
|                    |  | Financial Officer (Principal Financial |  |      | ) |  |  |               
|Glenn R. Richter    |  | Officer)                               |  |      | ) |  |  |               
|                    |  |                                        |  |      | ) |  |  |               
|*Thomas E. Bergmann |  | Vice President and Controller          |  |      | ) |  |  |               
|                    |  | (Principal Accounting Officer)         |  |      | ) |  |  |               
|Thomas E. Bergmann  |  |                                        |  |      | ) |  |  |               
|                    |  |                                        |  |      | ) |  |  | March 12, 2003
|*Hall Adams, Jr.    |  | Director                               |  |      | ) |  |  |               
|                    |  |                                        |  |      | ) |  |  |               
|Hall Adams, Jr.     |  |                                        |  |      | ) |  |  |               
|                    |  |                                        |  |      | ) |  |  |               
|*Brenda C. Barnes   |  | Director                               |  |      | ) |  |  |               
|                    |  |                                        |  |      | ) |  |  |               
|Brenda C. Barnes    |  |                                        |  |      | ) |  |  |               
|                    |  |                                        |  |      | ) |  |  |               
|*James R. Cantalupo |  | Director                               |  |      | ) |  |  |               
|                    |  |                                        |  |      | ) |  |  |               
|James R. Cantalupo  |  |                                        |  |      | ) |  |  |               
|                    |  |                                        |  |      | ) |  |  |               

41



---



##### Table of Contents



|                  |  |          |  |      |   |  |  |               
|----------------- |  | -------- |  | ---- | - |  |  | --------------
|Signature         |  | Title    |  | Date
|                  |  |          |  |     
|*Donald J. Carty  |  | Director |  |      | ) |  |  |               
|                  |  |          |  |      | ) |  |  |               
|Donald J. Carty   |  |          |  |      | ) |  |  |               
|                  |  |          |  |      | ) |  |  |               
|*W. James Farrell |  | Director |  |      | ) |  |  | March 12, 2003
|                  |  |          |  |      | ) |  |  |               
|W. James Farrell  |  |          |  |      | ) |  |  |               
|                  |  |          |  |      | ) |  |  |               
|*Michael A. Miles |  | Director |  |      | ) |  |  |               
|                  |  |          |  |      | ) |  |  |               
|Michael A. Miles  |  |          |  |      | ) |  |  |               
|                  |  |          |  |      | ) |  |  |               
|*Hugh B. Price    |  | Director |  |      | ) |  |  |               
|                  |  |          |  |      | ) |  |  |               
|Hugh B. Price     |  |          |  |      | ) |  |  |               
|                  |  |          |  |      | ) |  |  |               
|*Raul Yzaguirre   |  | Director |  |      | ) |  |  |               
|                  |  |          |  |      | ) |  |  |               
|Raul Yzaguirre    |  |          |  |      | ) |  |  |               
|                  |  |          |  |      | ) |  |  |               



|     |  |                                             |  |                                     
|---- |  | ------------------------------------------- |  | ------------------------------------
|*By: |  | /s/  Thomas E. Bergmann

Thomas E. Bergmann |  | Individually and as Attorney-in-fact

42



---



##### Table of Contents






CERTIFICATIONS

I, Alan J. Lacy, Chairman of the Board of Directors and Chief Executive Officer
of Sears, Roebuck and Co., certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Sears, Roebuck
and Co.;                                                                                                                                                                                                                                              
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  
|

| | (a) |  | Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | (c) |  | Presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        
|

| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the Audit Committee of registrants Board of Directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | (a) |  | All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        
|

| | 6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 12, 2003

| |     |  |                                                                                                                     
| | --- |  | --------------------------------------------------------------------------------------------------------------------
| | By: |  | /s/ Alan J. Lacy

    Alan J. Lacy
    Chairman of the Board of Directors,
    President and Chief Executive Officer

43



---



##### Table of Contents



I, Glenn R. Richter, Senior Vice President and Chief Financial Officer of
Sears, Roebuck and Co., certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Sears, Roebuck
and Co.;                                                                                                                                                                                                                                              
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  
|

| | (a) |  | Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | (c) |  | Presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        
|

| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the Audit Committee of registrants Board of Directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | (a) |  | All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        
|

| | 6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 12, 2003

| |     |  |                                                                                                      
| | --- |  | -----------------------------------------------------------------------------------------------------
| | By: |  | /s/ Glenn R. Richter

    Glenn R. Richter,
    Senior Vice President
    and Chief Financial Officer

44



---



##### Table of Contents






SEARS, ROEBUCK AND CO.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended December 28, 2002

|                                                |      |      | 
|----------------------------------------------- | ---- | ---- | 
|                                                | Page
|                                                |     
|Managements Report                             |      | F-2  | 
|Independent Auditors Report                    |      | F-3  | 
|Consolidated Statements of Income               |      | F-4  | 
|Consolidated Balance Sheets                     |      | F-5  | 
|Consolidated Statements of Cash Flows           |      | F-6  | 
|Consolidated Statements of Shareholders Equity |      | F-7  | 
|Notes to Consolidated Financial Statements      |      | F-8  | 
|Schedule II  Valuation and Qualifying Accounts |      | F-38 | 

F - 1



---



##### Table of Contents



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 accounting principles generally accepted in the
United States of America. All financial information is consistent with the
financial statements.

Management maintains a system of internal controls that it believes provides
reasonable assurance that, in all material respects, assets are maintained and
accounted for in accordance with managements authorizations, transactions are
recorded accurately in the books and records, and are appropriately reported
and disclosed in the Companys financial statements. 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 on the
following page. Their audit also includes gaining an understanding of the
Companys control environment, accounting systems and control procedures to the
extent necessary to plan and execute the audit. 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/ Alan J. Lacy

Alan J. Lacy
Chairman of the Board of Directors, President and Chief Executive Officer

/s/ Glenn R. Richter

Glenn R. Richter
Senior Vice President and Chief Financial Officer

/s/ Thomas E. Bergmann

Thomas E. Bergmann
Vice President and Controller

F - 2



---



##### Table of Contents



Independent Auditors Report

To the Board of Directors and Shareholders of
Sears, Roebuck and Co.

We have audited the accompanying Consolidated Balance Sheets of Sears, Roebuck
and Co. as of December 28, 2002 and December 29, 2001, and the related
Consolidated Statements of Income, Shareholders Equity, and Cash Flows for
each of the three years in the period ended December 28, 2002. Our audits also
included the financial statement schedule of Sears, Roebuck and Co., listed on
page F-1. These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2002 and December 29, 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 28,
2002, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Notes 3, 6 and 17 to the consolidated financial statements, the
Company changed its method of accounting for goodwill in 2002 and its methods
of accounting for credit card securitizations, derivative instruments and
hedging activities in 2001, as required by new accounting standards.



/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Chicago, Illinois
February 28, 2003

F - 3



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Consolidated Statements of Income

|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |      |        | 
|----------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------ | ------ | ----- | ------ | ---- | ------ | ---- | ------ | - | ------ | ---- | ------ | 
|millions, except per common share data                                                                |                                                                               | 2002                     |        | 2001  |        | 2000
|                                                                                                      |                                                                               |                          |        |       |        |     
|REVENUES                                                                                              |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|Merchandise sales and services                                                                        |                                                                               | $                        | 35,698 |       |        | $    | 35,755 |      |        | $ | 36,277 |     
|Credit and financial products revenues                                                                |                                                                               |                          | 5,668  |       |        |      | 5,235  |      |        |   | 4,571  |     
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|                                                                                                      |                                                                               | Total revenues           |        |       | 41,366 |      |        |      | 40,990 |   |        |      | 40,848 | 
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|COSTS AND EXPENSES                                                                                    |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|Cost of sales, buying and occupancy                                                                   |                                                                               |                          | 25,646 |       |        |      | 26,234 |      |        |   | 26,632 |     
|Selling and administrative                                                                            |                                                                               |                          | 9,249  |       |        |      | 8,892  |      |        |   | 8,807  |     
|Provision for uncollectible accounts                                                                  |                                                                               |                          | 2,261  |       |        |      | 1,866  |      |        |   | 884    |     
|Depreciation and amortization                                                                         |                                                                               |                          | 875    |       |        |      | 863    |      |        |   | 839    |     
|Interest                                                                                              |                                                                               |                          | 1,143  |       |        |      | 1,415  |      |        |   | 1,248  |     
|Special charges and impairments                                                                       |                                                                               |                          | 111    |       |        |      | 542    |      |        |   | 251    |     
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|                                                                                                      |                                                                               | Total costs and expenses |        |       | 39,285 |      |        |      | 39,812 |   |        |      | 38,661 | 
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|Operating income                                                                                      |                                                                               |                          | 2,081  |       |        |      | 1,178  |      |        |   | 2,187  |     
|Other income, net                                                                                     |                                                                               |                          | 372    |       |        |      | 45     |      |        |   | 36     |     
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|Income before income taxes, minority interest and cumulative
effect of change in accounting principle |                                                                               |                          | 2,453  |       |        |      | 1,223  |      |        |   | 2,223  |     
|Income taxes                                                                                          |                                                                               |                          | 858    |       |        |      | 467    |      |        |   | 831    |     
|Minority interest                                                                                     |                                                                               |                          | 11     |       |        |      | 21     |      |        |   | 49     |     
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|Income before cumulative effect of change in accounting principle                                     |                                                                               |                          | 1,584  |       |        |      | 735    |      |        |   | 1,343  |     
|Cumulative effect of a change in accounting for goodwill                                              |                                                                               |                          | (208   | )     |        |      |       |      |        |   |       |     
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|NET INCOME                                                                                            |                                                                               | $                        | 1,376  |       |        | $    | 735    |      |        | $ | 1,343  |     
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|EARNINGS PER COMMON SHARE:                                                                            |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|BASIC                                                                                                 |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|                                                                                                      | Earnings per share before cumulative effect of change in
accounting principle |                          | $      | 4.99  |        |      | $      | 2.25 |        |   | $      | 3.89 |       
|                                                                                                      | Cumulative effect of change in accounting principle                           |                          |        | (0.65 | )      |      |        |     |        |   |        |     |       
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|                                                                                                      | Earnings per share                                                            |                          | $      | 4.34  |        |      | $      | 2.25 |        |   | $      | 3.89 |       
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|DILUTED                                                                                               |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|                                                                                                      | Earnings per share before cumulative effect of change in
accounting principle |                          | $      | 4.94  |        |      | $      | 2.24 |        |   | $      | 3.88 |       
|                                                                                                      | Cumulative effect of change in accounting principle                           |                          |        | (0.65 | )      |      |        |     |        |   |        |     |       
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     
|                                                                                                      | Earnings per share                                                            |                          | $      | 4.29  |        |      | $      | 2.24 |        |   | $      | 3.88 |       
|                                                                                                      |                                                                               |                          |        |       |        |      |        |      |        |   |        |     

See accompanying notes.

F - 4



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Consolidated Balance Sheets

|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |        |        |  |  | 
|-------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ----------------------------------------- | ------ | ------ | ------ |  | ------ | ------ | ------ |  |  | 
|millions, except per share data                                                                                            |                                                                     | 2002                                      |        | 2001  
|                                                                                                                           |                                                                     |                                           |        |       
|ASSETS                                                                                                                     |                                                                     |                                           |        |        |        |  |        |       
|Current assets                                                                                                             |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           | Cash and cash equivalents                                           |                                           | $      | 1,962  |        |  | $      | 1,064  |       
|                                                                                                                           | Credit card receivables                                             |                                           |        | 32,595 |        |  |        | 29,321 |       
|                                                                                                                           |                                                                     | Less allowance for uncollectible accounts |        |        | 1,836  |  |        |        | 1,166  | 
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           |                                                                     | Net credit card receivables               |        |        | 30,759 |  |        |        | 28,155 | 
|                                                                                                                           | Other receivables                                                   |                                           |        | 863    |        |  |        | 658    |       
|                                                                                                                           | Merchandise inventories                                             |                                           |        | 5,115  |        |  |        | 4,912  |       
|                                                                                                                           | Prepaid expenses and deferred charges                               |                                           |        | 535    |        |  |        | 458    |       
|                                                                                                                           | Deferred income taxes                                               |                                           |        | 749    |        |  |        | 858    |       
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           | Total current assets                                                |                                           |        | 39,983 |        |  |        | 36,105 |       
|Property and equipment                                                                                                     |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           | Land                                                                |                                           |        | 442    |        |  |        | 434    |       
|                                                                                                                           | Buildings and improvements                                          |                                           |        | 6,930  |        |  |        | 6,539  |       
|                                                                                                                           | Furniture, fixtures and equipment                                   |                                           |        | 5,050  |        |  |        | 5,620  |       
|                                                                                                                           | Capitalized leases                                                  |                                           |        | 557    |        |  |        | 544    |       
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           |                                                                     | Gross property and equipment              |        |        | 12,979 |  |        |        | 13,137 | 
|                                                                                                                           |                                                                     | Less accumulated depreciation             |        |        | 6,069  |  |        |        | 6,313  | 
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           |                                                                     | Total property and equipment, net         |        |        | 6,910  |  |        |        | 6,824  | 
|Deferred income taxes                                                                                                      |                                                                     |                                           | 734    |        |        |  | 415    |       
|Goodwill                                                                                                                   |                                                                     |                                           | 944    |        |        |  | 294    |       
|Tradenames and other intangible assets                                                                                     |                                                                     |                                           | 704    |        |        |  |       |       
|Other assets                                                                                                               |                                                                     |                                           | 1,134  |        |        |  | 679    |       
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           | TOTAL ASSETS                                                        |                                           | $      | 50,409 |        |  | $      | 44,317 |       
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|LIABILITIES                                                                                                                |                                                                     |                                           |        |        |        |  |        |       
|Current liabilities                                                                                                        |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           | Short-term borrowings                                               |                                           | $      | 4,525  |        |  | $      | 3,557  |       
|                                                                                                                           | Current portion of long-term debt and capitalized
lease obligations |                                           |        | 4,808  |        |  |        | 3,157  |       
|                                                                                                                           | Accounts payable and other liabilities                              |                                           |        | 7,485  |        |  |        | 7,176  |       
|                                                                                                                           | Unearned revenues                                                   |                                           |        | 1,199  |        |  |        | 1,136  |       
|                                                                                                                           | Other taxes                                                         |                                           |        | 580    |        |  |        | 558    |       
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           | Total current liabilities                                           |                                           |        | 18,597 |        |  |        | 15,584 |       
|Long-term debt and capitalized lease obligations                                                                           |                                                                     |                                           | 21,304 |        |        |  | 18,921 |       
|Pension and postretirement benefits                                                                                        |                                                                     |                                           | 2,491  |        |        |  | 2,417  |       
|Minority interest and other liabilities                                                                                    |                                                                     |                                           | 1,264  |        |        |  | 1,276  |       
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           | Total Liabilities                                                   |                                           |        | 43,656 |        |  |        | 38,198 |       
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|COMMITMENTS AND CONTINGENT LIABILITIES                                                                                     |                                                                     |                                           |        |        |        |  |        |       
|SHAREHOLDERS EQUITY                                                                                                       |                                                                     |                                           |        |        |        |  |        |       
|Common shares issued ($.75 par value per share, 1,000 shares
authorized, 316.7 and 320.4 shares outstanding, respectively) |                                                                     |                                           | 323    |        |        |  | 323    |       
|Capital in excess of par value                                                                                             |                                                                     |                                           | 3,505  |        |        |  | 3,500  |       
|Retained earnings                                                                                                          |                                                                     |                                           | 8,497  |        |        |  | 7,413  |       
|Treasury stock - at cost                                                                                                   |                                                                     |                                           | (4,474 | )      |        |  | (4,223 | )     
|Deferred ESOP expense                                                                                                      |                                                                     |                                           | (42    | )      |        |  | (63    | )     
|Accumulated other comprehensive loss                                                                                       |                                                                     |                                           | (1,056 | )      |        |  | (831   | )     
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           | Total Shareholders Equity                                          |                                           |        | 6,753  |        |  |        | 6,119  |       
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       
|                                                                                                                           | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                          |                                           | $      | 50,409 |        |  | $      | 44,317 |       
|                                                                                                                           |                                                                     |                                           |        |        |        |  |        |       

See accompanying notes.

F - 5



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Consolidated Statements of Cash Flows

|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |     |      |        |  
|------------------------------------------------------------------------------------------ | --------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------- | ----- | ------ | ------ | ------ | ----- | ---- | ------ | ------ | --- | ---- | ------ | -
|millions                                                                                   |                                                     | 2002                                                     |                                                     | 2001  |        | 2000  
|                                                                                           |                                                     |                                                          |                                                     |       |        |       
|CASH FLOWS FROM OPERATING ACTIVITIES                                                       |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|Net income                                                                                 |                                                     | $                                                        | 1,376                                               |       |        | $      | 735    |       |      | $      | 1,343  |    
|Adjustments to reconcile net income to net cash provided by
(used in) operating activities |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|                                                                                           | Depreciation and amortization                       |                                                          |                                                     | 875   |        |        |        | 863   |      |        |        | 839 |     
|                                                                                           | Cumulative effect of change in accounting principle |                                                          |                                                     | 208   |        |        |        |      |      |        |        |    |     
|                                                                                           | Provision for uncollectible accounts                |                                                          |                                                     | 2,261 |        |        |        | 1,866 |      |        |        | 884 |     
|                                                                                           | Special charges and impairments                     |                                                          |                                                     | 111   |        |        |        | 542   |      |        |        | 265 |     
|                                                                                           | Gain on sales of property and investments           |                                                          |                                                     | (347  | )      |        |        | (21   | )    |        |        | (19 | )   
|                                                                                           | Income tax benefit on nonqualified stock options    |                                                          |                                                     | 24    |        |        |        | 14    |      |        |        | 3   |     
|                                                                                           | Change in (net of acquisitions):                    |                                                          |                                                     |       |        |        |        |       |      |        |        |     |     
|                                                                                           |                                                     | Deferred income taxes                                    |                                                     |       | (203   | )      |        |       | (190 | )      |        |     | 62   |       
|                                                                                           |                                                     | Retained interest in transferred credit card receivables |                                                     |       |       |        |        |       | (759 | )      |        |     | 106  |       
|                                                                                           |                                                     | Credit card receivables                                  |                                                     |       | (4,833 | )      |        |       | (810 | )      |        |     | (199 | )     
|                                                                                           |                                                     | Merchandise inventories                                  |                                                     |       | 45     |        |        |       | 610  |        |        |     | (560 | )     
|                                                                                           |                                                     | Other operating assets                                   |                                                     |       | (56    | )      |        |       | 61   |        |        |     | 8    |       
|                                                                                           |                                                     | Other operating liabilities                              |                                                     |       | 34     |        |        |       | (596 | )      |        |     | (47  | )     
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|                                                                                           |                                                     |                                                          | Net cash (used in) provided by operating activities |       |        | (505   | )      |       |      | 2,315  |        |     |      | 2,685  |  
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|CASH FLOWS FROM INVESTING ACTIVITIES                                                       |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|Acquisition of businesses, net of cash acquired                                            |                                                     |                                                          | (1,840                                              | )     |        |        |       |       |      |        | (1     | )  
|Proceeds from sales of property and investments                                            |                                                     |                                                          | 568                                                 |       |        |        | 59     |       |      |        | 75     |    
|Purchases of property and equipment                                                        |                                                     |                                                          | (1,035                                              | )     |        |        | (1,126 | )     |      |        | (1,055 | )  
|Purchases of long-term investments                                                         |                                                     |                                                          | (15                                                 | )     |        |        | (21    | )     |      |        | (40    | )  
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|                                                                                           |                                                     |                                                          | Net cash used in investing activities               |       |        | (2,322 | )      |       |      | (1,088 | )      |     |      | (1,021 | )
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|CASH FLOWS FROM FINANCING ACTIVITIES                                                       |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|Proceeds from long-term debt                                                               |                                                     |                                                          | 6,565                                               |       |        |        | 4,051  |       |      |        | 795    |    
|Repayments of long-term debt                                                               |                                                     |                                                          | (3,256                                              | )     |        |        | (3,532 | )     |      |        | (2,260 | )  
|Increase (decrease) in short-term borrowings, primarily 90 days
or less                    |                                                     |                                                          | 964                                                 |       |        |        | (708   | )     |      |        | 1,295  |    
|Repayments of ESOP note receivable                                                         |                                                     |                                                          | 11                                                  |       |        |        | 33     |       |      |        | 118    |    
|Common shares repurchased                                                                  |                                                     |                                                          | (427                                                | )     |        |        | (625   | )     |      |        | (1,233 | )  
|Common shares issued for employee stock plans                                              |                                                     |                                                          | 157                                                 |       |        |        | 75     |       |      |        | 58     |    
|Dividends paid to shareholders                                                             |                                                     |                                                          | (293                                                | )     |        |        | (302   | )     |      |        | (322   | )  
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|                                                                                           |                                                     |                                                          | Net cash provided by (used in) financing activities |       |        | 3,721  |        |       |      | (1,008 | )      |     |      | (1,549 | )
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|Effect of exchange rate changes on cash and cash equivalents                               |                                                     |                                                          | 4                                                   |       |        |        | 3      |       |      |        | (2     | )  
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                  |                                                     |                                                          | 898                                                 |       |        |        | 222    |       |      |        | 113    |    
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|BALANCE AT BEGINNING OF YEAR                                                               |                                                     |                                                          | 1,064                                               |       |        |        | 842    |       |      |        | 729    |    
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    
|BALANCE AT END OF YEAR                                                                     |                                                     | $                                                        | 1,962                                               |       |        | $      | 1,064  |       |      | $      | 842    |    
|                                                                                           |                                                     |                                                          |                                                     |       |        |        |        |       |      |        |        |    

See accompanying notes.

