**

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549  
**FORM 10-K**For Annual and Transition Reports pursuant to Sections13 or 15(d) of the Securities Exchange Act of 1934XANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 29, 2001       OR     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THESECURITIES EXCHANGE ACT OF 1934
         Commissionfile number 1-416 
**SEARS, ROEBUCK AND CO.**(Exact Name of Registrant as Specified in Its Charter)
NewYork(State of Incorporation)36-1750680(I.R.S. Employer Identification No.)3333Beverly 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 theAct:Titleof each classNameof Each Exchange on Which RegisteredCommonShares, par value $0.75 per shareNewYork Stock ExchangeChicagoStock ExchangePacificStock ExchangeSecuritiesregistered pursuant to Section 12(g) of the Act:          NoneOnJanuary 31, 2002, the Registrant had 320,374,844 common shares outstanding.Of these, 242,383,521 common shares, having an aggregate market value (basedon the closing price of these shares as reported in a summary of compositetransactions in *The Wall Street Journal* for stocks listed on theNew York Stock Exchange on January 31, 2002) of approximately $12.8 billion,were owned by shareholders other than (i) directors and executive officersof the Registrant and (ii) any person known by the Registrant as of thedate thereof to beneficially own five percent or more of Registrant's commonshares.Indicateby check mark whether the Registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months and (2) has been subject to such filingrequirements for the past 90 days.YesXNoIndicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of the Registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [   ]
Documents Incorporated By Reference
Part III of this Form 10-K incorporatesby reference certain information from the Registrant's definitive ProxyStatement, dated March 27, 2002, for its Annual Meeting of Shareholdersto be held on May 9, 2002 (the "2002 Proxy Statement").    
PART I
*Item 1. Business*
Sears, Roebuck and Co. ("Sears") originated from an enterpriseestablished in 1886 and was incorporated under the laws of New York in1906. Its principal executive offices are located at 3333 Beverly Road,Hoffman Estates, Illinois. Sears (together with its consolidated subsidiaries,the "Company") is a multi-line retailer that offers a wide array of merchandiseand related services. In addition, through its Credit and Financial Productsbusinesses, the Company offers its customers various financial, creditand related insurance products. The Company is organized into four principalbusiness segments - Retail and Related Services, Credit and Financial Products,Corporate and Other, and Sears Canada. The Company is among the largestretailers of merchandise in North America.
The domestic business segments are Retail and RelatedServices, Credit and Financial Products and Corporate and Other. The Companyconsiders its operations in both Puerto Rico and the United States as domestic.
The Sears Canada segment consists of similar retail, creditand corporate operations conducted through a majority-owned subsidiaryin Canada.
For further information, see "Retail and Related Services","Credit and Financial Products", "Corporate and Other" and "Sears Canada"below and "Management's Discussion and Analysis" under Item 7 hereof.________________________________Information regarding revenues, operating income, total assetsand capital expenditures of the Company's business segments for each ofthe three fiscal years ended December 29, 2001, December 30, 2000 and January1, 2000 is contained in Note 15 of the Notes to Consolidated FinancialStatements, in Item 8 hereof. Information on the components of revenuesis included in "Management's Discussion and Analysis" in Item 7 hereof.
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The Company's business segments are defined as follows:
***Retail and Related Services***-consisting of:
*Full-line Stores*- 867 Full-line Stores, averagingapproximately 90,000 selling square feet, located primarily in the bestmalls in the nation and offering:   s*Hardlines*- A full  assortment of appliances, electronics and home improvement products including  fitness and lawn and garden equipment; products range  from major national brands to exclusive Sears brands such as Kenmore,  Craftsman and WeatherBeater. Certain hardlines products  are also sold online at Sears.com and through three Sears Appliances and  Electronics Stores, a new retail format which is being tested by the Company.  These three stores, averaging 15,000 selling square feet, are located in  neighborhood shopping centers and offer the same appliance and electronic  products found in the Full-line Stores.  s*Softlines*- A completeselection of fashionable, quality apparel and accessories for the wholefamily, fine jewelry and home fashions, at value prices; includes leadingnational brands as well as exclusive Sears brands such as Canyon RiverBlues, Fieldmaster, Crossroads, Apostrophe and TKS Basics.  s*Sears Auto Centers -*Offermajor national brands of tires, DieHard and other brands of batteries andrelated automotive services.  s*Sears.com -*Sears onlinepresence, offers a limited assortment of hardlines and softlines merchandise.
*Specialty Stores*- More than 1,300 Specialty Stores,located primarily in free-standing, off-the-mall locations or high-trafficneighborhood shopping centers.   s*Dealer Stores* - 793 primarilyindependently-owned stores, predominately located in smaller communitiesand averaging 5,400 selling square feet, that offer appliances, electronics,lawn and garden merchandise, hardware and automobile batteries. DealerStores carry exclusive Sears brands such as Craftsman, Kenmore and DieHardas well as a wide assortment of national brands.  s*Hardware Stores -* 248 neighborhoodHardware Stores under the Sears Hardware and Orchard Supply Hardware names,ranging from 20,000 to 40,000 selling square feet, that carry Craftsmantools and lawn and garden equipment, a wide assortment of national brandsand other home improvement products.  s*National Tire & Battery(NTB) -* 223 stores that offer major national brands of tires, DieHardand other brands of batteries and related services.  s*The Great Indoors -* 13stores for home decorating and remodeling, averaging approximately 100,000selling square feet, dedicated to the four main rooms of the house: kitchen,bedroom, bathroom and great room.  s*Commercial Sales*- Primarilytargets home builders, remodelers and property managers for appliance purchasesas well as vocational schools, factory maintenance and service companiesfor industrial tool purchases. Commercial Sales has also implemented theAppliance Select program, which utilizes 82 Full-line Stores as showroomsto target the new home buyer and offers a full selection of Kenmore andother major national brand kitchen and home appliances.  s*Outlet Stores*- 35 storesaveraging 29,000 selling square feet that offer appliances, electronicsand lawn and garden merchandise.  s*Homelife Furniture Stores*-Included in 1999 until January 30, 1999, when the Company sold Homelife. 
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*Related Services* - consists primarily of:s*Sears Repair Services*-A broad range of services including service contracts, product installationand repair services primarily for products sold by the Company.  s*Direct to Customer*- Directmarketing of goods and services, clubs and services memberships, merchandisethrough specialty catalogs and impulse and continuity merchandise. 
***Credit and Financial Products*:**
This segment manages the Company's domestic portfolioof credit card receivables. The domestic credit card receivables portfolioconsists primarily of Sears Card and Sears ChargePlus (collectively "SearsCard") and Sears Gold MasterCard and The Great Indoors Gold MasterCard(collectively "Sears Gold MasterCard") account balances. The proprietarySears Card receivables are generated primarily from purchases of merchandiseand services from the Company's domestic operations. The Sears Gold MasterCardproducts are widely accepted by merchants outside the Company. The SearsGold MasterCard product receivables are generated from purchases from theCompany and other merchants, balance transfers and cash advances. Thissegment also sells related financial products such as credit protectionand insurance products.
Sears National Bank (the "Bank"), a wholly-owned subsidiaryof Sears based in Arizona, is a limited purpose credit card bank engagingin credit card operations. The Bank is subject to certain restrictionsunder federal law applicable to credit card banks as well as to Arizonacredit card lending guidelines. The Bank originates accounts in all fiftystates.  
***Corporate and Other:***
Corporate and Other operations include activities thatare of an overall holding company nature, primarily consisting of administrativeactivities, the costs of which are not allocated to the Company's businesses.The Corporate and Other segment also includes two businesses that are understrategic review. In 2001, the Company added its Sears Termite and PestControl business and the Sears Home Improvement Services businesses (primarilysales of home siding and windows) to the Corporate and Other segment. During2001, the Company sold the Sears Termite and Pest Control business. TheHome Improvement Services business remains under strategic review.  
***Sears Canada:***
The Company conducts similar retail, credit and corporateoperations in Canada through Sears Canada Inc. ("Sears Canada"), a consolidated,54.4% owned subsidiary of Sears.
On December 30, 1999, Sears Canada completed a share purchasetransaction with The T. Eaton Company Limited ("Eaton's"). Sears Canadaacquired 16 Eaton's store locations and an additional three leased Eaton'sstore locations, among other assets. Of the 19 Eaton's locations acquiredduring fiscal 2000, Sears Canada converted 10 locations to Sears Canadadepartment stores (three in replacement of existing Sears Canada storesin close proximity to the Eaton's locations), one to a Sears FurnitureStore, one to an outlet store and opened seven stores under the Eaton'sformat. In February 2002, Sears Canada announced its intention to convertthe remaining seven Eaton's stores to Sears Canada stores.  
*Seasonality*
Due to holiday buying patterns, merchandise sales traditionallyare higher in the fourth quarter than in the other quarterly periods, andthe Company typically earns a disproportionate share of operating incomein the fourth quarter.  
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*Trademarks*
The name "SEARS" is used extensively in the Company'sdomestic operations and other businesses. The Company's right to the name"SEARS" domestically continues so long as it uses the name. The name isalso the subject of numerous renewable United States and foreign trademarkregistrations. This trademark is material to the Company's domestic operationsand other related businesses.
The Company sells private label merchandise under a numberof brand names which are important to its domestic operations. Sears KENMORE®,KENMORE ELITE®, CRAFTSMAN®and DIEHARD® brands are amongthe most recognized private label brands in retailing. These names arethe subject of numerous renewable United States and foreign trademark andservice mark registrations. Other important and wellsrecognized Companytrademarks and service marks include THE GREAT INDOORS®,CANYON RIVER BLUES®, WISHBOOK®,NTB®, OSH ORCHARD SUPPLYHARDWARETM, APOSTROPHE®,TKS BASICS®, FIELDMASTER®,CROSSROADSTM and theSEARS, WHERE ELSESMad campaign. The Company's right to all of its brand names continues solong as it uses the names.  
*Competition*
The domestic retail and credit businesses are highly competitive.The principal factors that differentiate retail competitors include convenienceof shopping facilities, quality of merchandise, competitive prices, brandnames and availability of ancillary services such as credit, product delivery,repair and installation. The principal competitive factors that affectthe Company's credit business are new product offerings, interest ratesand credit and payment terms. The Company believes its business model enablesit to compete very effectively despite strong competitive pressures inrecent years.  
*Employees*
The Company employs approximately 259,000 people in theUnited States and Puerto Rico, and 51,000 people in Canada, including part-timeemployees.  
**FINANCE SUBSIDIARIES**
To meet certain capital requirements of its businesses,Sears borrows through the issuance of notes to Sears Roebuck AcceptanceCorp. ("SRAC"), a wholly-owned finance subsidiary. SRAC obtains funds primarilyby issuing commercial paper, medium-term notes and discrete underwrittendebt.
Sears DC Corp. ("SDC"), a wholly-owned finance subsidiaryof Sears, was formed to borrow in domestic and foreign debt markets andlend the proceeds of such borrowings to Sears and certain of its directand indirect subsidiaries in exchange for their unsecured notes. SDC raisedfunds through the sale of its medium-term notes and direct placement ofcommercial paper with corporate and institutional investors. The only outstandingdebt of SDC are two outstanding series of medium-term notes. SDC does notplan to issue additional debt.
Substantially all the debt and related interest expenseof SRAC and SDC support the Company's credit card receivables portfolio.
In addition, various subsidiaries of Sears have engagedin securitization programs in which pass-through certificates representinginterests in credit card receivables are issued in public or private transactions.See Notes 1, 3 and 5 of the Notes to Consolidated Financial Statements,respectively, in Item 8 hereof.  
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*Item 1A. Executive Officers of the Registrant*
The following table sets forth the names of the executiveofficers of the Company, their current positions and offices with the Company,the date they first became officers of the Company and their current ages:NamePositionDate First Became OfficerAge
Alan J. Lacy

Chairman of the Board of Directors,President and Chief Executive Officer

1994

48

Kathryn Bufano

Executive Vice President/GeneralManager, Softlines - Sears Retail

2002

49

Mary E. Conway

Executive Vice President/GeneralManager, Full-line Store Operations - Sears Retail

