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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q/A




|  |  |                                                                                                                                     
|- |  | ------------------------------------------------------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JUNE 29, 2002
| 
| 
| 
| 
|  |  |                                                                                                                                     
| 
| 
| 
| 
|  |  | OR                                                                                                                                  
| 
| 
| 
| 
|  |  |                                                                                                                                     
| 
| 
| 
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934                                            

Commission file number 1-416



SEARS, ROEBUCK AND CO.

(Exact name of registrant as specified in its charter)





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



Registrants telephone number, including area code: (847) 286-2500
Registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and [2] has been subject to such filing requirements for the past 90 days.

|         |  |        
|-------- |  | -------
|Yes    x |  | o    No

As of July 27, 2002, the Registrant had 315,950,647 common shares, $.75 par value, outstanding.





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TABLE OF CONTENTS



|                                                |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                  
|                                                | Item 1. Financial Statements                                                                 
|                                                |                                                                                               | Condensed Consolidated Statements of Income         
|                                                |                                                                                               | Condensed Consolidated Balance Sheets               
|                                                |                                                                                               | Condensed Consolidated Statements of Cash Flows     
|                                                |                                                                                               | Notes To Condensed Consolidated Financial Statements
|                                                | Item 2. Managements Discussion and Analysis of Operations, Financial Condition and Liquidity
|                                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION                     
|                                                | Item 1. Legal Proceedings                                                                    
|                                                | Item 4. Submission of Matters to a Vote of Security-Holders                                  
|                                                | Item 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURE                                      
|Computation of Ratio of Income to Fixed Charges
|Acknowledgement of Awareness                   
|Certification of Chief Executive Officer       
|Certification of Chief Financial Officer       
|Press Release                                  



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##### Table of Contents



SEARS, ROEBUCK AND CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 and 26 Weeks Ended June 29, 2002

Explanatory Note

The purpose of this amendment to the Companys Quarterly Report on Form 10-Q is
to incorporate changes and provide additional information in response to
comments received from the staff of the Securities and Exchange Commission
regarding the accounting estimate change discussed below.

As previously reported, during the second quarter of 2002, the Company refined
its method of determining its allowance for uncollectible accounts, resulting
in a pre-tax charge of $300 million ($191 million, net of tax). The Company
initially recorded the charge as a cumulative effect of a change in accounting
principle as of the beginning of fiscal 2002, and filed its original Quarterly
Report on Form 10-Q for the second quarter with such presentation. In
consideration of further interpretive guidance from the staff of the Securities
and Exchange Commission, the Company has restated its June 29, 2002 financial
statements to report the effect of the refinement in allowance methodology as a
change in accounting estimate in the second quarter of 2002. See Note 8 to the
Condensed Consolidated Financial Statements.

This Quarterly Report on Form 10-Q/A does not reflect events occurring after
the filing of the registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended June 29, 2002, or materially modify or update those disclosures,
except as discussed above.

|                               |  |                                                                                                                         |  |     
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                         |  | Page
|                               |  |                                                                                                                         |  |     
|PART I  FINANCIAL INFORMATION |  |                                                                                                                        
|                              
|                              
|                              
|                              
|Item 1.                        |  | Financial Statements                                                                                                    |  |     
|                              
|                              
|                              
|                              
|                               |  | Condensed Consolidated Statements of Income (Unaudited)
13 Weeks and 26 Weeks Ended June 29, 2002 and June 30, 2001     |  | 1   
|                              
|                              
|                              
|                              
|                               |  | Condensed Consolidated Balance Sheets
June 29, 2002 (Unaudited), June 30, 2001 (Unaudited)
and December 29, 2001        |  | 2   
|                              
|                              
|                              
|                              
|                               |  | Condensed Consolidated Statements of Cash Flows (Unaudited)
13 Weeks and 26 Weeks Ended June 29, 2002 and June 30, 2001 |  | 3   
|                              
|                              
|                              
|                              
|                               |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                        |  | 4   
|                              
|                              
|                              
|                              
|                               |  | Independent Accountants Report                                                                                         |  | 15  
|                              
|                              
|                              
|                              
|Item 2.                        |  | Managements Discussion and Analysis of Operations, Financial Condition
and Liquidity                                   |  | 16  
|                              
|                              
|                              
|                              
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                                              |  | 26  
|                              
|                              
|                              
|                              
|PART II  OTHER INFORMATION    |  |                                                                                                                        
|                              
|                              
|                              
|                              
|Item 1.                        |  | Legal Proceedings                                                                                                       |  | 27  
|                              
|                              
|                              
|                              
|Item 4.                        |  | Submission of Matters to a Vote of Security-Holders                                                                     |  | 28  
|                              
|                              
|                              
|                              
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                                        |  | 29  