F - 6



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Consolidated Statements of Shareholders Equity

|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |       | 
|------------------------------------------- | -------------------------- | ----------- | ------- | ------ | ------ | ------------ | ---------- | -------- |  | -------- | ----- | ------- |  | ---------- | ----- | -------- | -------- | - | ------ | - | ------ | - | ---- | - |  | - | ----------- | - | ----- | - | ------ | ----- | 
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   | Accumulated |   | Total
|                                            |                            |             | Common  |        | Common |              | Capital in |          |  |          |       |         |  |            |       |          | Deferred |   | Other  |   | Share-
|Dollars in millions                         |                            | Shares      |         | Stock  |        | Excess       |            | Retained |  | Treasury |       | ESOP    |  | Comprehen- |       | holders
|shares in thousands                         |                            | Outstanding |         | Issued |        | of Par Value |            | Earnings |  | Stock    |       | Expense |  | sive Loss  |       | Equity  
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |         
|Balance, beginning of year 2000             |                            |             | 369,128 |        |        | $            | 323        |          |  | $        | 3,554 |         |  | $          | 5,952 |          |          | $ | (2,569 | ) |        | $ | (134 | ) |  | $ | (287        | ) |       | $ | 6,839  |      
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |      
|Net income                                  |                            |             |         |        |        |              |            |          |  |          |       |         |  |            | 1,343 |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   | 1,343  |      
|Total other comprehensive income            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   | 38          |   |       |   | 38     |      
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |      
|                                            | Total comprehensive income |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        | 1,381 | 
|Dividends to shareholders
($0.92 per share) |                            |             |         |        |        |              |            |          |  |          |       |         |  |            | (316  | )        |          |   |        |   |        |   |      |   |  |   |             |   |       |   | (316   | )    
|Stock options exercised and
other changes   |                            |             | 1,963   |        |        |              |            |          |  |          | (16   | )       |  |            |       |          |          |   | 76     |   |        |   |      |   |  |   |             |   |       |   | 60     |      
|Shares repurchased                          |                            |             | (37,888 | )      |        |              |            |          |  |          |       |         |  |            |       |          |          |   | (1,233 | ) |        |   |      |   |  |   |             |   |       |   | (1,233 | )    
|ESOP expense recognized                     |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   | 38   |   |  |   |             |   |       |   | 38     |      
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |      
|Balance, end of year 2000                   |                            |             | 333,203 |        |        |              | 323        |          |  |          | 3,538 |         |  |            | 6,979 |          |          |   | (3,726 | ) |        |   | (96  | ) |  |   | (249        | ) |       |   | 6,769  |      
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |      
|Net income                                  |                            |             |         |        |        |              |            |          |  |          |       |         |  |            | 735   |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   | 735    |      
|Total other comprehensive income            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   | (582        | ) |       |   | (582   | )    
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |      
|                                            | Total comprehensive income |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        | 153   | 
|Dividends to shareholders
($0.92 per share) |                            |             |         |        |        |              |            |          |  |          |       |         |  |            | (301  | )        |          |   |        |   |        |   |      |   |  |   |             |   |       |   | (301   | )    
|Stock options exercised and
other changes   |                            |             | 3,349   |        |        |              |            |          |  |          | (38   | )       |  |            |       |          |          |   | 128    |   |        |   |      |   |  |   |             |   |       |   | 90     |      
|Shares repurchased                          |                            |             | (16,106 | )      |        |              |            |          |  |          |       |         |  |            |       |          |          |   | (625   | ) |        |   |      |   |  |   |             |   |       |   | (625   | )    
|ESOP expense recognized                     |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   | 33   |   |  |   |             |   |       |   | 33     |      
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |      
|Balance, end of year 2001                   |                            |             | 320,446 |        |        |              | 323        |          |  |          | 3,500 |         |  |            | 7,413 |          |          |   | (4,223 | ) |        |   | (63  | ) |  |   | (831        | ) |       |   | 6,119  |      
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |      
|Net income                                  |                            |             |         |        |        |              |            |          |  |          |       |         |  |            | 1,376 |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   | 1,376  |      
|Total other comprehensive loss              |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   | (225        | ) |       |   | (225   | )    
|                                            | Total comprehensive income |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        | 1,151 | 
|Dividends to shareholders
($0.92 per share) |                            |             |         |        |        |              |            |          |  |          |       |         |  |            | (292  | )        |          |   |        |   |        |   |      |   |  |   |             |   |       |   | (292   | )    
|Stock options exercised and
other changes   |                            |             | 4,517   |        |        |              |            |          |  |          | 5     |         |  |            |       |          |          |   | 176    |   |        |   |      |   |  |   |             |   |       |   | 181    |      
|Shares repurchased                          |                            |             | (8,229  | )      |        |              |            |          |  |          |       |         |  |            |       |          |          |   | (427   | ) |        |   |      |   |  |   |             |   |       |   | (427   | )    
|ESOP expense recognized                     |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   | 21   |   |  |   |             |   |       |   | 21     |      
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |      
|Balance, end of year 2002                   |                            |             | 316,734 |        |        | $            | 323        |          |  | $        | 3,505 |         |  | $          | 8,497 |          |          | $ | (4,474 | ) |        | $ | (42  | ) |  | $ | (1,056      | ) |       | $ | 6,753  |      
|                                            |                            |             |         |        |        |              |            |          |  |          |       |         |  |            |       |          |          |   |        |   |        |   |      |   |  |   |             |   |       |   |        |      

See accompanying notes.

F - 7



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Sears, Roebuck and Co. (together with its consolidated subsidiaries, the
Company) is a multi-line retailer that offers a wide array of merchandise and
related services. In addition, through its Credit and Financial Products
businesses, the Company offers its customers various credit card and related
insurance products. The Company operates principally in the United States,
Puerto Rico and Canada.

Basis of Consolidation

The consolidated financial statements include the accounts of Sears, Roebuck
and Co. and all majority-owned subsidiaries. Investments in companies in which
the Company exercises significant influence, but not control, are accounted for
using the equity method of accounting. Investments in companies in which the
Company has less than a 20% ownership interest, and does not exercise
significant influence, are accounted for at cost. All intercompany accounts
and transactions have been eliminated during consolidation.

Fiscal Year

The Companys fiscal year ends on the Saturday nearest December 31. Unless
otherwise stated, references to years in this report relate to fiscal years
rather than to calendar years.

|            |  |                   |  |       |    |  |  | 
|----------- |  | ----------------- |  | ----- | -- |  |  | 
|Fiscal year |  | Ended             |  | Weeks
|            |  |                   |  |      
|2002        |  | December 28, 2002 |  |       | 52 | 
|2001        |  | December 29, 2001 |  |       | 52 | 
|2000        |  | December 30, 2000 |  |       | 52 | 

Reclassifications

Certain reclassifications have been made to prior year financial statements and
the notes to conform with the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 reported amounts of revenues and
expenses during the reporting period. Significant estimates are required as
part of inventory valuation; determining the allowance for uncollectible
accounts; depreciation; amortization and recoverability of long-lived assets;
establishing restructuring and other reserves; and calculating retirement
benefits. Actual results may differ from these estimates.

F - 8



---



##### Table of Contents



SEARS, ROEBUCK AND CO.

Notes to Consolidated Financial Statements


Cash and Cash Equivalents

Cash equivalents include all highly liquid investments with original maturities
of three months or less at the date of purchase.

Credit Card Receivables

Credit card receivables arise under revolving credit accounts used primarily to
finance purchases. Sears Card products are typically available only on
purchases of merchandise and services offered by the Company, whereas
MasterCard is widely accepted by merchants outside the Company. Additional
MasterCard product receivables are generated from balance transfers and cash
advances. These accounts have various billing and payment structures,
including varying minimum payment levels and finance charge rates and fees.
Based on historical payment patterns, the full receivable balance will not be
repaid within one year.

Credit card receivables are shown net of an allowance for uncollectible
accounts. The allowance is an estimate of losses inherent in the portfolio
(including current accounts, finance charges and credit card fee balances) as
of the balance sheet date. The Company calculates the allowance using a model
that analyzes factors such as bankruptcy filings, delinquency rates, historical
charge-off patterns, recovery rates and other portfolio data. The Companys
calculation is then reviewed by management to assess whether, based on economic
events, additional analyses are required to appropriately estimate losses
inherent in the portfolio.

The entire balance of an account is contractually delinquent if the minimum
payment is not received by the payment due date. The Companys current credit
processing system charges off an account automatically when a customers number
of missed monthly payments outstanding reaches eight; however, accounts may be
charged off sooner in the event of customer bankruptcy. Bankrupt customer
accounts are charged off 60 days after the first meeting of the creditors for a
filing under Chapter 7 of the U.S. Bankruptcy Code and 90 days after the first
meeting of the creditors for a filing under Chapter 13 of the U.S. Bankruptcy
Code. All amounts collected on previously charged off accounts are included in
recoveries for the determination of net charge-offs.

Merchandise Inventories

Approximately 89% of merchandise inventories are valued at the lower of cost or
market, with cost determined using the retail inventory method (RIM) under
the last-in, first-out (LIFO) cost flow assumption. 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 $11 million in 2002, a
charge of $25 million in 2001 and a credit of $29 million in 2000. If the
first-in, first-out (FIFO) method of inventory valuation had been used
instead of the LIFO method, merchandise inventories would have been $602 and
$591 million higher at December 28, 2002 and December 29, 2001, respectively.

Inherent in the RIM calculation are certain significant management judgments
and estimates including, among others, merchandise markons, markups, markdowns
and shrinkage, which significantly impact the ending inventory valuation at
cost as well as resulting gross margins. The methodologies utilized by the
Company in its application of the RIM are consistent for all periods presented.
Such methodologies include the development of the cost-to-retail ratios, the
groupings of homogenous classes of merchandise, the development of shrinkage
reserves, the accounting for price changes and the computations inherent in the
LIFO adjustment. Management believes that the Companys RIM and application of
LIFO provides an inventory valuation which reasonably approximates cost using a
last-in, first-out assumption and results in carrying inventory at the lower of
cost or market.

F - 9



---



##### Table of Contents



SEARS, ROEBUCK AND CO.

Notes to Consolidated Financial Statements


Vendor Allowances

The Company receives allowances from its vendors through a variety of programs
and arrangements, including
co-operative advertising and markdown reimbursement programs. Given the
promotional nature of the Companys business, the allowances are generally
intended to offset the Companys costs of promoting, advertising and selling
the vendors products in its stores. Vendor allowances are recognized as a
reduction of cost of goods sold or related selling expense when the purpose for
which the vendor funds were intended to be used has been fulfilled.
Co-operative advertising allowances are reported as a reduction of advertising
expense in the period in which the advertising expenditures are incurred.
Markdown reimbursements are credited to cost of goods sold during the period in
which the related promotional markdown was taken. Accordingly, a reduction or
increase in vendor allowances has an inverse impact on cost of sales and/or
selling and administrative expenses.

Deferred Policy Acquisition Costs

For certain insurance products, policy acquisition costs are amortized for 5 to
15 years in proportion to income produced. The consolidated balance sheets
include deferred policy acquisition costs of $219 million and $191 million at
December 28, 2002 and December 29, 2001, respectively. The current portion is
included in prepaid expenses and deferred charges, while the long-term portion
is included in other assets. Deferred policy acquisition costs are
periodically reviewed for recoverability.

Tradenames and Other Identifiable Intangible Assets

The identifiable intangible assets of the Company are primarily tradenames
acquired in business combinations. The Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, at the beginning of 2002. Under the provisions of
SFAS No. 142, identifiable intangibles with finite lives are amortized and
those with indefinite lives are not amortized. The estimated useful life of an
identifiable intangible asset to the Company is based upon a number of factors
including the effects of demand, competition and the level of maintenance
expenditures required to obtain future cash flows. Prior to the start of 2002,
the Company followed the provisions of Accounting Principles Board Opinion
(APB) No. 17, which required that all identifiable intangibles be amortized
by systematic charges to income over the period expected to be benefited.

The Company tests identifiable intangible assets with an indefinite life for
impairment, at a minimum on an annual basis, relying on a number of factors
including operating results, business plans and projected future cash flows.
Identifiable intangible assets that are subject to amortization are evaluated
for impairment using a process similar to that used to evaluate other
long-lived assets. The impairment test for identifiable intangible assets not
subject to amortization consists of a comparison of the fair value of the
intangible asset with its carrying amount. An impairment loss is recognized
for the amount by which the carrying value exceeds the fair value of the asset.

Goodwill

Under the provisions of SFAS No. 142, goodwill is no longer amortized. Prior
to the start of 2002, the Company followed the provisions of APB Opinion No.
17, which required that goodwill be amortized by systematic charges to income
over the period expected to be benefited. That period ranged from 5 to 40
years.

Long-Lived Asset Recoverability

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets, long-lived

F - 10



---



##### Table of Contents



SEARS, ROEBUCK AND CO.

Notes to Consolidated Financial Statements


assets, primarily property and equipment, are tested for recoverability
whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. The SFAS No. 144 impairment
test is a two-step process. If the carrying value of the asset exceeds the
expected future cash flows (undiscounted and without interest) from the asset,
an impairment is indicated. The impairment loss recognized is the excess of
the carrying value of the asset over its fair value.

Revenue Recognition

In-store revenues from merchandise sales and services, including delivery fees,
are reported net of estimated returns and allowances and customer rebates, and
are recognized when the related goods are shipped and all significant
obligations of the Company have been satisfied. The reserve for returns and
allowances is calculated as a percentage of sales based on historical return
percentages. Commissions earned on sales made by licensed businesses are also
included as a component of merchandise sales and services.

During 2002, the Company adopted the provisions of Emerging Issues Task Force
(EITF) Issue 01-9, Accounting For Consideration Given By A Vendor To A
Customer. This EITF issue established requirements for the recognition,
measurement and display of certain sales incentives and impacted the Companys
presentation of rebates provided to customers. As a result of adopting EITF
Issue 01-9, net sales and cost of sales decreased by $88 million in 2002 and
$89 million in 2001 and 2000, respectively.

Revenues from product installation and repair services are recognized as the
services are provided. Additionally, the Company sells extended service
contracts with terms of coverage between 12 and 60 months. Revenues from the
sale of these contracts are deferred and amortized over the lives of the
contracts while the service costs are expensed as incurred. Incremental costs
directly related to the acquisition of such contracts are deferred and charged
to expense in proportion to the revenue recognized.

The Company direct markets merchandise through catalogs and online via
websites. Revenue is recognized for these items when the merchandise is
delivered to a customer unless the terms of the sale are FOB shipping point, in
which the revenue is recognized upon shipment. The Company also direct markets
insurance (credit protection, life and health) and clubs and services memberships.
Deferred revenue is recorded when the member is billed (upon expiration of any free trial period), and revenue is
recognized over the insurance or membership period. Membership revenue
associated with clubs and service memberships is recognized on a straight-line
basis.

The Company is responsible for providing warranty coverage on certain hardline
products. Based on historical warranty claims, the Company accrues the
estimated costs of the warranty coverage at the time of sale. A rollforward of
the warranty reserve is as follows:

|                  |  |      |      |      |  |   |      |  
|----------------- |  | ---- | ---- | ---- |  | - | ---- | -
|millions          |  | 2002 |      | 2001
|                  |  |      |      |     
|Beginning balance |  | $    | 114  |      |  | $ | 109  |  
|Warranty expense  |  |      | 233  |      |  |   | 255  |  
|Warranty claims   |  |      | (216 | )    |  |   | (250 | )
|                  |  |      |      |      |  |   |      |  
|Ending balance    |  | $    | 131  |      |  | $ | 114  |  
|                  |  |      |      |      |  |   |      |  

The Company recognizes finance charges and fee income on credit card
receivables according to the contractual provisions of the credit agreements,
and such charges and income are recorded until an account is charged off, at
which time uncollected finance charge and fee revenue are recorded as a
reduction of credit revenues. The Company provides an allowance for estimated
uncollectible finance charge and fee revenues in the provision.

F - 11



---



##### Table of Contents



SEARS, ROEBUCK AND CO.

Notes to Consolidated Financial Statements


Cost of Sales, Buying and Occupancy Expenses

Cost of sales, buying and occupancy includes buying, warehousing, distribution
and delivery and store occupancy costs related to the Companys retail store
operations, service and installation costs associated with product repair
services businesses, and all shipping, handling and delivery costs associated
with our online and direct-to-customer businesses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses primarily include payroll and
related benefits, advertising and data processing expenses.

Advertising and Direct Response Marketing

Costs for newspaper, television, radio and other media advertising are expensed
the first time the advertising occurs. The total cost of advertising charged
to selling, general and administrative expense was $1.8 billion in 2002 and
$1.6 billion in each of 2001 and 2000.

Certain direct response advertising and solicitation costs are capitalized.
Membership acquisition and renewal costs, which primarily relate to membership
solicitations, are capitalized since such direct response advertising costs
result in future economic benefits. Generally, such costs are amortized over
the shorter of the programs life or five years, primarily in proportion to
when revenues are recognized. For specialty catalogs, costs are amortized over
the life of the catalog, not to exceed one year. When the carrying amount of
such deferred direct advertising costs exceed the estimated future net revenues
realized from such advertising, any excess is recorded as advertising expense
of the current period. The consolidated balance sheets include deferred direct
response advertising costs of $58 million and $57 million at December 28, 2002
and December 29, 2001, respectively. The current portion is included in
prepaid expenses and deferred charges, while the long-term portion is included
in other assets.

Store Preopening Expenses

Non-capital costs associated with the opening of new stores are expensed as
incurred.

Depreciation and Amortization

Depreciation and amortization is provided principally by the straight-line
method over the estimated useful lives of the related assets, generally 2 to 10
years for furniture, fixtures and equipment, 15 to 50 years for buildings and
building improvements and 3 years for identifiable intangible assets with a
definitive estimated useful life.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
for the periods presented. Diluted earnings per common share also includes the
dilutive effect of potential common shares (primarily dilutive stock options)
outstanding during the period for the periods presented.

F - 12



---



##### Table of Contents



SEARS, ROEBUCK AND CO.