1998

53

E. Ronald Culp

Senior Vice President, PublicRelations, Communications and Government Affairs

1993

54

Lyle G. Heidemann

Executive Vice President/GeneralManager, Hardlines-Sears Retail

1992

57

Kevin T. Keleghan

President, Credit and FinancialProducts

1996

44

Anastasia D. Kelly

Senior Vice President and GeneralCounsel

1999

52

Greg A. Lee

Senior Vice President, Human Resources

2001

52

Paul J. Liska

Executive Vice President and ChiefFinancial Officer

2001

46

Gerald N. Miller

Senior Vice President and ChiefInformation Officer

1995

54

William G. Pagonis

Senior Vice President, SupplyChain Management

1993

60

Glenn R. Richter

Senior Vice President, Finance

2000

40

David W. Selby

Senior Vice President, Marketing

1997

45

Michael J. Tower

Senior Vice President, Strategy

1997

43

Messrs. Lacy, Culp, Heidemann, Keleghan, Miller and Pagonisand Ms. Conway have held the positions set forth in the above tables forat least the last five years or have served the Company in various executiveor administrative capacities for at least that length of time. The remainingexecutive officers have held the following positions for such five-yearperiod:
Ms. Bufano joined Sears as Executive Vice President, Softlinesin January 2002. Prior to joining Sears, she was President and Chief MerchandisingOfficer at the Dress Barn, a women's apparel retailer, since 2001. Priorto joining the Dress Barn, she was Executive Vice President, Women's Apparelat Macy's East, a department store chain, since 1996.
Ms. Kelly joined Sears as its General Counsel in March1999. Prior to joining Sears, she had been Senior Vice President of FannieMae, a financial services company, since 1995 and had been Fannie Mae'sGeneral Counsel and Secretary since 1996.
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Mr. Lee joined Sears as Senior Vice President, Human Resourcesin January 2001. Prior to joining Sears, he had been Senior Vice President,Human Resources of Whirlpool Corporation, a manufacturer of major homeappliances, since June 1998. Prior to joining Whirlpool, Mr. Lee servedin the same capacity for The St. Paul Companies, a property and casualtyinsurance company.
Mr. Liska joined Sears as Executive Vice President andChief Financial Officer in June 2001. Prior to joining Sears, Mr. Liskawas Executive Vice President and Chief Financial Officer of The St. PaulCompanies since 1997, and President and Chief Executive Officer of SpecialtyFoods Corporation, a manufacturer of bread and bakery products, from 1994until 1997.
Mr. Richter joined Sears as Vice President and Controllerin 2000. Mr. Richter became Senior Vice President, Finance in July 2001.Prior to joining Sears, Mr. Richter was Senior Vice President and ChiefFinancial Officer of Dade Behring International, a manufacturer of medicaltesting systems, since 1999 and Senior Vice President and Corporate Controllersince 1997.
Mr. Selby joined Sears as Vice President of MarketingServices in 1997 and was promoted to Senior Vice President of Retail Marketingprior to being named Senior Vice President, Marketing in 2001. Prior tojoining Sears, Mr. Selby held a number of senior positions with The LeoBurnett Company, an advertising agency. He completed his 18 years at LeoBurnett as senior vice president.
Mr. Tower joined Sears as Vice President, Corporate Strategyand Business Development in 1997. Mr. Tower became Senior Vice PresidentStrategy in February 2001. Prior to joining Sears, Mr. Tower held a numberof senior positions with A.T. Kearney, a consulting firm. He completedhis ten years at A.T. Kearney as Partner and Vice President.
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*Item 2. Properties*
The Company's principal executive offices are locatedon a 200-acre site owned by the Company at the Prairie Stone office park,in Hoffman Estates, Illinois. The complex consists of six interconnectedoffice buildings totaling approximately two million gross square feet ofoffice space.
The followingtable sets forth information concerning stores operated by the Company'sdomestic Retail operations.Full-line StoresSpecialty StoresTotalNTBHomelifeHardwareDealerOther(a)Stores at December29, 2001:Owned499 87 -- 18 -- 23 627 Leased(b)368 136 -- 230 23 31 788 Independentlyowned and Operated Stores-- -- -- -- 770 -- 770 Total867(e)223--248793542,185Total storesat fiscal year end:1998845 347 100 265 653 44 2,254   Storesopened during fiscal 199919 5 5 18 100 1 148   Storesclosed during fiscal 1999(6) (42)(105)(c)(16)(15)(5)(189)1999858 310 -- 267 738 40 2,213   Storesopened during fiscal 200011  3 -- 10 70 4 98   Storesclosed during fiscal 2000(6) (84)-- (3)(18)(1)(112)2000863 229 -- 274 790 43 2,199   Storesopened during fiscal 200113 1 -- 4 33 14 65   Storesclosed during fiscal 2001(9) (7)-- (30)(30)(3)(79)Stores at December29, 2001867 223 -- 248 793 54 2,185 Gross RetailArea at Fiscal Year-End*square feetin millions*2001 . . . ... . . . . . . . . . . . .127.3 2.5--8.76.63.4148.52000 . . . ... . . . . . . . . . . . .126.7 2.7--9.36.52.1147.31999 . . . ... . . . . . . . . . . . .125.9 3.7--8.96.11.8146.4Retail SellingArea at Fiscal Year-End*square feetin millions*2001 . . . ... . . . . . . . . . . . .79.2 0.3--6.74.32.492.92000 . . . ... . . . . . . . . . . . .77.7 0.3--7.24.31.490.91999 . . . ... . . . . . . . . . . . .77.2 0.3--6.94.01.389.7Retail StoreRevenues per Selling Square Foot (d)2001 . . . ... . . . . . . . . . . . .$ 319 2000 . . . ... . . . . . . . . . . . .$ 333 1999 . . . ... . . . . . . . . . . . .$ 327 (a)Consists ofsmall-size appliance and electronic stores, retail outlet stores and TheGreat Indoors stores. Excludes "Other" facilities owned or leased as partof Full-line Store properties.(b)Many of theleases contain renewal options and contingent rentals (for additional information,see Note 10 of the Notes to Consolidated Financial Statements under Item8 hereof).(c)Effective January30, 1999, Sears sold its Homelife business, including five retail outletstores transferred to the Homelife organization in January 1999.(d)Includes netcommissions earned from licensed businesses operating within the Retailstores.(e)Includes SearsAuto Centers
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In addition, at December 29, 2001, there were 836 othersales offices and service facilities, most of which are occupied undershort-term leases or are a part of other Sears facilities included in theabove table. There were also 108 distribution facilities, most of whichare leased for terms ranging from one to 10 years.
Credit principally services its accounts at nine regionalcredit card operations centers ("RCCOCs") in the US, one unit in PuertoRico, four Credit Processing Centers, at the headquarters of the Bank inTempe, Arizona and at the Company's headquarters in Hoffman Estates. TheCompany owns one of the RCCOCs and two of the Credit Processing Centersand leases eight of the RCCOCs and two of the Credit Processing Centers.
As of December 29, 2001, Sears Canada operated 125 departmentstores (118 under the Sears Canada banner and seven under the Eaton's format),37 Sears Furniture and Appliance stores, 17 outlet stores, 132 dealer stores,operated under independent local ownership, and 2,157 catalog selling locations,of which 1,839 are operated under independent, local ownership. Duringfiscal 2001, Sears Canada opened four net new Sears Furniture and Appliancestores, four net new dealer stores and two net new outlet stores.  
*Item 3. Legal Proceedings*
The Company is subject to various legal and governmentalproceedings, many involving routine litigation incidental to the businesses.Other matters contain allegations that are non-routine and involve compensatory,punitive or treble damage claims in very large amounts as well as othertypes of relief. The consequences of these matters are not presently determinablebut, in the opinion of management of the Company after consulting withlegal counsel, the ultimate liability in excess of reserves currently recordedis not expected to have a material effect on annual results of operations,financial position, liquidity or capital resources of the Company.  
*Item 4. Submission of Matters to a Vote of SecurityHolders*
None
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PART II
*Item 5. Market for Registrant's Common Equity and RelatedStockholder Matters*
**Description of Sears Common Shares**
The summary contained herein of certain provisions ofthe Restated Certificate of Incorporation, as amended (the "Certificateof Incorporation"), of Sears does not purport to be complete and is qualifiedin its entirety by reference to the provisions of such Certificate of Incorporationincorporated as Exhibit 3.(i) hereto and incorporated by reference herein.
The Certificate of Incorporation authorizes the issuanceof 1,000,000,000 common shares, par value $0.75 per share, and 50,000,000preferred shares, par value $1.00 per share. As of the date hereof, thereare no preferred shares outstanding. Preferred shares may be issued inseries with rights and privileges as authorized by the Board of Directors.
Subject to the restrictions on dividends mentioned belowand the rights of the holders of any preferred shares which may hereafterbe issued, each holder of common shares is entitled to one vote per share,to vote cumulatively for the election of directors, to dividends declaredby the Board of Directors, and, upon liquidation, to share in the assetsof Sears pro rata in accordance with his, her or its holdings after paymentof all liabilities and obligations. The holders of common shares have nopreemption, redemption, subscription or conversion rights.
Sears Board of Directors is divided into three classesserving staggered three-year terms. Because the Board is classified, shareholderswishing to exercise cumulative voting rights to assure the election ofone or more directors must own approximately three times as many sharesas would be required if the Board were not classified. Directors may beremoved only for cause upon the affirmative vote of at least 75% of theshares entitled to vote. Such a vote is also required to alter, amend orrepeal, or to adopt any provision inconsistent with, Article 5 of the Certificateof Incorporation concerning directors, or to fix the number of directorsby shareholder vote.
There are no restrictions on repurchases or redemptionof shares by Sears which do not impair its capital, except that the indenturesrelating to certain of Sears long-term debt and an agreement pursuant towhich Sears has provided a credit facility in support of certain tax incrementrevenue bonds issued by the Village of Hoffman Estates, Illinois, in connectionwith the construction of its headquarters facility, provide that Searswill not take certain actions, including the declaration of cash dividendsand the repurchase of shares, which would cause Unencumbered Assets pluscertain Capitalized Rentals to drop below 150% of Liabilities plus suchCapitalized Rentals (as such terms are defined in the indentures and theagreement). The amount by which such Unencumbered Assets plus CapitalizedRentals exceeds 150% of such Liabilities plus Capitalized Rentals, as computedunder certain of the indenture provisions, is set forth in Note 8 of theNotes to Consolidated Financial Statements.
Information regarding the principal market for Sears commonshares, the number of shareholders and the prices of, and dividends paidon, Sears common shares is included below and under the heading "Shareholders'Equity - Dividend Payments" contained in Note 8 of the Notes to ConsolidatedFinancial Statements under Item 8 hereof.  
**Common StockMarket Information and Dividend Highlights** *dollars*First QuarterSecond QuarterThird QuarterFourth QuarterYear2001200020012000200120002001200020012000Stock price rangeHigh41.6034.4443.0243.5047.8038.1348.9336.7548.9343.50Low32.8125.2532.6229.1329.9029.4433.5527.7529.9025.25Close35.2730.6342.3132.6334.6432.4248.0034.7548.0034.75Cash dividends declared0.230.230.230.230.230.230.230.230.920.92 
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Stock price ranges are for the New York Stock Exchange(trading symbol - S), which is the principal market for the Company's commonstock.
The number of registered common shareholders at February28, 2002 was 162,848.
In addition to the New York Stock Exchange, the Company'scommon stock is listed on the following exchanges: Chicago; Pacific, SanFrancisco; London, England; Amsterdam, The Netherlands; Swiss EBS; andDusseldorf, Germany.  
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*Item 6. Selected Financial Data*
**Five-Year Summary of Consolidated Financial Data** *millions,except per common share and shareholder data*20012000199919981997OPERATING RESULTSRevenues$41,078$40,937$39,484$39,953$39,837Costs and expenses39,90038,75037,07138,09837,843Operating income1,1782,1872,4131,8551,994Other income,net4536628144Income beforeincome taxes, minority    interest and extraordinary items1,2232,2232,4191,8832,138Income taxes467831904766912Income beforeextraordinary loss7351,3431,4531,0721,188Extraordinaryloss------24--Net income7351,3431,4531,0481,188FINANCIAL POSITIONCredit cardreceivables, net$28,155$17,317$18,033$17,972$19,843Retained interestin transferred credit card receivables (1)--3,1053,2114,3493,376Merchandiseinventories4,9125,6185,0694,8165,044Property andequipment, net6,8246,6536,4506,3806,414Total assets(1)44,31736,89936,95437,67538,700Short-term borrowings(1)3,5574,2802,9894,6245,208Long-term debt(1)22,07813,58015,04915,04515,632Total debt (1)25,63517,86018,03819,66920,840Shareholders'equity$6,119$6,769$6,839$6,066$5,862SHAREHOLDERSAND PER SHARE DATAShareholders164,354209,101220,749233,494235,336Average commonand equivalent shares outstanding329346381392398Earnings percommon share - diluted  Income from continuing operations$2.24$3.88$3.81$2.74$2.99  Extraordinary loss------.06--  Net income$2.24$3.88$3.81$2.68$2.99imCash dividendsdeclared per common share$0.92$0.92$0.92$0.92$0.92Market price- per common share (high-low)48.93-29.9043.50-25.2553.19-26.6965.00-39.0665.25-38.75Closing marketprice at December 3147.6434.7530.3842.5045.25(1) Impactedby a change in securitization accounting in 2001. The Company consolidatedits securitization structure and recognized approximately $8.1 billionof additional debt and related previously securitized receivables. (SeeNote 3 to the Consolidated Financial Statements)
Certain prior year information has been reclassified toconform with current year presentation.  
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*Item 7. Management's Discussion and Analysis*
**STRATEGIC INITIATIVES**
On October 24, 2001, the Company announced its plan toundertake a series of strategic initiatives designed to revitalize Searsand significantly improve its profitability. The principal objectives ofthe strategic initiatives are two fold:-  To improve the performance of the Company's largest retailbusiness, Full-line Stores; and
-  To improve the Company's productivity.
Full-line Stores will focus on its strengths, the categorieswhere Sears has authority and that make Sears unique. The Company willalso become more competitive. This will be achieved through:-  Improving merchandise offerings - The Company willincrease the space allocated to key hardlines franchises and improve apparelmerchandise offerings through the development of a high quality proprietarybrand. Merchandise lines which are not significant to the Company willbe de-emphasized or eliminated. The Company has already announced the exitof the skin care and color cosmetics and installed floor covering and customwindow treatment businesses.
-  Enhancing customers' experience in the store - Thestores will shift to two distinct, easy to understand service models: consultativeselling for more complex products where customers expect assistance, suchas appliances, and self-service for other products. In addition, the Companywill standardize and simplify the merchandise presentation. Centralizedcheckouts were placed in approximately 140 stores through year-end, andwill be in all Full-line Stores by mid-2002. Simplified signage, standardizedfixturing and store layouts are expected to provide an enhanced shoppingexperience for the customer.
-  Simplifying the store operating processes - The businessprocesses and structures necessary to operate Full-line Stores will besimplified, reducing costs and freeing up store management to better servecustomers.
The Company plans to achieve significant expense savingsbased on its productivity initiatives, including the Full-line Store organizationinitiative mentioned above. Approximately 5,950 positions will be eliminatedfrom Sears stores, field organization and home office, including 522 asof year-end. Furthermore, the Company's marketing resources are being reallocatedto focus on more effective promotional activity and to provide a strongeremphasis on the Sears brand.
The Company recognizes the execution risk inherent inits plans given the large number of specific initiatives involved and themagnitude of the overall change contemplated. Furthermore, the economicenvironment can adversely affect attainment of the profit improvement goal.However, the Company is highly focused on successful implementation andencouraged by the early results achieved in the second half of 2001 asprofit improvement was strong despite the difficult economic environmentand a decline in revenues. During 2002, the Company will continue to executeon these initiatives and expects that while revenues will be adverselyaffected from merchandise category edits, operating margin improvementsshould be realized.  
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**OUTLOOK**
The Company has established an overall financial objectiveof increasing annual operating profit by more than $1 billion by 2004.Approximately $600 million of the planned increase is forecasted to begenerated by productivity initiatives and the remainder from revenue andmargin enhancements. Retail and Related Services operating income is projectedto grow by $600 million to $1.5 billion by 2004. The plan also contemplatesoperating income growth in Credit and Financial Products and Sears Canada.The Company projects that domestic capital expenditures will average $1.3billion in the 2002 to 2004 timeframe to support the new strategy. TheCompany also plans to continue its share repurchase program.
The Company's preliminary outlook for 2002 is for comparableearnings per share to increase in the range of 13 to 15 percent. The Retailand Related Services business is expected to grow operating income at amid-teens rate and Credit and Financial Products is expected to grow ata mid single-digit rate. Sears Canada is expected to improve profitabilityand the Corporate and Other segment is anticipated to reflect significantbenefits from the Company's productivity initiatives.  
**BASIS OF PRESENTATION**
In 2001, the Company modified its externally reportedsegments to reflect the Company's changing business priorities, in particularthe de-emphasis of non-retail related service businesses, and to alignexternally reported business segments with changes in the Company's internalmanagement structure. Segmented financial data for 2000 and 1999 has beenrestated to reflect the new reporting structure. Throughout management'sanalysis of consolidated results and financial condition, certain prioryear information has been reclassified to conform to the current year presentation.
The Company has presented the following discussion ofresults of operations by business segment. The Company reports its businesssegments results excluding the impacts of noncomparable items and securitizationincome. The Company believes this presentation facilitates the understandingof the results and trends affecting each segment's core operations. Thispresentation is consistent with how the Company reports results internallyto senior management and the Board of Directors. A full discussion of thenoncomparable items is included below.
All references to earnings per share relate to dilutedearnings per common share.
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**Description of Noncomparable Items**
Earnings per share for 2001 were $2.24 compared with $3.88in 2000 and $3.81 in 1999. Net income was $735 million in 2001, $1.3 billionin 2000 and $1.5 billion in 1999. Results of operations for 2001, 2000and 1999 were affected by noncomparable items. The effects of noncomparableitems on net income and earnings per share are summarized in the tablebelow. *millions, except per share*Net IncomeEarnings per Share200120001999200120001999Excluding noncomparableitems$1,385   $1,458   $1,425   $4.22   $4.21   $3.74  Productivity initiatives(79)   --    --    (0.24)   --    --  Product category exits(97)   --    --    (0.30)   --    --  Exide battery litigation settlement(40)   --    --    (0.12)   --    --  Provision for previously securitizedreceivables(331)   --    --    (1.01)   --    --  Securitization income26    82    54    0.08    0.24    0.14  Homelife closure(116)   --    --    (0.35)   --    --  Sears Termite andPest Control impairment--    (98)   --    --    (0.28)   --  Store closings/staffreductions--    (99)   (29)   --    (0.29)   (0.08) Other(13)  --   3   (0.04)  --   0.01 As reported$735  $1,343  $1,453  $2.24  $3.88  $3.81 
The Company defines noncomparable items as transactionsthat are one-time in nature, related to the implementation of special initiativesof the Company, or related to changes in accounting. Following is a descriptionof the noncomparable items affecting 2001, 2000 and 1999.
During 2001, the Company announced strategic initiativesprimarily designed to revitalize its Full-line Stores and reduce operatingexpenses. In connection with these initiatives, the Company recorded apretax charge of $123 million ($79 million after-tax) primarily relatingto employee termination costs for staff reductions at the Company's headquartersand within store operations. In addition, the Company recorded a pretaxcharge of $151 million ($97 million after-tax) in connection with its exitof the floor covering, custom window treatments and skin care and colorcosmetics businesses. These charges primarily include asset write-downs,vendor cancellation payments and incremental customer claims and allowances.
During the fourth quarter of 2001, the Company recordeda pretax charge of $63 million ($40 million after-tax) in connection witha civil legal settlement related to the advertising of certain automotivebatteries in 1994 and 1995 that were manufactured by Exide Technologies.
During the second quarter of 2001, the Company recordeda non-cash, pretax charge of $522 million ($331 million after-tax) to establishan allowance for uncollectible accounts related to $12 billion of securitizedcredit card receivables reinstated on the Company's balance sheet as aresult of the Company's adoption of Statement of Financial Accounting Standards("SFAS") No. 140 in April 2001 (see Note 3 of the Notes to ConsolidatedFinancial Statements). In addition, effective in the second quarter of2001, the Company's securitization transactions are accounted for as securedborrowings and the Company ceased recording securitization income. As such,securitization income reported in prior periods is noncomparable subsequentto March 2001.
During the second quarter of 2001, the Company also recordeda pretax charge of $185 million ($116 million after-tax) relating to theformerly owned Homelife business which was sold to Citicorp Venture Capital,Ltd. in early 1999. Homelife filed for bankruptcy on July 16, 2001. Thecharge reflected the net estimated costs associated with certain propertyleases assigned to Homelife and other obligations related to Homelife inconnection with which Sears may incur losses.
During 1999 and 2000, the Company made investments totaling$20 million in a privately held retail company specializing in home decoratingproducts and services. In 2001, the Company recorded a pretax charge of$20 million ($13 million after-tax) to write-off its investment in thisentity as the entity ceased operations.  
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In December 2000, the Company recorded an impairment chargeof $115 million pretax ($98 million after-tax) for Sears Termite and PestControl based on ongoing and anticipated future losses and management'scommitment to a plan to dispose of this business.
In December 2000, the Company also announced the plannedclosure of 87 under-performing stores consisting of 53 NTB, 30 Hardwareand four Full-line Stores (including two Sears Auto Centers) resultingin a $150 million pretax charge ($99 million after-tax).
In the third quarter of 1999, the Company implementedcertain cost reduction strategies resulting in a $46 million pretax charge($29 million after-tax). Of the $46 million charge, $25 million relatedto the closing of 33 automotive stores and $21 million related to severancecosts for headquarters staff reductions of approximately 450 employees.
In the fourth quarter of 1999, certain estimates of remainingliabilities under the terms of the sale of Western Auto in 1998 were revised,resulting in $5 million of pretax income ($3 million after-tax) being recorded.  
**CRITICAL ACCOUNTING POLICIES**
Management's Discussion and Analysis discusses the resultsof operations and financial condition as reflected in the Company's consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. As discussed in Note1 to the Company's Consolidated Financial Statements, the preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and reported amounts of revenues and expenses duringthe reporting period. On an ongoing basis, management evaluates its estimatesand judgments, including those related to inventory valuation; the allowancefor uncollectible accounts; depreciation, amortization and recoverabilityof long-lived assets, including intangible assets; restructuring and otherreserves; the calculation of retirement benefits and revenue recognition.Management bases its estimates and judgments on its substantial historicalexperience and other relevant factors, the results of which form the basisfor making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. See Note 1 to the Company'sConsolidated Financial Statements for a discussion of the Company's significantaccounting policies.
While the Company believes that the historical experienceand other factors considered provide a meaningful basis for the accountingpolicies applied in the preparation of the consolidated financial statements,the Company cannot guarantee that its estimates and assumptions will beaccurate, which could require the Company to make adjustments to theseestimates in future periods.  
**ANALYSIS OF CONSOLIDATED RESULTS**
Excluding noncomparable items and securitization income,earnings per share were $4.22 in 2001, $4.21 in 2000 and $3.74 in 1999.Net income in 2001, excluding noncomparable items and securitization income,was $1.4 billion compared with $1.5 billion in 2000 and $1.4 billion in1999. In 2001, the decrease in net income reflects the increased operatingincome in Credit and Financial Products being more than offset by decreasesin the other segments. With respect to earnings per share, the increaserepresents a reduction of shares outstanding due to the Company's sharerepurchase programs. Excluding noncomparable items and securitization income,2001 earnings per share increased 0.2% over 2000 while net income decreasedby 5.0%.
In 2000, earnings per share and net income, excludingnoncomparable items and securitization income, increased by 12.6% and 2.3%,respectively, over comparable 1999 results. The increases reflect higheroperating income in the Credit and Financial Products segment and withrespect to earnings per share, a reduction of shares outstanding due tothe Company's share repurchase programs. These improvements were partiallyoffset by lower operating income in the Sears Canada and Retail and RelatedServices segments as well as higher corporate expenses.  
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**Retail and Related Services**
Retail and Related Servicesresults and key statistics were as follows:*millions,except number of stores and Retail store**revenues per selling square foot*