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##### Table of Contents












SEARS, ROEBUCK AND CO.
Condensed Consolidated Statements of Income
(Unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |        |       |       |  
|----------------------------------------------------------- | ------------------------ | ------------------------------------------------------------------------------------ | ------------------------- | -------------- | ---- | -------- | ----- | ------------- | ----- | ----- | ------ | ------ | ----- | ---- | ------ | ------ | ----- | ----- | -
|                                                            |                          | 13 Weeks Ended                                                                       |                           | 26 Weeks Ended
|                                                            |                          |                                                                                      |                           |               
|millions, except per common share data                      |                          | June 29,                                                                             |                           | June 30,       |      | June 29, |       | June 30,     
|                                                            |                          | 2002                                                                                 |                           | 2001           |      | 2002     |       | 2001         
|                                                            |                          |                                                                                      |                           |                |      |          |       |              
|                                                            |                          | (As restated-                                                                        |                           |                |      |          |       | (As restated- |       |       |        |       
|REVENUES                                                    |                          | see note 8)                                                                          |                           |                |      |          |       | see note 8)   |       |       |        |       
|Merchandise sales and services                              |                          | $                                                                                    | 8,753                     |                |      | $        | 8,834 |               |       | $     | 16,400 |        |       | $    | 16,588 |       
|                                                           
|                                                           
|                                                           
|                                                           
|Credit and financial products revenues                      |                          |                                                                                      | 1,389                     |                |      |          | 1,349 |               |       |       | 2,779  |        |       |      | 2,452  |       
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|                                                            | Total revenues           |                                                                                      |                           | 10,142         |      |          |       | 10,183        |       |       |        | 19,179 |       |      |        | 19,040 |      
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|COSTS AND EXPENSES                                          |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|                                                           
|                                                           
|                                                           
|                                                           
|Cost of sales, buying and occupancy                         |                          |                                                                                      | 6,342                     |                |      |          | 6,439 |               |       |       | 11,968 |        |       |      | 12,275 |       
|                                                           
|                                                           
|                                                           
|                                                           
|Selling and administrative                                  |                          |                                                                                      | 2,236                     |                |      |          | 2,256 |               |       |       | 4,297  |        |       |      | 4,287  |       
|                                                           
|                                                           
|                                                           
|                                                           
|Provision for uncollectible accounts                        |                          |                                                                                      | 701                       |                |      |          | 361   |               |       |       | 1,082  |        |       |      | 552    |       
|                                                           
|                                                           
|                                                           
|                                                           
|Provision for previously securitized receivables            |                          |                                                                                      |                          |                |      |          | 522   |               |       |       |       |        |       |      | 522    |       
|                                                           
|                                                           
|                                                           
|                                                           
|Depreciation and amortization                               |                          |                                                                                      | 221                       |                |      |          | 225   |               |       |       | 431    |        |       |      | 440    |       
|                                                           
|                                                           
|                                                           
|                                                           
|Interest                                                    |                          |                                                                                      | 276                       |                |      |          | 404   |               |       |       | 568    |        |       |      | 716    |       
|                                                           
|                                                           
|                                                           
|                                                           
|Special charges and impairments                             |                          |                                                                                      |                          |                |      |          | 287   |               |       |       | 111    |        |       |      | 287    |       
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|                                                            | Total costs and expenses |                                                                                      |                           | 9,776          |      |          |       | 10,494        |       |       |        | 18,457 |       |      |        | 19,079 |      
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|Operating income (loss)                                     |                          |                                                                                      | 366                       |                |      |          | (311  | )             |       |       | 722    |        |       |      | (39    | )     
|                                                           
|                                                           
|                                                           
|                                                           
|Other income, net                                           |                          |                                                                                      | 10                        |                |      |          | 7     |               |       |       | 88     |        |       |      | 8      |       
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|Income (loss) before income taxes and minority interest     |                          |                                                                                      | 376                       |                |      |          | (304  | )             |       |       | 810    |        |       |      | (31    | )     
|                                                           
|                                                           
|                                                           
|                                                           
|Income tax benefit (expense)                                |                          |                                                                                      | (140                      | )              |      |          | 112   |               |       |       | (288   | )      |       |      | 14     |       
|                                                           
|                                                           
|                                                           
|                                                           
|Minority interest                                           |                          |                                                                                      | (7                        | )              |      |          | (5    | )             |       |       | 25     |        |       |      | (4     | )     
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|Income (loss) before cumulative effect of accounting change |                          |                                                                                      | 229                       |                |      |          | (197  | )             |       |       | 547    |        |       |      | (21    | )     
|                                                           
|                                                           
|                                                           
|                                                           
|Cumulative effect of a change in accounting for goodwill    |                          |                                                                                      |                          |                |      |          |      |               |       |       | (208   | )      |       |      |       |       
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|NET INCOME (LOSS)                                           |                          | $                                                                                    | 229                       |                |      | $        | (197  | )             |       | $     | 339    |        |       | $    | (21    | )     
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|EARNINGS (LOSS) PER COMMON SHARE                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | BASIC                    |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |        |      
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |                          | Earnings (loss) per share before cumulative
effect of change in accounting principle |                           | $              | 0.72 |          |       | $             | (0.60 | )     |        | $      | 1.72  |      |        | $      | (0.06 | )    
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |                          | Cumulative effect of change in accounting principle                                  |                           |                |     |          |       |               |      |       |        |        | (0.65 | )    |        |        |      |      
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|                                                            |                          |                                                                                      | Earnings (loss) per share |                | $    | 0.72     |       |               | $     | (0.60 | )      |        | $     | 1.07 |        |        | $     | (0.06 | )
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|                                                            | DILUTED                  |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |        |      
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |                          | Earnings (loss) per share before cumulative
effect of change in accounting principle |                           | $              | 0.71 |          |       | $             | (0.60 | )     |        | $      | 1.70  |      |        | $      | (0.06 | )    
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |                          | Cumulative effect of change in accounting principle                                  |                           |                |     |          |       |               |      |       |        |        | (0.65 | )    |        |        |      |      
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|                                                            |                          |                                                                                      | Earnings (loss) per share |                | $    | 0.71     |       |               | $     | (0.60 | )      |        | $     | 1.05 |        |        | $     | (0.06 | )
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|Cash dividends declared per common share                    |                          | $                                                                                    | 0.23                      |                |      | $        | 0.23  |               |       | $     | 0.46   |        |       | $    | 0.46   |       
|                                                            |                          |                                                                                      |                           |                |      |          |       |               |       |       |        |        |       |      |        |       
|Average common and common equivalent shares
outstanding     |                          |                                                                                      | 321.1                     |                |      |          | 326.6 |               |       |       | 322.5  |        |       |      | 329.2  |       

See accompanying notes.