Notes to Consolidated Financial Statements


Stock-Based Compensation

At December 28, 2002, the Company has various stock-based employee compensation
plans which are described more fully in Note 11. The Company accounts for
those plans in accordance with APB No. 25, Accounting For Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as no options granted under those plans had an
exercise price less than the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.

|                                                                                                                                    |  |      |       |      |  |      |      |   |  |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ---- | - |  | - | ----- | -
|millions, except earnings per share                                                                                                 |  | 2002 |       | 2001 |  | 2000
|                                                                                                                                    |  |      |       |      |  |     
|Net
income - as reported                                                                                                            |  | $    | 1,376 |      |  | $    | 735  |   |  | $ | 1,343 |  
|Less: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related taxes |  |      | (49   | )    |  |      | (51  | ) |  |   | (43   | )
|                                                                                                                                    |  |      |       |      |  |      |      |   |  |   |       |  
|Net income - pro forma                                                                                                              |  | $    | 1,327 |      |  | $    | 684  |   |  | $ | 1,300 |  
|                                                                                                                                    |  |      |       |      |  |      |      |   |  |   |       |  
|Earnings per share - basic                                                                                                          |  |      |       |      |  |      |      |   |  |   |       |  
|As reported                                                                                                                         |  | $    | 4.34  |      |  | $    | 2.25 |   |  | $ | 3.89  |  
|Pro forma                                                                                                                           |  |      | 4.18  |      |  |      | 2.10 |   |  |   | 3.77  |  
|Earnings per share - diluted                                                                                                        |  |      |       |      |  |      |      |   |  |   |       |  
|As reported                                                                                                                         |  |      | 4.29  |      |  |      | 2.24 |   |  |   | 3.88  |  
|Pro forma                                                                                                                           |  | $    | 4.14  |      |  | $    | 2.08 |   |  | $ | 3.75  |  

Financial Instruments

The Company uses financial instruments primarily to manage its exposures to
movements in interest rates. The use of interest rate derivatives lessens the
exposure to this risk with the intent to reduce the risk or cost to the
Company. The Company does not use derivatives for trading purposes.

The Company formally documents its hedge relationships, including
identification of the hedging instruments and the hedged items, as well as its
risk management objectives and strategies for undertaking the hedge
transaction. The Company also formally assesses, both at inception and at
least quarterly thereafter, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in the fair value of
the hedged item. If it is determined that a derivative ceases to be a highly
effective hedge, the Company discontinues hedge accounting.

The Companys interest rate derivatives are designated as fair value hedges of
fixed rate borrowings, including fixed rate borrowings that fund its credit
card receivables, on the date the derivative is entered. A fair value hedge is
a hedge of a recognized asset or liability or an unrecognized firm commitment.
For fair value hedges, both the effective and ineffective portions of the
changes in the fair value of the derivative, along with the offsetting gain or
loss on the hedged item that is attributable to the hedged risk, are recorded
in earnings and reported in the consolidated statements of income in the same
account as the hedged item.

Fair Value of Financial Instruments

Due to their short-term nature, the carrying value of the Companys cash and
cash equivalents, credit card and other receivables and short-term borrowings
approximate fair value. The fair value of long-term debt is disclosed in Note
5. The Companys derivative financial instruments are recorded on the balance
sheet within other assets and other long-term liabilities at fair value. Fair
value estimates for the Companys derivative and debt instruments are based on
market prices when available or are derived from financial valuation methodologies
such as discounted cash flow analyses.

F - 13



---



##### Table of Contents



SEARS, ROEBUCK AND CO.

Notes to Consolidated Financial Statements


Effect of Accounting Standards Not Yet Adopted

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities.
This standard requires a liability to be recognized at fair value for costs
associated with the exit or disposal activities only when the liability is
incurred, as opposed to recognizing a liability at the time the Company commits
to an exit plan as permitted under EITF Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002. SFAS No. 146 could result in the Company recognizing the
cost of future exit or disposal activities over a period of time as opposed to
at a point in time.

On January 17, 2003, the FASB issued FASB Interpretation (FIN) No. 46,
Consolidation of Variable Interest entities, an interpretation of ARB 51.
The primary objectives of FIN No. 46 are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights (Variable Interest Entities) and how to determine
when and which business enterprise should consolidate the Variable Interest
Entity (the primary beneficiary). The transitional disclosure requirements of
FIN No. 46 take effect immediately and are required in all financial statements
initially issued after January 31, 2003, if certain conditions are met. The
Company does not have any variable interest entities and therefore, FIN No. 46
will not impact its financial statements.

The FASBs EITF Issue 02-16, Accounting By A Customer (Including A
Reseller) For Cash Consideration Received From A Vendor addressed the
accounting treatment for vendor allowances. The Company has not completed the
process of evaluating the impact of EITF Issue 02-16, however, the Company
does not expect that its adoption in 2003 will have a material impact on its
financial position or results of operations.

NOTE 2 - ACQUISITION

On June 17, 2002, the Company acquired 100 percent of the outstanding common
shares of Lands End. The results of Lands Ends operations have been
included in the consolidated financial statements since that date.
Headquartered in Dodgeville, Wisconsin, Lands End is a leading direct merchant
of traditionally styled, casual clothing for men, women and children,
accessories, footwear, home products and soft luggage.

The Company acquired Lands End for $1.8 billion in cash. The acquisition has
been accounted for using the purchase method in accordance with SFAS No. 141,
Business Combinations. Accordingly, the total purchase price has
preliminarily been allocated to the assets acquired and liabilities assumed
based on their estimated fair values at acquisition as follows (amounts in
millions):

|                                                          |  |   |       |  
|--------------------------------------------------------- |  | - | ----- | -
|Merchandise inventories                                   |  | $ | 238   |  
|Property and equipment                                    |  |   | 185   |  
|Intangible assets (primarily indefinite lived tradenames) |  |   | 704   |  
|Goodwill                                                  |  |   | 834   |  
|Other assets                                              |  |   | 48    |  
|Accounts payable and other liabilities                    |  |   | (169  | )
|                                                          |  |   |       |  
|Total                                                     |  | $ | 1,840 |  
|                                                          |  |   |       |  

Of the $704 million acquired intangibles, $700 million was assigned to
registered tradenames that are not subject to amortization and $4 million was
assigned to customer lists with an estimated useful life of three years.

The amount allocated to goodwill is reflective of the benefit the Company
expects to realize from leveraging the Lands End brand name across its retail
business. The goodwill related to the Lands End acquisition is not deductible
for tax purposes.

F - 14



---



##### Table of Contents



SEARS, ROEBUCK AND CO.

Notes to Consolidated Financial Statements


The following unaudited pro forma information presents the results of
operations of the Company as if the Lands End acquisition had taken place at
the beginning of each respective period. Pro forma adjustments have been made
to reflect additional interest expense from the $1.8 billion in debt associated
with the acquisition. The pro forma results of operations include $18 million
of non-recurring transaction costs incurred by Lands End in 2002.

|                                                     |  |             |        |             |  |   |        |  |  |  | 
|---------------------------------------------------- |  | ----------- | ------ | ----------- |  | - | ------ |  |  |  | 
|millions, except per share data                      |  | 2002        |        | 2001       
|                                                     |  | (Pro Forma) |        | (Pro Forma)
|                                                     |  |             |        |             |  |   |       
|Revenues                                             |  | $           | 42,020 |             |  | $ | 42,524 | 
|Income before cumulative effect of accounting change |  |             | 1,571  |             |  |   | 736    | 
|Net income                                           |  |             | 1,363  |             |  |   | 736    | 
|Earnings per share:                                  |  |             |        |             |  |   |        | 
|Basic                                                |  |             |        |             |  |   |        |  |  |  | 
|Earnings per share                                   |  |             | 4.29   |             |  |   | 2.25   | 
|Diluted                                              |  |             |        |             |  |   |        | 
|Earnings per share                                   |  |             | 4.25   |             |  |   | 2.24   | 

The unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations that
would have occurred had the Lands End acquisition occurred at the beginning of
the respective periods.

NOTE 3 - CREDIT CARD RECEIVABLES

A summary of the Companys credit card receivables at year-end is as follows:

|                              |              |      |        |        |  |   |        |        | 
|----------------------------- | ------------ | ---- | ------ | ------ |  | - | ------ | ------ | 
|millions                      |              | 2002 |        | 2001  
|                              |              |      |        |       
|Credit card receivables (1)   |              |      |        |        |  |   |        |       
|                              | Domestic     |      | $      | 30,766 |  |   | $      | 27,599 | 
|                              | Sears Canada |      |        | 1,797  |  |   |        | 1,682  | 
|                              |              |      |        |        |  |   |        |        | 
|                              |              |      | 32,563 |        |  |   | 29,281 |       
|Other customer receivables    |              |      | 32     |        |  |   | 40     |       
|                              |              |      |        |        |  |   |        |        | 
|Total credit card receivables |              | $    | 32,595 |        |  | $ | 29,321 |       
|                              |              |      |        |        |  |   |        |        | 



---

|(1) |  | At December 28, 2002 and December 29, 2001, $23.8
billion and $16.1 billion, respectively, of credit
card receivables were segregated in securitization
trusts.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------




Summary of Securitization Process

Credit card securitizations are utilized as part of the Companys overall
funding strategy. Sears sells certain of its credit card receivable balances
to various subsidiaries that in turn transfer those balances to master trusts
(trusts). The trusts then securitize the receivable balances by issuing
certificates representing undivided interests in the trusts receivables to
both outside investors and to the Company (as a retained interest). These
certificates entitle the holder to a series of scheduled cash flows under
preset terms and conditions, the receipt of which is dependent upon cash flows
generated by the related trusts assets. In each securitization transaction, a
Sears subsidiary has retained certain subordinated interests which serve as a
credit enhancement to the certificates held by the outside investors. As a
result, the credit quality of certificates held by outside investors is
enhanced. However, the investors and the trusts have no recourse against the
Company beyond the trust assets.

F - 15



---



##### Table of Contents



SEARS, ROEBUCK AND CO.

Notes to Consolidated Financial Statements


Accounting for Securitizations

On March 31, 2001, the Company adopted the requirements of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, which superceded SFAS No. 125. Under SFAS No. 125, the
Companys securitization transactions were accounted for as sales of
receivables. SFAS No. 140 established new conditions for a securitization to
be accounted for as a sale of receivables. Specifically, SFAS No. 140 changed
the requirements for an entity to be a qualifying special purpose entity and
modified under what conditions a transferor has retained effective control over
transferred assets. The new standard became effective for transfers occurring
after March 31, 2001.

The addition of previously uncommitted assets to the securitization trust in
April 2001 required the Company to consolidate the securitization structure for
financial reporting purposes on a prospective basis. Accordingly, the Company
recorded on the balance sheet approximately $8.1 billion of previously
unconsolidated securitized credit card receivables and related securitization
borrowings in the second quarter of 2001. In addition, approximately $3.9
billion of assets were reclassified to credit card receivables from retained
interest in transferred credit card receivables. The Company recognized
incremental operating income of $40 million and $128 million in 2001 and 2000,
respectively, from net securitization activity. The Company now accounts for
securitizations as secured borrowings.

In connection with the consolidation of the securitization structure, the
Company recognized a non-cash, pretax charge of $522 million in 2001 to
establish an allowance for uncollectible accounts related to the receivables
which were previously considered as sold or accounted for as retained interests
in transferred credit card receivables.

Significant Group Concentrations of Credit Risk

The Company grants credit to a large and diverse group of customers throughout
North America. The five states and the respective receivable balances in which
the Company had the largest amount of credit card receivables were as follows:

|             |  |      |       |         |  |      |      |         |  |   |       |  |  |      |      |   |  | 
|------------ |  | ---- | ----- | ------- |  | ---- | ---- | ------- |  | - | ----- |  |  | ---- | ---- | - |  | 
|             |  |      |       |         |  |      |      | % of    |  |   |       |  |  | % of
|millions     |  | 2002 |       | Balance |  | 2001 |      | Balance
|             |  |      |       |         |  |      |      |         |  |  
|California   |  | $    | 3,417 |         |  |      | 11.2 | %       |  | $ | 2,982 |  |  |      | 10.9 | %
|Texas        |  |      | 2,380 |         |  |      | 7.8  | %       |  |   | 2,139 |  |  |      | 7.9  | %
|Florida      |  |      | 2,140 |         |  |      | 7.0  | %       |  |   | 1,919 |  |  |      | 7.0  | %
|New
York     |  |      | 1,960 |         |  |      | 6.4  | %       |  |   | 1,699 |  |  |      | 6.2  | %
|Pennsylvania |  |      | 1,506 |         |  |      | 4.9  | %       |  |   | 1,349 |  |  |      | 5.0  | %

F - 16



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

NOTE 4  ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

A summary of the activity in the allowance for uncollectible accounts is as
follows:

|                                                 |  |      |        |      |  |   |        |  
|------------------------------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|millions                                         |  | 2002 |        | 2001
|                                                 |  |      |        |     
|Beginning of year balance                        |  | $    | 1,166  |      |  | $ | 686    |  
|Provision excluding noncomparable items          |  |      | 1,961  |      |  |   | 1,497  |  
|Noncomparable items:                             |  |      |        |      |  |   |        |  
|Change in estimate                               |  |      | 300    |      |  |   |       |  
|Securitization adjustment                        |  |      |       |      |  |   | (153   | )
|Provision for previously securitized receivables |  |      |       |      |  |   | 522    |  
|                                                 |  |      |        |      |  |   |        |  
|Total provision                                  |  |      | 2,261  |      |  |   | 1,866  |  
|Net charge-offs                                  |  |      | (1,591 | )    |  |   | (1,289 | )
|Transfer to Securitization Master Trust          |  |      |       |      |  |   | (83    | )
|Reduction in accounts sold                       |  |      |       |      |  |   | (14    | )
|                                                 |  |      |        |      |  |   |        |  
|Ending balance                                   |  | $    | 1,836  |      |  | $ | 1,166  |  
|                                                 |  |      |        |      |  |   |        |  

In the second quarter of 2002, the Company refined its method of determining
its allowance for uncollectible accounts. The Company periodically reviews its
accounting practices to ensure that its adopted policies appropriately reflect
changes in its businesses, the industries it operates in, and the regulatory
and political environments. During the second quarter, the Company compared
its methodology for computing the allowance for uncollectible accounts to the
methodologies of participants in the bank card industry. The Company believed
that a comparison to bank card issuers was appropriate given the growth of the
MasterCard product (approximately $8.5 billion in balances at the end of the
second quarter of 2002). The Company determined that practice in the industry
was diverse and evolving, particularly in the areas of providing allowances for
current accounts, finance charges and credit card fees. Also, during this
review the Company became aware of new interpretive guidance that banking
regulators were proposing to narrow the diversity in practice. As a result of
its review, the Company refined its methodology for determining the
uncollectible portion of current accounts and credit card fee balances,
resulting in an increase to the allowance for uncollectible accounts in the
amount of $300 million in the second quarter of 2002. In accordance with APB
No. 20, Accounting Changes, the effect of this change in accounting was
recorded as a change in accounting estimate in the second quarter of 2002.

In the first quarter of 2001, the Companys securitization transactions were
accounted for as sales of receivables as required by SFAS No. 125. As a result
of the sale treatment, the provision and net charge-offs were $153 million less
in the quarter than they would have been had the receivables been owned. In
the second quarter of 2001, the securitized receivables which had previously
been considered sold were reconsolidated on to the Companys balance sheet and
a provision of $522 million was recorded to establish an allowance for
uncollectible accounts for these receivables.

NOTE 5  BORROWINGS

Short-term borrowings consist of:

|                                                         |  |      |       |      |  |   |       |  
|-------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|millions                                                 |  | 2002 |       | 2001
|                                                         |  |      |       |     
|Unsecured commercial paper                               |  | $    | 2,950 |      |  | $ | 3,412 |  
|Asset-backed commercial paper                            |  |      | 1,500 |      |  |   |      |  
|Bank loans                                               |  |      | 75    |      |  |   | 75    |  
|Promissory note                                          |  |      |      |      |  |   | 70    |  
|                                                         |  |      |       |      |  |   |       |  
|Total short-term borrowings                              |  | $    | 4,525 |      |  | $ | 3,557 |  
|                                                         |  |      |       |      |  |   |       |  
|Weighted-average annual interest rate on short-term debt |  |      | 2.8   | %    |  |   | 5.5   | %

F - 17



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

The Company maintains committed credit facilities to support its unsecured
commercial paper borrowings. At December 28, 2002, the Companys domestic
financing subsidiary, Sears Roebuck Acceptance Corp.
(SRAC), had a $4.4 billion syndicated credit agreement. This syndicated
credit agreement provides for loans at prevailing interest rates and matures in
April 2003. Sears Canada has a credit facility totaling $510 million due to
expire in November 2003. The Company pays commitment fees in connection with
these credit agreements.

The Companys domestic financing subsidiary, SRFG, Inc., maintains an
asset-backed commercial paper program. As of December 28, 2002, this program
had access up to $3.2 billion, of which $1.5 billion was outstanding. This
program had an original expiration date in March 2003. $2.8 billion of this
program was renewed on February 28, 2003, with an expiration in February 2004.

On February 24, 2003, SRAC, through a syndicate of banks, replaced its existing
credit facility with an unsecured, 364-day revolving credit facility in the
amount of $3.5 billion. The new facility includes the option to extend the
repayment of borrowings, if any, to February 2005.

The Company had interest rate swap agreements that established floating rates
on $10.7 billion and $10.6 billion of long-term fixed rate debt at December 28,
2002 and December 29, 2001, respectively. The weighted-average maturity of
these agreements was approximately 3.5 years and 4.5 years as of December 28,
2002 and December 29, 2001, respectively. The weighted-average interest rate
received by the Company related to the agreements was 4.5% and 4.4% at December
28, 2002 and December 29, 2001, respectively.

Long-term debt is as follows:

|                                                        |                                                                                  |   |        |       |      |   |        |       | 
|------------------------------------------------------- | -------------------------------------------------------------------------------- | - | ------ | ----- | ---- | - | ------ | ----- | 
|millions                                                | ISSUE                                                                            |   | 2002   |       | 2001
|                                                        |                                                                                  |   |        |      
|SEARS, ROEBUCK AND CO.                                  |                                                                                  |   |        |       |      |   |        |      
|                                                        | 6.25% Notes, due in 2004                                                         |   | $      | 300   |      |   | $      | 300   | 
|                                                        | 9.375% Debentures, due 2011                                                      |   |        | 300   |      |   |        | 300   | 
|                                                        | 6.15% to 10.0% Medium-Term Notes, due 2003 to 2021                               |   |        | 610   |      |   |        | 759   | 
|SEARS ROEBUCK ACCEPTANCE CORP.                          |                                                                                  |   |        |       |      |   |        |      
|                                                        | 6% to 7.50% Notes, due 2003 to 2042                                              |   |        | 8,542 |      |   |        | 7,321 | 
|                                                        | 4.50% to 7.50% Medium-Term Notes, due 2003 to 2013                               |   |        | 1,678 |      |   |        | 2,222 | 
|                                                        | LIBOR + 0.20% to 1.18% Floating Rate Medium-Term Notes,
due 2003 to 2004         |   |        | 440   |      |   |        | 540   | 
|SRFG, INC.                                              |                                                                                  |   |        |       |      |   |        |      
|                                                        | 5.25% to 7.50% Asset-backed certificates, due 2003 to 2005                       |   |        | 3,671 |      |   |        | 5,074 | 
|                                                        | LIBOR + 0.10% to 1.25% Floating Rate Asset-backed certificates,
due 2004 to 2012 |   |        | 8,280 |      |   |        | 3,878 | 
|SEARS DC CORP.                                          |                                                                                  |   |        |       |      |   |        |      
|                                                        | 8.55% to 9.26% Medium-Term Notes, due 2003 to 2012                               |   |        | 53    |      |   |        | 78    | 
|SEARS CANADA INC.                                       |                                                                                  |   |        |       |      |   |        |      
|                                                        | 6.55% to 7.45% Debentures and Medium-Term Notes, due 2006 to 2010                |   |        | 398   |      |   |        | 391   | 
|SEARS CANADA RECEIVABLES TRUST                          |                                                                                  |   |        |       |      |   |        |      
|                                                        | 4.72% to 9.18% Receivables Trusts, due 2003 to 2006                              |   |        | 757   |      |   |        | 860   | 
|CAPITALIZED LEASE OBLIGATIONS                           |                                                                                  |   | 458    |       |      |   | 458    |      
|OTHER NOTES AND MORTGAGES                               |                                                                                  |   | 16     |       |      |   | 16     |      
|                                                        |                                                                                  |   |        |       |      |   |        |      
|Total long-term debt                                    |                                                                                  |   | 25,503 |       |      |   | 22,197 |      
|SFAS 133 Hedge Accounting Adjustment (see Note 6)       |                                                                                  |   | 609    |       |      |   | (119   | )    
|Current maturities                                      |                                                                                  |   | (4,808 | )     |      |   | (3,157 | )    
|                                                        |                                                                                  |   |        |       |      |   |        |       | 
|Long-term debt                                          |                                                                                  | $ | 21,304 |       |      | $ | 18,921 |      
|                                                        |                                                                                  |   |        |       |      |   |        |      
|Weighted-average annual interest rate on long-term debt |                                                                                  |   | 4.4    | %     |      |   | 5.5    | %    

The fair value of long-term debt was $25.1 billion and $22.6 billion at
December 28, 2002 and December 29, 2001, respectively.