2001

2000

1999Full-line Storesrevenues (1)$24,406 $25,122 $24,300 Specialty Storesrevenues (1)4,743 4,621 4,406 Related Services revenues2,2852,2812,280Total Retail and RelatedServices revenues31,43432,02430,986Cost of sales,buying and occupancy23,169 23,662 22,721 Selling and administrative6,628 6,687 6,455 Depreciation andamortization704 710 715 Interest322545Total costs and expenses30,53331,08429,936Operating income$901$940$1,050Number of Full-lineStores (1)867 863 858 Number of SpecialtyStores (1)1,3181,3361,355Total Retail stores2,1852,1992,213Retail store revenuesper selling square foot$319 $333 $327 Comparable storesales percentage increase (decrease)-2.3% 2.3% 1.7% (1) Sears Auto Centers areconsidered part of Full-line Stores rather than separate Specialty Stores.NTB stores are stand-alone locations and are included with Specialty Stores.
**2001 Compared with 2000**
In 2001, total Retail and Related Services revenues decreased1.8% to $31.4 billion and comparable store sales decreased by 2.3%.
Full-line Stores revenues decreased 2.9% to $24.4 billionin 2001, as comparable store sales decreased 3.0%, and four net new storeswere added. In Hardlines, solid revenue increases in home appliances weremore than offset by revenue declines in home office, home improvement,and home electronics merchandise categories. The increase in home appliancesrevenue is primarily due to increased sales of the Company's newly launchedenergy efficient laundry products and food storage products. Home officerevenue declines can be attributed to declines in computer and computeraccessories sales, as these product offerings were significantly editedduring 2001 in an effort to improve gross margin. Within home improvement,a slight increase in lawn and garden sales was more than offset by decreasesin hardware, plumbing and heating, paint and home fitness. Merchandiseedits were also made within the home fitness category in which bicycleproduct offerings were removed and game room and other fitness productcategories were expanded. The decrease in home electronics is primarilydue to a decrease in sales of non-digital products such as camcorders andstereo equipment, which is reflective of the Company's de-emphasis of theseproducts, partially offset by increased sales in big screen and projectiontelevisions. In Softlines, the Company experienced sales increases in homefashions/home décor, which were primarily driven by the sale ofmattresses. Mattress product offerings were successfully reintroduced inthe Full-line Stores in the second quarter of 2001. This increase was morethan offset by significant declines in men's, children's and women's apparelsales. In addition, the Company's exit of the skin care and color cosmeticsbusiness contributed to unfavorable revenue declines in Softlines. SearsAuto Centers revenues increased due to solid comparable store sales increases,which were achieved through successful promotions in 2001, partially offsetby unfavorable comparison to the prior year which benefited from the Firestonerecall.  
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Specialty Store revenues increased 2.6% to $4.7 billionin 2001 from 2000. The increase reflects the addition of nine The GreatIndoors stores and overall comparable store sales growth of 2.5%, partiallyoffset by the net closure of 27 other Specialty Stores. Dealer Stores revenueincreases in 2001 resulted from solid comparable store sales increasesand the net addition of three Dealer Stores. Hardware Stores revenues increasedprimarily due to an increase in comparable store sales partially offsetby the net closure of 26 stores. The Great Indoors experienced strong revenuegrowth due to the addition of nine new stores as well as a modest comparablestore sales increase. NTB revenue decreases were due primarily to the closureof 53 NTB stores in December of 2000 as well as a 4.4% decline in comparablestore sales due primarily to an unfavorable comparison to the prior year,which benefited from the Firestone recall.
Related Services revenues increased 0.2% in 2001 comparedwith 2000. The revenue increase in Sears Repair Services was offset byrevenue declines in Direct to Customer and Clubs and Services due to theelimination of underperforming product offerings.
Retail and Related Services gross margin as a percentageof Retail and Related Services revenues improved 20 basis points in 2001compared with 2000. The year ended December 29, 2001 included a LIFO chargeof $25 million whereas 2000 included a LIFO credit of $29 million. Excludingthe LIFO adjustments, the gross margin rate improved 40 basis points, primarilyreflecting margin improvement within virtually all Specialty Store formatsand Related Services businesses, partially offset by a decline in Full-lineStore margin rates. The decline in Full-line Stores is primarily due toincreased markdown activity in 2001, partially offset by benefits achievedthrough strategic sourcing initiatives.
Retail and Related Services selling and administrativeexpense as a percentage of Retail and Related Services revenues increased20 basis points in 2001 from 2000. While the Company began to recognizeexpense savings from its productivity initiatives in the second half of2001, selling and administrative expense leverage was unfavorably affectedby the decrease in sales throughout 2001.
Retail and Related Services operating income was $901million in 2001, $39 million lower than 2000, as lower revenues and unfavorableexpense leverage were partially offset by higher gross margin rates.  
**2000 Compared with 1999**
Retail and Related Services revenues increased to $32.0billion in 2000, up 3.4% from 1999. Excluding the Homelife business from1999, total Retail and Related Services revenues increased 3.5% in 2000.
Full-line Stores revenues increased 3.4% in 2000, benefitingfrom comparable store sales growth as well as the net addition of fiveFull-line Stores. The Full-line Stores comparable store sales increasewas led by solid revenue performance in hardlines merchandise. Hardlinesrevenue increases in home appliances, electronics and home improvementwere partially offset by a decline in home office merchandise sales. Softlinesrevenue increases in footwear, fine jewelry, home fashions and cosmeticsand fragrances were offset by declines in children's and men's appareland floor coverings, while sales of women's apparel were essentially flatwith 1999. Sears Auto Centers benefited from the Firestone recall, strongcomparable store sales growth and the net addition of six new stores.
Specialty Store revenues increased to $4.6 billion in2000 from 1999. Excluding the sold Homelife business, specialty retailrevenues increased 6.0% in 2000. The increases reflect comparable storesales growth as well as new store openings. Dealer Stores revenue increasesin 2000 resulted from the net addition of 52 Dealer Stores and strong comparablestore sales increases. The Great Indoors benefited from strong revenuegrowth due to the addition of two new stores as well as double-digit comparablestore sales increases. Hardware Stores revenue gains were due primarilyto the net addition of seven new Hardware Stores, while comparable storesales increased slightly. NTB revenues declined due to 81 net store closuresand a 1.2% decline in comparable store sales.  
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Related Services revenues were relatively flat in 2000compared with 1999. Revenue increases in Clubs and Services and Sears Carpetand Upholstery were offset by revenue declines in Sears Repair Services.
Retail and Related Services gross margin as a percentageof Retail and Related Services revenues declined 60 basis points in 2000compared with 1999, partially reflecting a lower LIFO credit in the fourthquarter. The LIFO credit was $29 million in 2000 compared with $73 millionin 1999. Excluding the LIFO credits, the 2000 gross margin rate declined40 basis points compared to 1999, primarily reflecting increased markdownactivity in 2000.
Retail and Related Services selling and administrativeexpense as a percentage of Retail and Related Services revenues increased10 basis points in 2000 from 1999. The decline was primarily driven byincreased infrastructure costs associated with the online business.
Retail and Related Services depreciation and amortizationexpense decreased 0.7% in 2000 compared with 1999. The slight decreasein 2000 primarily reflects less capital spending in the Full-line Storesin 2000.
Retail and Related Services operating income was $940million in 2000, $115 million lower than 1999, as lower gross margin ratesand unfavorable expense leverage more than offset higher sales volumes.  
**Credit and Financial Products**
Credit and Financial Productsresults were as follows:*millions*200120001999Credit and FinancialProducts revenues$5,216$5,247$5,367Selling and administrative833 810 949 Provision for uncollectibleaccounts1,441 1,358 1,496 Depreciation and amortization18 16 14 Interest1,3951,5501,542    Total costsand expenses3,6873,7344,001Operating income$1,529$1,513$1,366
Credit and Financial Products operating income excludingsecuritization income increased by $16 million in 2001 over 2000, primarilyreflecting lower funding costs partially offset by a decrease in revenues,an increase in selling and administrative costs, and increased provisionexpense.
Operating income excluding securitization income was $1.5billion in 2000, an increase of $147 million over the 1999 level. AlthoughCredit and Financial Products revenue decreased during 2000, operatingincome favorability resulted from a lower provision for uncollectible accountsand lower operating expenses. The lower provision expense was primarilydriven by lower net charge-offs.
In 2001, Credit and Financial Products revenues decreased0.6% to $5.2 billion. The decrease in revenues was primarily due to a 51basis point decrease in portfolio yield, partially offset by an increasein average per card balances. The increase in average per card balancesisprimarily attributable to an increase in the average balances for the SearsGold MasterCard, which has a lower yield than the traditional Sears Card,thus causing a decrease in the overall portfolio yield. The lower yieldfor the Sears Gold MasterCard is somewhat offset by interchange fees receivedfrom non-Sears locations that accept the card. In 2000, Credit and FinancialProducts revenues decreased 2.2% to $5.2 billion. The decrease in revenueswas attributable to a lower level of average credit card receivables whichwas partially offset by a 10 basis point improvement in portfolio yield.  
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A summary of credit information for the domestic managedportfolio is as follows:  *millions,except for average account balance*200120001999Sears credit cardsales as a % of sales47.0% 47.4% 48.5% Average account balanceas of year-end *(dollars)*$1,136 $1,113 $1,121 Sears Card averagemanaged credit card receivables$23,828 $25,336 $26,595 Sears Gold MasterCardaverage managed credit card receivables2,490494--   Totalaverage managed credit card receivables$26,318$25,830$26,595Sears Card endingmanaged credit card receivables$22,342 $25,652$26,785 Sears Gold MasterCardending managed credit card receivables5,2571,349--   Totalending managed credit card receivables$27,599$27,001$26,785
The percentage of merchandise sales and services transactedwith Sears credit cards in 2001 declined to 47.0% from 47.4% in 2000, dueto a greater preference for other payment methods, including cash, checkand third-party credit and debit cards. Sears stores accept third partycredit and debit cards such as VISA, MasterCard, American Express and DiscoverCard. Although Sears accepts these third party credit and debit cards atall Sears stores, the Company remains focused on marketing and other initiativesthat are designed to maintain the penetration of Sears credit productsin the Company's various sales and service channels.
However, the Sears Gold MasterCard product, which waslaunched in 2000, has been successful in offsetting the declining trendin average managed balances in 2001.
Credit and Financial Products selling and administrativeexpense increased 2.8% in 2001 from 2000 levels. The increase is primarilydue to an increase in consumer fraud costs, payroll and benefits, customernotification expenses and costs associated with the continued roll-outof the Sears Gold MasterCard product. These increases were partially offsetby decreases in outsourcing expenses as well as increased reimbursementfrom Retail and Related Services for zero percent financing. Credit andFinancial Products selling and administrative expense decreased 14.6% in2000 from 1999. Reductions in marketing, legal and collection expensescontributed to the decrease in selling and administrative expenses in 2000compared with 1999.
The activity in the domestic allowance for uncollectibleowned accounts and related information is as follows:   *millions*200120001999Balance, beginningof year$649 $725 $942 Provision for uncollectibleaccounts1,441 1,358 1,496 Less: securitizationadjustment(153)(522)(659)Net domestic provision for uncollectibleaccounts1,288 836 837 Provision for previouslysecuritized receivables522 -- -- Net charge-offs(1,247) (801) (1,054) Transfer to Securitization MasterTrust(83) (111) -- Reduction for accounts sold (1)(14)-- -- Balance, end of year$1,115 $649 $725 Allowance as percentof ending owned credit card receivables4.04%4.03%4.26%Net credit charge-offs to averagemanaged credit card receivables5.32%5.12%6.44%Delinquency rate at year-end (2)7.58%7.56%7.58%(1)In the fourth quarterof 2001, the Company sold receivables related to its Home Improvement Servicesbusinesses.(2)The aging methodologyis based on the number of completed billing cycles during which a customerhas failed to make a required payment. Accounts are considered delinquentwhen a customer has failed to make a payment in each of the last threeor more billing cycles.
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In 2001, the net domestic provision for uncollectibleaccounts increased $452 million from 2000 primarily due to the additionalcredit card receivable balances recorded when the Company consolidatedits securitization structure for financial reporting purposes in the secondquarter of 2001. As a result, charge-offs that had previously been recognizedby the master trust are now included in the provision for uncollectibleaccounts. Charge-offs increased by $446 million reflecting the inclusionin 2001 of charge-offs for the previously sold and securitized receivablesand an increase in the net charge-off rate in 2001 to 5.32% from 5.12%in 2000, primarily due to increased customer bankruptcy filings. Despitethe increase in bankruptcy filings in 2001, the delinquency rate for 2001remained relatively flat with 2000. At December 29, 2001, the year-endallowance as a percent of on-book receivables was 4.04%, or $1.1 billionversus 4.03% or $649 million at year-end 2000.
In 2000, the net domestic provision for uncollectibleaccounts was roughly flat with 1999. The net charge-off rate for 2000 decreasedto 5.12% from 6.44% in 1999 due to improvement in the quality of the creditportfolio and a methodology change in the determination of charge-offs.The domestic allowance for uncollectible accounts at year-end 2000 was$649 million, or 4.03% of receivables versus 4.26% at the prior year-end.Also in 2000, the allowance was reduced by $111 million due to the transferof $2.4 billion of receivables to the securitization Master Trust.
In 2000, the Company substituted approximately seven millionSears Gold MasterCard accounts for Sears Card accounts. These accountsgenerally were not incurring finance charges, either because cardholderswere not using their cards or because they were using the cards only forconvenience, generally making full payments within the grace periods. In2001, the Company substituted an additional 11 million Sears Gold MasterCardaccounts for Sears Card accounts, the vast majority of which were incurringlittle or no finance charges. The Company also began offering the SearsGold MasterCard to approximately 180 thousand new accounts. In 2002, theCompany will continue to substitute Sears Gold MasterCard accounts forcertain Sears Card accounts and offer the Sears Gold MasterCard to newcustomers. The Company intends to change the terms of the Sears Card in2002 to move from a fixed rate finance charge to a variable rate financecharge based on the prime rate plus a spread designed to provide initialfinance charge rates approximately equal to the finance charge rates generatedunder the current fixed rates.
Interest expense from the domestic segments is includedin the Credit and Financial Products segment discussion because the majorityof the Company's domestic interest expense is allocated to the Credit andFinancial Products segment. Generally, the domestic interest expense thatis not allocated to the Credit and Financial Products segment is allocatedto the Retail and Related Services segment and is not significant relativeto total costs in the Retail and Related Services segment.
Domestic interest expense is combined with the fundingcost on securitized receivables to represent total funding costs. Totaldomestic funding costs were as follows:   *millions*200120001999Domestic segmentsinterest expense$1,304 $1,135 $1,168 Domestic fundingcost of securitized receivables(1)123 440 419Total domesticfunding costs$1,427 $1,575 $1,587 (1) Beginning inthe second quarter of 2001, funding costs on securitized receivables areincluded in segment interest expense.
Total domestic funding costs decreased 9.4% in 2001 to$1.4 billion. The decrease in funding costs primarily reflects the Company'sincreased use of variable rate financing in a declining interest rate environment.At year-end 2001 and 2000, 85% and 33%, respectively, of the Company'sfunding portfolio was variable rate (including current maturities of fixedrate long-term debt and fixed rate debt converted to variable rate throughthe use of derivative financial instruments). The shift to more variablerate funding is in response to the growth of variable rate receivableswithin the credit card portfolio (primarily the Sears Gold MasterCard product)and the Company's intention to convert Sears Card finance charges fromfixed rate to variable rate in 2002. The increase in variable rate fundingwas achieved primarily by using interest rate swaps to convert fixed ratedebt to variable rate and by current year issuance of variable rate debt.  
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Total domestic funding costs decreased 0.8% in 2000 to$1.6 billion. The decrease in funding costs in 2000 resulted from a lowerlevel of average credit card receivable balances mostly offset by a higherfunding rate environment.  
**Corporate and Other**
Corporate and Other segmentresults were as follow:*millions*200120001999Home Improvement Servicesrevenues$378 $353 $358 Cost of sales, buying and occupancy159  144  143  Selling and administrative473  407  427  Depreciation and amortization58 53 54    Total costs and expenses690 604 624 Operating loss$(312)$(251)$(266)
Revenues from the home improvement services businessesincluded in the Corporate and Other segment increased by 7.1% to $378 millionover 2000 primarily due to strong performance by Sears Siding and Windows.Segment operating loss was $61 million higher due to increased home officeexpenses. The increase primarily reflected consulting expenses relatedto the development of the Company's strategic initiatives.
On October 1, 2001, the Company completed the sale ofcertain assets of its wholly owned subsidiary, Sears Termite and Pest Control,Inc. ("STPC"), to the ServiceMaster Company. Under the terms of the transaction,the Company will provide certain transition services and may share in thecost of remediating termite damage claims in excess of defined amounts,if any, for a limited period of time. This transaction did not materiallyaffect results of operations or consolidated financial position of theCompany.
Revenues from the home improvement services businessesdecreased by 1.4% to $353 million in 2000 compared to 1999. Segment operatingloss improved $15 million, with a decrease in home office expenses partiallyoffset by higher operating losses from the home improvement services businesses.Corporate headquarters expenses decreased $26 million in 2000 comparedwith 1999. The decrease was primarily attributable to decreased spendingin 2000 on information systems as well as lower spending in 2000 acrossother corporate areas.  
**Sears Canada**
Sears Canada results were as follow: *millions, exceptrevenues per selling square foot*200120001999Merchandise salesand services$4,031 $3,989 $3,619 Credit revenues294293275   Total revenues4,3254,2823,894Cost of sales, buyingand occupancy2,994 2,901 2,561 Selling and administrative997 1,038 905 Provision for uncollectibleaccounts56 48 34 Depreciation and amortization83 60 76 Interest111113100   Totalcosts and expenses4,2414,1603,676Operating income$84$122$218Revenues per sellingsquare foot$190 $193 $231 Comparable store salespercentage (decrease) increase-0.4%5.0%9.5% 
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**2001 Compared with 2000**
The Canadian economy continued to exhibit recessionarycharacteristics in 2001, resulting in a very soft and challenging retailenvironment. In response to the adverse market conditions, Sears Canadafocused 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 increasedby 1.1% while same store sales decreased by 0.4%. Full-line and Specialtyformats 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 Eaton's stores. In February2002, Sears Canada announced its intention to convert the remaining sevenEaton's stores to Sears Canada stores. The Company expects to record aone-time, pre-tax charge of $107 million ($40 million after-tax and minorityinterest) in the first quarter of 2002 related to the conversions.
Credit revenues were flat compared to prior year. WithinSears Canada credit operations, the net charge-off rate increased to 4.1%in 2001 from 4.0% in 2000.
Sears Canada gross margin rate as a percentage of merchandisesales and services revenues declined by 160 basis points in 2001 reflectingincreased markdown activity as well as higher buying and occupancy expensesassociated with the Eaton's stores.
Sears Canada selling and administrative expense as a percentageof total revenues improved 110 basis points in 2001, primarily due to thefact that 2000 included costs associated with the integration and relaunchof Eaton's.
Sears Canada depreciation and amortization increased by38.3% due to the additional Eaton's stores. Interest expense was relativelyflat with the prior year. The provision for uncollectible accounts increasedby $8 million due to higher charge-offs.
Sears Canada operating income declined by $38 million,or 31.1%, primarily due to pressures on margins caused by the very competitivepromotional environment.  
**2000 Compared with 1999**
Total Sears Canada revenues were $4.3 billion in 2000,a 10.0% increase over 1999. Sears Canada's total merchandise sales increasedby 10.2% while same store sales increased by 5.0%. Full-line, Specialtyand Catalog formats all posted sales gains. In 2000, 17 new Full-line Storeswere opened primarily representing stores acquired from Eaton's on December30, 1999. Seven of these stores were reopened as Eaton's while the remainderwere reopened as Sears stores. Sears Canada also opened 29 specialty off-the-mallstores in 2000. Sears Canada's Full-line Store selling square feet increasedby 30% in 2000.
Sears Canada gross margin rate as a percentage of merchandisesales and services revenues declined by 190 basis points in 2000 reflectingincreased markdown activity as well as higher expenses associated withthe re-launch of the Eaton's chain and conversion of certain Eaton's storesto Sears banner stores.
Sears Canada selling and administrative expense as a percentageof total revenues was 100 basis points higher than 1999, primarily drivenby higher payroll and store opening costs.
Sears Canada depreciation and amortization declined by21.1% benefiting from amortization of negative goodwill arising from theEaton's acquisition. Interest expense increased by 13.0% due to increasedborrowing levels and a higher funding rate environment. The provision foruncollectible accounts increased by $14 million due to higher charge-offs.
Sears Canada operating income declined by $96 millionor 44.0% predominately due to costs associated with integrating and reopeningstores acquired from Eaton's outpacing the partial year revenue benefits.  
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**INCOME TAX EXPENSE**
Consolidated income tax expense as a percentage of pretaxincome increased to 38.2% in 2001 from 37.4% in 2000. This increase isprimarily due to an increase in Sears Canada's effective tax rate in 2001.Sears Canada's effective tax rate increased from 2000 due to revaluinga deferred tax asset.
The consolidated effective tax rate was 37.4% in both2000 and 1999. The 2000 consolidated tax expense includes an unusuallylow tax benefit on special charges and impairments due to the write-downof non-tax deductible goodwill. Excluding special charges and impairments,the 2000 consolidated effective tax rate would have been 36.1% or 130 basispoints lower than the 1999 rate. The decrease from 1999 is primarily dueto a reduction in the effective tax rate on Canadian income caused by non-taxablenegative goodwill related to the Eaton's acquisition.  
**INFLATION**
The moderate rate of inflation over the past three yearshas not had a significant effect on the Company's sales and profitability.  
**ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION**
The Company has significant financial capacity and flexibilitydue to the quality and liquidity of its assets, principally its creditcard receivables. As such, the Company has the ability to access multiplesources of capital.
A summary of the Company's credit card receivables atyear-end is as follows: *millions *200120001999Domestic:Managed credit cardreceivables$27,599$27,001 $26,785 Securitized balancessold--(7,834)(6,579)Retained interestin transferred credit card receivables (1)--(3,051)(3,175)Other customer receivables4059 37Domestic owned creditcard receivables27,63916,175 17,068 Sears Canada creditcard receivables1,6821,828 1,725 Consolidated ownedcredit card receivables$29,321$18,003$18,793 (1) The 2000 and 1999 retainedinterest amounts exclude reserves of $82 and $31 million, respectively,and interest-only strip balances of $136 and $67 million, respectively,related to the transfer of credit card receivables into the Trust. 
As of year-end 2000 and 1999, the credit card receivablesbalance of $18.0 billion and $18.8 billion, respectively, excluded creditcard receivables transferred to a securitization Master Trust ("Trust").Through its subsidiary, SRFG, Inc., the Company obtains funding by sellingsecurities backed by a portion of the receivables in the Trust. In additionto the receivables in the Trust, which support securities sold to thirdparties, the Company transfers additional receivables to the Trust to havereceivables readily available for future securitizations. As discussedin Note 3 of the Company's Consolidated Financial Statements, the Companyconsolidated its Master Trust beginning in the second quarter of 2001,subsequent to the adoption of SFAS No. 140. The Company continues to utilizesecuritizations as a key funding source.  
24