1



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SEARS, ROEBUCK AND CO.
Condensed Consolidated Balance Sheets

|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |        |        | 
|------------------------------------------------ | ------------------------------------------------------------------- | ----------------------------------------- | ------ | -------- | ------ | ------------ | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|                                                 |                                                                     | (Unaudited)                               |        |          |        |             
|                                                 |                                                                     |                                           |        |          |        |             
|                                                 |                                                                     | June 29,                                  |        | June 30, |        | December 29,
|millions                                         |                                                                     | 2002                                      |        | 2001     |        | 2001        
|                                                 |                                                                     |                                           |        |          |        |             
|ASSETS                                           |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                
|                                                
|                                                
|                                                
|Current assets                                   |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Cash and cash equivalents                                           |                                           | $      | 1,019    |        |              | $      | 476    |        |  | $      | 1,064  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Credit card receivables                                             |                                           |        | 29,812   |        |              |        | 27,615 |        |  |        | 29,321 |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                     | Less allowance for uncollectible accounts |        |          | 1,485  |              |        |        | 1,129  |  |        |        | 1,166  | 
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                 |                                                                     | Net credit card receivables               |        |          | 28,327 |              |        |        | 26,486 |  |        |        | 28,155 | 
|                                                
|                                                
|                                                
|                                                
|                                                 | Other receivables                                                   |                                           |        | 635      |        |              |        | 628    |        |  |        | 658    |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Merchandise inventories                                             |                                           |        | 5,396    |        |              |        | 5,596  |        |  |        | 4,912  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Prepaid expenses and deferred charges                               |                                           |        | 617      |        |              |        | 585    |        |  |        | 458    |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred income taxes                                               |                                           |        | 1,010    |        |              |        | 1,170  |        |  |        | 858    |       
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                 | Total current assets                                                |                                           |        | 37,004   |        |              |        | 34,941 |        |  |        | 36,105 |       
|                                                
|                                                
|                                                
|                                                
|Property and equipment, net                      |                                                                     |                                           | 6,797  |          |        |              | 6,604  |        |        |  | 6,824  |       
|                                                
|                                                
|                                                
|                                                
|Deferred income taxes                            |                                                                     |                                           | 365    |          |        |              | 232    |        |        |  | 415    |       
|                                                
|                                                
|                                                
|                                                
|Goodwill                                         |                                                                     |                                           | 936    |          |        |              | 287    |        |        |  | 294    |       
|                                                
|                                                
|                                                
|                                                
|Tradenames and Other Intangible assets           |                                                                     |                                           | 725    |          |        |              |       |        |        |  |       |       
|                                                
|                                                
|                                                
|                                                
|Other assets                                     |                                                                     |                                           | 917    |          |        |              | 703    |        |        |  | 679    |       
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                 | TOTAL ASSETS                                                        |                                           | $      | 46,744   |        |              | $      | 42,767 |        |  | $      | 44,317 |       
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|LIABILITIES                                      |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                
|                                                
|                                                
|                                                
|Current liabilities                              |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Short-term borrowings                                               |                                           | $      | 3,981    |        |              | $      | 3,326  |        |  | $      | 3,557  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Current portion of long-term debt and capitalized lease
obligations |                                           |        | 4,325    |        |              |        | 3,243  |        |  |        | 3,157  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts payable and other liabilities                              |                                           |        | 6,831    |        |              |        | 6,488  |        |  |        | 7,176  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Unearned revenues                                                   |                                           |        | 1,180    |        |              |        | 1,131  |        |  |        | 1,136  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Other taxes                                                         |                                           |        | 471      |        |              |        | 475    |        |  |        | 558    |       
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                 | Total current liabilities                                           |                                           |        | 16,788   |        |              |        | 14,663 |        |  |        | 15,584 |       
|                                                
|                                                
|                                                
|                                                
|Long-term debt and capitalized lease obligations |                                                                     |                                           | 20,348 |          |        |              | 18,870 |        |        |  | 18,921 |       
|                                                
|                                                
|                                                
|                                                
|Postretirement benefits                          |                                                                     |                                           | 1,645  |          |        |              | 1,867  |        |        |  | 1,732  |       
|                                                
|                                                
|                                                
|                                                
|Minority interest and other liabilities          |                                                                     |                                           | 1,868  |          |        |              | 1,334  |        |        |  | 1,961  |       
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                 | Total Liabilities                                                   |                                           |        | 40,649   |        |              |        | 36,734 |        |  |        | 38,198 |       
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|COMMITMENTS AND CONTINGENT LIABILITIES           |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                
|                                                
|                                                
|                                                
|SHAREHOLDERS EQUITY                             |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                
|                                                
|                                                
|                                                
|Common shares                                    |                                                                     |                                           | 323    |          |        |              | 323    |        |        |  | 323    |       
|                                                
|                                                
|                                                
|                                                
|Capital in excess of par value                   |                                                                     |                                           | 3,516  |          |        |              | 3,523  |        |        |  | 3,500  |       
|                                                
|                                                
|                                                
|                                                
|Retained earnings                                |                                                                     |                                           | 7,605  |          |        |              | 6,806  |        |        |  | 7,413  |       
|                                                
|                                                
|                                                
|                                                
|Treasury stock  at cost                         |                                                                     |                                           | (4,506 | )        |        |              | (4,071 | )      |        |  | (4,223 | )     
|                                                
|                                                
|                                                
|                                                
|Deferred ESOP expense                            |                                                                     |                                           | (48    | )        |        |              | (77    | )      |        |  | (63    | )     
|                                                
|                                                
|                                                
|                                                
|Accumulated other comprehensive loss             |                                                                     |                                           | (795   | )        |        |              | (471   | )      |        |  | (831   | )     
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                 | Total Shareholders Equity                                          |                                           |        | 6,095    |        |              |        | 6,033  |        |  |        | 6,119  |       
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                 | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                          |                                           | $      | 46,744   |        |              | $      | 42,767 |        |  | $      | 44,317 |       
|                                                 |                                                                     |                                           |        |          |        |              |        |        |        |  |        |       
|                                                 | Total common shares outstanding                                     |                                           |        | 316.8    |        |              |        | 324.3  |        |  |        | 320.4  |       

See accompanying notes.