F - 18



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

As of December 28, 2002, long-term debt maturities for the next five years and
thereafter are as follows:

millions

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2003                |  | $ | 4,808  | 
|2004                |  |   | 3,236  | 
|2005                |  |   | 3,984  | 
|2006                |  |   | 2,640  | 
|2007 and thereafter |  |   | 10,835 | 
|                    |  |   |        | 
|                    |  | $ | 25,503 | 
|                    |  |   |        | 

The Company paid interest of $1.1 billion, $1.3 billion and $1.2 billion in
2002, 2001 and 2000, respectively. Interest capitalized was $4 million, $11
million and $4 million in 2002, 2001 and 2000, respectively.

NOTE 6  DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL GUARANTEES

Effective in the first quarter of 2001, the Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities. The adoption of SFAS No. 133 did not affect net income.
In 2001, the cumulative effect of the change in accounting principle reduced
other comprehensive income (OCI) by $262 million, including the
reclassification to OCI of a $228 million ($389 million pretax) deferred loss
on an interest rate swap that was terminated in 1997 and the recognition in OCI
of $34 million ($56 million pretax) related to a cash flow hedge. The deferred
swap loss is being amortized into earnings at the rate of approximately $17
million ($26 million pretax) a year over the original life of the interest rate
swap. During the second quarter of 2001, the Company terminated the cash flow
hedge. The termination had no impact on earnings.

The Company utilizes derivative financial instruments as part of an overall
risk management program designed to address certain financial exposures faced
by the Company. The only significant derivative instruments the Company
currently holds are interest rate swaps. As of December 28, 2002, the Company
had interest rate swaps with an aggregate fair value of $690 million that have
been used to synthetically convert certain of the Companys domestic fixed rate
debt to variable rate. The objective of this conversion is to achieve
increased levels of variable rate funding given the growth of variable rate
receivable levels within the Companys credit card receivables portfolio
resulting primarily from the Companys conversion of the finance charge on the
Sears Card from fixed rate to variable rate in 2002.

The Companys interest rate swaps have been recorded on the balance sheet at
fair value, classified as $81 million of other receivables and $609 million of
other assets. For accounting purposes, the swaps are designated and qualify as
fair value hedges of certain of the Companys fixed rate debt instruments. As
the critical terms of the swaps are designed to match those of the underlying
hedged debt, the change in fair value of the swaps is largely offset by changes
in fair value recorded on the hedged debt. Consequently, the amount of hedge
ineffectiveness recorded during 2002 in connection with these hedges was not
material and is reflected as a component of interest expense.

F - 19



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

The following sets forth the notional amounts and fair values of interest rate
swaps outstanding at the end of 2002 and 2001:

|                                      |  |             |        |            |  |        |     |             |  |   |        |  |  |   |     |  
|------------------------------------- |  | ----------- | ------ | ---------- |  | ------ | --- | ----------- |  | - | ------ |  |  | - | --- | -
|                                      |  | 2002        |        | 2001      
|                                      |  |             |        |           
|                                      |  | Contract or |        |            |  |        |     | Contract or |  |   |        | 
|                                      |  | Notional    |        |            |  |        |     | Notional    |  |   |        | 
|millions                              |  | Amount      |        | Fair Value |  | Amount |     | Fair Value 
|                                      |  |             |        |            |  |        |     |            
|Interest rate swap agreements:        |  |             |        |            |  |        |     |             |  |   |        |  |  |   |     |  
|Pay floating rate, receive fixed rate |  | $           | 10,742 |            |  | $      | 690 |             |  | $ | 10,642 |  |  | $ | (63 | )

The Company paid a weighted-average rate of 1.86% and received a
weighted-average rate of 4.47% in 2002. The fair values of interest rate swaps
are based on prices quoted from derivative dealers. If a counterparty fails to
meet the terms of a swap agreement, the Companys exposure is limited to the
net amount that would have been received, if any, over the agreements
remaining life, net of any collateral posted.

Financial Guarantees

The Company had total financial guarantees of $84 million at December 28, 2002,
which primarily included a $79 million guaranty representing a commitment by
the Company to guarantee the performance of certain municipal bonds issued in
connection with the Companys headquarters building. Payments under this
guaranty were $6 million and $5 million for 2002 and 2001, respectively, and
have been recorded as long-term receivables since they are expected to be
recovered from future cash flows generated by the property. This guaranty
expires in 2012. In addition, the Company had additional guarantees of $5
million in which the Company guaranteed leases of certain Company affiliates.

NOTE 7  SPECIAL CHARGES AND IMPAIRMENTS

Special charges and impairments included the following:

|                          |                                     |      |     |      |  |      |     |     |  |   |     |     | 
|------------------------- | ----------------------------------- | ---- | --- | ---- |  | ---- | --- | --- |  | - | --- | --- | 
|millions                  |                                     | 2002 |     | 2001 |  | 2000
|                          |                                     |      |     |      |  |     
|Restructuring
Initiatives |                                     |      |     |      |  |      |     |     |  |   |     |    
|                          | Sears Canada  Eatons conversion    |      | $   | 111  |  |      | $   |    |  |   | $   |    | 
|                          | Productivity initiatives            |      |     |     |  |      |     | 123 |  |   |     |    | 
|                          | Product category exits              |      |     |     |  |      |     | 151 |  |   |     |    | 
|                          | 2000 store closures                 |      |     |     |  |      |     |    |  |   |     | 136 | 
|Other
Special Charges     |                                     |      |     |      |  |      |     |     |  |   |     |    
|                          | Homelife closure                    |      |     |     |  |      |     | 185 |  |   |     |    | 
|                          | Exide battery litigation settlement |      |     |     |  |      |     | 63  |  |   |     |    | 
|                          | STPC impairment                     |      |     |     |  |      |     |    |  |   |     | 115 | 
|                          | Other                               |      |     |     |  |      |     | 20  |  |   |     |    | 
|                          |                                     |      |     |      |  |      |     |     |  |   |     |    
|                          |                                     | $    | 111 |      |  | $    | 542 |     |  | $ | 251 |    
|                          |                                     |      |     |      |  |      |     |     |  |   |     |    

Sears Canada  Eatons Conversion

In February 2002, Sears Canada announced its intention to convert the remaining
seven Eatons stores to the Sears Canada banner. The conversion of the stores
was completed at the end of July 2002. This decision enabled the Company to
better leverage its buying and advertising efforts, and take better advantage
of the Sears brands equity. The Company recorded a one-time, pretax charge of
$111 million in 2002 related to the conversions. Of

F - 20



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

the $111 million charge,
$92 million was to record asset impairments on fixtures and equipment in such
facilities. The remaining $19 million was comprised of $16 million for
contractual
obligations and holding costs and $3 million for employee termination costs.
As of December 28, 2002, all actions identified under this plan have been
executed.

Productivity Initiatives

During the fourth quarter of 2001, the Company announced a series of strategic
initiatives designed to revitalize its Full-line Stores and reduce operating
expenses. In connection therewith, the Company recorded a pretax charge of
$123 million related to employee termination, facility closing and other exit
costs. Of the $123 million charge, $102 million is for employee termination
costs associated with the planned elimination of 5,950 associate positions as
part of this initiative. The positions eliminated include store support
positions within the Companys headquarters as well as positions within store
and field operations. The remaining $21 million of productivity-related
charges was comprised of $13 million for contractual obligations and holding
costs associated with certain support facilities to be vacated as a result of
the plan, and $8 million to record asset impairments on fixtures and equipment
in such facilities. As of December 28, 2002, all actions identified under this
plan have been executed.

Product Category Exits

During 2001, the Company announced its decision to exit certain product
categories within its Full-line Stores, including its skin care and color
cosmetics, installed floor covering and custom window treatments businesses.
In connection with these exits, the Company recorded pretax charges totaling
$151 million during 2001. Of the $151 million charge, $106 million was
recorded for the cost of settling contractual obligations to certain vendors
and contractors and for other exit costs associated with the Companys plan to
discontinue these businesses, including incremental customer warranty claims
liability to be incurred by the Company in the absence of ongoing relationships
with certain product manufacturers. Also included within the $151 million
charge were asset impairment charges of $38 million, primarily reflecting the
write-down of store fixtures within the exited businesses to their estimated
fair value. The remaining $7 million of product category exit charges was for
employee termination costs associated with managements decision to eliminate
1,980 associate positions connected to the exited businesses, primarily store
sales positions. As of December 28, 2002, all positions have been eliminated.

Homelife Closure

The Company sold its Homelife furniture division to Citicorp Venture Capital,
Ltd. in early 1999. As part of the sale, Sears received a 19% equity interest
in the new Homelife Corporation. Additionally, the Company assigned certain
store leases to Homelife in connection with the sale. Subsequently, the
Company guaranteed certain indebtedness related to the new Homelife
Corporation, and also obtained secured interests in certain Homelife assets.
Homelife ceased operations and subsequently filed for Chapter 11 bankruptcy
protection on July 16, 2001. The Company recorded a pretax charge of $185
million in the second quarter of 2001 to reflect the Companys estimated
obligations and asset impairments relative to Homelife. The pretax charge
included an accrual for net future lease obligations of $150 million reduced by
estimated sublease income, early terminations and lease mitigation costs of $50
million; indebtedness guarantees, obligations to Homelife customers related to
unshipped product billed on the Sears card, and other costs of $69 million; and
write-offs of $16 million for logistics services previously provided to
Homelife. As of December 28, 2002, the Company has paid approximately $119
million relative to its Homelife obligations. While the timing of any
additional cash outlays related to these charges is uncertain, management does
not expect that such payments will have a material impact on the liquidity or
financial condition of the Company.

F - 21



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

Exide Battery Litigation Settlement

The Company reached a civil settlement agreement in December 2001 with the U.S.
Attorney for the Southern District of Illinois concluding an investigation into
the advertising of certain Company automotive batteries in 1994 and 1995 that
were manufactured by Exide Technologies. A pretax charge of $63 million was
recorded to reflect the Companys payment obligation to the government under
the terms of the settlement agreement.

Other

During 1999 and 2000, the Company made investments totaling $20 million in a
privately-held retail company specializing in home decorating products and
services. In 2001, the Company recorded a pretax charge of $20 million to
write-off its investment in this entity as it had ceased operations.

2000 Store Closures

In December 2000, the Company announced the planned closure of 87
underperforming stores consisting of
53 NTB, 30 Hardware and four Full-line stores (including two Sears Auto
Centers) and the termination of approximately 2,000 positions as a direct
result of the store closures. In connection with the store closings, the
Company recognized a pretax charge of $150 million in the fourth quarter of
2000 of which $59 million related to asset impairments, $17 million related to
goodwill impairment, $57 million related to lease and holding costs, $14
million related to inventory liquidation losses and $3 million related to
employee termination costs. Of the $150 million charge, $136 million was
recorded in Special Charges and Impairments and $14 million was recorded in
Cost of Sales.

The asset impairment charge related to the write-down of property and equipment
to fair value (less costs to sell and net of estimated salvage value). The
assets consisted primarily of land, abandoned leasehold improvements and
equipment used at the closed stores. As part of the asset impairment review
for the closed stores, the Company wrote-off the goodwill allocated to the
stores (on a pro rata basis using the relative fair values of the long-lived
assets at the acquisition date). The charge also provided a reserve for
incremental costs and contractual obligations for items such as estimated
future lease obligations net of sublease income, lease termination payments and
other facility exit costs incurred as a direct result of the store closures.
As a result of the store closings, certain inventory was written down to its
net realizable value. This resulted in a charge to cost of goods sold of $14
million. As of December 28, 2002, all 87 stores have been closed and all
affected employees have been terminated.

Impairment of Investment in Sears Termite and Pest Control (STPC)

During the fourth quarter of 2000, due to ongoing and anticipated operating
losses and based on estimated future cash flows, management determined that the
assets of Sears Termite and Pest Control were impaired and committed to a plan
to dispose of this business. Accordingly, the Company recorded a $115 million
charge to reflect the assets at fair value, less related costs to dispose. On
October 1, 2001, the Company completed the sale of certain assets of STPC to
the ServiceMaster Company. Under the terms of the transaction, the Company
will provide certain transition services and may share in the cost of
remediating termite damage claims in excess of defined amounts, if any, for a
limited period of time. This transaction did not materially affect results of
operations or consolidated financial position or require adjustment to the 2000
special charge.

Following is a summary of the 2002 activity in the reserves established in
connection with the Companys restructuring initiatives:

F - 22



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

|                         |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |    | 
|------------------------ | --------------------------------------- | -------- | ------- | ------- | ---- | ---- | ------ | -------- | ---- | -------- | ------- | --- | - | ------- | --- | ---- | ------ |  | -- | -- | 
|                         |                                         |          | Ending  |         |      |      |        |          |      |          |         |     |   |         |     |      | Ending
|                         |                                         | Reserve  |         |         |      |      |        | Asset    |      |          |         |     |   | Reserve
|                         |                                         |          | Balance |         | 2002 |      | Write- |          | Cash |          | Balance
|millions                 |                                         | 12/29/01 |         | Charges |      | Down |        | Payments |      | 12/28/02
|                         |                                         |          |         |         |      |      |        |          |      |         
|Sears Canada             |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   
|                         | Employee termination costs              |          | $       |        |      |      | $      | 3        |      |          | $       |    |   |         | $   | (3   | )      |  | $  |   | 
|                         | Contractual obligations and other costs |          |         |        |      |      |        | 16       |      |          |         |    |   |         |     | (16  | )      |  |    |   | 
|                         | Asset impairments                       |          |         |        |      |      |        | 92       |      |          |         | (92 | ) |         |     |     |        |  |    |   | 
|                         |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   
|                         |                                         |          |        |         |      |      | 111    |          |      |          | (92     | )   |   |         | (19 | )    |        |  |   |   
|Productivity Initiatives |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   
|                         | Employee termination costs              |          |         | 92      |      |      |        |         |      |          |         |    |   |         |     | (69  | )      |  |    | 23 | 
|                         | Contractual obligations and other costs |          |         | 5       |      |      |        |         |      |          |         |    |   |         |     | (5   | )      |  |    |   | 
|                         |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   
|                         |                                         |          | 97      |         |      |      |       |          |      |          |        |     |   |         | (74 | )    |        |  | 23 |   
|Product Category Exits   |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   
|                         | Employee termination costs              |          |         | 7       |      |      |        |         |      |          |         |    |   |         |     | (6   | )      |  |    | 1  | 
|                         | Contractual obligations and other costs |          |         | 65      |      |      |        |         |      |          |         |    |   |         |     | (26  | )      |  |    | 39 | 
|                         |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   
|                         |                                         |          | 72      |         |      |      |       |          |      |          |        |     |   |         | (32 | )    |        |  | 40 |   
|2000 Store Closures      |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   
|                         | Lease and holding costs                 |          |         | 41      |      |      |        |         |      |          |         |    |   |         |     | (13  | )      |  |    | 28 | 
|                         |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   
|                         |                                         |          | 41      |         |      |      |       |          |      |          |        |     |   |         | (13 | )    |        |  | 28 |   
|                         |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   
|                         | Total                                   |          | $       | 210     |      |      | $      | 111      |      |          | $       | (92 | ) |         | $   | (138 | )      |  | $  | 91 | 
|                         |                                         |          |         |         |      |      |        |          |      |          |         |     |   |         |     |      |        |  |    |   

As of December 28, 2002 all restructuring activities have been substantially
completed. The reserve for employee termination costs will be paid out in the
first half of 2003. The remaining reserves will be paid out over several years
as they primarily relate to lease obligations and long-term product warranties.

NOTE 8  LEASES

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. Contingent rent is accrued
over the lease term, provided that the achievement of the specified sales level
that triggers the contingent rental is probable. Certain leases include
renewal or purchase options. Operating lease rentals were $474 million, $483
million and $409 million, including contingent rentals of $56 million, $59
million and $54 million in 2002, 2001 and 2000, respectively.

Minimum lease obligations, excluding taxes, insurance and other expenses
payable directly by the Company, for leases in effect as of December 28, 2002,
are as follows:

|                                        |  |         |           |  |  |   |      
|--------------------------------------- |  | ------- | --------- |  |  | - | -----
|                                        |  | Capital | Operating
|millions                                |  | Leases  | Leases   
|                                        |  |         |           | 
|2003                                    |  | $       | 76        |  |  | $ | 335  
|2004                                    |  |         | 72        |  |  |   | 290  
|2005                                    |  |         | 70        |  |  |   | 250  
|2006                                    |  |         | 69        |  |  |   | 208  
|2007                                    |  |         | 62        |  |  |   | 164  
|After 2007                              |  |         | 643       |  |  |   | 1,046
|                                        |  |         |           |  |  |   |      
|Total minimum payments                  |  |         | 992       |  |  | $ | 2,293
|                                        |  |         |           |  |  |   |      
|Less imputed interest                   |  |         | 534       |  |  |   |      
|                                        |  |         |           |  |  |   |      
|Present value of minimum lease payments |  |         | 458       |  |  |   |      
|Less current maturities                 |  |         | 23        |  |  |   |      
|                                        |  |         |           |  |  |   |      
|Long-term obligations                   |  | $       | 435       |  |  |   |      
|                                        |  |         |           |  |  |   |      

F - 23



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

NOTE 9  SHAREHOLDERS EQUITY

Dividend Payments

Under terms of indentures entered into in 1981 and thereafter, the Company
cannot take specified actions, including the declaration of cash dividends,
that would cause its unencumbered assets, as defined, to fall below 150% of its
liabilities, as defined. At December 28, 2002, approximately $8.0 billion
could be paid in dividends to shareholders under the most restrictive
indentures.

Share Repurchase Program

The Company repurchased shares in 2002, 2001 and 2000 under share repurchase
programs approved by the Board of Directors. As of December 28, 2002, the
Company had remaining authorization to repurchase $1.25 billion of shares by
December 31, 2004 under a $1.5 billion share repurchase plan approved by the
Board of Directors on December 12, 2001.

Comprehensive Income and Accumulated Other Comprehensive (Loss) Income

The following table shows the computation of comprehensive income:

|                                                                                |  |              |       |              |  |              |      |   |  |   |       |  
|------------------------------------------------------------------------------- |  | ------------ | ----- | ------------ |  | ------------ | ---- | - |  | - | ----- | -
|millions                                                                        |  | December 28, |       | December 29, |  | December 30,
|                                                                                |  | 2002         |       | 2001         |  | 2000        
|                                                                                |  |              |       |              |  |             
|Net income                                                                      |  | $            | 1,376 |              |  | $            | 735  |   |  | $ | 1,343 |  
|Other comprehensive income (loss):                                              |  |              |       |              |  |              |      |   |  |   |       |  
|Minimum
pension liability(1)                                                    |  |              | (246  | )            |  |              | (333 | ) |  |   | 63    |  
|Cumulative effect of a change in
accounting for derivatives, net of tax of $183 |  |              |      |              |  |              | (262 | ) |  |   |      |  
|Amounts amortized into interest expense from OCI (2)                            |  |              | 16    |              |  |              | 17   |   |  |   |      |  
|Change in fair value of cash flow hedges (3)                                    |  |              | (6    | )            |  |              | 34   |   |  |   |      |  
|Unrealized loss on investments (4)                                              |  |              |      |              |  |              | (1   | ) |  |   | (18   | )
|Foreign currency translation adjustments                                        |  |              | 11    |              |  |              | (37  | ) |  |   | (7    | )
|                                                                                |  |              |       |              |  |              |      |   |  |   |       |  
|Total accumulated other comprehensive (loss) income                             |  |              | (225  | )            |  |              | (582 | ) |  |   | 38    |  
|                                                                                |  |              |       |              |  |              |      |   |  |   |       |  
|Total comprehensive income                                                      |  | $            | 1,151 |              |  | $            | 153  |   |  | $ | 1,381 |  
|                                                                                |  |              |       |              |  |              |      |   |  |   |       |  



---



|(1) |  | Net of tax of $153 million, $184 million and $36 million for 2002, 2001 and 2000,
respectively.
|--- |  | -----------------------------------------------------------------------------------------------
|   
|(2) |  | Net of tax of $10 million and $9 million for 2002 and 2001, respectively.                      
|   
|(3) |  | Net of tax of $2 million and $22 million for 2002 and 2001, respectively.                      
|   
|(4) |  | Net of tax of $1 million and $10 million for 2001 and 2000, respectively.                      