Consolidated credit card receivable balances are geographicallydiversified within the United States and Canada. The Company grants retailconsumer credit based on the use of proprietary and commercially availablecredit histories and scoring models. The Company promptly recognizes uncollectibleaccounts and maintains an adequate allowance for uncollectible accountsto reflect losses inherent in the owned portfolio as of the balance sheetdate. There is further discussion of receivable balances in the discussionof the Credit and Financial Products segment's Results of Operations.
Inventories are primarily valued on the last-in, first-outor LIFO method. Inventories would have been approximately $590 millionhigher if valued on the first-in, first-out or FIFO method at December29, 2001. Inventories on a FIFO basis totaled $5.5 billion at December29, 2001, compared with $6.2 billion at December 30, 2000. The majorityof the decrease in domestic inventory levels reflects decreased hardlinesand softlines inventories in Full-line Stores as well as decreases in inventoriesfor virtually all Specialty Store formats. Sears Canada inventory alsodecreased due to continued focus on managing inventory levels.  
**CAPITAL RESOURCES**
Total borrowings outstanding at the end of 2001 and 2000were $25.6 billion and $25.7 billion, respectively. Total borrowings, includingdebt reflected on the balance sheet and investor certificates related tocredit card receivables issued through securitizations, were as follows:   *millions* 2001% ofTotal 2000% ofTotal 1999% ofTotalShort-term borrowings$3,557 13.9% $4,280 16.7% $2,989 12.2% Long-term debt (1)22,078 86.1% 13,580 52.8% 15,049 61.1% Securitized balances sold (2)----7,83430.5%6,57926.7%Total borrowings$25,635100.0%$25,694100.0%$24,617100.0%(1) Includes capitalizedlease obligations.(2) Included in long-term debt in 2001 dueto the change in securitization accounting; the securitization trust wasnot consolidated in 2000 and 1999 (see Note 3 of the Notes to the ConsolidatedFinancial Statements). 
The Company accesses a variety of capital markets to preserveflexibility and diversify its funding sources. The broad access to capitalmarkets also allows the Company to effectively manage liquidity and interestrate risk. Liquidity risk is the measure of the Company's ability to fundmaturities and provide for the operating needs of its businesses. Interestrate risk is the effect on net income from changes in interest rates. TheCompany's cost of funds is affected by a variety of general economic conditions,including the level and volatility of interest rates. The Company's policyis to manage interest rate risk through the use of fixed and variable ratedebt and interest rate derivatives.
The ratings of the Company's debt securities as of December29, 2001, appear in the table below:   Moody'sInvestorsServices, Inc.Standard& Poor'sFitchRatingsUnsecured long-term debtA3A-A-Unsecured commercial paperP-2A-2F-2Term securitizationAaaAAAAAA 
25

The Company utilizes Sears Roebuck Acceptance Corp. ("SRAC"),a wholly owned subsidiary, to issue commercial paper, maintain a medium-termnote program, and issue intermediate and long-term underwritten debt. SRACcommercial paper outstanding was $3.2 billion and $3.9 billion at December29, 2001 and December 30, 2000, respectively. SRAC commercial paper issupported by a $5.1 billion syndicated credit agreement, $875 million ofwhich expires in April 2002 and $4.2 billion of which expires in April2003. The following securities were issued by SRAC during 2001:  s$1.8 billion of discreteunderwritten notes with a weighted average coupon of 6.89% and an averageterm of 10 years; ands$270 million of variablerate medium-term notes with a weighted average coupon of 3 month LIBOR+ 1.06% and an average term of 2.3 years.
The Company, through its subsidiary SRFG, Inc., securitizesdomestic credit card receivables to access intermediate-term funding ina cost effective manner. In 2001, the Company issued $2.2 billion of floatingrate term securitizations, compared with $2.6 billion of fixed and floatingrate term securitizations in 2000. As of December 29, 2001, $15.0 billionof domestic credit card receivables included in the balance sheet are segregatedin Master Trusts. The Company does not have any off-balance sheet, specialpurpose entity funding arrangements as of December 29, 2001.  
**CAPITAL SPENDING**
The Company has an ongoing capital expenditure programto renovate and update its Full-line Stores. In addition, the Company hasadded more Full-line and Specialty Stores. Capital expenditures duringthe past three years were as follows:*millions*200120001999Full-line Stores,primarily remodeling and expansion efforts$531$428$530Specialty Stores318198114Other domestic- distribution/support191205246Sears Canada86253143Total capitalexpenditures$1,126$1,084$1,033 
The Company plans capital expenditures of $1.3 billionfor 2002 on a consolidated basis. The planned increase in domestic capitalspending over 2001 is largely to support Full-line Store remodels and continuedexpansion of The Great Indoors with approximately seven store openingsplanned in 2002. The 2002 domestic capital plan also includes the openingof approximately nine Full-line Stores and more than 40 Specialty Stores,and the relocation of approximately six Full-line Stores. Sears Canadacapital spending is projected to increase approximately 50 percent in 2002from 2001 spending levels. The Company may also pursue selective strategicacquisitions.  
**SHARE REPURCHASES**
During 2001, the Company repurchased 16.1 million commonshares for $625 million under a $1.0 billion share repurchase program approvedby the Board of Directors in August 2000. As of the end of 2001, the Companyhad remaining authorization to repurchase $177 million of common sharesby December 31, 2002 under this program.
In addition, on December 12, 2001, the Board of Directorsapproved a new common share repurchase program to acquire up to $1.5 billionof the Company's common shares. This authorization expires on December31, 2004.  
26

**LIQUIDITY**
The Company's principal sources of liquidity are operatingcash flows and various sources of capital market borrowings. Capital marketborrowings are used primarily to support the Company's Credit business.Ongoing access to the capital markets is critical to the Credit business.
Operating cash flows from the Company's retail businessesare impacted by the competitive conditions in the retail industry, theeffects of the current economic climate and consumer confidence. The Company'sCredit business is subject to federal and state legislation and regulation.From time to time, such legislation as well as competitive conditions,may affect, among other things, credit card finance charges. While theCompany cannot predict the effect of future competitive conditions andlegislation or the measures the Company might take in response thereto,a significant reduction in the finance charges imposed by the credit businesswould have an adverse effect on the Company. In addition, changes in generalU.S. economic conditions, including, but not limited to, higher interestrates and increases in delinquencies, charge-offs and personal bankruptciescould have an adverse effect on the Company.
The Company has not identified any reasonably possiblecircumstances that would likely impair the Company's ability to maintainits planned level of operations, capital expenditures, dividends and sharerepurchases in the foreseeable future or that would trigger any early paymentor acceleration provisions in the debt portfolio.  
**CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS**
To facilitate an understanding of the Company's contractualobligations and commercial commitments, the following data is provided: *millions*Payments Due by PeriodTotalWithin1 year2-3 years4-5 yearsAfter 5 yearsContractualObligationsLong-Term Debt$21,739 $3,138 $7,977 $3,961 $6,663 Short-Term Debt3,557 3,557 -- -- -- Capital Lease Obligations458 19 29 28 382 Operating Leases2,4473125694321,134Total ContractualCash Obligations$28,201$7,026$8,575$4,421$8,179Amount of Commitment Expiration Per Period*millions*Total Amounts CommittedWithin1 year2-3 years4-5 yearsAfter 5 yearsOther CommercialCommitmentsStandby Lettersof Credit$37$5$1$1$30Guarantees9113323115Import Lettersof Credit185185------Total CommercialCommitments$313$203$33$32$45
27

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION**
Certain statements made in this Annual Report on Form10-K, including the Chairman's letter accompanying the report and statementsin the report under the headings "Strategic Initiatives" and "Outlook",are "forward-looking statements" that involve risks and uncertainties thatcould cause actual results to differ materially. Such statements are basedon assumptions about many important factors, including competitive changesin conditions in the retail industry; changes in consumer confidence andspending in the United States and Canada; interest rates, bankruptcy filings,delinquency and charge-off trends in the credit card receivables portfolio;consumer acceptance of the Sears Gold MasterCard program; customer reactionand execution risk with respect to the Company's strategic initiatives,including marketing and product mix; anticipated cash flow; general UnitedStates and Canada economic conditions and normal business uncertainty.In addition, the Company typically earns a disproportionate share of itsoperating income in the fourth quarter due to seasonal buying patterns,which are difficult to forecast with certainty. While the Company believesthat its assumptions are reasonable, it cautions that it is impossibleto predict the impact of such factors which could cause actual resultsto differ materially from predicted results. The Company intends theseforward-looking statements to speak only at the time of this report anddoes not undertake to update or revise these projections as more informationbecomes available.  
28

*Item 7a. Quantitative and Qualitative Disclosures AboutMarket Risk*
The primary market risk exposure faced by the Companyis interest rate risk and arises from the Company's debt obligations, creditcard assets and derivative financial instruments. The Company's policyis to manage interest rate risk through the use of fixed and variable ratedebt and interest rate derivatives. All debt securities and derivativeinstruments are considered non-trading.
At year-end 2001 and 2000, 85% and 33%, respectively,of the Company's funding portfolio was variable rate (including currentmaturities of fixed rate long-term debt and fixed-rate debt converted tovariable rate through the use of derivative financial instruments). Theshift to more variable rate funding is in response to the growth of variablerate receivables within the Company's credit card portfolio (primarilythe Sears Gold MasterCard product) and the Company's intention to convertthe finance charge on the Sears Card from fixed rate to variable rate in2002. The increase in variable rate funding was achieved primarily by usinginterest rate swaps to convert fixed rate debt to variable rate and bycurrent year issuance of variable rate debt.
The objective of the shift to variable rate funding isto reduce net interest margin risk by better aligning the Company's fundingwith its credit card assets. However, the Company is exposed to basis riskon any differences in the variable rate on the Company's debt, primarilyLIBOR-based, and the prime-based variable rate finance charge on the Company'scredit card portfolio.
Prior to the conversion of the Sears Card to variablerate in 2002, the increased level of variable-rate funding increases thepotential effect on earnings of fluctuations in short term interest rates,primarily LIBOR. Based on the size of the Company's variable rate fundingportfolio at year-end 2001 and 2000, which totaled $21.8 billion and $8.5billion, respectively, an immediate 100 basis point change in interestrates would have affected pretax funding costs by approximately $218 millionand $85 million in 2001 and 2000, respectively. These estimates assumethat the funding portfolio remains constant for an annual period and theinterest rate change occurs at the beginning of the period. These estimatesalso do not take into account the effect on net interest margin of changesin revenue resulting from either changes in terms of the assets or in theindex applicable to the variable rate receivables. Additionally, the Company'sability to increase the finance charge yield of its variable rate creditcard assets may be limited at some point by competitive conditions.
The Company actively manages the risk of non-payment byits derivative counterparties by limiting its exposure to individual counterpartiesbased on credit ratings, value at risk and maturities. The counterpartiesto these instruments are major financial institutions with credit ratingsof single-A or better. In certain cases, counterparty risk is also managedthrough the use of collateral in the form of cash or U.S. government securities.The following table summarizes notional amounts, fair values and averageremaining life of domestic derivative instruments: Notional Amount*(millions)* Fair Value*(millions)*Average RemainingLife (years)$10,642$(63)4.5No more than 16 percent of the notional amount of the derivativesportfolio was contracted with any one counterparty.  
*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 includedin this report beginning on page F-1. 
*Item 9. Changes in and Disagreements with IndependentAuditors on Accounting and Financial Disclosure*
None  
29

PART III  
*Item 10. Directors and Executive Officers of the Registrant*
Information regarding directors and executive officersof Sears is incorporated herein by reference to the descriptions under"Item 1: Election of Directors" and "Section 16(a) Beneficial OwnershipReporting Compliance" of the 2002 Proxy Statement and to Item 1A of thisReport under the caption "Executive Officers of the Registrant".  
*Item 11. Executive Compensation*
Information regarding executive compensation is incorporatedby reference to the material under the captions "Item 1: Election of Directors,""Directors' Compensation and Benefits," "Executive Compensation," "StockOptions," "Long-Term Performance Incentive Program," "Pension Plan," "OfficerAgreements" and "Compensation Committee Interlocks and Insider Participation"of the 2002 Proxy Statement.  
*Item 12. Security Ownership of Certain Beneficial Ownersand Management*
Information regarding security ownership of certain beneficialowners and management is incorporated herein by reference to the materialunder the heading "Beneficial Ownership" of the 2002 Proxy Statement.  
*Item 13. Certain Relationships and Related Transactions*
Information regarding certain relationships and relatedtransactions is incorporated herein by reference to the material underthe heading "Certain Transactions" of the 2002 Proxy Statement.  
30

PART IV  
*Item 14. Exhibits, Financial Statement Schedules, andReports on Form 8-K*
(a)1 and 2 - An "Index to Financial Statements and FinancialStatement Schedules" has been filed as a part of this Report beginningon page F-1 hereof.
(a)3 - Exhibits:
An "Exhibit Index" has been filed as a part of this Reportbeginning 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 11, 2001 wasfiled with the Securities and Exchange Commission on October 11, 2001 toreport, under Item 5, comparable store sales of the Registrant.
A Current Report on Form 8-K dated October 24, 2001 wasfiled with the Securities and Exchange Commission on October 24, 2001 toreport, under Item 5, third quarter earnings of the Registrant.
A Current Report on Form 8-K dated December 12, 2001 wasfiled with the Securities and Exchange Commission on December 17, 2001to report, under Item 5, a $1.5 billion share repurchase program of theRegistrant.  
31

SIGNATURES
Pursuant to the requirements of Section 13 of the SecuritiesExchange Act of 1934, as amended (the "Exchange Act") the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.  SEARS, ROEBUCKAND CO.
(Registrant)*Thomas E.BergmannBy: Thomas E. Bergmann
Vice President and ControllerMarch 13, 2002
Pursuant to therequirements of the Exchange Act, this report has been signed below bythe following persons on behalf of the Registrant and in the capacitiesand on the dates indicated.  SignatureTitle Date*Alan J. LacyAlan J. LacyChairman ofthe Board of Directors, President and Chief Executive Officer)))))*Paul J. LiskaPaul J. LiskaExecutive VicePresident and Chief Financial Officer (Principal Financial Officer))))))*Thomas E. BergmannThomas E. BergmannVice Presidentand Controller (Principal Accounting Officer)))))) 
March 13, 2002*Hall Adams,Jr.Hall Adams,Jr.Director)))))*Brenda C. BarnesBrenda C. BarnesDirector)))))*Warren L. BattsWarren L. BattsDirector)))))*James R. CantalupoJames R. CantalupoDirector)))))*Donald J. CartyDonald J. CartyDirector)))))   SignatureTitle Date*W. James FarrellW. James Farrell
 Director)))
)
)March 13, 2002*Michael A.MilesMichael A. Miles
 Director)))
)
)*Hugh B. PriceHugh B. Price
 Director)))
)
)*Dorothy A.TerrellDorothy A. Terrell
 Director)))
)
)*Raul YzaguirreRaul Yzaguirre
 Director)))
)     *By: /s/ThomasE. Bergmann                   Individually and as Attorney-in-fact
Thomas E. Bergmann           
[This Page Intentionally Left Blank]           
 **SEARS, ROEBUCK AND CO.****INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENTSCHEDULES****Year Ended December 29, 2001**PageManagement'sReport     F-2IndependentAuditors' Report     F-3ConsolidatedStatements of Income     F-4ConsolidatedBalance Sheets     F-5ConsolidatedStatements of Cash Flows     F-6ConsolidatedStatements of Shareholders' Equity     F-7Notes to ConsolidatedFinancial Statements     F-8Schedule II - Valuation and Qualifying Accounts     F-35
F-1