2



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##### Table of Contents






SEARS, ROEBUCK AND CO.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |     |        |        |  
|--------------------------------------------------------------------------------------- | --------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------- | -------- | ------ | ------ | ------ | --- | ------ | ------ | -
|                                                                                        |                                                     | 26 Weeks Ended                                          
|                                                                                        |                                                     |                                                         
|                                                                                        |                                                     | June 29,                                                 |                                                     | June 30,
|millions                                                                                |                                                     | 2002                                                     |                                                     | 2001    
|                                                                                        |                                                     |                                                          |                                                     |         
|                                                                                        |                                                     | (As restated-                                            |                                                     |          |        |       
|CASH FLOWS FROM OPERATING ACTIVITIES                                                    |                                                     | see note 8)                                              |                                                     |          |        |       
|Net income (loss)                                                                       |                                                     | $                                                        | 339                                                 |          |        | $      | (21    | )  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Adjustments to reconcile net income (loss) to net cash
provided by operating activities |                                                     |                                                          |                                                     |          |        |        |        |    
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Depreciation and amortization                       |                                                          |                                                     | 431      |        |        |        | 440 |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Cumulative effect of change in accounting principle |                                                          |                                                     | 208      |        |        |        |    |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Provision for uncollectible accounts                |                                                          |                                                     | 1,082    |        |        |        | 552 |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Provision for previously securitized receivables    |                                                          |                                                     |         |        |        |        | 522 |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Special charges and impairments                     |                                                          |                                                     | 111      |        |        |        | 287 |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Gain on sales of property and investments           |                                                          |                                                     | (76      | )      |        |        | (1  | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Income tax benefit on nonqualified stock options    |                                                          |                                                     | 24       |        |        |        | 7   |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Change in (net of acquisitions):                    |                                                          |                                                     |          |        |        |        |     |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                     | Deferred income taxes                                    |                                                     |          | (95    | )      |        |     | (313   | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                     | Retained interest in transferred credit card receivables |                                                     |          |       |        |        |     | (759   | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                     | Credit card receivables                                  |                                                     |          | (1,161 | )      |        |     | 1,732  |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                     | Merchandise inventories                                  |                                                     |          | (216   | )      |        |     | 11     |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                     | Other operating assets                                   |                                                     |          | (345   | )      |        |     | 95     |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                     | Other operating liabilities                              |                                                     |          | (491   | )      |        |     | (1,351 | )     
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    
|                                                                                        |                                                     |                                                          | Net cash (used in) provided by operating activities |          |        | (189   | )      |     |        | 1,201  |  
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    
|CASH FLOWS FROM INVESTING ACTIVITIES                                                    |                                                     |                                                          |                                                     |          |        |        |        |    
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Acquisition of businesses, net of cash acquired                                         |                                                     |                                                          | (1,832                                              | )        |        |        |       |    
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Proceeds from sales of property and investments                                         |                                                     |                                                          | 130                                                 |          |        |        | 40     |    
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Purchases of property and equipment                                                     |                                                     |                                                          | (391                                                | )        |        |        | (573   | )  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Purchases of long-term investments                                                      |                                                     |                                                          | (9                                                  | )        |        |        | (12    | )  
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    
|                                                                                        |                                                     |                                                          | Net cash used in investing activities               |          |        | (2,102 | )      |     |        | (545   | )
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    
|CASH FLOWS FROM FINANCING ACTIVITIES                                                    |                                                     |                                                          |                                                     |          |        |        |        |    
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Proceeds from long-term debt                                                            |                                                     |                                                          | 3,974                                               |          |        |        | 1,787  |    
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Repayments of long-term debt                                                            |                                                     |                                                          | (1,715                                              | )        |        |        | (1,374 | )  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Increase (decrease) in short term borrowings, primarily
90 days or less                 |                                                     |                                                          | 411                                                 |          |        |        | (950   | )  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Repayments of ESOP note receivable                                                      |                                                     |                                                          | 7                                                   |          |        |        | 21     |    
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Common shares repurchased                                                               |                                                     |                                                          | (427                                                | )        |        |        | (400   | )  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Common shares issued for employee stock plans                                           |                                                     |                                                          | 136                                                 |          |        |        | 32     |    
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Dividends paid to shareholders                                                          |                                                     |                                                          | (147                                                | )        |        |        | (152   | )  
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    
|                                                                                        |                                                     |                                                          | Net cash provided by (used in) financing activities |          |        | 2,239  |        |     |        | (1,036 | )
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    
|Effect of exchange rate changes on cash and cash equivalents                            |                                                     |                                                          | 7                                                   |          |        |        | 14     |    
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                               |                                                     |                                                          | (45                                                 | )        |        |        | (366   | )  
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    
|BALANCE AT BEGINNING OF YEAR                                                            |                                                     |                                                          | 1,064                                               |          |        |        | 842    |    
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    
|BALANCE AT END OF PERIOD                                                                |                                                     | $                                                        | 1,019                                               |          |        | $      | 476    |    
|                                                                                        |                                                     |                                                          |                                                     |          |        |        |        |    

See accompanying notes.

3



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##### Table of Contents






SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Condensed Consolidated Balance Sheets as of June 29, 2002 and June 30,
2001, the related Condensed Consolidated Statements of Income for the 13 and 26
weeks ended June 29, 2002 and June 30, 2001, and the Condensed Consolidated
Statements of Cash Flows for the 26 weeks ended June 29, 2002 and June 30,
2001, are unaudited. The interim financial statements reflect all adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Sears, Roebuck and Co. (the Company or Sears) 2001
Annual Report on Form 10-K. The results of operations for the interim periods
should not be considered indicative of results to be expected for the full
year.

Certain reclassifications have been made to the 2001 financial statements to
conform with the current year presentation.

NOTE 2  ACQUISITION

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

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

|                                                          |       |   |      |       | 
|--------------------------------------------------------- | ----- | - | ---- | ----- | 
|Merchandise inventories                                   |       | $ | 238  |      
|                                                         
|                                                         
|                                                         
|                                                         
|Property and equipment                                    |       |   | 177  |      
|                                                         
|                                                         
|                                                         
|                                                         
|Intangible assets (primarily indefinite lived tradenames) |       |   | 725  |      
|                                                         
|                                                         
|                                                         
|                                                         
|Goodwill                                                  |       |   | 826  |      
|                                                         
|                                                         
|                                                         
|                                                         
|Other assets                                              |       |   | 44   |      
|                                                         
|                                                         
|                                                         
|                                                         
|Accounts payable and other liabilities                    |       |   | (178 | )    
|                                                          |       |   |      |      
|                                                          | Total |   | $    | 1,832 | 
|                                                          |       |   |      |      

The amount allocated to goodwill is reflective of the benefit the Company
expects to realize from leveraging the Lands End brandname across its retail
and credit businesses. The Company is in the process of obtaining third-party
valuations to ascertain the fair value of assets and liabilities; therefore,
the allocation of the purchase price is preliminary.