---

The following table displays the components of accumulated other comprehensive
loss:

|                                               |  |      |        |      |  |      |      |   |  |   |      |  
|---------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ---- | - |  | - | ---- | -
|millions                                       |  | 2002 |        | 2001 |  | 2000
|                                               |  |      |        |      |  |     
|Accumulated derivative loss                    |  | $    | (201   | )    |  | $    | (211 | ) |  | $ |     |  
|Currency translation adjustments               |  |      | (144   | )    |  |      | (155 | ) |  |   | (118 | )
|Minimum pension liability, net of tax          |  |      | (711   | )    |  |      | (465 | ) |  |   | (132 | )
|Unrealized gain on securities held, net of tax |  |      |       |      |  |      |     |   |  |   | 1    |  
|                                               |  |      |        |      |  |      |      |   |  |   |      |  
|Accumulated other comprehensive loss           |  | $    | (1,056 | )    |  | $    | (831 | ) |  | $ | (249 | )
|                                               |  |      |        |      |  |      |      |   |  |   |      |  

F - 24



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

NOTE 10  BENEFIT PLANS

Expenses for retirement and savings-related benefit plans were as follows:

|                          |  |      |     |      |  |      |     |   |  |   |     |  
|------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|millions                  |  | 2002 |     | 2001 |  | 2000
|                          |  |      |     |      |  |     
|Sears 401(k) Savings Plan |  | $    | 26  |      |  | $    | 23  |   |  | $ | 29  |  
|Pension plans             |  |      | 70  |      |  |      | 68  |   |  |   | 116 |  
|Postretirement benefits   |  |      | (60 | )    |  |      | (65 | ) |  |   | (68 | )
|                          |  |      |     |      |  |      |     |   |  |   |     |  
|Total                     |  | $    | 36  |      |  | $    | 26  |   |  | $ | 77  |  
|                          |  |      |     |      |  |      |     |   |  |   |     |  

Sears 401(k) Savings Plan

Most domestic employees are eligible to become members of the Sears 401(k)
Savings Plan (the Plan). Under the terms of the Plan, the Company matches a
portion of employee contributions with Sears common shares. Per the Plan, the
Company match is 70% of eligible employee contributions. The Companys
matching contributions were $72 million, $76 million and $72 million in 2002,
2001 and 2000, respectively. Matching contributions were made at the end of
each calendar quarter, based on the quarter-end stock price.

The Plan includes an Employee Stock Ownership Plan (the ESOP) to prefund a
portion of the Companys anticipated contribution. The Company provided the
ESOP with a loan that was used to purchase Sears common shares in 1989. The
purchased shares represent deferred compensation expense, which is presented as
a reduction of shareholders equity and recognized as expense when the shares
are allocated to employees to fund the Company contribution. The per share
cost of Sears common shares purchased by the ESOP in 1989 was $15.27. The
Company uses the ESOP shares or cash to fund the Company contribution, which
thereby reduces expense. The Company contribution funded with ESOP shares was
$56 million, $76 million and $72 million in 2002, 2001 and 2000, respectively,
and the Company contribution funded with cash was $16 million in 2002.

The ESOP loan bears interest at 6.1% and is repaid from dividends on the ESOP
shares and additional cash payments provided by the Company. The Company has
contributed cash to the ESOP annually in the amount equal to the ESOPs
required interest and principal payments on the loan, less dividends received
on the ESOP shares. The cash payments amounted to $11, $33 and $118 million in
2002, 2001 and 2000, respectively. The balance of the ESOP loan was $16 and
$38 million at December 28, 2002 and December 29, 2001, respectively. Cash on
hand in the ESOP at December 28, 2002 was $3 million.

In 2002, the ESOP allocated 1.3 million shares to employees. At December 28,
2002, 23.2 million ESOP shares had been allocated and 2.7 million are available
for future allocation. All ESOP shares are considered outstanding in the
calculation of earnings per share.

Retirement Benefit Plans

Certain domestic full-time and 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. The Company uses October 31 as the measurement date for determining
pension plan assets and obligations.

F - 25



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

In addition to providing pension benefits, the Company provides certain medical
and life insurance benefits for retired employees. Employees may become
eligible for medical benefits if they retire in accordance with the Companys
established retirement policy and are continuously insured under the Companys
group medical 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. Generally, the Companys
share of these benefit costs will be capped at the Company contribution
calculated during the year of retirement. The Companys postretirement benefit
plans are not funded. The Company has the right to modify or terminate these
plans.

The change in benefit obligation, change in plan assets, funded status and
reconciliation to amounts recognized in the consolidated balance sheets are as
follows:

|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |       |      |  
|--------------------------------------------------- | ----------------------------------------- | --------------------------------- | ------ | ---------------- | ---- | ----- | ----- | ----- | ---- | ---- | --- | --- | ---- | - | --- | ---- | --- | - | ------ | ----- | ---- | - | ----- | ----- | ---- | -
|                                                    |                                           |                                   |        | Pension Benefits
|                                                    |                                           |                                   |        |                 
|millions                                            |                                           | Domestic                          |        | Sears Canada     |      | Total
|                                                    |                                           |                                   |        | 2002             |      |       | 2001  |       |      | 2002 |     |     | 2001 |   |     | 2002 |     |   | 2001  
|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |       
|Change in projected benefit obligation              |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|Beginning balance                                   |                                           | $                                 | 2,421  |                  |      | $     | 2,197 |       |      | $    | 670 |     |      | $ | 620 |      |     | $ | 3,091  |       |      | $ | 2,817 |      
|                                                    |                                           | Benefits earned during the period |        |                  | 69   |       |       |       | 54   |      |     |     | 20   |   |     |      | 14  |   |        |       | 89   |   |       |       | 68   |  
|                                                    |                                           | Interest cost                     |        |                  | 154  |       |       |       | 172  |      |     |     | 42   |   |     |      | 39  |   |        |       | 196  |   |       |       | 211  |  
|                                                    |                                           | Actuarial loss (gain)             |        |                  | 141  |       |       |       | 210  |      |     |     | (78  | ) |     |      | 56  |   |        |       | 63   |   |       |       | 266  |  
|                                                    |                                           | Benefits paid                     |        |                  | (280 | )     |       |       | (204 | )    |     |     | (36  | ) |     |      | (32 | ) |        |       | (316 | ) |       |       | (236 | )
|                                                    |                                           | Foreign exchange impact           |        |                  |     |       |       |       |     |      |     |     | 13   |   |     |      | (38 | ) |        |       | 13   |   |       |       | (38  | )
|                                                    |                                           | Other                             |        |                  | (5   | )     |       |       | (8   | )    |     |     | 11   |   |     |      | 11  |   |        |       | 6    |   |       |       | 3    |  
|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|Ending balance                                      |                                           | $                                 | 2,500  |                  |      | $     | 2,421 |       |      | $    | 642 |     |      | $ | 670 |      |     | $ | 3,142  |       |      | $ | 3,091 |      
|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|Change in assets at fair value:                     |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|Beginning balance                                   |                                           | $                                 | 1,586  |                  |      | $     | 1,873 |       |      | $    | 763 |     |      | $ | 916 |      |     | $ | 2,349  |       |      | $ | 2,789 |      
|                                                    |                                           | Actual return on plan assets      |        |                  | (107 | )     |       |       | (191 | )    |     |     | (40  | ) |     |      | (80 | ) |        |       | (147 | ) |       |       | (271 | )
|                                                    |                                           | Company contributions             |        |                  | 187  |       |       |       | 116  |      |     |     | 1    |   |     |      |    |   |        |       | 188  |   |       |       | 116  |  
|                                                    |                                           | Benefits paid                     |        |                  | (280 | )     |       |       | (204 | )    |     |     | (36  | ) |     |      | (32 | ) |        |       | (316 | ) |       |       | (236 | )
|                                                    |                                           | Foreign exchange impact           |        |                  |     |       |       |       |     |      |     |     | 15   |   |     |      | (57 | ) |        |       | 15   |   |       |       | (57  | )
|                                                    |                                           | Other                             |        |                  | (5   | )     |       |       | (8   | )    |     |     | 16   |   |     |      | 16  |   |        |       | 11   |   |       |       | 8    |  
|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|                                                    | Ending balance                            |                                   | $      | 1,381            |      |       | $     | 1,586 |      |      | $   | 719 |      |   | $   | 763  |     |   | $      | 2,100 |      |   | $     | 2,349 |     
|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|Funded status of the plans                          |                                           | $                                 | (1,119 | )                |      | $     | (835  | )     |      | $    | 77  |     |      | $ | 93  |      |     | $ | (1,042 | )     |      | $ | (742  | )    
|Unrecognized net loss                               |                                           |                                   | 1,303  |                  |      |       | 908   |       |      |      | 66  |     |      |   | 45  |      |     |   | 1,369  |       |      |   | 953   |      
|Unrecognized prior service (benefit) cost           |                                           |                                   | (29    | )                |      |       | (38   | )     |      |      | 19  |     |      |   | 23  |      |     |   | (10    | )     |      |   | (15   | )    
|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|Net amount recognized                               |                                           | $                                 | 155    |                  |      | $     | 35    |       |      | $    | 162 |     |      | $ | 161 |      |     | $ | 317    |       |      | $ | 196   |      
|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|Amounts recognized in the
balance sheet consist of: |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|                                                    | Prepaid benefit cost                      |                                   | $      |                 |      |       | $     |      |      |      | $   | 162 |      |   | $   | 161  |     |   | $      | 162   |      |   | $     | 161   |     
|                                                    | Accrued benefit liability                 |                                   |        | (965             | )    |       |       | (685  | )    |      |     |    |      |   |     |     |     |   |        | (965  | )    |   |       | (685  | )   
|                                                    | Accumulated other
comprehensive income(1) |                                   |        | 1,120            |      |       |       | 720   |      |      |     |    |      |   |     |     |     |   |        | 1,120 |      |   |       | 720   |     
|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      
|                                                    | Net amount recognized                     |                                   | $      | 155              |      |       | $     | 35    |      |      | $   | 162 |      |   | $   | 161  |     |   | $      | 317   |      |   | $     | 196   |     
|                                                    |                                           |                                   |        |                  |      |       |       |       |      |      |     |     |      |   |     |      |     |   |        |       |      |   |       |      




|(1) |  | The minimum pension liability, net of tax, was $711 million and $465 million as of
December 28, 2002 and December 29, 2001, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  |                                                                                                                                          




F - 26



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

|                                                    |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |        |      |  
|--------------------------------------------------- | ------------------------- | --------------------------------- | ----------------------- | ------------ | ---- | ----- | ------ | ------ | ---- | ---- | ---- | ---- | -- | ---- | --- | --- | -- | - | ------ | ------ | ---- | - | ------ | ------ | ---- | -
|                                                    |                           |                                   | Postretirement Benefits
|                                                    |                           |                                   |                         |             
|millions                                            |                           | Domestic                          |                         | Sears Canada |      | Total
|                                                    |                           |                                   |                         | 2002         |      | 2001  |        | 2002   |      | 2001 |      | 2002 |    | 2001
|                                                    |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |     
|Change in projected benefit obligation:             |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |        |     
|                                                    | Beginning balance         |                                   | $                       | 814          |      |       | $      | 831    |      |      | $    | 91   |    |      | $   | 65  |    |   | $      | 905    |      |   | $      | 896    |     
|                                                    |                           | Benefits earned during the period |                         |              | 4    |       |        |        | 2    |      |      |      | 3  |      |     |     | 2  |   |        |        | 7    |   |        |        | 4    |  
|                                                    |                           | Interest cost                     |                         |              | 45   |       |        |        | 55   |      |      |      | 12 |      |     |     | 13 |   |        |        | 57   |   |        |        | 68   |  
|                                                    |                           | Actuarial loss                    |                         |              | 47   |       |        |        | 75   |      |      |      | 2  |      |     |     | 16 |   |        |        | 49   |   |        |        | 91   |  
|                                                    |                           | Benefits paid                     |                         |              | (139 | )     |        |        | (149 | )    |      |      | (8 | )    |     |     | (1 | ) |        |        | (147 | ) |        |        | (150 | )
|                                                    |                           | Foreign exchange impact           |                         |              |     |       |        |        |     |      |      |      | 2  |      |     |     | (4 | ) |        |        | 2    |   |        |        | (4   | )
|                                                    |                           | Other                             |                         |              | 31   |       |        |        |     |      |      |      |   |      |     |     |   |   |        |        | 31   |   |        |        |     |  
|                                                    |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |       
|                                                    | Ending balance            |                                   | $                       | 802          |      |       | $      | 814    |      |      | $    | 102  |    |      | $   | 91  |    |   | $      | 904    |      |   | $      | 905    |     
|                                                    |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |       
|Change in plan assets at fair value:                |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |       
|                                                    | Beginning balance         |                                   | $                       |             |      |       | $      |       |      |      | $    |     |    |      | $   |    |    |   | $      |       |      |   | $      |       |     
|                                                    |                           | Company contributions             |                         |              | 139  |       |        |        | 149  |      |      |      | 8  |      |     |     | 1  |   |        |        | 147  |   |        |        | 150  |  
|                                                    |                           | Benefits paid                     |                         |              | (139 | )     |        |        | (149 | )    |      |      | (8 | )    |     |     | (1 | ) |        |        | (147 | ) |        |        | (150 | )
|                                                    |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |       
|                                                    | Ending balance            |                                   | $                       |             |      |       | $      |       |      |      | $    |     |    |      | $   |    |    |   | $      |       |      |   | $      |       |     
|                                                    |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |       
|Funded status of the plans                          |                           | $                                 | (802                    | )            |      | $     | (814   | )      |      | $    | (102 | )    |    | $    | (91 | )   |    | $ | (904   | )      |      | $ | (905   | )     
|Unrecognized net (gain) loss                        |                           |                                   | (322                    | )            |      |       | (391   | )      |      |      | 34   |      |    |      | 27  |     |    |   | (288   | )      |      |   | (364   | )     
|Unrecognized prior service benefit                  |                           |                                   | (334                    | )            |      |       | (463   | )      |      |      |     |      |    |      |    |     |    |   | (334   | )      |      |   | (463   | )     
|                                                    |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |       
|Net amount recognized                               |                           | $                                 | (1,458                  | )            |      | $     | (1,668 | )      |      | $    | (68  | )    |    | $    | (64 | )   |    | $ | (1,526 | )      |      | $ | (1,732 | )     
|                                                    |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |       
|Amounts recognized in the balance
sheet consist of: |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |       
|                                                    | Accrued benefit liability |                                   | $                       | (1,458       | )    |       | $      | (1,668 | )    |      | $    | (68  | )  |      | $   | (64 | )  |   | $      | (1,526 | )    |   | $      | (1,732 | )   
|                                                    |                           |                                   |                         |              |      |       |        |        |      |      |      |      |    |      |     |     |    |   |        |        |      |   |        |       

Weighted-average assumptions are as follows:

|                               |  |                  |      |                         |  |      |      |      |  |      |      |      |  |    |      |    |  |    |      |   |  |  |      |  
|------------------------------ |  | ---------------- | ---- | ----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | -- | ---- | -- |  | -- | ---- | - |  |  | ---- | -
|                               |  | Pension Benefits |      | Postretirement Benefits
|                               |  |                  |      |                        
|                               |  | 2002             |      | 2001                    |  | 2000 |      | 2002 |  | 2001 |      | 2000
|                               |  |                  |      |                         |  |      |      |      |  |      |      |     
|Discount rate                  |  |                  | 7.00 | %                       |  |      | 7.25 | %    |  |      | 8.25 | %    |  |    | 7.00 | %  |  |    | 7.25 | % |  |  | 8.25 | %
|Return on plan assets          |  |                  | 9.00 | %                       |  |      | 9.00 | %    |  |      | 9.50 | %    |  | NA |      | NA |  | NA
|Rate of compensation increases |  |                  | 4.25 | %                       |  |      | 4.00 | %    |  |      | 4.00 | %    |  | NA |      | NA |  | NA

The components of net periodic benefit cost are as follows:

|                                         |                                                        |      |                  |      |                         |      |   |      |   |      |   |      |   |  |   |     |   |  |   |      |   |  |   |      |  
|---------------------------------------- | ------------------------------------------------------ | ---- | ---------------- | ---- | ----------------------- | ---- | - | ---- | - | ---- | - | ---- | - |  | - | --- | - |  | - | ---- | - |  | - | ---- | -
|                                         |                                                        |      | Pension Benefits |      | Postretirement Benefits
|                                         |                                                        |      |                  |      |                        
|millions                                 |                                                        | 2002 |                  | 2001 |                         | 2000 |   | 2002 |   | 2001 |   | 2000
|                                         |                                                        |      |                  |      |                         |      |   |      |   |      |   |     
|Components of net periodic benefit cost: |                                                        |      |                  |      |                         |      |   |      |   |      |   |      |   |  |   |     |   |  |   |      |   |  |   |     
|                                         | Benefits earned during the period                      |      | $                | 89   |                         |      | $ | 68   |   |      | $ | 83   |   |  | $ | 7   |   |  | $ | 4    |   |  | $ | 5    |  
|                                         | Interest cost                                          |      |                  | 196  |                         |      |   | 211  |   |      |   | 216  |   |  |   | 57  |   |  |   | 68   |   |  |   | 58   |  
|                                         | Expected return on plan assets                         |      |                  | (236 | )                       |      |   | (221 | ) |      |   | (216 | ) |  |   |    |   |  |   |     |   |  |   |     |  
|                                         | Amortization of unrecognized net prior service
benefit |      |                  | (4   | )                       |      |   | (4   | ) |      |   | (4   | ) |  |   | (97 | ) |  |   | (102 | ) |  |   | (102 | )
|                                         | Recognized net loss (gain)                             |      |                  | 29   |                         |      |   | 18   |   |      |   | 42   |   |  |   | (27 | ) |  |   | (35  | ) |  |   | (29  | )
|                                         | Other                                                  |      |                  | (4   | )                       |      |   | (4   | ) |      |   | (5   | ) |  |   |    |   |  |   |     |   |  |   |     |  
|                                         |                                                        |      |                  |      |                         |      |   |      |   |      |   |      |   |  |   |     |   |  |   |      |   |  |   |     
|                                         | Net periodic benefit cost (benefit)                    |      | $                | 70   |                         |      | $ | 68   |   |      | $ | 116  |   |  | $ | (60 | ) |  | $ | (65  | ) |  | $ | (68  | )
|                                         |                                                        |      |                  |      |                         |      |   |      |   |      |   |      |   |  |   |     |   |  |   |      |   |  |   |     

For 2003 and beyond, the weighted-average health care cost trend rates used in
measuring the postretirement benefit expense are a 9.0% trend rate in 2003 to
an ultimate trend rate of 5.0% in 2009 for pre-65 retirees, and a 12.5% trend
rate in 2003 to an ultimate trend rate of 6.5% in 2009 for post-65 retirees. A
100 basis point change

F - 27



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

in the assumed health care cost trend rate would have the following effects on
the postretirement liability:

|                                                     |  |                |    |                |  |   |     |  
|---------------------------------------------------- |  | -------------- | -- | -------------- |  | - | --- | -
|                                                     |  | 100 Basis      |    | 100 Basis     
|millions                                             |  | Point Increase |    | Point Decrease
|                                                     |  |                |    |               
|Effect on total service and interest cost components |  | $              | 3  |                |  | $ | (2  | )
|Effect on postretirement benefit obligation          |  | $              | 20 |                |  | $ | (17 | )

NOTE 11 - STOCK-BASED COMPENSATION

Stock Option Plans

Options to purchase common shares of the Company have been granted to employees
under various plans at prices not less than the fair market value of the shares
on the dates the options were granted. Generally, options vest over a three-
or four-year period and become exercisable either in equal, annual installments
over the vesting period, or at the end of the vesting period. Options
generally expire in 10 years.