**Management's Report**
The financial statements, financial analyses and all otherinformation were prepared by management, which is responsible for theirintegrity and objectivity. Management believes the financial statements,which require the use of certain estimates and judgments, fairly and accuratelyreflect the financial position and operating results of Sears, Roebuckand Co. ("the Company") in accordance with accounting principles generallyaccepted in the United States of America. All financial information isconsistent with the financial statements.
Management maintains a system of internal controls thatit believes provides reasonable assurance that, in all material respects,assets are maintained and accounted for in accordance with management'sauthorizations and transactions are recorded accurately in the books andrecords. The concept of reasonable assurance is based on the premise thatthe cost of internal controls should not exceed the benefits derived. Toassure the effectiveness of the internal control system, the organizationalstructure provides for defined lines of responsibility and delegation ofauthority. The Company's formally stated and communicated policies demandof employees high ethical standards in their conduct of its business. Thesepolicies address, among other things, potential conflicts of interest;compliance with all domestic and foreign laws, including those relatedto financial disclosure; and the confidentiality of proprietary information.As a further enhancement of the above, the Company's comprehensive internalaudit program is designed for continual evaluation of the adequacy andeffectiveness of its internal controls and measures adherence to establishedpolicies and procedures.
Deloitte & Touche LLP, independent certified publicaccountants, have audited the financial statements of the Company, andtheir report is presented on the following page. Their audit also includesa study and evaluation of the Company's control environment, accountingsystems and control procedures to the extent necessary to conclude thatthe financial statements present fairly the Company's financial positionand results of operations. The independent accountants and internal auditorsadvise management of the results of their audits, and make recommendationsto improve the system of internal controls. Management evaluates the auditrecommendations and takes appropriate action.
The Audit Committee of the Board of Directors is comprisedentirely of directors who are not employees of the Company. The committeereviews audit plans, internal control reports, financial reports and relatedmatters and meets regularly with the Company's management, internal auditorsand independent accountants. The independent accountants and the internalauditors advise the committee of any significant matters resulting fromtheir audits and have free access to the committee without management beingpresent.  
/s/ Alan J. LacyAlan J. LacyChairman of the Board of Directors, President and ChiefExecutive Officer  
/s/ Paul J. LiskaPaul J. LiskaExecutive Vice President and Chief Financial Officer  
/s/ Thomas E. BergmannThomas E. BergmannVice President and Controller  
F-2

**Independent Auditors' Report**  
To the Board of Directors and Shareholders ofSears, Roebuck and Co.
We have audited the accompanying Consolidated BalanceSheets of Sears, Roebuck and Co. as of December 29, 2001 and December 30,2000, and the related Consolidated Statements of Income, Shareholders'Equity, and Cash Flows for each of the three years in the period endedDecember 29, 2001. Our audits also included the financial statement scheduleof Sears, Roebuck and Co., listed on page F-35. These financial statementsand financial statement schedule are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on the financialstatements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standardsgenerally accepted in the United States of America. Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of Sears,Roebuck and Co. as of December 29, 2001 and December 30, 2000, and theresults of its operations and its cash flows for each of the three yearsin the period ended December 29, 2001, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion,such financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly inall material respects the information set forth therein.
As discussed in Notes 3 and 5 to the consolidated financialstatements, the Company in 2001 changed its method of accounting for creditcard securitizations and derivative instruments and hedging activities,as required by new accounting standards. /s/ DELOITTE& TOUCHE LLPDeloitte &Touche LLPChicago, IllinoisFebruary 8,2002
F-3     
**SEARS, ROEBUCK AND CO.****Consolidated Statements of Income***millions,except per common share data*200120001999**REVENUES**Merchandisesales and services$35,843$36,366$34,963Credit and financialproducts revenues5,2354,5714,521   Total revenues41,07840,93739,484**COSTS ANDEXPENSES**Cost of sales,buying and occupancy26,32226,72125,425Selling andadministrative8,8928,8078,607Provision foruncollectible accounts1,344884871Provision forpreviously securitized receivables522----Depreciationand amortization863839859Interest1,4151,2481,268Special chargesand impairments54225141   Total costs and expenses39,90038,75037,071Operating income1,1782,1872,413Other income,net45366Income beforeincome taxes and minority interest1,2232,2232,419Income taxes467831904Minority interest214962**NET INCOME**$735$1,343$1,453**EARNINGSPER COMMON SHARE:**   BASIC$2.25$3.89$3.83   DILUTED$2.24$3.88$3.81See accompanying notes.  
F-4  
**SEARS, ROEBUCK AND CO.****Consolidated Balance Sheets***millions,except per share data*20012000ASSETSCurrent assetsCash and cashequivalents$1,064 $842 Retained interestin transferred credit card receivables-- 3,105 Credit cardreceivables29,321 18,003 Less allowancefor uncollectible accounts1,166 686 Net credit cardreceivables28,155 17,317 Other receivables658 506 Merchandiseinventories4,912 5,618 Prepaid expensesand deferred charges458 486 Deferred incometaxes858 920 Total currentassets36,105 28,794  Property andequipmentLand434 408 Buildings andimprovements6,539 6,096 Furniture, fixturesand equipment5,620 5,559 Capitalizedleases544 522 Gross propertyand equipment13,137 12,585 Less accumulateddepreciation6,313 5,932 Total propertyand equipment, net6,824 6,653 Deferred incometaxes415 174 Other assets973 1,278 **TOTAL ASSETS**$44,317 $36,899 LIABILITIESCurrent liabilitiesShort-term borrowings$3,557 $4,280 Current portionof long-term debt and capitalized lease obligations3,157 2,560 Accounts payableand other liabilities7,176 7,336 Unearned revenues1,136 1,058 Other taxes558 562 Total currentliabilities15,584 15,796  Long-term debtand capitalized lease obligations18,921 11,020 Postretirementbenefits1,732 1,951 Minority interestand other liabilities1,961 1,363 Total Liabilities38,198 30,130 COMMITMENTSAND CONTINGENT LIABILITIESSHAREHOLDERS'EQUITYCommon shares($.75 par value per share, 1,000 shares authorized, 320.4 and 333.2 sharesoutstanding, respectively)323 323 Capital in excessof par value3,500 3,538 Retained earnings7,413 6,979 Treasury stock- at cost(4,223)(3,726)Deferred ESOPexpense(63)(96)Accumulatedother comprehensive loss(831)(249)Total Shareholders'Equity6,119 6,769 **TOTAL LIABILITIESAND SHAREHOLDERS' EQUITY**$44,317 $36,899 
See accompanying notes.  
F-5  
**SEARS, ROEBUCK AND CO.****Consolidated Statements of Cash Flows***millions*200120001999CASH FLOWS FROMOPERATING ACTIVITIESNet income$735 $1,343 $1,453 
Adjustmentsto reconcile net income to net cash provided by    operating activities   Depreciation, amortization and other noncash items751 901 908    Provision for uncollectible accounts1,344 884 871    Provision for previously securitized receivables522 -- --    Restructuring, impairments and sale of businesses542 265 46    Gain on sales of property and investments(21)(19)(10)   Income tax benefit on nonqualified stock options14 3 8    Change in (net of acquisitions):       Deferred income taxes146 26 356        Retained interest in transferred credit card receivables(759)106 1,138        Credit card receivables(810)(199)(873)       Merchandise inventories610 (560)(305)       Other operating assets(128)(51)(98)       Other operating liabilities(684)3 251            Net cash provided by operating activities2,262 2,702 3,745  CASH FLOWS FROMINVESTING ACTIVITIESAcquisitionof businesses, net of cash acquired-- (1)(68)Proceeds fromsales of property and investments59 75 118 Purchases ofproperty and equipment(1,126)(1,084)(1,033)Purchases oflong-term investments(21)(40)(40)           Net cash used in investing activities(1,088)(1,050)(1,023)CASH FLOWS FROMFINANCING ACTIVITIESProceeds fromlong-term debt4,124 824 1,491 Repayments oflong-term debt(3,552)(2,277)(1,516)
   (Decrease) increasein short-term borrowings, primarily 90 days       or less(708)1,295 (1,653)Repayments ofESOP note receivable33 118 57 Common sharesrepurchased(625)(1,233)(570)Common sharesissued for employee stock plans75 58 53 Dividends paidto shareholders(302)(322)(355)           Net cash used in financing activities(955)(1,537)(2,493)Effect of exchangerate changes on cash and cash equivalents3 (2)5 NET INCREASEIN CASH AND CASH EQUIVALENTS222 113 234 **BALANCE ATBEGINNING OF YEAR**842 729 495 **BALANCE ATEND OF YEAR**$1,064 $842 $729 
See accompanying notes.  
F-6  
**SEARS, ROEBUCK AND CO.****Consolidated Statements of Shareholders' Equity**
*dollars in millions**shares in thousands*Common Shares OutstandingCommon StockCapital in Excess of Par ValueRetained EarningsTreasury StockDeferred ESOP ExpenseAccumulated Other Comprehen-sive LossTotal Share-holders' EquityBalance, beginningof year 1999383,508 $323$3,583 $4,848 $(2,089)$(175)$(424)$6,066Net income1,453  1,453 Total other comprehensiveincome137  137   Total comprehensive income1,590 Dividends to shareholders    ($0.92 per share)(349)(349)Stock options exercisedand other     changes2,041 (29)90   61 Shares repurchased(16,421)(570)  (570)ESOP expense recognized41 41Balance, end of year1999369,128 3233,554 5,952 (2,569)(134)(287)6,839Net income1,343 1,343 Total other comprehensiveincome38 38   Total comprehensive income1,381 Dividends to shareholders    ($0.92 per share)(316)(316)Stock options exercisedand other    changes1,963  (16)76  60 Shares repurchased(37,888) (1,233)(1,233)ESOP expense recognized38 38Balance, end of year2000333,203 3233,538 6,979 (3,726)(96)(249)6,769Net income735 735  Total other comprehensiveloss(582)(582)   Total comprehensive income153 Dividends to shareholders    ($0.92 per share)(301)(301)Stock options exercisedand other    changes3,349 (38)128 90 Shares repurchased(16,106)(625)(625)ESOP expense recognized33 33Balance, end of year2001320,446 $323$3,500$7,413$(4,223)$(63)$(831)$6,119  
See accompanying notes.  
F-7  
**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 consolidatedsubsidiaries, the "Company") is a multi-line retailer that offers a widearray of merchandise and related services. In addition, through its Creditand Financial Products businesses, the Company offers its customers variouscredit card and related insurance products. The Company operates principallyin the United States, Puerto Rico and Canada.  
**Basis of Consolidation**
The consolidated financial statements include the accountsof Sears, Roebuck and Co. and all majority-owned subsidiaries. Investmentsin companies in which the Company exercises significant influence, butnot control, are accounted for using the equity method of accounting. Investmentsin 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 duringconsolidation.
The Company holds an equity method investment in AdvanceAuto Parts. The Company's carrying value and fair value of its 35.1% ownershipinterest in Advance Auto Parts at December 29, 2001 were approximately$190 million and $500 million, respectively.  
**Use of Estimates**
The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and reported amountsof revenues and expenses during the reporting period. While actual resultscould differ from these estimates, management does not expect the differences,if any, to have a material effect on the financial statements.
Significant estimates are required as part of inventoryvaluation, determining the allowance for uncollectible accounts, depreciation,amortization and recoverability of long-lived assets, establishing restructuringand other reserves, and calculating retirement benefits.  
**Reclassifications**
Certain reclassifications have been made to prior yearfinancial statements and the notes to conform with the current year presentation.  
F-8  
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
**Fiscal Year**
The Company's fiscal year ends on the Saturday nearestDecember 31. Unless otherwise stated, references to years in this reportrelate to fiscal years rather than to calendar years. Fiscal yearEndedWeeks2001December 29, 2001522000December 30, 2000521999January 1, 200052  
**Revenue Recognition**
Revenues from merchandise sales and services, includingdelivery fees, are reported net of estimated returns and allowances andare recognized when the related goods are shipped and all significant obligationsof the Company have been satisfied. The reserve for returns and allowancesis calculated as a percentage of sales based on historical return percentages.Commissions earned on sales made by licensed businesses are also includedas a component of merchandise sales and services.
Revenues from product installation and repair servicesare recognized as the services are provided. Additionally, the Companysells extended service contracts with terms of coverage between 12 and60 months. Revenues from the sale of these contracts are deferred and amortizedover the lives of the contracts while the service costs are expensed asincurred. Incremental costs directly related to the acquisition of suchcontracts are deferred and charged to expense in proportion to the revenuerecognized.
The Company direct markets insurance (credit protection,life and health) and clubs and services memberships. Deferred revenue isrecorded when the member is billed (upon expiration of any free trial period),and revenue is recognized over the insurance or membership period. TheCompany also direct markets merchandise through specialty catalogs andother impulse and continuity merchandise. Revenue is recognized for theseitems when the merchandise is shipped.
The Company is responsible for providing warranty coverageon certain hardline products. Based on historical warranty claims, theCompany accrues the estimated costs of the warranty coverage at the timeof sale.  
**Advertising and Direct Response Marketing**
Costs for newspaper, television, radio and other mediaadvertising are expensed the first time the advertising occurs. The totalcost of advertising charged to selling, general and administrative expensewas $1.6 billion in each of 2001, 2000 and 1999.
Certain direct response advertising and solicitation costsare capitalized. Membership acquisition and renewal costs, which primarilyrelate to membership solicitations, are capitalized since such direct responseadvertising costs result in future economic benefits. Generally such costsare amortized over the shorter of the program's life or five years, primarilyin proportion to when revenues are recognized. For specialty catalogs,costs are amortized over the life of the catalog, not to exceed one year.The consolidated balance sheets include deferred direct response advertisingcosts of $57 and $53 million at December 29, 2001 and December 30, 2000,respectively. The current portion is included in prepaid expenses and deferredcharges, while the long-term portion is included in other assets.  
F-9     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**

**Deferred Policy Acquisition Costs**
For certain insurance products, policy acquisition costsare amortized for five to 15 years in proportion to income produced. Theconsolidated balance sheets include deferred policy acquisition costs of$191 and $149 million at December 29, 2001 and December 30, 2000, 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**
Costs associated with the opening of new stores are expensedas incurred.  
**Fair Value of Financial Instruments**
Due to their short-term nature, the carrying value ofthe Company's cash and cash equivalents, credit card and other receivablesand short-term borrowings approximate fair value. The fair value of long-termdebt is disclosed in Note 4. Beginning in January 2001, the Company's derivativefinancial instruments are recorded on the balance sheet at fair value.Fair value estimates for the Company's derivative and debt instrumentsare based on market prices when available or are derived from financialvaluation methodologies such as discounted cash flow analyses.  
**Earnings Per Common Share**
Basic earnings per common share is computed by dividingnet income available to common shareholders by the weighted average numberof common shares outstanding for the periods presented. Diluted earningsper common share also includes the dilutive effect of potential commonshares (primarily dilutive stock options) outstanding during the periodfor the periods presented.  
**Stock-Based Compensation**
The Company accounts for stock-based compensation in accordancewith Accounting Principles Board Opinion ("APB") No. 25, "Accounting ForStock Issued to Employees," and provides the pro forma disclosures of Statementof Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-BasedCompensation". Under the provisions of APB No. 25, compensation cost forstock options is measured as the excess, if any, of the quoted market pricesof the Company's common stock at the date of grant over the amount an employeemust pay to acquire the stock.  
**Cash and Cash Equivalents**
Cash equivalents include all highly liquid investmentswith original maturities of three months or less at the date of purchase.  
F-10     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**

**Retained Interest in Transferred Credit Card Receivables**
Prior to April 2001, the Company accounted for its securitizationsof credit card receivables as sales of receivables. As part of these sales,the Company retained interest-only strips, one or more subordinated tranchesand servicing rights, all of which were retained interests in the securitizedreceivables. In addition, the Company's retained interest included contractuallyrequired seller's interest, which supported securities sold to third parties,and excess seller's interest, which represented receivables available forfuture securitizations. Gain or loss on the sale of the receivables dependedin part on the previous carrying amount of the financial assets involvedin the transfer based on their relative fair value at the date of transfer.The Company estimated fair value based on the present value of future expectedcash flows estimated using management's estimates of key assumptions -credit losses, yield and discount rates commensurate with the risks involved.  
**Credit Card Receivables**
Credit card receivables arise under revolving credit accountsused primarily to finance purchases. Sears Card products are typicallyavailable only on purchases of merchandise and services offered by theCompany, whereas Sears Gold MasterCard is widely accepted by merchantsoutside the Company. Additional Sears Gold MasterCard product receivablesare generated from balance transfers and cash advances. These accountshave various billing and payment structures, including varying minimumpayment levels and finance charge rates. Based on historical payment patterns,the full receivable balance will not be repaid within one year.
Credit card receivables are shown net of an allowancefor uncollectible accounts. The Company calculates an allowance for uncollectibleaccounts using a model that analyzes factors such as bankruptcy filings,delinquency rates, historical charge-off patterns, recovery rates and otherportfolio data. The Company's calculation is then reviewed by managementto assess whether, based on recent economic events, additional analysesare required to appropriately estimate losses inherent in the portfolio.
The Company's current credit processing system chargesoff an account automatically when a customer has failed to make a requiredpayment in each of the eight billing cycles following a missed payment,however accounts may be charged off sooner in the event of customer bankruptcy.Finance charge revenue is recorded until an account is charged off, atwhich time uncollected finance charge revenue is recorded as a reductionof credit revenues.  
**Merchandise Inventories**
Approximately 88% of merchandise inventories are valuedat the lower of cost or market, with cost determined using the retail inventorymethod ("RIM") under the last-in, first-out ("LIFO") cost flow assumption.To estimate the effects of inflation on inventories, the Company utilizesinternally developed price indices.
The LIFO adjustment to cost of sales was a charge of $25million in 2001 and a credit of $29 and $73 million in 2000 and 1999, respectively.During 2001, the Company liquidated certain LIFO inventories that werecarried at lower costs prevailing in prior years. LIFO layer liquidationswere not significant to the LIFO adjustments in 2001, 2000 or 1999. Ifthe first-in, first-out ("FIFO") method of inventory valuation had beenused instead of the LIFO method, merchandise inventories would have been$591 and $566 million higher at December 29, 2001 and December 30, 2000,respectively.  
F-11     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**

Inherent in the RIM calculation are certain significantmanagement judgments and estimates including, among others, merchandisemarkon, markups, markdowns and shrinkage, which significantly impact theending inventory valuation at cost as well as resulting gross margins.The methodologies utilized by the Company in its application of the RIMare consistent for all periods presented. Such methodologies include thedevelopment of the cost-to-retail ratios, the groupings of homogenous classesof merchandise, the development of shrinkage reserves, the accounting forprice changes, and the computations inherent in the LIFO adjustment. Managementbelieves that the Company's RIM and application of LIFO provides an inventoryvaluation which reasonably approximates cost using a last in, first outassumption and results in carrying inventory at the lower of cost or market.
Merchandise inventories of Sears Canada operations, operationsin Puerto Rico and NTB stores, which in total represent approximately 12%of merchandise inventories, are recorded at the lower of cost or marketbased on the FIFO method.  
**Depreciation and Amortization**
Depreciation is provided principally by the straight-linemethod over the estimated useful lives of the related assets, generally2 to 10 years for furniture, fixtures and equipment, and 15 to 50 yearsfor buildings and building improvements. Goodwill is amortized using thestraight-line method over periods ranging from 5 to 40 years.  
**Long-Lived Asset Recoverability**
Long-lived assets, including intangible assets, are reviewedwhen facts and circumstances indicate that the carrying value of the assetmay not be recoverable. When necessary, impaired assets are written downto estimated fair value based on the best information available. Estimatedfair value is generally based on either appraised value or measured bydiscounting estimated future cash flows. Considerable management judgmentis necessary to estimate discounted future cash flows. Accordingly, actualresults could vary significantly from such estimates.  
**Effect of Accounting Standards Not Yet Adopted** 
In June 2001, the FASB issued SFAS No. 141, "BusinessCombinations," and SFAS No. 142, "Goodwill and Other Intangible Assets".The guidance in SFAS No. 141 supercedes APB No. 16, "Business Combinations,"and is applicable to business combinations initiated after June 30, 2001.The Company will adopt SFAS No. 142 in fiscal year 2002. Upon adoptionof SFAS No. 142, goodwill ceases to be amortized and is instead subjectto fair-value based impairment tests performed, at a minimum, on an annualbasis. In addition, a transitional goodwill impairment test is requiredas of the adoption date. These impairment tests are conducted on each businessof the Company where goodwill is recorded, and may require two steps. Theinitial step is designed to identify potential goodwill impairment by comparingan estimate of fair value for each applicable business to its respectivecarrying value. For those businesses where the carrying value exceeds fairvalue, a second step is performed to measure the amount of goodwill impairmentin existence, if any.  
F-12     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**