The following unaudited pro forma information presents the results of
operations of the Company as if the Lands End acquisition had taken place at
the beginning of each respective period. Pro forma adjustments have been made
to reflect additional interest expense from the $1.8 billion in debt associated
with the acquisition. The pro forma results of operations include $18 million
of non recurring transaction costs incurred by Lands End for the 13 and 26
weeks ended June 29, 2002, respectively.

4



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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

|                                                            |         |                           |        |                |      |             |        |               |       |   |        |  |      |   |        |   |       |  
|----------------------------------------------------------- | ------- | ------------------------- | ------ | -------------- | ---- | ----------- | ------ | ------------- | ----- | - | ------ |  | ---- | - | ------ | - | ----- | -
|                                                            |         | 13 Weeks Ended            |        | 26 Weeks Ended
|                                                            |         |                           |        |               
|                                                            |         | June 29,                  |        | June 30,       |      | June 29,    |        | June 30,     
|                                                            |         | 2002                      |        | 2001           |      | 2002        |        | 2001         
|millions, except per share data                             |         | (Pro Forma)               |        | (Pro Forma)    |      | (Pro Forma) |        | (Pro Forma)  
|                                                            |         |                           |        |                |      |             |        |              
|                                                            |         | (As restated-             |        |                |      |             |        | (As restated- |       |   |        | 
|                                                            |         | see note 8)               |        |                |      |             |        | see note 8)   |       |   |        | 
|Revenues                                                    |         | $                         | 10,458 |                |      | $           | 10,499 |               |       | $ | 19,833 |  |      | $ | 19,654 |  
|                                                           
|                                                           
|                                                           
|                                                           
|Income (loss) before cumulative effect of accounting change |         |                           | 216    |                |      |             | (206   | )             |       |   | 530    |  |      |   | (44    | )
|                                                           
|                                                           
|                                                           
|                                                           
|Net income (loss)                                           |         |                           | 216    |                |      |             | (206   | )             |       |   | 322    |  |      |   | (44    | )
|                                                           
|                                                           
|                                                           
|                                                           
|Earnings (loss) per share:                                  |         |                           |        |                |      |             |        |               |       |   |        |  |      |   |        |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Basic   |                           |        |                |      |             |        |               |       |   |        |  |      |   |        |   |      
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |         | Earnings (loss) per share |        |                | 0.67 |             |        |               | (0.65 | ) |        |  | 0.97 |   |        |   | (0.16 | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Diluted |                           |        |                |      |             |        |               |       |   |        |  |      |   |        |   |      
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |         | Earnings (loss) per share |        |                | 0.66 |             |        |               | (0.65 | ) |        |  | 0.95 |   |        |   | (0.16 | )

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

NOTE 3  SHAREHOLDERS EQUITY

Dividend Payments

Under terms of indentures entered into in 1981 and thereafter, the Company
cannot take specified actions, including the declaration of cash dividends,
that would cause its unencumbered assets, as defined, to fall below 150% of its
liabilities, as defined. At June 29, 2002, approximately $6.8 billion could be
paid in dividends to shareholders under the most restrictive indentures.

Share Repurchase Program

The Company repurchased common shares during 2002 and 2001 under common share
repurchase programs approved by the Board of Directors. A summary of share
repurchase activity is as follows (all amounts in millions):

|                    |              |  |        |      |      |   |     |     | 
|------------------- | ------------ |  | ------ | ---- | ---- | - | --- | --- | 
|                    |              |  | Shares |      | Cost
|                    |              |  |        |      |     
|First quarter 2001  |              |  | 4.3    |      |      | $ | 168 |    
|                   
|                   
|                   
|                   
|Second quarter 2001 |              |  | 6.1    |      |      |   | 232 |    
|                    |              |  |        |      |      |   |     |    
|                    | Year to date |  |        | 10.4 |      |   | $   | 400 | 
|                    |              |  |        |      |      |   |     |    
|First quarter 2002  |              |  | 8.2    |      |      | $ | 427 |    
|                   
|                   
|                   
|                   
|Second quarter 2002 |              |  |       |      |      |   |    |    
|                    |              |  |        |      |      |   |     |    
|                    | Year to date |  |        | 8.2  |      |   | $   | 427 | 
|                    |              |  |        |      |      |   |     |    

As of June 29, 2002 the Company has remaining authorization to repurchase $1.25
billion of shares by December 31, 2004 under the existing share repurchase
program.

5



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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss

The following table shows the computation of comprehensive income (loss):

|                                                                      |  |                |     |                |  |          |      |          |  |   |     |   |  |   |      |  
|--------------------------------------------------------------------- |  | -------------- | --- | -------------- |  | -------- | ---- | -------- |  | - | --- | - |  | - | ---- | -
|                                                                      |  | 13 Weeks Ended |     | 26 Weeks Ended
|                                                                      |  |                |     |               
|                                                                      |  | June 29,       |     | June 30,       |  | June 29, |      | June 30,
|millions                                                              |  | 2002           |     | 2001           |  | 2002     |      | 2001    
|                                                                      |  |                |     |                |  |          |      |         
|                                                                      |  | (As restated-  |     |                |  |          |      |          |  |   |     |   |  |  
|                                                                      |  | see note 8)    |     |                |  |          |      |          |  |   |     |   |  |  
|Net income (loss)                                                     |  | $              | 229 |                |  | $        | (197 | )        |  | $ | 339 |   |  | $ | (21  | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other comprehensive income (loss):                                    |  |                |     |                |  |          |      |          |  |   |     |   |  |   |      |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|After tax cumulative effect of a change in
accounting for derivatives |  |                |    |                |  |          |     |          |  |   |    |   |  |   | (262 | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Amounts amortized into interest expense from OCI                      |  |                | 4   |                |  |          | 4    |          |  |   | 8   |   |  |   | 8    |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Change in fair value of cash flow hedges                              |  |                | (3  | )              |  |          | 38   |          |  |   | (3  | ) |  |   | 34   |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Unrealized gain on investments                                        |  |                |    |                |  |          | 3    |          |  |   |    |   |  |   | 5    |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Foreign currency translation adjustments                              |  |                | 29  |                |  |          | 20   |          |  |   | 30  |   |  |   | (7   | )
|                                                                      |  |                |     |                |  |          |      |          |  |   |     |   |  |   |      |  
|Total other comprehensive income (loss)                               |  |                | 30  |                |  |          | 65   |          |  |   | 35  |   |  |   | (222 | )
|                                                                      |  |                |     |                |  |          |      |          |  |   |     |   |  |   |      |  
|Total comprehensive income (loss)                                     |  | $              | 259 |                |  | $        | (132 | )        |  | $ | 374 |   |  | $ | (243 | )
|                                                                      |  |                |     |                |  |          |      |          |  |   |     |   |  |   |      |  