In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the assumptions listed below:

|                         |  |         |      |         |  |         |      |   |  |  |      |  
|------------------------ |  | ------- | ---- | ------- |  | ------- | ---- | - |  |  | ---- | -
|                         |  | 2002    |      | 2001    |  | 2000   
|                         |  |         |      |         |  |        
|Dividend yield           |  |         | 1.92 | %       |  |         | 1.60 | % |  |  | 1.60 | %
|Expected volatility      |  |         | 41   | %       |  |         | 31   | % |  |  | 31   | %
|Risk-free interest rate  |  |         | 4.75 | %       |  |         | 4.86 | % |  |  | 6.55 | %
|Expected life of options |  | 8 years |      | 8 years |  | 8 years

The Company had 0.9 million, 0.9 million and 1.1 million performance-based
options outstanding at the end of 2002, 2001 and 2000, respectively. These
options contain vesting provisions that require the Companys share price to
reach specified targets at specified intervals. Subject to the satisfaction of
the performance-based features, these performance-based options vest 50% in
2003, 25% in 2004 and 25% in 2005. The Company did not recognize compensation
expense in 2002, 2001 or 2000 related to these options because the exercise
price exceeded the Company share price at each year-end.

Changes in stock options are as follows (shares in thousands):

|                                              |                |  |        |        |       |   |           |       |       |  |        |        |           |   |       |       |  |  |           |        |  |   |       |       | 
|--------------------------------------------- | -------------- |  | ------ | ------ | ----- | - | --------- | ----- | ----- |  | ------ | ------ | --------- | - | ----- | ----- |  |  | --------- | ------ |  | - | ----- | ----- | 
|                                              |                |  | 2002   |        | 2001  |   | 2000     
|                                              |                |  |        |        |       |   |          
|                                              |                |  |        |        |       |   | Weighted- |       |       |  |        |        | Weighted- |   |       |       |  |  | Weighted-
|                                              |                |  |        |        |       |   | Average   |       |       |  |        |        | Average   |   |       |       |  |  | Average  
|                                              |                |  |        |        |       |   | Exercise  |       |       |  |        |        | Exercise  |   |       |       |  |  | Exercise 
|                                              |                |  | Shares |        | Price |   | Shares    |       | Price |  | Shares |        | Price    
|                                              |                |  |        |        |       |   |           |       |       |  |        |        |          
|Beginning balance                             |                |  | 32,578 |        |       | $ | 39.04     |       |       |  | 21,950 |        |           | $ | 38.42 |       |  |  | 18,526    |        |  | $ | 40.44 |      
|Granted                                       |                |  | 1,081  |        |       |   | 51.41     |       |       |  | 14,942 |        |           |   | 38.27 |       |  |  | 6,352     |        |  |   | 32.17 |      
|Exercised                                     |                |  | (3,414 | )      |       |   | 32.96     |       |       |  | (2,052 | )      |           |   | 22.74 |       |  |  | (854      | )      |  |   | 22.90 |      
|Canceled or expired                           |                |  | (3,367 | )      |       |   | 38.97     |       |       |  | (2,262 | )      |           |   | 42.32 |       |  |  | (2,074    | )      |  |   | 44.13 |      
|                                              |                |  |        |        |       |   |           |       |       |  |        |        |           |   |       |       |  |  |           |        |  |   |       |      
|                                              | Ending balance |  |        | 26,878 |       |   | $         | 40.32 |       |  |        | 32,578 |           |   | $     | 39.04 |  |  |           | 21,950 |  |   | $     | 38.42 | 
|                                              |                |  |        |        |       |   |           |       |       |  |        |        |           |   |       |       |  |  |           |        |  |   |       |      
|Reserved for future grant at year-end         |                |  | 17,381 |        |       |   |           |       |       |  | 15,755 |        |           |   |       |       |  |  | 15,566    |        |  |   |       |      
|Exercisable                                   |                |  | 9,855  |        |       | $ | 43.33     |       |       |  | 9,399  |        |           | $ | 41.90 |       |  |  | 9,020     |        |  | $ | 32.82 |      
|Fair value of options granted during
the year |                |  |        |        |       | $ | 23.05     |       |       |  |        |        |           | $ | 14.47 |       |  |  |           |        |  | $ | 12.98 |      

F - 28



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

The following table summarizes information about stock options outstanding at
December 28, 2002 (shares in thousands):

|                 |  |             |        |               |  |                     |     |                     |  |          |       |  |  |           |       |  |  |   |       | 
|---------------- |  | ----------- | ------ | ------------- |  | ------------------- | --- | ------------------- |  | -------- | ----- |  |  | --------- | ----- |  |  | - | ----- | 
|                 |  |             |        |               |  | Options Outstanding |     | Options Exercisable
|                 |  |             |        |               |  |                     |     |                    
|                 |  |             |        |               |  | Weighted-           |     |                     |  |          |       |  |  |           |       |  |  |  
|                 |  |             |        |               |  | Average             |     | Weighted-           |  |          |       |  |  | Weighted-
|Range of         |  | Number      |        | Remaining     |  | Average             |     | Number              |  | Average 
|Exercise         |  | Outstanding |        | Contractual   |  | Exercise            |     | Exercisable         |  | Exercise
|Prices           |  | at 12/28/02 |        | Life in Years |  | Price               |     | at 12/28/02         |  | Price   
|                 |  |             |        |               |  |                     |     |                     |  |         
|$10.00 to $20.00 |  |             | 83     |               |  |                     | 1.3 |                     |  | $        | 12.83 |  |  |           | 83    |  |  | $ | 12.83 | 
|20.01 to 30.00   |  |             | 1,646  |               |  |                     | 3.1 |                     |  |          | 24.46 |  |  |           | 1,518 |  |  |   | 24.24 | 
|30.01 to 40.00   |  |             | 16,675 |               |  |                     | 8.7 |                     |  |          | 36.39 |  |  |           | 1,822 |  |  |   | 35.43 | 
|40.01 to 50.00   |  |             | 4,177  |               |  |                     | 6.6 |                     |  |          | 43.24 |  |  |           | 3,881 |  |  |   | 43.19 | 
|50.01 to 64.00   |  |             | 4,297  |               |  |                     | 6.2 |                     |  |          | 59.32 |  |  |           | 2,551 |  |  |   | 61.55 | 
|                 |  |             |        |               |  |                     |     |                     |  |          |       |  |  |           |       |  |  |   |       | 
|$10.00 to $64.00 |  |             | 26,878 |               |  |                     | 7.6 |                     |  | $        | 40.32 |  |  |           | 9,855 |  |  | $ | 43.33 | 
|                 |  |             |        |               |  |                     |     |                     |  |          |       |  |  |           |       |  |  |   |       | 

Associate Stock Purchase Plan

The Companys Associate Stock Purchase Plan (ASPP) allows eligible employees
the right to elect to use up to 15% of their eligible compensation to purchase
the Companys common shares on a quarterly basis at the lower of 85% of the
fair market value at the beginning or end of each calendar quarter. The
maximum number of shares available under the ASPP is 10 million. As of
December 28, 2002, 3.5 million shares had been issued under the ASPP and 6.5
million shares remain available.

Performance Share Plan

In 2001, the Companys Board of Directors approved the initiation of a
performance share plan for a limited number of key executives. The level of
awards to be earned under the plan is contingent upon the attainment of
specific performance targets over a three-year period. Subject to the
satisfaction of the performance-based features, the awards vest 50% in 2004 and
50% in 2005. Performance award expense of approximately $5 million and $2
million was recorded in 2002 and 2001, respectively.

NOTE 12 - OTHER INCOME

Consolidated other income consists of:

|                                          |  |      |     |      |  |      |    |  |  |   |    | 
|----------------------------------------- |  | ---- | --- | ---- |  | ---- | -- |  |  | - | -- | 
|millions                                  |  | 2002 |     | 2001 |  | 2000
|                                          |  |      |     |      |  |     
|Gain on sales of property and investments |  | $    | 347 |      |  | $    | 21 |  |  | $ | 19 | 
|Equity income in unconsolidated companies |  |      | 20  |      |  |      | 12 |  |  |   | 17 | 
|Sears Mexico dividend                     |  |      | 5   |      |  |      | 12 |  |  |   |   | 
|                                          |  |      |     |      |  |      |    |  |  |   |    | 
|Total                                     |  | $    | 372 |      |  | $    | 45 |  |  | $ | 36 | 
|                                          |  |      |     |      |  |      |    |  |  |   |    | 

The gain on sales of property and investments for 2002 includes a gain of $336
million related to the sale of the Companys holdings in Advance Auto Parts,
Inc.

F - 29



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

NOTE 13 - INCOME TAXES

Income before income taxes, minority interests and cumulative effect of change
in accounting principle is as follows:

|         |  |      |       |      |  |      |       |  |  |   |       |  | 
|-------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  | 
|millions |  | 2002 |       | 2001 |  | 2000
|         |  |      |       |      |  |     
|Domestic |  | $    | 2,424 |      |  | $    | 1,125 |  |  | $ | 2,073 | 
|Foreign  |  |      | 29    |      |  |      | 98    |  |  |   | 150   | 
|         |  |      |       |      |  |      |       |  |  |   |       | 
|Total    |  | $    | 2,453 |      |  | $    | 1,223 |  |  | $ | 2,223 | 
|         |  |      |       |      |  |      |       |  |  |   |       | 

The provision for income tax expense consists of:

|                     |         |      |     |       |   |      |     |     |   |   |     |     |  
|-------------------- | ------- | ---- | --- | ----- | - | ---- | --- | --- | - | - | --- | --- | -
|millions             |         | 2002 |     | 2001  |   | 2000
|                     |         |      |     |       |   |     
|Current              |         |      |     |       |   |      |     |     |   |   |     |    
|                     | Federal |      | $   | 988   |   |      | $   | 300 |   |   | $   | 736 |  
|                     | State   |      |     | 2     |   |      |     | (4  | ) |   |     | 54  |  
|                     | Foreign |      |     | 39    |   |      |     | 25  |   |   |     | 15  |  
|                     |         |      |     |       |   |      |     |     |   |   |     |    
|                     | Total   |      |     | 1,029 |   |      |     | 321 |   |   |     | 805 |  
|                     |         |      |     |       |   |      |     |     |   |   |     |    
|Deferred             |         |      |     |       |   |      |     |     |   |   |     |    
|                     | Federal |      |     | (167  | ) |      |     | 88  |   |   |     | (4  | )
|                     | State   |      |     | 32    |   |      |     | 32  |   |   |     | 3   |  
|                     | Foreign |      |     | (36   | ) |      |     | 26  |   |   |     | 27  |  
|                     |         |      |     |       |   |      |     |     |   |   |     |    
|                     | Total   |      |     | (171  | ) |      |     | 146 |   |   |     | 26  |  
|                     |         |      |     |       |   |      |     |     |   |   |     |    
|Income tax provision |         | $    | 858 |       |   | $    | 467 |     |   | $ | 831 |    
|                     |         |      |     |       |   |      |     |     |   |   |     |    

A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:

|                                               |  |      |      |      |  |      |      |   |  |  |      |  
|---------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                               |  | 2002 |      | 2001 |  | 2000
|                                               |  |      |      |      |  |     
|Statutory federal rate                         |  |      | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|State income taxes, net of federal tax benefit |  |      | 0.9  |      |  |      | 1.5  |   |  |  | 1.7  |  
|Sears Canada deferred tax asset revaluation    |  |      | (0.8 | )    |  |      | 1.9  |   |  |  |     |  
|Other                                          |  |      | (0.1 | )    |  |      | (0.2 | ) |  |  | 0.7  |  
|                                               |  |      |      |      |  |      |      |   |  |  |      |  
|Effective income tax rate                      |  |      | 35.0 | %    |  |      | 38.2 | % |  |  | 37.4 | %
|                                               |  |      |      |      |  |      |      |   |  |  |      |  

The major components of deferred tax assets and liabilities is as follow:

|                               |                                      |      |       |      |  |   |       |     | 
|------------------------------ | ------------------------------------ | ---- | ----- | ---- |  | - | ----- | --- | 
|millions                       |                                      | 2002 |       | 2001
|                               |                                      |      |       |     
|Deferred tax assets:           |                                      |      |       |      |  |   |       |    
|                               | Unearned service contract income     |      | $     | 414  |  |   | $     | 506 | 
|                               | Allowance for uncollectible accounts |      |       | 646  |  |   |       | 454 | 
|                               | State income taxes                   |      |       | 61   |  |   |       | 150 | 
|                               | Postretirement benefit liability     |      |       | 599  |  |   |       | 732 | 
|                               | Minimum pension liability            |      |       | 417  |  |   |       | 258 | 
|                               | Net operating loss carryforward      |      |       | 93   |  |   |       | 115 | 
|                               | Special charges and impairments      |      |       | 90   |  |   |       | 117 | 
|                               | Other deferred tax assets            |      |       | 544  |  |   |       | 580 | 
|                               |                                      |      |       |      |  |   |       |    
|Total deferred tax assets      |                                      |      | 2,864 |      |  |   | 2,912 |    
|                               |                                      |      |       |      |  |   |       |    
|Deferred tax liabilities:      |                                      |      |       |      |  |   |       |    
|                               | Property and equipment               |      |       | 293  |  |   |       | 361 | 
|                               | Prepaid pension                      |      |       | 172  |  |   |       | 101 | 
|                               | LIFO                                 |      |       | 67   |  |   |       | 84  | 
|                               | Deferred gain                        |      |       | 236  |  |   |       | 313 | 
|                               | Deferred revenue                     |      |       | 356  |  |   |       | 335 | 
|                               | Other deferred tax liabilities       |      |       | 257  |  |   |       | 445 | 
|                               |                                      |      |       |      |  |   |       |    
|Total deferred tax liabilities |                                      |      | 1,381 |      |  |   | 1,639 |    
|                               |                                      |      |       |      |  |   |       |    
|Net deferred tax asset         |                                      | $    | 1,483 |      |  | $ | 1,273 |    
|                               |                                      |      |       |      |  |   |       |    

F - 30



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

Management believes that the realization of the deferred tax assets is more
likely than not, based on the expectation that the Company will generate the
necessary taxable income in future periods and, accordingly, no valuation
reserve has been provided. Tax benefits from loss carryforwards will expire by
year-end 2009.

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 $429 million at December 28, 2002.
If these earnings were to be remitted, taxes of $55 million would be due.

Income taxes of $918 million, $341 million and $868 million were paid in 2002,
2001 and 2000, respectively.

NOTE 14 - EARNINGS PER SHARE

The following table sets forth the computations of basic and diluted earnings
per share:

|                                                        |  |      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|millions, except per
share data                         |  | 2002 |       | 2001 |  | 2000
|                                                        |  |      |       |      |  |     
|Net income (1)                                          |  | $    | 1,376 |      |  | $    | 735   |  |  | $ | 1,343 | 
|Average common shares outstanding                       |  |      | 317.4 |      |  |      | 326.4 |  |  |   | 345.1 | 
|                                                        |  |      |       |      |  |      |       |  |  |   |       | 
|Earnings per share  basic                              |  | $    | 4.34  |      |  | $    | 2.25  |  |  | $ | 3.89  | 
|Dilutive effect of stock options                        |  |      | 3.3   |      |  |      | 2.1   |  |  |   | 1.2   | 
|Average common and common equivalent shares outstanding |  |      | 320.7 |      |  |      | 328.5 |  |  |   | 346.3 | 
|                                                        |  |      |       |      |  |      |       |  |  |   |       | 
|Earnings per share  diluted                            |  | $    | 4.29  |      |  | $    | 2.24  |  |  | $ | 3.88  | 



---

| |  | (1) Net income is the same for purposes of calculating basic and diluted EPS.
| |  | -----------------------------------------------------------------------------




The following table sets forth the computations of basic and diluted earnings
per share before cumulative effect of changes in accounting:

|                                                                           |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|millions, except per
share data                                            |  | 2002 |       | 2001 |  | 2000
|                                                                           |  |      |       |      |  |     
|Income before cumulative effect of accounting change (1)                   |  | $    | 1,584 |      |  | $    | 735   |  |  | $ | 1,343 | 
|Average common shares outstanding                                          |  |      | 317.4 |      |  |      | 326.4 |  |  |   | 345.1 | 
|                                                                           |  |      |       |      |  |      |       |  |  |   |       | 
|Earnings per share  basic                                                 |  | $    | 4.99  |      |  | $    | 2.25  |  |  | $ | 3.89  | 
|Dilutive effect of stock options                                           |  |      | 3.3   |      |  |      | 2.1   |  |  |   | 1.2   | 
|Average common and common equivalent shares outstanding                    |  |      | 320.7 |      |  |      | 328.5 |  |  |   | 346.3 | 
|                                                                           |  |      |       |      |  |      |       |  |  |   |       | 
|Earnings per share before cumulative effect of
accounting change  diluted |  | $    | 4.94  |      |  | $    | 2.24  |  |  | $ | 3.88  | 




| |  | (1) Income before cumulative of accounting change for goodwill is the same for purposes of
calculating basic and diluted EPS.
| |  | -----------------------------------------------------------------------------------------------------------------------------




In each period, certain options were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive. At December 28,
2002, December 29, 2001 and December 30, 2000, options to purchase 5.8 million,
6.5 million and 11.3 million common shares at prices ranging from $45 to $64,
$40 to $64 and $33 to $64 per share were excluded from the 2002, 2001 and 2000
calculations, respectively.

F - 31



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

NOTE 15 - LEGAL PROCEEDINGS

Pending against the Company and certain of its officers and directors are a
number of lawsuits, described below, that relate to the credit card business
and public statements about it. The Company believes that all of these claims
lack merit and is defending against them vigorously.

On October 18, 2002, a lawsuit was filed in the United States District Court
for the Northern District of Illinois against the Company and certain current
and former officers alleging that certain public announcements by the Company
concerning its credit card business violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
Additional lawsuits of the same tenor followed; with one exception, which is
pending in the United States District Court for the Northern District of
California, these cases are pending in the Northern District of Illinois. The
plaintiffs purport to represent classes of shareholders who purchased the
Companys common shares between January 17, 2002, and October 17, 2002. The
Northern District of Illinois actions are being consolidated into a single
class action.

On November 15, 2002, two lawsuits were filed in the United States District
Court for the Northern District of Illinois against the Company, certain
officers and directors, and alleged fiduciaries of Sears 401(k) Savings Plan
(the Plan), seeking damages and equitable relief under the Employee
Retirement Income Security Act (ERISA). The plaintiffs purport to represent
participants and beneficiaries of the Plan, and allege breaches of fiduciary
duties under ERISA in connection with the Plans investment in the Companys
common shares and alleged communications made to Plan participants regarding
the Companys financial condition. A third complaint was filed on December 16,
2002, making substantially the same claims. These actions have been
consolidated into a single class action.

On October 23, 2002, a purported derivative suit was filed in the Supreme Court
of the State of New York against the Company (as a nominal defendant) and
certain current and former directors seeking damages on behalf of the Company.
The complaint purports to allege a breach of fiduciary duty by the directors
with respect to the Companys management of its credit business. The Companys
motion to dismiss is currently pending. Two like suits were subsequently filed
in the Circuit Court of Cook County, Illinois, and a third was filed in the
United States District Court for the Northern District of Illinois. Motions
have been or will be made to dismiss these actions, or, in the alternative, to
stay them, pending disposition of the action in New York.

The Company is subject to various other legal and governmental proceedings,
many involving litigation incidental to the businesses. Some matters contain
class action allegations, environmental and asbestos exposure allegations and
other consumer based claims that involve compensatory, punitive or 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 management of the Company after consulting with legal counsel and
taking into account insurance and reserves, the ultimate liability is not
expected to have a material effect on annual results of operations, financial
position, liquidity or capital resources of the Company.

NOTE 16 - SUMMARY OF SEGMENT DATA

As of December 28, 2002, the Company organized its business into three domestic
segments, Retail and Related Services, Credit and Financial Products and
Corporate and Other, and one international segment, Sears Canada.