The Company had approximately $371 million in positivegoodwill and $77 million in negative goodwill recorded in its consolidatedbalance sheet as of December 29, 2001 as well as approximately $104 millionin positive goodwill related to an equity method investment. The Companyrecorded approximately $22 million in amortization expense related to positivegoodwill and $27 million (before minority interest of $12 million) of incomefrom negative goodwill amortization in 2001. The equity method investmentgoodwill is not subject to SFAS No. 142 impairment tests, and the $77 millionin negative goodwill will be de-recognized upon adoption of the Statementin the first quarter of 2002. The Company has completed its impairmentanalysis of its existing goodwill in the first quarter of 2002, and hasdetermined that $261 million of goodwill recorded within the Company'sRetail and Related Services segment, primarily related to NTB and OrchardSupply Hardware, is impaired under the fair value impairment test approachrequired by SFAS No. 142. A $208 million charge, net of tax and minorityinterest, will be recognized in the first quarter of 2002 to record thisimpairment as well as the removal of negative goodwill upon adoption ofthe Statement, and will be classified as a cumulative effect of a changein accounting principle.
In June 2001, the FASB issued SFAS No. 143, "Accountingfor Asset Retirement Obligations". SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs. SFAS No. 143is effective for fiscal years beginning after June 15, 2002 with earlieradoption encouraged. The Company does not expect the provisions of SFASNo. 143 to have a material impact on the Company's consolidated financialposition, results of operations, or cash flows and intends to adopt SFASNo. 143 for the 2003 fiscal year.
In August 2001, the FASB issued SFAS No. 144, "Accountingfor the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedesSFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of" and the accounting and reporting requirementsof APB No. 30, "Reporting the Results of Operations - Reporting the Effectsof Disposal of a Segment of a Business, and Extraordinary and Unusual andInfrequently Occurring Events and Transactions" for the disposal of a segmentof a business. SFAS No. 144 resolves certain implementation issues relatedto SFAS No. 121 and establishes a single accounting model for long-livedassets to be disposed of by sale (whether individual assets or a componentof a business). SFAS No. 144 will be adopted by the Company in 2002. TheCompany is evaluating the provisions of SFAS No. 144, but does not expectits adoption to have a material impact on the Company's consolidated financialposition, results of operations, or cash flows.  
**NOTE 2 - SPECIAL CHARGES AND IMPAIRMENTS**
The special charges and impairments line of the incomestatement consists of the following: *millions*200120001999RestructuringInitiatives   Productivity initiatives$123$--$--     Product category exits151----     2000 store closures--136--     1999 store closures----25     Headquarters staff reductions----21  Other SpecialCharges   Homelife closure185----     Exide battery litigation settlement63----     STPC impairment--115--     Other20--(5)$542$251$41 
F-13     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
 
**Productivity Initiatives**
During the fourth quarter of 2001, the Company announceda series of strategic initiatives designed to revitalize its Full-lineStores and reduce operating expenses. In connection therewith, the Companyrecorded a pretax charge of $123 million related to employee termination,facility closing and other exit costs. Of the $123 million charge, $102million is for employee termination costs associated with the planned eliminationof 5,950 associate positions as part of this initiative. The positionsto be eliminated include store support positions within the Company's headquartersas well as positions within store and field operations. As of December29, 2001, 522 positions have been eliminated as a result of this plan.The remaining $21 million of productivity related charges is comprisedof $13 million for contractual obligations and holding costs associatedwith certain support facilities to be vacated as a result of the plan,and $8 million to record asset impairments on fixtures and equipment insuch facilities.  
**Product Category Exits**
During 2001, the Company announced its decision to exitcertain product categories within its Full-line Stores, including its skincare and color cosmetics, installed floor covering and custom window treatmentsbusinesses. In connection with these exits, the Company recorded pretaxcharges totaling $151 million during 2001. Of the $151 million charge,$106 million was recorded for the cost of settling contractual obligationsto certain vendors and contractors and for other exit costs associatedwith the Company's plan to discontinue these businesses, including incrementalcustomer warranty claims liability to be incurred by the Company in theabsence of ongoing relationships with certain product manufacturers. Alsoincluded within the $151 million charge are asset impairment charges of$38 million, primarily reflecting the write-down of store fixtures withinthe exited businesses to their estimated fair value. The remaining $7 millionof product category exit charges is for employee termination costs associatedwith management's decision to eliminate 1,980 associate positions connectedto the exited businesses, primarily store sales positions. These plannedeliminations are scheduled for early 2002.  
**Homelife Closure**
The Company sold its Homelife furniture division to CiticorpVenture Capital, Ltd. in early 1999. As part of the sale, Sears receiveda 19 percent equity interest in the new Homelife Corporation. Additionally,the Company assigned certain store leases to Homelife in connection withthe sale. Subsequently, the Company guaranteed certain indebtedness relatedto the new Homelife Corporation, and also obtained secured interests incertain Homelife assets. Homelife ceased operations and subsequently filedfor Chapter 11 bankruptcy protection on July 16, 2001. The Company recordeda pretax charge of $185 million in the second quarter of 2001 to reflectthe Company's estimated obligations and asset impairments relative to Homelife.The pretax charge included an accrual for net future lease obligationsof $150 million reduced by estimated sublease income, early terminationsand lease mitigation costs of $50 million; indebtedness guarantees, obligationsto Homelife customers related to unshipped product billed on the Searscard, and other costs of $69 million; and write-offs of $16 million forlogistics services previously provided to Homelife. As of December 29,2001, the Company has paid approximately $105 million relative to its Homelifeobligations. While the timing of any additional cash outlays related tothese charges is uncertain, management does not expect that such paymentswill have a material impact on the liquidity or financial condition ofthe Company.  
F-14     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
**Exide Battery Litigation Settlement**
The Company reached a civil settlement agreement in December2001 with the U.S. Attorney for the Southern District of Illinois concludingan investigation into the advertising of certain Company automotive batteriesin 1994 and 1995 that were manufactured by Exide Technologies. A pretaxcharge of $63 million was recorded to reflect the Company's payment obligationto the government under the terms of the settlement agreement.  
**2000 Store Closures**
In December 2000, the Company announced the planned closureof 87 under-performing stores consisting of 53 NTB, 30 Hardware and fourFull-line Stores (including two Sears Auto Centers) and the terminationof approximately 2,000 positions as a direct result of the store closures.In connection with the store closings, the Company recognized a pretaxcharge of $150 million in the fourth quarter of 2000 of which $59 millionrelated to asset impairments, $17 million related to goodwill impairment,$57 million related to lease and holding costs, $14 million related toinventory liquidation losses and $3 million related to employee terminationcosts. Of the $150 million charge, $136 million was recorded in SpecialCharges and Impairments and $14 million was recorded in Cost of Sales.
The asset impairment charge related to the write-downof property and equipment to fair value (less costs to sell and net ofestimated salvage value). The assets consisted primarily of land, abandonedleasehold improvements and equipment used at the closed stores. As partof the asset impairment review for the closed stores, the Company wrote-offthe goodwill allocated to the stores (on a pro rata basis using the relativefair values of the long-lived assets at the acquisition date). The chargealso provided a reserve for incremental costs and contractual obligationsfor items such as estimated future lease obligations net of sublease income,lease termination payments and other facility exit costs incurred as adirect result of the store closures. As a result of the store closings,certain inventory was written down to its net realizable value. This resultedin a charge to cost of goods sold of $14 million. As of December 29, 2001,all 87 stores have been closed and 1,008 employees were terminated.  
**Impairment of Investment in Sears Termite and PestControl ("STPC")**
During the fourth quarter of 2000, due to ongoing andanticipated operating losses and based on estimated future cash flows,management determined that the assets of Sears Termite and Pest Controlwere impaired and committed to a plan to dispose of this business. Accordingly,the Company recorded a $115 million charge to reflect the assets at fairvalue, less related costs to dispose. On October 1, 2001, the Company completedthe sale of certain assets of STPC to the ServiceMaster Company. Underthe terms of the transaction, the Company will provide certain transitionservices and may share in the cost of remediating termite damage claimsin excess of defined amounts, if any, for a limited period of time. Thistransaction did not materially affect results of operations or consolidatedfinancial position or require adjustment to the 2000 special charge.  
**1999 Store Closures**
During the third quarter of 1999, the Company closed 33automotive stores in three geographic markets. In connection therewith,the Company recognized a pretax charge of $25 million related to employeetermination, facility closing and other exit costs. The charge included$21 million to reflect the assets at fair value (less cost to sell andnet of estimated salvage value). The assets consisted primarily of land,abandoned leasehold improvements and equipment used at the closed stores.In addition, the store closure provision included $3 million related toemployee termination benefits and $1 million related to net incrementallease costs.  
F-15     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
 
**Headquarters Staff Reductions**
During the third quarter of 1999, the Company recordeda pretax charge of $21 million related to severance costs for headquartersstaff reductions of approximately 450 employees. The staff reductions tookplace during the third quarter of 1999.
 
**Other**
During 1999 and 2000, the Company made investments totaling$20 million in a privately-held retail company specializing in home decoratingproducts and services. In 2001, the Company recorded a pretax charge of$20 million to write-off its investment in this entity as it had ceasedoperations.
In the fourth quarter of 1999, certain estimates of remainingliabilities under the terms of the sale of Western Auto in 1998 were revised,resulting in $5 million of pretax income being recorded.
Following is a summary of the 2001 activity in the reservesestablished in connection with the Company's restructuring initiatives: *millions*Ending Reserve Balance 12/30/002001ChargesAssetWrite-DownsCash PaymentsOtherAdjustmentsEnding Reserve Balance 12/29/01**ProductivityInitiatives**    Employee termination costs$--$102 $-- $(10) $-- $92    Contractual obligations and other        costs--13 -- (8) -- 5    Asset impairments--8(8)-------- 123 (8) (18) -- 97 **Product CategoryExits**   Employee termination costs -- 7 -- -- -- 7    Contractual obligations and other        costs -- 106 -- (41) -- 65    Asset impairments --38(38)-------- 151 (38) (41) --72 **2000 Store Closures**   Employee termination costs3  -- -- (3) ----    Lease and holding costs57----(19)34160----(22)341   Total$60$274$(46)$(81)$3$210
F-16     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
 
**NOTE 3 - CREDIT CARD RECEIVABLES**
A summary of the Company's credit card receivables atyear-end is as follows: *millions *20012000Domestic:Managed creditcard receivables(1)$27,599$27,001 Securitizedbalances sold--(7,834)Retained interestin transferred credit card receivables (2)--(3,051)Other customerreceivables4059 Domestic ownedcredit card receivables27,63916,175 Sears Canadacredit card receivables(3)1,6821,828 Consolidatedowned credit card receivables$29,321$18,003 
(1) AtDecember 29, 2001 and December 30, 2000, $15.0 and $11.0 billion, respectively,of domestic credit card receivables were segregated in securitization trusts.(2) The2000 retained interest amount excludes a reserve of $82 million and aninterest-only strip balance of $136 million related to the transfer ofcredit card receivables into the Trust.(3)At December 29, 2001 and December 30, 2000, $1.1 and $1.2 billion, respectively,of Sears Canada credit card receivables were segregated in securitizationtrusts. 
**Summary of Securitization Process**
Credit card securitizations are utilized as part of theCompany's overall funding strategy. The Company transfers certain of itscredit card receivable balances to master trusts ("trusts"). The truststhen securitize the receivable balances by issuing certificates representingundivided interests in the trusts' receivables to both outside investorsand to the Company (retained interest). These certificates entitle theholder to a series of scheduled cash flows under preset terms and conditions,the receipt of which is dependent upon cash flows generated by the relatedtrusts' assets. In each securitization transaction, the Company has retainedcertain subordinated interests which serve as a credit enhancement to thecertificates held by the outside investors. As a result, the credit qualityof certificates held by outside investors is enhanced. However, the investorsand the trusts have no recourse against the Company beyond the trust assets.  
**Accounting for Securitizations - SFAS No. 140**
In September 2000, the FASB issued SFAS No. 140, "Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities". The guidance in SFAS No. 140 superceded SFAS No. 125. UnderSFAS No. 125, the Company's securitization transactions were accountedfor as sales of receivables. SFAS No. 140 established new conditions fora securitization to be accounted for as a sale of receivables. Specifically,SFAS No. 140 changed the requirements for an entity to be a qualifyingspecial purpose entity and modified under what conditions a transferorhas retained effective control over transferred assets. The new standardwas effective for transfers occurring after March 31, 2001.  
F-17     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
The addition of previously uncommitted assets to the securitizationtrust in April 2001 required the Company to consolidate the securitizationstructure for financial reporting purposes on a prospective basis. Accordingly,the Company recognized approximately $8.1 billion of previously unconsolidatedsecuritized credit card receivables and related securitization borrowingsin the second quarter of 2001. In addition, approximately $3.9 billionof assets were reclassified to credit card receivables from retained interestin transferred credit card receivables. The Company now accounts for securitizationsas secured borrowings.
In connection with the consolidation of the securitizationstructure, the Company recognized a non-cash, pretax charge of $522 millionto establish an allowance for uncollectible accounts related to the receivableswhich were previously considered as sold or accounted for as retained interestsin transferred credit card receivables.  
**Accounting for Securitizations - SFAS No. 125**
Prior to April 2001, the issuance of certificates to outsideinvestors was considered a sale of receivables for which the Company recognizeda gain on the sale. The Company recognized incremental operating incomeof $40, $128 and $86 million in 2001, 2000 and 1999, respectively, fromnet securitization activity.
The Company's retained interests were recorded by theCompany at the date of sale to the trusts by allocating the original carryingamounts of the credit card receivables held by the Company between thesold interests and the retained interests based on their relative fairvalues. Management used certain assumptions in determining the fair valueof its retained interests. Key assumptions used during the first quarterof 2001 and in fiscal 2000 were a yield of 19.85%, a monthly principalpayment rate of 5.26%, a discount rate of 12.0% and an annual charge-offrate of 7.40%.  
**Securitization Cash Flow Data**
The table below summarizes certain cash flows that theCompany received from and paid to the securitization trust in 2000. Cashflow data has not been provided for 2001 as the securitization trust wasconsolidated beginning in the second quarter. *millions *2000Proceeds from newsecuritizations$2,620 Proceeds from collections reinvestedin previous securitizations3,547 Servicing fees received200 Purchase of charged-off balances,net of recoveries(522)  
**NOTE 4 - BORROWINGS**
Short-term borrowings consist of:   *millions *20012000Commercial paper$3,412 $4,115 Bank loans75 95 Promissory note7070Total short-term borrowings$3,557$4,280Weighted average annualinterest rate on short-term debt5.5%7.4%
F-18     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
 
The Company maintains committed credit facilities to supportits commercial paper borrowings. At December 29, 2001, the Company's domesticfinancing subsidiary, Sears Roebuck Acceptance Corp ("SRAC"), had $5.1billion in syndicated credit agreements. Sears Canada had credit agreementstotaling $500 million. These syndicated and other credit agreements providefor loans at prevailing interest rates and mature at various dates throughApril 2003. The Company pays commitment fees in connection with these creditagreements.
The Company had interest rate swap agreements that establishedfloating rates on $10.6 billion of long-term fixed rate debt at December29, 2001. The weighted average maturity of agreements in effect on December29, 2001 was approximately 4 years. The weighted average interest rateof the agreements was 4.4%.
The Company had interest rate swap agreements that establishedfixed rates on $1.4 billion of short-term variable rate debt at December30, 2000. The weighted average interest rate of the agreements was 6.6%.  
Long-term debt is as follows:   ISSUE 20012000*millions*SEARS,ROEBUCK AND CO.   6.25% Notes, due in 2004$300 $300    9.375% Debentures, due 2011300 300    6.15% to 10.0% Medium-Term Notes, due 2002 to 2021759 871 SEARSROEBUCK ACCEPTANCE CORP.   6% to 7.50% Notes, due 2002 to 20387,321 5,579    5.53% to 7.60% Medium-Term Notes, due 2002 to 20132,222 4,238    LIBOR + 0.20% to 1.18% Floating Rate Medium-Term    Notes, due 2002 to 2004540 370 SRFG,INC.   5.25% to 7.50% Asset-backed certificates, due 2002 to    20055,074 --    LIBOR + 0.11% to 0.54% Floating Rate Asset-backed    certificates, due 2004 to 20083,878 -- SEARSDC CORP.   8.52% to 9.26% Medium-Term Notes, due 2002 to 201278 213 SEARSCANADA INC.   6.55% to 7.45% Debentures, due 2002 to 2010391 350 SEARSCANADA RECEIVABLES TRUST   3.25% to 9.18% Receivables Trusts, due 2002 to 2006860 916 CAPITALIZEDLEASE OBLIGATIONS458 424 OTHERNOTES AND MORTGAGES1619Totallong-term debt22,197 13,580 LessSFAS 133 Hedge Accounting Adjustment (see Note 5)119 -- Lesscurrent maturities3,1572,560Long-termdebt$18,921$11,020Weightedaverage annual interest rate on long-term debt5.5% 7.0% 
The fair value of long-term debt was $22.6 and $13.4 billionat December 29, 2001 and December 30, 2000, respectively.  
F-19     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
As of December 29, 2001, long-term debt maturities forthe next five years and thereafter are as follows:
 *millions*2002 . . . . ... . . . . .$3,157 2003 . . . . ... . . . . .4,798 2004 . . . . ... . . . . .3,208 2005 . . . . ... . . . . .1,244 2006 and thereafter... . . .9,790$22,197
The Company paid interest of $1.3, $1.2 and $1.2 billionin 2001, 2000 and 1999, respectively. Interest capitalized was $11, $4and $5 million in 2001, 2000 and 1999, respectively. 
**NOTE 5 - DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIALGUARANTEES**
Effective in the first quarter of 2001, the Company adoptedSFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities",as amended by SFAS No. 138, "Accounting for Certain Derivative Instrumentsand Certain Hedging Activities". SFAS No. 133 sets forth accounting andreporting standards for derivative instruments and hedging activities,requiring the recognition of all derivative instruments as either assetsor liabilities in the balance sheet measured at fair value. SFAS No. 133also establishes criteria for a derivative to qualify as a hedge for accountingpurposes.
The adoption of SFAS No. 133 did not affect net income.The cumulative effect of the change in accounting principle reduced othercomprehensive income (OCI) by $262 million, including the reclassificationto OCI of a $228 million ($389 million pretax) deferred loss on an interestrate swap that was terminated in 1997 and the recognition in OCI of $34million ($56 million pretax) related to an existing cash flow hedge. Thedeferred 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 interestrate swap. During the second quarter of 2001, the Company terminated thecash flow hedge. The termination had no impact on earnings.
The Company utilizes derivative financial instrumentsas part of an overall risk management program designed to address certainfinancial exposures faced by the Company. The only significant derivativeinstruments the Company currently holds are interest rate swaps. As ofDecember 29, 2001, the Company had interest rate swaps with an aggregatefair value of $(63) million that have been used as a cost-effective meansto synthetically convert certain of the Company's domestic fixed rate debtto variable rate. The objective of this conversion is to achieve increasedlevels of variable rate funding given the growth of variable rate receivablelevels within the Company's credit card receivables portfolio and the Company'sintention to convert the finance charge on the Sears Card from fixed rateto variable rate in 2002.
The Company's interest rate swaps have been recorded onthe balance sheet at fair value, classified as $56 million within otherreceivables, $16 million within other assets, and $135 million within otherlong-term liabilities. For accounting purposes, the swaps are designatedand qualify as fair value hedges of certain of the Company's fixed ratedebt instruments. As the critical terms of the swaps are designed to matchthose of the underlying hedged debt, the change in fair value of the swapsis largely offset by changes in fair value recorded on the hedged debt.Consequently, the amount of hedge ineffectiveness recorded during 2001in connection with these hedges was not material and is reflected as acomponent of interest expense.  
F-20     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
The following sets forth the notional amounts and fairvalues of derivative financial instruments outstanding at the end of 2001and 2000: 20012000*millions*Contract or Notional AmountFairValueContract or Notional AmountFairValueInterest rate swapagreements:Pay floating rate,receive fixed rate$10,642$(63)$--$-- Pay fixed rate,receive floating rate---- 1,382(59)Foreign currencyhedge agreements---- 4(1)
For pay floating rate, receive fixed rate swaps, the Companypaid a weighted average rate of 2.82% and received a weighted average rateof 4.80% in 2001. The fair values of interest rate swaps are based on pricesquoted from derivative dealers. If a counterparty fails to meet the termsof a swap agreement, the Company's exposure is limited to the net amountthat 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 $91 millionat December 29, 2001, which primarily included an $84 million guarantyrepresenting a commitment by the Company to guarantee the performance ofcertain municipal bonds issued in connection with the Company's headquartersbuilding. Payments under this guaranty were $5 million and $3 million for2001 and 2000, respectively and have been recorded as long-term receivablessince they are expected to be recovered from future cash flows generatedby the property. This guaranty expires in 2012. In addition, the Companyhad additional guarantees of $7 million in which the Company guaranteedleases and debt of certain Company affiliates.  
**NOTE 6 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDITRISK**
The Company grants credit to a large and diverse groupof customers throughout North America. The five states and the respectivereceivable balances in which the Company had the largest amount of managedcredit card receivables were as follows: *millions*2001% ofBalance2000% ofBalanceCalifornia$2,98210.9%$2,84610.5%Texas2,1397.9%2,1137.8%Florida1,9197.0%1,9267.1%New York1,6996.2%1,6136.0%Pennsylvania1,3495.0%1,3515.0%
F-21     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
 