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

|                                               |  |          |      |          |  |              |      |   |  |   |      |  
|---------------------------------------------- |  | -------- | ---- | -------- |  | ------------ | ---- | - |  | - | ---- | -
|                                               |  | June 29, |      | June 30, |  | December 29,
|millions                                       |  | 2002     |      | 2001     |  | 2001        
|                                               |  |          |      |          |  |             
|Accumulated derivative loss                    |  | $        | (205 | )        |  | $            | (220 | ) |  | $ | (211 | )
|                                              
|                                              
|                                              
|                                              
|Unrealized gain on securities held, net of tax |  |          |     |          |  |              | 6    |   |  |   |     |  
|                                              
|                                              
|                                              
|                                              
|Currency translation adjustments               |  |          | (125 | )        |  |              | (125 | ) |  |   | (155 | )
|                                              
|                                              
|                                              
|                                              
|Minimum pension liability, net of tax (1)      |  |          | (465 | )        |  |              | (132 | ) |  |   | (465 | )
|                                               |  |          |      |          |  |              |      |   |  |   |      |  
|Accumulated other comprehensive loss           |  | $        | (795 | )        |  | $            | (471 | ) |  | $ | (831 | )
|                                               |  |          |      |          |  |              |      |   |  |   |      |  



---

|(1) |  | Minimum pension liability is calculated annually in the
fourth quarter. Changes thereto are recorded at that time.
|--- |  | ------------------------------------------------------------------------------------------------------------------

NOTE 4  EARNINGS (LOSS) PER SHARE

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

|                                                        |  |                |       |                |  |          |       |          |  |   |       |  |  |   |       |  
|------------------------------------------------------- |  | -------------- | ----- | -------------- |  | -------- | ----- | -------- |  | - | ----- |  |  | - | ----- | -
|                                                        |  | 13 Weeks Ended |       | 26 Weeks Ended
|                                                        |  |                |       |               
|                                                        |  | June 29,       |       | June 30,       |  | June 29, |       | June 30,
|millions, except per share data                         |  | 2002           |       | 2001           |  | 2002     |       | 2001    
|                                                        |  |                |       |                |  |          |       |         
|                                                        |  | (As restated-  |       |                |  |          |       |          |  |   |       |  |  |  
|                                                        |  | see note 8)    |       |                |  |          |       |          |  |   |       |  |  |  
|Net income (loss) available to Common shareholders (1)  |  | $              | 229   |                |  | $        | (197  | )        |  | $ | 339   |  |  | $ | (21   | )
|                                                       
|                                                       
|                                                       
|                                                       
|Average common shares outstanding                       |  |                | 316.1 |                |  |          | 326.6 |          |  |   | 317.5 |  |  |   | 329.2 |  
|                                                        |  |                |       |                |  |          |       |          |  |   |       |  |  |   |       |  
|Earnings (loss) per share  basic                       |  | $              | 0.72  |                |  | $        | (0.60 | )        |  | $ | 1.07  |  |  | $ | (0.06 | )
|                                                       
|                                                       
|                                                       
|                                                       
|Dilutive effect of stock options                        |  |                | 5.0   |                |  |          |      |          |  |   | 5.0   |  |  |   |      |  
|                                                       
|                                                       
|                                                       
|                                                       
|Average common and common equivalent shares outstanding |  |                | 321.1 |                |  |          | 326.6 |          |  |   | 322.5 |  |  |   | 329.2 |  
|                                                        |  |                |       |                |  |          |       |          |  |   |       |  |  |   |       |  
|Earnings (loss) per share  diluted                     |  | $              | 0.71  |                |  | $        | (0.60 | )        |  | $ | 1.05  |  |  | $ | (0.06 | )
|                                                        |  |                |       |                |  |          |       |          |  |   |       |  |  |   |       |  



---

|(1) |  | Income (loss) available to common shareholders is the
same for purposes of calculating basic and diluted EPS.
|--- |  | -------------------------------------------------------------------------------------------------------------

6



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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

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

|                                                                |  |                |       |                |  |          |       |               |  |   |       |  |  |   |       |  
|--------------------------------------------------------------- |  | -------------- | ----- | -------------- |  | -------- | ----- | ------------- |  | - | ----- |  |  | - | ----- | -
|                                                                |  | 13 Weeks Ended |       | 26 Weeks Ended
|                                                                |  |                |       |               
|                                                                |  | June 29,       |       | June 30,       |  | June 29, |       | June 30,     
|millions, except per share data                                 |  | 2002           |       | 2001           |  | 2002     |       | 2001         
|                                                                |  |                |       |                |  |          |       |              
|                                                                |  | (As restated-  |       |                |  |          |       | (As restated- |  |   |       | 
|                                                                |  | see note 8)    |       |                |  |          |       | see note 8)   |  |   |       | 
|Income (loss) before cumulative effect of accounting change (1) |  | $              | 229   |                |  | $        | (197  | )             |  | $ | 547   |  |  | $ | (21   | )
|                                                               
|                                                               
|                                                               
|                                                               
|Average common shares outstanding                               |  |                | 316.1 |                |  |          | 326.6 |               |  |   | 317.5 |  |  |   | 329.2 |  
|                                                                |  |                |       |                |  |          |       |               |  |   |       |  |  |   |       |  
|Earnings (loss) per share  basic                               |  | $              | 0.72  |                |  | $        | (0.60 | )             |  | $ | 1.72  |  |  | $ | (0.06 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Dilutive effect of stock options                                |  |                | 5.0   |                |  |          |      |               |  |   | 5.0   |  |  |   |      |  
|                                                               
|                                                               
|                                                               
|                                                               
|Average common and common equivalent shares outstanding         |  |                | 321.1 |                |  |          | 326.6 |               |  |   | 322.5 |  |  |   | 329.2 |  
|                                                                |  |                |       |                |  |          |       |               |  |   |       |  |  |   |       |  
|Earnings (loss) per share  diluted                             |  | $              | 0.71  |                |  | $        | (0.60 | )             |  | $ | 1.70  |  |  | $ | (0.06 | )
|                                                                |  |                |       |                |  |          |       |               |  |   |       |  |  |   |       |  