The Retail and Related Services segment consists of merchandise sales and
related services, including service contracts, delivery and product
installation and repair services. It includes all Sears selling channels,
including Specialty and Full-line Stores as well as Direct to Customer
operations which includes online, catalogs, clubs and services and Lands End
online and catalog business.

F - 32



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

The Credit and Financial Products segment manages the Companys portfolio of
Sears Card and MasterCard receivables. Sears Card receivables arise primarily
from purchases of merchandise and services from domestic operations, whereas,
MasterCard is widely accepted by merchants outside the Company. This segment
also includes related financial products, such as credit protection and
insurance products.

The Corporate and Other segment includes activities that are of an overall
holding company nature primarily consisting of administrative activities. This
segment also includes Home Improvement Services such as siding and windows and
pest control. The pest control business was sold in 2001.

The Sears Canada segment includes similar retail, credit and corporate
operations conducted by Sears Canada Inc., a 54.4% owned subsidiary.

These businesses have been aggregated into their respective reportable segments
based on the management reporting structure and their similar economic
characteristics, customers and distribution channels. No single product or
service accounts for a significant percentage of the Companys consolidated
revenue.

External revenues and expenses are allocated between the applicable segments.
For zero-percent financing promotions in which customers receive free
financing, Retail and Related Services reimburses Credit and Financial Products
over the life of the financing period at a 10% annual rate. The cost is
reported as selling expense by Retail and Related Services and an offsetting
benefit is recognized by Credit and Financial Products.

The domestic segments participate in a centralized funding program. Interest
expense is allocated to the Credit and Financial Products segment based on its
funding requirements. Funding includes debt reflected on the balance sheet and
investor certificates related to credit card receivables transferred to trusts
through securitizations. The remainder of net domestic interest expense is
reported in the Retail and Related Services segment.

The Companys segments are evaluated on a pretax basis, and a stand-alone
income tax provision is not calculated for the individual segments. The
Company includes its deferred income taxes within the Corporate and Other
segment. The Company excludes the impact of securitization income and
noncomparable items from its analysis of segment results. The Company defines
noncomparable items as transactions that are related to the implementation of
special initiatives of the Company (generally special changes and impairments);
unusual or infrequent in nature (e.g., significant one-time transactions
gains/losses unrelated to core operations); or related changes in accounting.
The other accounting policies of the segments are substantially the same as
those described in the Companys summary of significant accounting policies
footnote.

F - 33



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

2002

|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |     |        |        |  |        |  | 
|----------------------- | -------------------------------------- | -------- | ------------------------ | -------- |  | ---------- | ------ | ---------- |  | --------- | ----- | ------ |  | ----- | ----- | ----- |  | -------- | ------ | ------- |  | ------- | - | -------- |  | ----------------- | ---- | --- |  | --- | ------ | ------ |  | ------ |  | 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  | Reconciling Items |      |     |  |    
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |    
|                        |                                        |          |                          |          |  | Retail and |        | Credit and |  | Corporate |       |        |  |       |       |       |  |          |        | Securi- |  | Noncom- |   | Consoli-
|                        |                                        |          |                          |          |  | Related    |        | Financial  |  | and       |       | Sears  |  |       |       |       |  | tization |        | parable |  | dated  
|millions                |                                        | Services |                          | Products |  | Other      |        | Canada     |  | Total     |       | Impact |  | Items |       | GAAP 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |      
|Revenues                |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |     |        |       
|                        | Merchandise sales and services         |          | $                        | 31,459   |  |            | $      |           |  |           | $     | 326    |  |       | $     | 3,913 |  |          | $      | 35,698  |  |         | $ |         |  |                   | $    |    |  |     | $      | 35,698 | 
|                        | Credit and financial products
revenues |          |                          |         |  |            |        | 5,392      |  |           |       |       |  |       |       | 276   |  |          |        | 5,668   |  |         |   |         |  |                   |      |    |  |     |        | 5,668  | 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |     |        |        | 
|Total revenues          |                                        |          | 31,459                   |          |  |            | 5,392  |            |  |           | 326   |        |  |       | 4,189 |       |  |          | 41,366 |         |  |         |  |          |  |                   |     |     |  |     | 41,366 |       
|Costs and expenses      |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |     |        |       
|                        | Cost of sales, buying and
occupancy    |          |                          | 22,743   |  |            |        |           |  |           |       | 121    |  |       |       | 2,782 |  |          |        | 25,646  |  |         |   |         |  |                   |      |    |  |     |        | 25,646 | 
|                        | Selling and administrative             |          |                          | 6,816    |  |            |        | 955        |  |           |       | 442    |  |       |       | 1,036 |  |          |        | 9,249   |  |         |   |         |  |                   |      |    |  |     |        | 9,249  | 
|                        | Provision for uncollectible
accounts   |          |                          |         |  |            |        | 1,903      |  |           |       |       |  |       |       | 58    |  |          |        | 1,961   |  |         |   |         |  |                   |      | 300 |  |     |        | 2,261  | 
|                        | Depreciation and amortization          |          |                          | 710      |  |            |        | 18         |  |           |       | 55     |  |       |       | 92    |  |          |        | 875     |  |         |   |         |  |                   |      |    |  |     |        | 875    | 
|                        | Interest                               |          |                          | 35       |  |            |        | 1,014      |  |           |       |       |  |       |       | 94    |  |          |        | 1,143   |  |         |   |          |  |                   |      |    |  |     |        | 1,143  | 
|                        | Special charges and impairments        |          |                          |         |  |            |        |           |  |           |       |       |  |       |       |      |  |          |        |        |  |         |   |         |  |                   |      | 111 |  |     |        | 111    | 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |     |        |        | 
|                        |                                        |          | Total costs and expenses |          |  | 30,304     |        |            |  | 3,890     |       |        |  | 618   |       |       |  | 4,062    |        |         |  | 38,874  |   |          |  |                  |      |     |  | 411 |        |        |  | 39,285 | 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |     |        |        | 
|Operating income (loss) |                                        | $        | 1,155                    |          |  | $          | 1,502  |            |  | $         | (292  | )      |  | $     | 127   |       |  | $        | 2,492  |         |  | $       |  |          |  | $                 | (411 | )   |  | $   | 2,081  |       
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |     |        |       
|Total assets            |                                        | $        | 12,469                   |          |  | $          | 32,207 |            |  | $         | 2,252 |        |  | $     | 3,481 |       |  | $        | 50,409 |         |  |         |   |          |  |                   |      |     |  |     |        |       
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |     |        |       
|Capital expenditures    |                                        | $        | 894                      |          |  | $          | 6      |            |  | $         | 18    |        |  | $     | 117   |       |  | $        | 1,035  |         |  |         |   |          |  |                   |      |     |  |     |        |       
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |   |          |  |                   |      |     |  |     |        |       

2001

|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |       |        |        |  |        |  | 
|----------------------- | -------------------------------------- | -------- | ------------------------ | -------- |  | ---------- | ------ | ---------- |  | --------- | ----- | ------ |  | ----- | ----- | ----- |  | -------- | ------ | ------- |  | ------- | ---- | -------- | - | ----------------- | ------ | --- |  | ----- | ------ | ------ |  | ------ |  | 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   | Reconciling Items |        |     |  |      
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |      
|                        |                                        |          |                          |          |  | Retail and |        | Credit and |  | Corporate |       |        |  |       |       |       |  |          |        | Securi- |  | Noncom- |      | Consoli-
|                        |                                        |          |                          |          |  | Related    |        | Financial  |  | and       |       | Sears  |  |       |       |       |  | tization |        | parable |  | dated  
|millions                |                                        | Services |                          | Products |  | Other      |        | Canada     |  | Total     |       | Impact |  | Items |       | GAAP 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |      
|Revenues                |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |       |        |        | 
|                        | Merchandise sales and services         |          | $                        | 31,346   |  |            | $      |           |  |           | $     | 378    |  |       | $     | 4,031 |  |          | $      | 35,755  |  |         | $    |         |   |                   | $      |    |  |       | $      | 35,755 | 
|                        | Credit and financial products
revenues |          |                          |         |  |            |        | 5,216      |  |           |       |       |  |       |       | 294   |  |          |        | 5,510   |  |         |      | (275     | ) |                   |        |    |  |       |        | 5,235  | 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |       |        |        | 
|Total revenues          |                                        |          | 31,346                   |          |  |            | 5,216  |            |  |           | 378   |        |  |       | 4,325 |       |  |          | 41,265 |         |  |         | (275 | )        |   |                   |       |     |  |       | 40,990 |       
|Costs and expenses      |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |       |        |       
|                        | Cost of sales, buying and
occupancy    |          |                          | 23,081   |  |            |        |           |  |           |       | 159    |  |       |       | 2,994 |  |          |        | 26,234  |  |         |      |         |   |                   |        |    |  |       |        | 26,234 | 
|                        | Selling and administrative             |          |                          | 6,628    |  |            |        | 833        |  |           |       | 473    |  |       |       | 997   |  |          |        | 8,931   |  |         |      | (39      | ) |                   |        |    |  |       |        | 8,892  | 
|                        | Provision for uncollectible
accounts   |          |                          |         |  |            |        | 1,441      |  |           |       |       |  |       |       | 56    |  |          |        | 1,497   |  |         |      | (153     | ) |                   |        | 522 |  |       |        | 1,866  | 
|                        | Depreciation and amortization          |          |                          | 704      |  |            |        | 18         |  |           |       | 58     |  |       |       | 83    |  |          |        | 863     |  |         |      |         |   |                   |        |    |  |       |        | 863    | 
|                        | Interest                               |          |                          | 32       |  |            |        | 1,395      |  |           |       |       |  |       |       | 111   |  |          |        | 1,538   |  |         |      | (123     | ) |                   |        |    |  |       |        | 1,415  | 
|                        | Special charges and impairments        |          |                          |         |  |            |        |           |  |           |       |       |  |       |       |      |  |          |        |        |  |         |      |         |   |                   |        | 542 |  |       |        | 542    | 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |       |        |        | 
|                        |                                        |          | Total costs and expenses |          |  | 30,445     |        |            |  | 3,687     |       |        |  | 690   |       |       |  | 4,241    |        |         |  | 39,063  |      |          |   | (315              | )      |     |  | 1,064 |        |        |  | 39,812 | 
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |       |        |        | 
|Operating income (loss) |                                        | $        | 901                      |          |  | $          | 1,529  |            |  | $         | (312  | )      |  | $     | 84    |       |  | $        | 2,202  |         |  | $       | 40   |          |   | $                 | (1,064 | )   |  | $     | 1,178  |       
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |       |        |        | 
|Total assets            |                                        | $        | 10,674                   |          |  | $          | 27,900 |            |  | $         | 2,264 |        |  | $     | 3,479 |       |  | $        | 44,317 |         |  |         |      |          |   |                   |        |     |  |       |        |       
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |       |        |       
|Capital expenditures    |                                        | $        | 829                      |          |  | $          | 25     |            |  | $         | 185   |        |  | $     | 87    |       |  | $        | 1,126  |         |  |         |      |          |   |                   |        |     |  |       |        |       
|                        |                                        |          |                          |          |  |            |        |            |  |           |       |        |  |       |       |       |  |          |        |         |  |         |      |          |   |                   |        |     |  |       |        |       

F - 34



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

2000

|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     |  |     |        |        |  |        | 
|----------------------- | -------------------------------------- | -------- | ------------------------ | -------- | ---------- | ------ | ---------- | ------ | --------- | ----- | ----- | ------ |  | ----- | ----- | ----- | -------- | ----- | ------- | ------ | ------- | ------ | -------- | ---- | ----------------- | ------ | ---- | --- |  | --- | ------ | ------ |  | ------ | 
|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      | Reconciling Items |        |      |     | 
|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     | 
|                        |                                        |          |                          |          | Retail and |        | Credit and |        | Corporate |       |       |        |  |       |       |       |          |       | Securi- |        | Noncom- |        | Consoli-
|                        |                                        |          |                          |          | Related    |        | Financial  |        | and       |       | Sears |        |  |       |       |       | tization |       | parable |        | dated  
|millions                |                                        | Services |                          | Products |            | Other  |            | Canada |           | Total |       | Impact |  | Items |       | GAAP 
|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |      
|Revenues                |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     |  |     |        |       
|                        | Merchandise sales and services         |          | $                        | 31,935   |            |        | $          |       |           |       | $     | 353    |  |       | $     | 3,989 |          |       | $       | 36,277 |         |        | $        |     |                   |        | $    |    |  |     | $      | 36,277 | 
|                        | Credit and financial products
revenues |          |                          |         |            |        |            | 5,247  |           |       |       |       |  |       |       | 293   |          |       |         | 5,540  |         |        |          | (969 | )                 |        |      |    |  |     |        | 4,571  | 
|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     |  |     |        |        | 
|Total revenues          |                                        |          | 31,935                   |          |            |        | 5,247      |        |           |       | 353   |        |  |       | 4,282 |       |          |       | 41,817  |        |         |        | (969     | )    |                   |        |     |     |  |     | 40,848 |       
|                        | Costs and expenses                     |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     |  |     |        |        | 
|                        | Cost of sales, buying and
occupancy    |          |                          | 23,573   |            |        |            |       |           |       |       | 144    |  |       |       | 2,901 |          |       |         | 26,618 |         |        |          |     |                   |        |      | 14  |  |     |        | 26,632 | 
|                        | Selling and administrative             |          |                          | 6,687    |            |        |            | 810    |           |       |       | 407    |  |       |       | 1,038 |          |       |         | 8,942  |         |        |          | (135 | )                 |        |      |    |  |     |        | 8,807  | 
|                        | Provision for uncollectible
accounts   |          |                          |         |            |        |            | 1,358  |           |       |       |       |  |       |       | 48    |          |       |         | 1,406  |         |        |          | (522 | )                 |        |      |    |  |     |        | 884    | 
|                        | Depreciation and amortization          |          |                          | 710      |            |        |            | 16     |           |       |       | 53     |  |       |       | 60    |          |       |         | 839    |         |        |          |     |                   |        |      |    |  |     |        | 839    | 
|                        | Interest                               |          |                          | 25       |            |        |            | 1,550  |           |       |       |       |  |       |       | 113   |          |       |         | 1,688  |         |        |          | (440 | )                 |        |      |    |  |     |        | 1,248  | 
|                        | Special charges and impairments        |          |                          |         |            |        |            |       |           |       |       |       |  |       |       |      |          |       |         |       |         |        |          |     |                   |        |      | 251 |  |     |        | 251    | 
|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     |  |     |        |        | 
|                        |                                        |          | Total costs and expenses |          |            | 30,995 |            |        |           | 3,734 |       |        |  | 604   |       |       |          | 4,160 |         |        |         | 39,493 |          |      |                   | (1,097 | )    |     |  | 265 |        |        |  | 38,661 | 
|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     |  |     |        |        | 
|Operating income (loss) |                                        | $        | 940                      |          |            | $      | 1,513      |        |           | $     | (251  | )      |  | $     | 122   |       |          | $     | 2,324   |        |         | $      | 128      |      |                   | $      | (265 | )   |  | $   | 2,187  |       
|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     |  |     |        |        | 
|Total assets            |                                        | $        | 11,221                   |          |            | $      | 20,026     |        |           | $     | 1,936 |        |  | $     | 3,716 |       |          | $     | 36,899  |        |         |        |          |      |                   |        |      |     |  |     |        |       
|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     |  |     |        |       
|Capital expenditures    |                                        | $        | 802                      |          |            | $      | 11         |        |           | $     | 18    |        |  | $     | 253   |       |          | $     | 1,084   |       
|                        |                                        |          |                          |          |            |        |            |        |           |       |       |        |  |       |       |       |          |       |         |        |         |        |          |      |                   |        |      |     |  |     |        |       

NOTE 17 - IMPLEMENTATION OF NEW ACCOUNTING STANDARD

SFAS No. 145, Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, is effective for all financial
statements issued on or after May 15, 2002. SFAS 145, eliminates Statement 4,
which required all gains and losses from debt extinguishment to be aggregated,
and if material, classified as an extraordinary item, net of tax. Under SFAS
No. 145, debt extinguishments used as part of an entitys risk management
strategy do not meet the criteria for classification as extraordinary items.
The Companys adoption of SFAS No. 145 did not have an impact on the
consolidated financial statements.

Effective at the beginning of 2002, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets. Upon adoption of SFAS No. 142, goodwill
amortization ceased. Goodwill is now subject to fair-value based impairment
tests performed, at a minimum, on an annual basis. In addition, a transitional
goodwill impairment test is required as of the adoption date. These impairment
tests are conducted on each business of the Company where goodwill is recorded,
and may require two steps. The initial step is designed to identify potential
goodwill impairment by comparing an estimate of fair value for each applicable
business to its respective carrying value. For those businesses where the
carrying value exceeds fair value, a second step is performed to measure the
amount of goodwill impairment in existence, if any.

The Company had approximately $371 million in positive goodwill and $77 million
in negative goodwill recorded in its consolidated balance sheet at the
beginning of 2002 as well as approximately $104 million in positive goodwill
related to an equity method investment which is not subject to SFAS No. 142
impairment tests. The $77 million in negative goodwill was required to be
recognized into income upon adoption of the Statement. The Company completed
the required transitional goodwill impairment test in the first quarter of 2002
and determined that $261 million of goodwill recorded within the Companys
Retail and Related Services segment, primarily related to NTB and Orchard
Supply Hardware, was impaired under the fair value impairment test approach
required by SFAS No. 142.

F - 35



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

The fair value of these reporting units was estimated using the expected
present value of associated future cash flows and market values of comparable
businesses where available. Upon adoption of the Statement, a $208 million
charge, net of tax and minority interest, was recognized in the first quarter
of 2002 to record this impairment as well as the recognition of negative
goodwill and was classified as a cumulative effect of a change in accounting
principle.

The following table presents the pro forma effect of the adoption of SFAS No.
142 on recent fiscal periods as if the change was applied at the beginning of
the respective fiscal year:

|                                                        |  |      |       |      |  |   |       |  
|------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|millions, except earnings (loss) per common share       |  | 2001 |       | 2000
|                                                        |  |      |       |     
|Reported net income                                     |  | $    | 735   |      |  | $ | 1,343 |  
|Add back:                                               |  |      |       |      |  |   |       |  
|Negative goodwill amortization                          |  |      | (14   | )    |  |   | (15   | )
|Positive goodwill amortization                          |  |      | 20    |      |  |   | 24    |  
|                                                        |  |      |       |      |  |   |       |  
|Pro forma net income                                    |  | $    | 741   |      |  | $ | 1,352 |  
|                                                        |  |      |       |      |  |   |       |  
|Earnings per common share                               |  |      |       |      |  |   |       |  
|Basic earnings per share:                               |  |      |       |      |  |   |       |  
|Reported net income                                     |  | $    | 2.25  |      |  | $ | 3.89  |  
|Goodwill amortization                                   |  |      | 0.02  |      |  |   | 0.03  |  
|                                                        |  |      |       |      |  |   |       |  
|Pro forma net income                                    |  | $    | 2.27  |      |  | $ | 3.92  |  
|                                                        |  |      |       |      |  |   |       |  
|Diluted earnings per share:                             |  |      |       |      |  |   |       |  
|Reported net income                                     |  | $    | 2.24  |      |  | $ | 3.88  |  
|Goodwill amortization                                   |  |      | 0.02  |      |  |   | 0.03  |  
|                                                        |  |      |       |      |  |   |       |  
|Pro forma net income                                    |  | $    | 2.26  |      |  | $ | 3.91  |  
|                                                        |  |      |       |      |  |   |       |  
|Average common shares outstanding                       |  |      | 326.4 |      |  |   | 345.1 |  
|Average common and common equivalent shares outstanding |  |      | 328.5 |      |  |   | 346.3 |  

The changes in the carrying amount of goodwill as of December 28, 2002 are as
follows:

|                                |                                             |                                  |     |            |      |            |   |           |   |       |    |   |   |   |     |    |   |   |     |     |      |  
|------------------------------- | ------------------------------------------- | -------------------------------- | --- | ---------- | ---- | ---------- | - | --------- | - | ----- | -- | - | - | - | --- | -- | - | - | --- | --- | ---- | -
|                                |                                             |                                  |     | Retail and |      | Credit and |   | Corporate |   |       |    |   |   |   |     |   
|                                |                                             |                                  |     | Related    |      | Financial  |   | and       |   | Sears |    |   |   |  
|millions                        |                                             | Services                         |     | Products   |      | Other      |   | Canada    |   | Total
|                                |                                             |                                  |     |            |      |            |   |           |   |      
|Balance as of December 29, 2001 |                                             | $                                | 291 |            |      | $          | 2 |           |   | $     | 61 |   |   | $ | (60 | )  |   | $ | 294 |    
|                                | Cumulative effect of adopting SFAS No. 142: |                                  |     |            |      |            |   |           |   |       |    |   |   |   |     |    |   |   |     |     |     
|                                |                                             | Impairment loss recognized       |     |            | (261 | )          |   |           |  |       |    |   |  |   |     |    |  |   |     |     | (261 | )
|                                |                                             | Elimination of negative goodwill |     |           |      |            |   |          |   |       |    |  |   |   |     | 77 |   |   |     | 77  |     
|                                | Acquisition of Lands End                   |                                  |     | 834        |      |            |   |          |   |       |    |  |   |   |     |   |   |   |     | 834 |     
|                                |                                             |                                  |     |            |      |            |   |           |   |       |    |   |   |   |     |    |   |   |     |    
|Balance as of December 28, 2002 |                                             | $                                | 864 |            |      | $          | 2 |           |   | $     | 61 |   |   | $ | 17  |    |   | $ | 944 |    
|                                |                                             |                                  |     |            |      |            |   |           |   |       |    |   |   |   |     |    |   |   |     |    

The Companys policy is to test the realizability of goodwill as of the end of
the fiscal year. The Company tested the realizability of the $944 million of
goodwill as of December 28, 2002 resulting in no additional impairment being
recorded.