**NOTE 7 - EARNINGS PER SHARE**
The following table sets forth the computations of basicand diluted earnings per share: *millions,except per share data*200120001999Net income availableto Common shareholders (1)$735 $1,343 $1,453 Average common shares outstanding326.4345.1379.2Earnings per share - basic$2.25 $3.89 $3.83 Dilutive effect of stock options2.1 1.2 1.8 Average common andcommon equivalent shares outstanding328.5346.3381.0Earnings per share - diluted$2.24 $3.88 $3.81 (1) Income availableto common shareholders is the same for purposes of calculating basic anddiluted EPS. 
In each period, certain options were excluded from thecomputation of diluted earnings per share because they would have beenanti-dilutive. At December 29, 2001, December 30, 2000 and January 1, 2000,options to purchase 6.5, 11.3 and 11.9 million common shares at pricesranging from $40 to $64, $33 to $64 and $40 to $64 per share were excludedfrom the 2001, 2000 and 1999 calculations, respectively.  
**NOTE 8 - SHAREHOLDERS' EQUITY**
**Dividend Payments**
Under terms of indentures entered into in 1981 and thereafter,the Company cannot take specified actions, including the declaration ofcash dividends, that would cause its unencumbered assets, as defined, tofall below 150% of its liabilities, as defined. At December 29, 2001, approximately$5.9 billion could be paid in dividends to shareholders under the mostrestrictive indentures.  
**Share Repurchase Program**
The Company repurchased shares in 2001, 2000 and 1999under share repurchase programs approved by the Board of Directors. Asof December 29, 2001, the Company had remaining authorization to repurchase$177 million of shares by December 31, 2002 under a $1.0 billion sharerepurchase plan approved by the Board of Directors on August 9, 2000.
In addition, on December 12, 2001, the Board of Directorsapproved another common share repurchase program to acquire up to $1.5billion of the Company's common shares. This authorization expires on December31, 2004.  
F-22     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
 
**Comprehensive Income and Accumulated Other ComprehensiveLoss**
The following table shows the computation of comprehensiveincome: *millions*December 29, 2001December 30, 2000January 1,2000Net income$735 $1,343 $1,453 Other comprehensiveincome (loss):Minimum pensionliability (1)(333) 63 104 After tax cumulativeeffect of a change in    accounting for derivatives, net oftax of $183(262) -- -- Amounts amortizedinto interest expense from OCI,    net of tax of $917 -- -- Change in fairvalue of cash flow hedges, net of tax of $2234 -- --  Unrealized gain(loss) on investments (2)(1) (18) 19 Foreign currency translationadjustments(37)(7)14Total other comprehensive(loss) income(582)38 137Total comprehensiveincome$153 $1,381$1,590
(1)Net of tax of $184, $36 and $57 million for 2001, 2000 and 1999, respectively.
(2)Net of tax of $1, $10 and $11 million for 2001, 2000 and 1999, respectively.  
The following table displays the components of accumulatedother comprehensive loss: *millions*200120001999Accumulated derivativeloss$(211)$-- $-- Currency translationadjustments(155)(118)(111)Minimum pension liability,net of tax(465)(132)(195)Unrealized gain on securitiesheld, net of tax--119Accumulated othercomprehensive loss$(831)$(249)$(287)  
**NOTE 9 - STOCK-BASED COMPENSATION**
**Stock Option Plans**
Options to purchase common shares of the Company havebeen granted to employees under various plans at prices equal to the fairmarket value of the shares on the dates the options were granted. Generally,options vest over a three- or four-year period and become exercisable eitherin equal, annual installments over the vesting period, or at the end ofthe vesting period. Options generally expire in 10 years.  
F-23     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
The Company measures compensation cost under APB No. 25,and no compensation expense has been recognized for its fixed stock optionplans. Had compensation expense for the Company's stock option plans beendetermined using the fair value method under SFAS No. 123, the Company'snet income and earnings per share would have been reduced to the pro formaamounts indicated below: *millions, exceptearnings per share*200120001999Net income - asreported$735$1,343$1,453Net income - pro forma6841,3001,414Earnings per share - basic    As reported2.253.893.83    Pro forma2.103.773.73Earnings per share - diluted    As reported2.243.883.81    Pro forma2.083.753.71 
In accordance with SFAS No. 123, "Accounting for Stock-BasedCompensation," the fair value of each option grant is estimated on thedate of grant using the Black-Scholes option-pricing model with the assumptionslisted below: 200120001999Dividend yield1.60%1.60%2.16%Expected volatility31%31%28%Risk-free interest rate4.86%6.55%5.03%Expected life of options8 years8 years6 years 
The Company had 0.9, 1.1 and 1.1 million performance-basedoptions outstanding at the end of 2001, 2000 and 1999, respectively. Theseoptions contain vesting provisions that require the Company's share priceto reach specified targets at specified intervals. Subject to the satisfactionof the performance-based features, these performance-based options vest50% in 2003, 25% in 2004 and 25% in 2005. The Company did not recognizecompensation expense in 2001, 2000 or 1999 related to these options becausethe exercise price exceeded the Company share price at each year-end.
Changes in stock options are as follows (shares in thousands): 200120001999SharesWeightedAverageExercisePriceSharesWeightedAverageExercisePriceSharesWeightedAverageExercisePriceBeginning balance21,950 $38.42 18,526 $40.44 15,251 $39.93 Granted14,942 38.27 6,352 32.17 5,668 40.89 Exercised(2,052) 22.74 (854) 22.90 (1,084) 22.76 Canceled or expired(2,262)42.32(2,074)44.13(1,309)51.11    Ending balance32,578 $39.0421,950 $38.4218,526 $40.44Reserved for futuregrant at year-end15,755 15,566 5,337 Exercisable9,399 $41.90 9,020 $32.82 7,844 $27.92 Fair value of optionsgranted during    the year $14.47 $12.9 8  $13.35 
F-24     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
 
The following table summarizes information about stockoptions outstanding at December 29, 2001 (shares in thousands): Options OutstandingOptions ExercisableRange ofExercisePricesNumberOutstandingat 12/29/01WeightedAverageRemainingContractualLife in YearsWeightedAverageExercisePriceNumberExercisableat 12/29/01WeightedAverageExercisePrice$10.00 to $20.00205 2.5 $13.57 205 $13.57     20.01 to30.002,811 3.6 24.25 2,807 24.24     30.01 to40.0020,079 9.6 36.26 933 31.67     40.01 to50.005,684 7.5 42.94 2,620 45.40     50.01 to 64.003,7996.660.192,83461.58$10.00 to $64.0032,5788.3$39.049,399$41.90  
**Associate Stock Purchase Plan**
The Company's Associate Stock Ownership Plan ("ASOP")allows eligible employees the right to elect to use up to 10% of theireligible compensation to purchase the Company's common shares on a quarterlybasis at the lower of 85% of the fair market value at the beginning orend of each calendar quarter. Commencing in 2001, eligible employees areallowed to elect up to 15% of their eligible compensation to purchase theCompany's shares through the ASOP. The maximum number of shares availableunder the ASOP is 10 million. As of December 29, 2001, 2.8 million shareshad been issued under the ASOP and 7.2 million shares remain available.  
**Performance Share Plan**
In 2001, the Company's Board of Directors approved theinitiation 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 theattainment of specific performance targets over a three-year period. Subjectto the satisfaction of the performance-based features, the awards vest50% in 2004 and 50% in 2005. Performance award expense of approximately$2 million was recorded in 2001.    
**NOTE 10 - LEASE AND SERVICE AGREEMENTS**
The Company leases certain stores, office facilities,warehouses, computers and transportation equipment.
Operating and capital lease obligations are based uponcontractual minimum rates and, for certain stores, amounts in excess ofthese minimum rates are payable based upon specified percentages of sales.Contingent rent is accrued over the lease term, provided that the achievementof the specified sales level that triggers the contingent rental is probable.Certain leases include renewal or purchase options. Operating lease rentalswere $483, $409 and $399 million, including contingent rentals of $59,$54 and $52 million in 2001, 2000 and 1999, respectively.  
F-25     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
 
Minimum lease obligations, excluding taxes, insuranceand other expenses payable directly by the Company, for leases in effectas of December 29, 2001, are as follows: *millions*CapitalLeasesOperatingleases2002$69 $312 200354 298 200448 271 200543 240 200652 192 After 20065971,134Total minimum payments863 $2,447Less imputed interest405Present value of minimum leasepayments458 Less current maturities19Long-term obligations$439 
**NOTE 11 - OTHER INCOME**
Consolidated other income consists of: *millions*200120001999Gain on sales ofproperty and investments$21 $19 $10 Equity income (loss) in unconsolidatedcompanies12 17 (4) Sears Mexico dividend12---- Total$45$36$6   
**NOTE 12 - INCOME TAXES**
Income before income taxes, minority interests and extraordinaryloss is as follows: *millions*200120001999Domestic$1,125 $2,073 $2,189 Foreign98150230Total$1,223$2,223$2,419
The provision for income tax expense consists of: *millions*200120001999CurrentFederal$300 $736 $414 State(4) 54 24 Foreign25 15 110 Total321 805 548 DeferredFederal88 (4) 332 State32 3 40 Foreign26 27 (16)Total146 26 356 Income tax provision$467 $831 $904 
F-26       
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
A reconciliation of the statutory federal income tax rateto the effective income tax rate is as follows: 200120001999Statutory federalrate35.0%35.0%35.0%State income taxes, net offederal tax benefit1.5 1.7 1.7 Sears Canada deferred tax assetrevaluation1.9 -- --Other(0.2) 0.7 0.7 Effective income taxrate38.2%37.4%37.4% 
The major components of deferred tax assets and liabilitiesfollow: *millions*20012000Deferredtax assets:Unearned service contract income$506 $460 Allowance for uncollectibleaccounts454 303 State income taxes150 161 Postretirement benefit liability732 840 Minimum pension liability258 73 Net operating loss carryforward115 171 Restructuring reserves117 67 Other deferred tax assets580498Total deferredtax assets2,9122,573Deferred tax liabilities:Property and equipment361 434 Prepaid pension101 90 LIFO84 91 Deferred gain313 295 Deferred revenue335 55 Deferred swap termination loss-- 162 Other deferred tax liabilities445352Total deferred taxliabilities1,6391,479Net deferred taxes$1,273$1,094 
Management believes that the realization of the deferredtax assets is more likely than not, based on the expectation that the Companywill generate the necessary taxable income in future periods and, accordingly,no valuation reserve has been provided. Tax benefits from loss carryforwardswill expire by year-end 2009.
U.S. income and foreign withholding taxes were not providedon certain unremitted earnings of international affiliates which the Companyconsiders to be permanent investments. The cumulative amount of unremittedincome for which income taxes have not been provided totaled $477 millionat December 29, 2001. If these earnings were to be remitted, taxes of $74million would be due.
Income taxes of $341, $868 and $327 million were paidin 2001, 2000 and 1999, respectively.  
F-27     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**

**NOTE 13 - BENEFIT PLANS**
Expenses for retirement and savings-related benefit planswere as follows: *millions*200120001999Sears 401(k) SavingsPlan$23 $29 $37 Pension plans68 116 89 Postretirement benefits(65)(68)(46)Total$26 $77 $80   
**Sears 401(k) Savings Plan**
Most domestic employees are eligible to become membersof the Sears 401(k) Savings Plan (the "Plan"). Under the terms of the Plan,the Company matches a portion of employee contributions with Sears commonshares. Per the Plan, the Company match is 70% of eligible employee contributions.The Company's matching contributions were $76, $72 and $77 million in 2001,2000 and 1999, respectively. In 1999, matching contributions were madeat the end of the calendar year based on the year-end stock price. In 2001and 2000, matching contributions were made at the end of each calendarquarter, based on the quarter-end stock price.
The Plan includes an Employee Stock Ownership Plan ("theESOP") to prefund a portion of the Company's anticipated contribution.The Company provided the ESOP with a loan that was used to purchase Searscommon shares in 1989. The purchased shares represent deferred compensationexpense, which is presented as a reduction of shareholders' equity andrecognized as expense when the shares are allocated to employees to fundthe Company contribution. The per share cost of Sears common shares purchasedby the ESOP in 1989 was $15.27. The Company uses the ESOP shares to fundthe Company contribution, which thereby reduces expense.
The ESOP loan bears interest at 6.1% and is repaid fromdividends on the ESOP shares and additional cash payments provided by theCompany. The Company has contributed cash to the ESOP annually in the amountequal to the ESOP's required interest and principal payments on the loan,less dividends received on the ESOP shares. The cash payments amountedto $33, $118 and $57 million in 2001, 2000 and 1999, respectively. Thebalance of the ESOP loan was $38 and $82 million at December 29, 2001 andDecember 30, 2000, respectively. Cash on hand in the ESOP at December 29,2001 was $3 million.
The reported expense is determined as follows: *millions*200120001999Interest expenserecognized by ESOP$4 $7 $13 Less dividends on ESOP shares(14)(16)(17)Cost of shares allocated to employeesand plan expenses333841Sears 401(k) Savings Plan expense$23$29$37
In 2001, the ESOP allocated 2.2 million shares to employees.At December 29, 2001, 21.8 million ESOP shares had been allocated and 4.1million are available for future allocation. All ESOP shares are consideredoutstanding in the calculation of earnings per share.  
F-28     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**

**Retirement Benefit Plans**
Certain domestic full-time and part-time employees areeligible to participate in noncontributory defined benefit plans aftermeeting age and service requirements. Substantially all Canadian employeesare eligible to participate in contributory defined benefit plans. Pensionbenefits are based on length of service, compensation and, in certain plans,Social Security or other benefits. Funding for the various plans is determinedusing various actuarial cost methods. The Company uses October 31 as themeasurement date for determining pension plan assets and obligations.
In addition to providing pension benefits, the Companyprovides certain medical and life insurance benefits for retired employees.Employees may become eligible for medical benefits if they retire in accordancewith the Company's established retirement policy and are continuously insuredunder the Company's group medical plans or other approved plans for 10or more years immediately prior to retirement. The Company shares the costof the retiree medical benefits with retirees based on years of service.Generally, the Company's share of these benefit costs will be capped atthe Company contribution calculated during the first year of retirement.The Company's postretirement benefit plans are not funded. The Companyhas 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 consolidatedbalance sheets are as follows: Pension BenefitsPostretirement Benefits*millions*2001200020012000Changein benefit obligation:Beginning balance$2,817 $2,830 $896 $934   Benefits earned duringthe period68 83 4 5   Interest cost211 216 68 58   Actuarial loss266 53 91 59   Benefits paid(236)(356)(150)(159)  Foreign exchange impact(38)(10)(4)(1)  Other31----Ending balance$3,091$2,817$905$896Change in planassets at fair value:Beginning balance$2,789 $2,671 $-- $--   Actual return on planassets(271)434 -- --   Company contributions116 47 150 159   Benefits paid(236)(356)(150)(159)  Foreign exchange impact(57)(14)-- --   Other87----Ending balance$2,349$2,789$--$--Funded status ofthe plan:$(742) $(28) $(905) $(896) Unrecognized net loss (gain)953 203 (364) (490) Unrecognized prior service benefit(15)(17)(463)(565)Net amount recognized$196 $158 $(1,732) $(1,951) Amounts recognizedin the balance sheet consist of:Prepaid benefit cost$161 $171 $-- $-- Accrued benefit liability(685)(216)(1,732) (1,951) Accumulated other comprehensiveincome720203----Net amount recognized$196$158$(1,732)$(1,951)
F-29     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**