---

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

In each period, certain options were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive. At June 29,
2002, options to purchase 3.6 million common shares at prices ranging from $54
to $64 and $53 to $64 per share were excluded from the 13 and 26 week 2002
calculations, respectively. As of June 30, 2001, out-of-the-money options to
purchase 16.5 million shares of stock were excluded from the 13 and 26 week
calculations. Because the Company reported a net loss during the 2001 periods,
the calculations also exclude 1.6 million shares representing the anti-dilutive
effect of in-the-money options.

NOTE 5  SEGMENT DISCLOSURES

The following tables set forth operating results and total assets by segment:

For the 13 weeks ended June 29, 2002

|                                       |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |            |       |              |       |   |        |        |       |               |      |               |     |   |       |        |       | 
|-------------------------------------- | ------------------------------------ | ------------------------ | ------ | ---------- | ----- | --------- | ------ | ------ | --- | ----- | ----- | ----- | --- | ---------- | ----- | ------------ | ----- | - | ------ | ------ | ----- | ------------- | ---- | ------------- | --- | - | ----- | ------ | ----- | 
|                                       |                                      | Retail and               |        | Credit and |       | Corporate |        |        |     |       |       |       |     |            |       | Non-         |       |   |        |       
|                                       |                                      | Related                  |        | Financial  |       | and       |        | Sears  |     |       |       |       |     | comparable |       | Consolidated
|millions                               |                                      | Services                 |        | Products   |       | Other     |        | Canada |     | Total |       | items |     | GAAP      
|                                       |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |           
|                                       |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |            |       |              |       |   |        |        |       | (As restated- |      | (As restated-
|                                       |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |            |       |              |       |   |        |        |       | see note 8)   |      | see note 8)  
|Merchandise sales and services         |                                      | $                        | 7,699  |            |       | $         |       |        |     | $     | 92    |       |     | $          | 962   |              |       | $ | 8,753  |        |       | $             |     |               |     | $ | 8,753 |       
|                                      
|                                      
|                                      
|                                      
|Credit and financial products revenues |                                      |                          |       |            |       |           | 1,321  |        |     |       |      |       |     |            | 68    |              |       |   | 1,389  |        |       |               |     |               |     |   | 1,389 |       
|                                       |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |            |       |              |       |   |        |        |       |               |      |               |     |   |       |       
|                                       | Total revenues                       |                          |        | 7,699      |       |           |        | 1,321  |     |       |       | 92    |     |            |       | 1,030        |       |   |        | 10,142 |       |               |      |              |     |   |       | 10,142 |      
|                                      
|                                      
|                                      
|                                      
|Costs and expenses                     |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |            |       |              |       |   |        |        |       |               |      |               |     |   |       |       
|                                      
|                                      
|                                      
|                                      
|                                       | Cost of sales, buying and occupancy  |                          |        | 5,602      |       |           |        |       |     |       |       | 35    |     |            |       | 705          |       |   |        | 6,342  |       |               |      |              |     |   |       | 6,342  |      
|                                      
|                                      
|                                      
|                                      
|                                       | Selling and administrative           |                          |        | 1,616      |       |           |        | 264    |     |       |       | 110   |     |            |       | 246          |       |   |        | 2,236  |       |               |      |              |     |   |       | 2,236  |      
|                                      
|                                      
|                                      
|                                      
|                                       | Provision for uncollectible accounts |                          |        |           |       |           |        | 393    |     |       |       |      |     |            |       | 8            |       |   |        | 401    |       |               |      | 300           |     |   |       | 701    |      
|                                      
|                                      
|                                      
|                                      
|                                       | Depreciation and amortization        |                          |        | 176        |       |           |        | 5      |     |       |       | 16    |     |            |       | 24           |       |   |        | 221    |       |               |      |              |     |   |       | 221    |      
|                                      
|                                      
|                                      
|                                      
|                                       | Interest                             |                          |        | 5          |       |           |        | 247    |     |       |       |      |     |            |       | 24           |       |   |        | 276    |       |               |      |              |     |   |       | 276    |      
|                                       |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |            |       |              |       |   |        |        |       |               |      |               |     |   |       |       
|                                       |                                      | Total costs and expenses |        |            | 7,399 |           |        |        | 909 |       |       |       | 161 |            |       |              | 1,007 |   |        |        | 9,476 |               |      |               | 300 |   |       |        | 9,776 | 
|                                       |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |            |       |              |       |   |        |        |       |               |      |               |     |   |       |       
|Operating income (loss)                |                                      | $                        | 300    |            |       | $         | 412    |        |     | $     | (69   | )     |     | $          | 23    |              |       | $ | 666    |        |       | $             | (300 | )             |     | $ | 366   |       
|                                       |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |            |       |              |       |   |        |        |       |               |      |               |     |   |       |       
|Total assets                           |                                      | $                        | 12,685 |            |       | $         | 28,454 |        |     | $     | 2,280 |       |     | $          | 3,325 |              |       | $ | 46,744 |        |       |               |      |               |     |   |       |       
|                                       |                                      |                          |        |            |       |           |        |        |     |       |       |       |     |            |       |              |       |   |        |        |       |               |      |               |     |   |       |       