F - 36



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements

NOTE 18 - QUARTERLY RESULTS (Unaudited)

millions, except per common share data

|                                                             |  |               |       |                |  |               |       |                |  |      |        |      |  |      |        |      |  |      |       |      |  |   |       |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------------------ |  | ------------- | ----- | -------------- |  | ------------- | ----- | -------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                             |  | First Quarter |       | Second Quarter |  | Third Quarter |       | Fourth Quarter |  | Year
|                                                             |  |               |       |                |  |               |       |                |  |     
|                                                             |  | 2002          |       | 2001           |  | 2002          |       | 2001           |  | 2002 |        | 2001 |  | 2002 |        | 2001 |  | 2002 |       | 2001
|                                                             |  |               |       |                |  |               |       |                |  |      |        |      |  |      |        |      |  |      |       |     
|Revenues                                                     |  | $             | 9,037 |                |  | $             | 8,857 |                |  | $    | 10,142 |      |  | $    | 10,183 |      |  | $    | 9,669 |      |  | $ | 9,730 |  |  | $ | 12,518 |  |  | $ | 12,220 |  |  | $ | 41,366 |  |  | $ | 40,990 | 
|Operating income                                             |  |               | 356   |                |  |               | 272   |                |  |      | 366    |      |  |      | (311   | )    |  |      | 275   |      |  |   | 391   |  |  |   | 1,084  |  |  |   | 826    |  |  |   | 2,081  |  |  |   | 1,178  | 
|Net income before
accounting change                          |  |               | 318   |                |  |               | 176   |                |  |      | 229    |      |  |      | (197   | )    |  |      | 189   |      |  |   | 262   |  |  |   | 848    |  |  |   | 494    |  |  |   | 1,584  |  |  |   | 735    | 
|Net income                                                   |  |               | 110   |                |  |               | 176   |                |  |      | 229    |      |  |      | (197   | )    |  |      | 189   |      |  |   | 262   |  |  |   | 848    |  |  |   | 494    |  |  |   | 1,376  |  |  |   | 735    | 
|Earnings (loss) per
share before
accounting change -
diluted |  |               | 0.98  |                |  |               | 0.53  |                |  |      | 0.71   |      |  |      | (0.60  | )    |  |      | 0.59  |      |  |   | 0.80  |  |  |   | 2.67   |  |  |   | 1.52   |  |  |   | 4.94   |  |  |   | 2.24   | 
|Earnings (loss) per
common share -
diluted                   |  | $             | 0.34  |                |  | $             | 0.53  |                |  | $    | 0.71   |      |  | $    | (0.60  | )    |  | $    | 0.59  |      |  | $ | 0.80  |  |  | $ | 2.67   |  |  | $ | 1.52   |  |  | $ | 4.29   |  |  | $ | 2.24   | 

The fourth quarter pretax LIFO adjustments were credits of $19 and $5 million
in 2002 and 2001, compared with charges of $30 million for the first nine
months of the respective years.

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

F - 37



---



##### Table of Contents



SEARS, ROEBUCK AND CO.

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS


|                             |                                      |  |            |       |            |  |            |       |        |  |            |       |  |  |   |       | 
|---------------------------- | ------------------------------------ |  | ---------- | ----- | ---------- |  | ---------- | ----- | ------ |  | ---------- | ----- |  |  | - | ----- | 
|                             |                                      |  |            |       |            |  | Additions  |       |        |  |            |       |  |  |  
|                             |                                      |  |            |       |            |  |            |       |        |  |            |       |  |  |  
|                             |                                      |  | Balance at |       | Charged to |  |            |       |        |  | Balance at
|                             |                                      |  | beginning  |       | costs and  |  |            |       |        |  | end of    
|                             |                                      |  | of period  |       | expenses   |  | Deductions |       | period
|                             |                                      |  |            |       |            |  |            |       |       
|Year Ended December 28, 2002 |                                      |  |            |       |            |  |            |       |        |  |            |       |  |  |   |      
|                             | Allowance for uncollectible accounts |  | $          | 1,166 |            |  | $          | 2,261 |        |  | $          | 1,591 |  |  | $ | 1,836 | 
|                             |                                      |  |            |       |            |  |            |       |        |  |            |       |  |  |   |      
|Year Ended December 29, 2001 |                                      |  |            |       |            |  |            |       |        |  |            |       |  |  |   |      
|                             | Allowance for uncollectible accounts |  | $          | 686   |            |  | $          | 1,866 |        |  | $          | 1,386 |  |  | $ | 1,166 | 
|                             |                                      |  |            |       |            |  |            |       |        |  |            |       |  |  |   |      
|Year Ended December 30, 2000 |                                      |  |            |       |            |  |            |       |        |  |            |       |  |  |   |      
|                             | Allowance for uncollectible accounts |  | $          | 760   |            |  | $          | 884   |        |  | $          | 958   |  |  | $ | 686   | 
|                             |                                      |  |            |       |            |  |            |       |        |  |            |       |  |  |   |      

F - 38



---



##### Table of Contents






EXHIBIT INDEX

Sears, Roebuck and Co. Form 10-K
For the Year Ended December 28, 2002

|     |  |                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Restated Certificate of Incorporation, as amended to May 13,
1996 (incorporated by reference to Exhibit 3(a) to
Registration Statement No. 333-8141 of Registrant).                                                                                            
|     |  |                                                                                                                                                                                                                                                                
|3.2  |  | By-Laws as amended to February 14, 2001 (incorporated by
reference to Exhibit 3.(ii) to Registrants Annual Report on
Form 10-K for the fiscal year ended December 30, 2000).**                                                                                
|     |  |                                                                                                                                                                                                                                                                
|4.1  |  | Forms of restricted stock grants under Registrants 1990
Employees Stock Plan (incorporated by reference to Exhibit
4.(i) to Registrants Annual Report on Form 10-K for the
fiscal year ended December 31, 1993).** ****                                      
|     |  |                                                                                                                                                                                                                                                                
|4.2  |  | Form of restricted stock grants under Registrants 1994
Employees Stock Plan (incorporated by reference to Exhibit
4.(ii) to Registrants Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).** ****                                      
|     |  |                                                                                                                                                                                                                                                                
|4.3  |  | Forms of performance-based stock options granted under
Registrants 1994 Employees Stock Plan (incorporated by
reference to Exhibit 4(iii) to Registrants Annual Report on
Form 10-K for the fiscal year ended January 3, 1998).** ****                       
|     |  |                                                                                                                                                                                                                                                                
|4.4  |  | Forms of performance-based restricted stock grants under
Registrants 1994 Employees Stock Plan (incorporated by
reference to Exhibit 4(iv) to Registrants Annual Report on
Form 10-K for the fiscal year ended January 3, 1998).** ****                      
|     |  |                                                                                                                                                                                                                                                                
|4.5  |  | Forms of stock options granted under Registrants 1994
Employees Stock Plan (incorporated by reference to Exhibit
4(v) to Registrants Annual Report on Form 10-K for the
fiscal year ended January 2, 1999).** ****                                           
|     |  |                                                                                                                                                                                                                                                                
|4.6  |  | Forms of stock options granted under Registrants 2000
Employees Stock Plan (incorporated by reference to Exhibit
4(vi) to Registrants Annual Report on Form 10-K for the
fiscal year ended December 29, 2001).** ****                                        
|     |  |                                                                                                                                                                                                                                                                
|4.7  |  | Registrant hereby agrees to furnish to the Commission, upon
request, with the instruments defining the rights of holders
of each issue of long-term debt of Registrant and its
consolidated subsidiaries.                                                      
|     |  |                                                                                                                                                                                                                                                                
|10.1 |  | Tax Sharing Agreement dated May 14, 1993 between Registrant
and its subsidiaries (incorporated by reference to Exhibit
10.6 to Amendment No. 3 to The Allstate Corporations
Registration Statement No. 33-59676).                                             
|     |  |                                                                                                                                                                                                                                                                
|10.2 |  | Supplemental Tax Sharing Agreement dated January 27, 1995
between Registrant and The Allstate Corporation (incorporated
by reference to Exhibit 10(d) to The Allstate Corporations
Current Report on Form 8-K dated February 22, 1995).***                    
|     |  |                                                                                                                                                                                                                                                                
|10.3 |  | Acquisition Agreement and Agreement and Plan of Merger, dated
as of May 12, 2002, by and among Registrant, Inlet
Acquisition Corp. and Lands End, Inc. (incorporated by
reference to Exhibit (d)(1) to the Schedule TO filed by
Registrant on May 17, 2002).**
|     |  |                                                                                                                                                                                                                                                                
|10.4 |  | Registrants 1982 Employees Stock Plan (incorporated by
reference to Exhibit 4(a)(1) to Registration Statement No.
2-80037 of Registrant).****                                                                                                                 

E - 1



---



##### Table of Contents



EXHIBIT INDEX

Sears, Roebuck and Co. Form 10-K
For the Year Ended December 28, 2002

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5   |  | Registrants 1986 Employees Stock Plan, amended as of May
12, 1994 (incorporated by reference to Exhibit 10.19 to The
Allstate Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).*** ****                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.6   |  | Registrants 1990 Employees Stock Plan, amended as of May
12, 1994 (incorporated by reference to Exhibit 10.20 to The
Allstate Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).*** ****                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.7   |  | Registrants 1994 Employees Stock Plan (incorporated by
reference to Appendix A to Registrants Proxy Statement
dated March 23, 1994).** ****                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.8   |  | Registrants 2000 Employees Stock Plan (incorporated by
reference to Appendix A to Registrants Proxy Statement
dated March 17, 2000).** ****                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.9   |  | Registrants Associate Stock Ownership Plan (incorporated by
reference to Exhibit 10.(iii)(21) to Registrants Annual
Report on Form 10-K for the fiscal year ended January 3,
1998).** ****                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|*10.10 |  | First Amendment to Registrants Associate Stock Ownership
Plan, effective as of January 1, 2001.****                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|*10.11 |  | Second Amendment to Registrants Associate Stock Ownership
Plan, changing the name of the Plan to the Associate Stock
Purchase Plan, effective as of April 1, 2001.****                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|*10.12 |  | Third Amendment to Registrants Associate Stock Purchase
Plan, effective as of June 29, 2002.****                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.13  |  | Registrants 2001 Broad-Based Stock Option Plan
(incorporated by reference to Exhibit 4 to Registration
Statement No. 333-72514 of Registrant).****                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.14  |  | Registrants Annual Incentive Compensation Plan, amended and
restated as of January 1, 1994 (incorporated by reference to
Appendix B to Registrants Proxy Statement dated March 23,
1994).** ****                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.15  |  | Registrants Long-Term Performance Incentive Program dated
October 10, 2001 and operative adopting resolution
(incorporated by reference to Exhibit 10.(ii)(21) to
Registrants Annual Report on Form 10-K for the fiscal year
ended December 29, 2001).** ****                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.16  |  | Registrants Conformed Amended and Restated Long-Term
Performance Incentive Program (LTPIP), as conformed and
restated through August 14, 2002 and Conforming Amendment to
Registrants 2000 Employee Stock Plan for purposes of the
LTPIP (incorporated by reference to Exhibit 10(a) to
Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended September 28, 2002).** ****
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.17  |  | Description of Registrants Supplemental Life Insurance
Plan, amended as of December 31, 1986 (incorporated by
reference to the second and third full paragraphs on page 10
of Registrants Proxy Statement dated March 26, 1987).** ****                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.18  |  | Registrants Supplemental Retirement Income Plan, as amended
and restated effective March 25, 1997 (incorporated by
reference to Exhibit 10.(ii)(11) to Registrants Annual
Report on Form 10-K for the fiscal year ended January 1,
2000).** ****                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.19  |  | Registrants Supplemental Long-Term Disability Plan
(incorporated by reference to Exhibit 10(d) to Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1995).** ****                                                                                                                                                                                         

E - 2



---



##### Table of Contents



EXHIBIT INDEX

Sears, Roebuck and Co. Form 10-K
For the Year Ended December 28, 2002

|       |  |                                                                                                                                                                                                                                                 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20  |  | Registrants Deferred Compensation Plan, as amended and
restated to December 13, 2000 (incorporated by reference to
Exhibit 10. (ii)(15) to Registrants Annual Report on Form
10-K for the fiscal year ended December 30, 2000). ** ****       
|       |  |                                                                                                                                                                                                                                                 
|*10.21 |  | Registrants Supplemental 401(k) Savings Plan, as
amended and restated as of January 1, 2001.****                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                 
|10.22  |  | Registrants Transferred Executives Pension
Supplement (incorporated by reference to Exhibit
10.(iii)(16) to Registrants Annual Report on Form
10-K for the fiscal year ended December 31,
1988).** ****                                       
|       |  |                                                                                                                                                                                                                                                 
|10.23  |  | Amendment to Registrants Transferred Executives
Pension Supplement adopted on March 13, 1996
(incorporated by reference to Exhibit 10.(iii)(14)
to Registrants Annual Report on Form 10-K for the
fiscal year ended December 30, 1995).** ****
|       |  |                                                                                                                                                                                                                                                 
|10.24  |  | Amendment to Registrants Executive Retirement Plan
Arrangements, effective as of March 24, 1997
(incorporated by reference to Exhibit 10.2 to
Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended June 28, 1997).** ****   
|       |  |                                                                                                                                                                                                                                                 
|10.25  |  | Registrants Non-Employee Directors Retirement
Plan, as amended and restated to March 13, 1996
(incorporated by reference to Exhibit 10.(iii)(8)
to Registrants Annual Report on Form 10-K for the
fiscal year ended December 30, 1995).** ****
|       |  |                                                                                                                                                                                                                                                 
|10.26  |  | Description of Registrants Non-Employee Director
Life Insurance Plan (incorporated by reference to
the first paragraph on page 10 of Registrants
Proxy Statement dated March 26, 1998).** ****                                                
|       |  |                                                                                                                                                                                                                                                 
|10.27  |  | Registrants Non-Employee Director Stock Plan
(incorporated by reference to Appendix B of
Registrants Proxy Statement dated March 20,
1996).** ****                                                                                            
|       |  |                                                                                                                                                                                                                                                 
|10.28  |  | Registrants 2002 Non-Employee Director Stock Plan
(incorporated by reference to Appendix B to
Registrants Proxy Statement dated March 27,
2002).** ****                                                                                       
|       |  |                                                                                                                                                                                                                                                 
|10.29  |  | Letter from Registrant to Anastasia D. Kelly dated
December 14, 1998 relating to employment
(incorporated by reference to Exhibit 10 to
Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended April 3, 1999).** ****          
|       |  |                                                                                                                                                                                                                                                 
|10.30  |  | Term Sheet from Registrant to Greg A. Lee dated
December 8, 2000 relating to employment
(incorporated by reference to Exhibit 10 to
Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2001).** ****             
|       |  |                                                                                                                                                                                                                                                 
|10.31  |  | Letter from Registrant to Paul J. Liska executed
October 1, 2001 relating to employment
(incorporated by reference to Exhibit 10.(ii)(24)
to Registrants Annual Report on Form 10-K for the
fiscal year ended December 29, 2001).** ****       
|       |  |                                                                                                                                                                                                                                                 
|10.32  |  | Letter from Registrant to Kathryn Bufano dated
November 26, 2001 relating to employment
(incorporated by reference to Exhibit 10 to
Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended March 30, 2002).** ****             
|       |  |                                                                                                                                                                                                                                                 
|10.33  |  | Amended and Restated Agreement between Lands End, Inc. and
David F. Dyer dated May 12, 2002 relating to employment
(incorporated by reference to Exhibit (e)(4) to Schedule
14D-9 filed by Lands End, Inc. on May 17, 2002).****              
|       |  |                                                                                                                                                                                                                                                 
|10.34  |  | Letter Agreement between Registrant and David F. Dyer dated
May 13, 2002 relating to employment (incorporated by
reference to Exhibit (d)(4) to Schedule TO filed by
Registrant on May 17, 2002).** ****                                        

E - 3



---



##### Table of Contents



EXHIBIT INDEX

Sears, Roebuck and Co. Form 10-K
For the Year Ended December 28, 2002

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.35 |  | Letter from Registrant to Gerald F. Kelly relating to employment
dated September 27, 2002.****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|*10.36 |  | Letter from Registrant to Janine M. Bousquette relating to
employment dated October 4, 2002.****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|*10.37 |  | Letter from Registrant to Mark S. Cosby relating to employment
dated November 13, 2002.****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|*10.38 |  | Memorandum from Greg A. Lee to William G. Pagonis relating to
employment dated April 9, 2002.****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.39  |  | Form of Non-Compete/Change of Control Agreement for Executive
Officers of Registrant (incorporated by reference to Exhibit 10
to Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended July 3, 1999).** ****                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.40  |  | Form of Executive Non-Disclosure and Non-Solicitation of
Employees Agreement and form of Executive Severance/Non-Compete
Agreement for Executive Officers of Registrant (incorporated by
reference to Exhibit 10.(ii)(26) to Registrants Annual Report on
Form 10-K for the fiscal year ended December 29, 2001).** ****                                                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.41  |  | $3,500,000,000 364-day Credit Agreement dated as of February 24,
2003 among Sears Roebuck Acceptance Corp. (SRAC), the banks,
financial institutions and other institutional lenders listed on
the signature pages thereof, Bank One, NA, as syndication agent,
Barclays Bank PLC and Bank of America, N.A., as documentation
agents, Salomon Smith Barney Inc. and Banc One Capital Markets,
Inc. as joint lead arrangers and joint bookrunners, and Citibank,
N.A., as agent for the Lenders (incorporated by reference to
Exhibit 10(a) to SRACs Current Report on Form 8-K dated February
24, 2003).
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.42  |  | Credit Arrangement Support Letter dated as of February 24, 2003
between Registrant and Sears Roebuck Acceptance Corp.
(incorporated by reference to Exhibit 10(b) to SRACs Current
Report on Form 8-K dated February 24, 2003).                                                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|*12.   |  | Computation of ratio of income to fixed charges for Registrant
and consolidated subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|*21.   |  | Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|*23.   |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|*24.   |  | Power of Attorney of certain officers and directors of Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|*99.1  |  | Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|*99.2  |  | Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                            



---

|*    |  | Filed herewith                                                                                                                                 
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                
|**   |  | SEC File No. 1-416                                                                                                                             
|     |  |                                                                                                                                                
|***  |  | SEC File No. 1-11840                                                                                                                           
|     |  |                                                                                                                                                
|**** |  | A management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report pursuant to Item 15(c) of Form
10-K

E - 4