Weighted average assumptions are as follows: Pension BenefitsPostretirement Benefits200120001999200120001999Discount rate7.25%8.25%8.00%7.25%8.25%8.00%Return on plan assets9.00%9.50%9.50%NANANARate of compensation increases4.00%4.00%4.00%NANANA 
The components of net periodic benefit cost are as follows: Pension BenefitsPostretirement Benefits*millions*200120001999200120001999Components of netperiodic benefit cost:Benefits earned during theperiod$68 $83 $95 $4 $5 $5 Interest cost211 216 192 68 58 74 Expected return on plan assets(221) (216) (228) -- -- -- Amortization of unrecognizednet prior servicebenefit(4) (4) (3) (102) (102) (102) Recognized net loss (gain)18 42 34 (35) (29) (23) Other(4)(5)(1)-- -- -- Net periodic benefit cost$68 $116 $89 $(65)$(68)$(46)
The projected benefit obligation, accumulated benefitobligation and fair value of plan assets for the pension plans with accumulatedbenefit obligations in excess of plan assets were $2,421, $2,271 and $1,586million, respectively, at December 29, 2001, and $2,197, $2,089 and $1,873million, respectively, at December 30, 2000. The provisions of SFAS No.87, "Employers' Accounting for Pensions," require the recognition of aminimum pension liability for each defined benefit plan for which the accumulatedbenefit obligation exceeds plan assets. The minimum pension liability,net of tax, was $465 million at December 29, 2001 and $132 million at December30, 2000, and is included in Accumulated Other Comprehensive Income.
For 2002 and beyond, the weighted average health carecost trend rates used in measuring the postretirement benefit expense area 9.0% trend rate in 2002 to an ultimate trend rate of 5.0% in 2006 forpre-65 retirees, and a 10.5% trend rate in 2002 to an ultimate trend rateof 6.5% in 2006 for post-65 retirees. A one hundred basis point changein the assumed health care cost trend rate would have the following effects: *millions*100 BasisPoint Increase100 BasisPoint DecreaseEffect on totalservice and interest cost components$2$(2)Effect on postretirementbenefit obligation$20$(17)  
**NOTE 14 - LEGAL PROCEEDINGS**
The Company is subject to various legal and governmentalproceedings, many involving routine litigation incidental to the businesses.Other matters contain allegations that are non-routine and involve compensatory,punitive or treble damage claims in very large amounts as well as othertypes of relief. The consequences of these matters are not presently determinablebut, in the opinion of management of the Company after consulting withlegal counsel, the ultimate liability in excess of reserves currently recordedis not expected to have a material effect on annual results of operations,financial position, liquidity or capital resources of the Company.  
F-30     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**

**NOTE 15 - SUMMARY OF SEGMENT DATA**
As of December 29, 2001, the Company organized its businessinto three domestic segments, which include the Company's operations inthe United States and Puerto Rico, and one international segment, SearsCanada. The domestic segments are Retail and Related Services, Credit andFinancial Products and Corporate and Other. Effective in 2001, the Companymodified its externally reported segments to reflect the Company's changingbusiness priorities, in particular, the de-emphasis of non-retail relatedservices businesses, and to align externally reported business segmentswith changes in the Company's internal structure. Segment financial datafor 2000 and 1999 has been restated to reflect the new segment reportingstructure.
The Retail and Related Services segment consists of merchandisesales and related services, including service contracts, delivery and productinstallation and repair services. It includes all Sears selling channels,including Specialty and Full-line Stores as well as Direct to Customeroperations which includes Online, Catalogs and Clubs and Services.
The Credit and Financial Products segment manages theCompany's portfolio of Sears Card and Sears Gold MasterCard receivables.Sears Card receivables arise primarily from purchases of merchandise andservices from domestic operations, whereas, Sears Gold MasterCard is widelyaccepted by merchants outside the Company. This segment also includes relatedfinancial products, such as credit protection and insurance products.
The Corporate and Other segment includes activities thatare of an overall holding company nature primarily consisting of administrativeactivities. This segment also includes Home Improvement Services such assiding and windows and pest control.
The Sears Canada segment includes operations conductedby Sears Canada Inc., a 54.4% owned subsidiary.
These businesses have been aggregated into their respectivereportable segments based on the management reporting structure and theirsimilar economic characteristics, customers and distribution channels.No single product or service accounts for a significant percentage of theCompany's consolidated revenue.
External revenues and expenses are allocated between theapplicable segments. For zero percent financing promotions in which customersreceive free financing, Retail and Related Services reimburses Credit andFinancial Products over the life of the financing period at a 10% annualrate. The cost is reported as selling expense by Retail and Related Servicesand an offsetting benefit is recognized by Credit and Financial Products.
The domestic segments participate in a centralized fundingprogram. Interest expense is allocated to the Credit and Financial Productssegment based on its funding requirements. Funding includes debt reflectedon the balance sheet and investor certificates related to credit card receivablestransferred to trusts through securitizations. The remainder of net domesticinterest 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 individualsegments. The Company includes its deferred income taxes within the Corporateand Other segment. The Company excludes the impact of securitization incomeand noncomparable items from its analysis of segment results. The Companydefines noncomparable items as transactions that are one-time in nature,related to special initiatives of the Company, or related to changes inaccounting. The Company recorded $522 million of provision expense as aresult of the Company's adoption of SFAS No. 140. See Note 3 for additionaldiscussion. The remaining noncomparable items are discussed in Note 2,Special Charges and Impairments. The other accounting policies of the segmentsare substantially the same as those described in the Company's summaryof significant accounting policies footnote.  
F-31     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**
**2001** Reconciling Items*millions*Retail and Related ServicesCredit and Financial ProductsCorporate andOther
Sears CanadaTotalSecuri-tization ImpactNoncom-parable itemsConsoli-dated GAAPTotal revenues$31,434 $5,216 $378 $4,325 $41,353 $(275) $-- $41,078 Costs and expenses    Cost ofsales, buying and occupancy23,169 -- 159 2,994 26,322 --  -- 26,322     Sellingand administrative6,628 833 473 997 8,931 (39) -- 8,892     Provisionfor uncollectible accounts-- 1,441 -- 56 1,497 (153) -- 1,344    Provision for previously securitized      receivables-- -- -- -- -- -- 522 522    Depreciation and amortization704 18 58 83 863 -- -- 863    Interest32 1,395 -- 111 1,538 (123) -- 1,415     Special chargesand impairments------ -- ---- 542 542       Total costs and expenses30,5333,687690 4,241 39,151(315)1,064 39,900Operating income (loss)$901$1,529$(312)$84 $2,202$40 $(1,064)$1,178Total assets$10,674$27,900$2,264 $3,479 $44,317Capital expenditures$829$25$185 $87 $1,126  
**2000** Reconciling Items*millions*Retail and Related ServicesCredit and Financial ProductsCorporateandOtherSears CanadaTotalSecuri-tization ImpactNoncom-parable itemsConsoli-dated GAAPTotal revenues$32,024 $5,247 $353 $4,282 $41,906 $(969) $-- $40,937 Costs and expenses    Cost ofsales, buying and        occupancy23,662 -- 144 2,901 26,707 -- 14 26,721     Sellingand administrative6,687 810 407 1,038 8,942 (135) -- 8,807     Provisionfor uncollectible        accounts-- 1,358 -- 48 1,406 (522) -- 884     Depreciationand amortization710 16 53 60 839 -- -- 839     Interest25 1,550 -- 113 1,688 (440) -- 1,248     Special chargesand impairments------ ------ 251 251       Total costs and expenses31,0843,734604 4,16039,582(1,097)265 38,750Operating income (loss)$940$1,513$(251)$122$2,324$128 $(265)$2,187Total assets$11,221$20,026$1,936 $3,716$36,899Capital expenditures$802$11$18 $253$1,084
F-32     
**SEARS, ROEBUCK AND CO.****Notes to Consolidated Financial Statements**

**1999** Reconciling Items*millions*Retail and Related ServicesCredit and Financial ProductsCorporateandOtherSears CanadaTotalSecuri-tization ImpactNoncom-parable itemsConsoli-dated GAAPTotal revenues$30,986 $5,367 $358 $3,894 $40,605 $(1,121) $-- $39,484 Costs and expenses    Cost ofsales, buying and        occupancy22,721 -- 143 2,561 25,425 -- -- 25,425     Sellingand administrative6,455 949 427 905 8,736 (129) -- 8,607     Provisionfor uncollectible        accounts-- 1,496 -- 34 1,530 (659) -- 871     Depreciationand amortization715 14 54 76 859 -- -- 859     Interest45 1,542 -- 100 1,687 (419) -- 1,268     Special chargesand impairments------ ------ 41 41       Total costs and expenses29,9364,001624 3,67638,237(1,207)41 37,071Operating income (loss)$1,050$1,366$(266)$218$2,368$86 $(41)$2,413Total assets$10,700$20,874$2,056 $3,324$36,954Capital expenditures$743$38$109 $143$1,033  
**NOTE 16 - QUARTERLY RESULTS (Unaudited)**   *millions,except per common share data*First QuarterSecond QuarterThird QuarterFourth QuarterYear2001200020012000200120002001200020012000Revenues$8,857$8,925$10,226 $10,045$9,753$9,593$12,242$12,374$41,078$40,937Operating income272380(311)6233914438267411,1782,187Net income176235(197)3882622784944427351,343Earnings percommon share -   diluted$ 0.53$ 0.65 $ 0.60  $ 1.11 $ 0.80 $ 0.81 $ 1.52 $ 1.32 $ 2.24 $3.88 
The fourth quarter pretax LIFO adjustments were creditsof $5 and $59 million in 2001 and 2000, compared with charges of $30 millionfor the first nine months of the respective years.
Total of quarterly earnings per common share may not equalthe annual amount because net income per common share is calculated independentlyfor each quarter.  
**NOTE 17 - SUBSEQUENT EVENTS (Unaudited)**
In February 2002, Sears Canada announced plans to convertits existing seven Eaton's stores to Sears stores. This decision will enableSears Canada to better leverage its buying and advertising efforts, andtake greater advantage of the Sears brand's equity. The Company expectsto record a one-time, pretax charge of $107 million ($40 million after-taxand minority interest) in the first quarter of 2002 related to severancepayments, third party commitments, transition costs and the write-downof fixtures and leasehold improvements.  
F-33           
[This Page Intentionally Left Blank]        
F-34    
**SEARS, ROEBUCK AND CO.**
**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS**
  Balance at Beginning of PeriodAdditionsDeductionsBalance at end of periodCharged to costs and expensesYear Ended December 29, 2001Allowance for uncollectibleaccounts$686$1,866$1,386$1,166Year Ended December 30, 2000Allowance for uncollectibleaccounts$760$
884$958$686Year Ended January 1, 2000Allowance for uncollectible accounts$974$871$1,085$760
F-35       
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-KFor the Year Ended December 29, 2001
3.(i) Restated Certificate of Incorporation,as amended to May 13, 1996 (incorporated by reference to Exhibit 3(a) toRegistration Statement No. 333-8141).3.(ii) By-Laws as amended to February14, 2001 (incorporated by reference to Exhibit 3.(ii) to the Registrant'sAnnual Report on Form 10-K for the fiscal year ended December 30, 2000).**4.(i) Forms of restricted stock grantsunder Registrant's 1990 Employees Stock Plan (incorporated by referenceto Exhibit 4.(i) to the Registrant's Annual Report on Form 10-K for thefiscal year ended December 31, 1993).** ****4.(ii) Form of restricted stock grantsunder Registrant's 1994 Employees Stock Plan (incorporated by referenceto Exhibit 4.(ii) to the Registrant's Annual Report on Form 10-K for thefiscal year ended December 31, 1994).** ****4.(iii) Forms of Performance-Based StockOptions granted under Registrant's 1994 Employees Stock Plan (incorporatedby reference to Exhibit 4(iii) to the Registrant's Annual Report on Form10-K for the fiscal year ended January 3, 1998).** ****4.(iv) Forms of Performance-Based RestrictedStock grants under Registrant's 1994 Employees Stock Plan (incorporatedby reference to Exhibit 4(iv) to the Registrant's Annual Report on Form10-K for the fiscal year ended January 3, 1998).** ****4.(v) Forms of stock options granted under  Registrant's 1994 Employees Stock Plan (incorporated by reference to Exhibit  4(v) to the Registrant's Annual Report on Form 10-K for the fiscal year ended  January 2, 1999).** *****4.(vi) Forms of stock options grantedunder Registrant's 2000 Employees Stock Plan. ****4.(vii) Registrant hereby agrees to furnishto the Commission, upon request, with the instruments defining the rightsof holders of each issue of long-term debt of the Registrant and its consolidatedsubsidiaries.10.(i)(a) Tax Sharing Agreement dated May14, 1993 between Registrant and its subsidiaries (incorporated by referenceto Exhibit 10.6 to Amendment No. 3 to The Allstate Corporation's RegistrationStatement No. 33-59676).10.(i)(b) Supplemental Tax Sharing Agreementdated January 27, 1995 between Registrant and The Allstate Corporation(incorporated by reference to Exhibit 10(d) to The Allstate Corporation'sCurrent Report on Form 8-K dated February 22, 1995).***10.(ii)(1) Registrant's 1979 Incentive CompensationPlan (incorporated by reference to Exhibit 10.(iii)(1) to the Registrant'sQuarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1985).******10.(ii)(2) Registrant's Deferred CompensationPlan for Directors, as amended and restated on August 11, 1999 (incorporatedby reference to Exhibit 10.(ii)(3) to Registrant's Annual Report on Form10-K for the fiscal year ended January 1, 2000).** ****10.(ii)(3) Registrant's Annual IncentiveCompensation Plan, amended and restated as of January 1, 1994 (incorporatedby reference to Appendix B to the Registrant's Proxy Statement dated March23, 1994).** **** 
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-KFor the Year Ended December 29, 2001
10.(ii)(4) Registrant's Long-Term IncentiveCompensation Plan, amended and restated as of January 1, 1994 (incorporatedby reference to Appendix C to the Registrant's Proxy Statement dated March23, 1994).** ****10.(ii)(5) Registrant's 1982 Employees StockPlan (incorporated by reference to Exhibit 4(a)(1) to Registration StatementNo. 2-80037 of the Registrant).****10.(ii)(6) Description of Registrant's SupplementalLife Insurance Plan, amended as of December 31, 1986 (incorporated by referenceto the second and third full paragraphs on page 10 of the Registrant'sProxy Statement dated March 26, 1987).** ****10.(ii)(7) Registrant's Non-Employee Directors'Retirement Plan, as amended and restated to March 13, 1996 (incorporatedby reference to Exhibit 10.(iii)(8) to Registrant's Annual Report on Form10-K for the fiscal year ended December 30, 1995).** ****10.(ii)(8) Description of Registrant's Non-EmployeeDirector Life Insurance Plan (incorporated by reference to the first paragraphon page 10 of the Registrant's Proxy Statement dated March 26, 1998).******10.(ii)(9)Registrant's 1990Employees Stock Plan, amended as of May 12, 1994 (incorporated by referenceto Exhibit 10.20 to The Allstate Corporation's Annual Report on Form 10-Kfor the fiscal year ended December 31, 1994).*** ****10.(ii)(10) Registrant's Supplemental RetirementIncome Plan, as amended and restated effective March 25, 1997 (incorporatedby reference to Exhibit 10.(ii)(11) to Registrant's Annual Report on Form10-K for the fiscal year ended January 1, 2000).** ****10.(ii)(11) Registrant's 1986 Employees StockPlan, amended as of May 12, 1994 (incorporated by reference to Exhibit10.19 to The Allstate Corporation's Annual Report on Form 10-K for thefiscal year ended December 31, 1994).*** ****10.(ii)(12) Registrant's Transferred ExecutivesPension Supplement (incorporated by reference to Exhibit 10.(iii)(13) tothe Registrant's Annual Report on Form 10-K for the fiscal year ended December31, 1988).** ****10.(ii)(13) Amendment to Registrant's TransferredExecutives Pension Supplement adopted on March 13, 1996 (incorporated byreference to Exhibit 10.(iii)(14) to the Registrant's Annual Report onForm 10-K for the fiscal year ended December 30, 1995).** ****10.(ii)(14) Registrant's Supplemental Long-TermDisability Plan (incorporated by reference to Exhibit 10.d to the Registrant'sQuarterly Report on Form 10-Q for the fiscal quarter ended September 30,1995).** ****10.(ii)(15) Registrant's Deferred CompensationPlan, as amended and restated to December 13, 2000 (incorporated by referenceto Exhibit 10. (ii)(15) to the Registrant's Annual Report on Form 10-Kfor the fiscal year ended December 30, 2000). ** ****10.(ii)(16) Registrant's Management SupplementalDeferred Profit Sharing Plan (incorporated by reference to Exhibit 10(b)to the Registrant's Quarterly Report on Form 10-Q for the quarter endedOctober 1, 1994).** **** 
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-KFor the Year Ended December 29, 2001
10.(ii)(17)Registrant's Non-EmployeeDirector Stock Plan (incorporated by reference to Appendix B of the Registrant'sProxy Statement dated March 20, 1996).** ****10.(ii)(18) Registrant's 1994Employees Stock Plan (incorporated by reference to Appendix A to the Registrant'sProxy Statement dated March 23, 1994).** ****10.(ii)(19) Registrant's AssociateStock Ownership Plan (incorporated by reference to Exhibit 10.(iii)(21)to the Registrant's Annual Report on Form 10-K for the fiscal year endedJanuary 3, 1998).**10.(ii)(20)Registrant's 2000 EmployeesStock Plan (incorporated by reference to Appendix A to the Registrant'sProxy Statement dated March 17, 2000).** *****10.(ii)(21)Registrant'sLong-Term Performance-Based Incentive Plan dated  October 10, 2001 and operativeadopting resolution.****10.(ii)(22)Letter from the Registrantto Anastasia D. Kelly dated December 14, 1998 relating to employment (incorporatedby reference to Exhibit 10 to the Registrant's Quarterly Report on Form10-Q for the fiscal quarter ended April 3, 1999).** ****10.(ii)(23) Term Sheet from theRegistrant to Greg A. Lee dated December 8, 2000 relating to employment(incorporated by reference to Exhibit 10 to the Registrant's QuarterlyReport on form 10-Q for the fiscal quarter ended March 31, 2001). ** *****10.(ii)(24) Letter from the  Registrant to Paul J. Liska executed October 1, 2001 relating to  employment.****10.(ii)(25) Form of  Severance and Non-Compete Agreement for Executive Officers of the Registrant  (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q  for the quarterly period ended July 3, 1999).** *****10.(ii)(26) Form of  Executive Non-Disclosure and Non-Solicitation of Employees Agreement and form  of Executive Severance/Non-Compete Agreement for Executive Officers of the  Registrant. ****10.(ii)(27)Sears Executive RetirementPlan Arrangements dated March 27, 1997 (incorporated by reference to Exhibit10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarterended June 28, 1997).** *****12.Computation of ratioof income to fixed charges for Registrant and consolidated subsidiaries.*21.Subsidiaries of theRegistrant.*23.Consent of Deloitte& Touche LLP. 
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-KFor the Year Ended December 29, 2001*24.  Power of Attorney of certain officersand directors of the Registrant.
* Filed herewith
** SEC File No. 1-416
*** SEC File No. 1-11840
**** A management contract or compensatory plan or arrangementrequired to be filed as an exhibit to this report pursuant to Item 14(c)of Form 10-K.  

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