7



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

For the 13 weeks ended June 30, 2001

|                                                       |                                                  |                          |        |            |       |            |        |           |     |       |       |       |     |      |       |            |       |       |        |          |       |   |      |     |     |   |       |        |        | 
|------------------------------------------------------ | ------------------------------------------------ | ------------------------ | ------ | ---------- | ----- | ---------- | ------ | --------- | --- | ----- | ----- | ----- | --- | ---- | ----- | ---------- | ----- | ----- | ------ | -------- | ----- | - | ---- | --- | --- | - | ----- | ------ | ------ | 
|                                                       |                                                  |                          |        | Retail and |       | Credit and |        | Corporate |     |       |       |       |     |      |       |            |       | Non-  |        | Consoli-
|                                                       |                                                  |                          |        | Related    |       | Financial  |        | and       |     | Sears |       |       |     |      |       | comparable |       | dated
|millions                                               |                                                  | Services                 |        | Products   |       | Other      |        | Canada    |     | Total |       | items |     | GAAP
|                                                       |                                                  |                          |        |            |       |            |        |           |     |       |       |       |     |     
|Merchandise sales and services                         |                                                  | $                        | 7,760  |            |       | $          |       |           |     | $     | 112   |       |     | $    | 962   |            |       | $     | 8,834  |          |       | $ |     |     |     | $ | 8,834 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Credit and financial products revenues                 |                                                  |                          |       |            |       |            | 1,276  |           |     |       |      |       |     |      | 73    |            |       |       | 1,349  |          |       |   |     |     |     |   | 1,349 |       
|                                                       |                                                  |                          |        |            |       |            |        |           |     |       |       |       |     |     
|                                                       | Total revenues                                   |                          |        | 7,760      |       |            |        | 1,276     |     |       |       | 112   |     |      |       | 1,035      |       |       |        | 10,183   |       |   |      |    |     |   |       | 10,183 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Costs and expenses                                    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Costs of sales, buying and occupancy             |                          |        | 5,674      |       |            |        |          |     |       |       | 46    |     |      |       | 719        |       |       |        | 6,439    |       |   |      |    |     |   |       | 6,439  |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Selling and administrative                       |                          |        | 1,677      |       |            |        | 212       |     |       |       | 122   |     |      |       | 245        |       |       |        | 2,256    |       |   |      |    |     |   |       | 2,256  |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Provision for uncollectible accounts             |                          |        |           |       |            |        | 350       |     |       |       |      |     |      |       | 11         |       |       |        | 361      |       |   |      |     |     |   |       | 361    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Provision for previously securitized
receivables |                          |        |           |       |            |        |          |     |       |       |      |     |      |       |           |       |       |        |         |       |   |      | 522 |     |   |       | 522    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Depreciation and amortization                    |                          |        | 185        |       |            |        | 4         |     |       |       | 15    |     |      |       | 21         |       |       |        | 225      |       |   |      |    |     |   |       | 225    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Interest                                         |                          |        | 11         |       |            |        | 365       |     |       |       |      |     |      |       | 28         |       |       |        | 404      |       |   |      |    |     |   |       | 404    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Special charges and impairments                  |                          |        |           |       |            |        |          |     |       |       |      |     |      |       |           |       |       |        |         |       |   |      | 287 |     |   |       | 287    |       
|                                                       |                                                  |                          |        |            |       |            |        |           |     |       |       |       |     |      |       |            |       |       |        |          |       |   |      |     |     |   |       |       
|                                                       |                                                  | Total costs and expenses |        |            | 7,547 |            |        |           | 931 |       |       |       | 183 |      |       |            | 1,024 |       |        |          | 9,685 |   |      |     | 809 |   |       |        | 10,494 | 
|                                                       |                                                  |                          |        |            |       |            |        |           |     |       |       |       |     |      |       |            |       |       |        |          |       |   |      |     |     |   |       |       
|                                                      
|                                                      
|                                                      
|                                                      
|Operating income (loss)                                |                                                  |                          | 213    |            |       |            | 345    |           |     |       | (71   | )     |     |      | 11    |            |       |       | 498    |          |       |   | (809 | )   |     |   | (311  | )     
|                                                       |                                                  |                          |        |            |       |            |        |           |     |       |       |       |     |      |       |            |       |       |        |          |       |   |      |     |     |   |       |       
|Goodwill amortization expense                          |                                                  |                          | 5      |            |       |            |       |           |     |       |      |       |     |      | (7    | )          |       |       | (2     | )        |       |   |     |     |     |   | (2    | )     
|                                                       |                                                  |                          |        |            |       |            |        |           |     |       |       |       |     |      |       |            |       |       |        |          |       |   |      |     |     |   |       |       
|Operating income (loss) excluding
amortization expense |                                                  | $                        | 218    |            |       | $          | 345    |           |     | $     | (71   | )     |     | $    | 4     |            |       | $     | 496    |          |       | $ | (809 | )   |     | $ | (313  | )     
|                                                       |                                                  |                          |        |            |       |            |        |           |     |       |       |       |     |      |       |            |       |       |        |          |       |   |      |     |     |   |       |       
|Total assets                                           |                                                  | $                        | 11,245 |            |       | $          | 25,857 |           |     | $     | 2,273 |       |     | $    | 3,392 |            |       | $     | 42,767 |          |       |   |      |     |     |   |       |       
|                                                       |                                                  |                          |        |            |       |            |        |           |     |       |       |       |     |      |       |            |       |       |        |          |       |   |      |     |     |   |       |       

For the 26 weeks ended June 29, 2002

|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |              |        |        |        |               |      |               |     |   |        |        |        | 
|-------------------------------------- | ------------------------------------ | ------------------------ | ------ | ---------- | ------ | ---------- | ------ | --------- | ----- | ----- | ----- | ----- | --- | ---- | ----- | ---------- | ----- | ------------ | ------ | ------ | ------ | ------------- | ---- | ------------- | --- | - | ------ | ------ | ------ | 
|                                       |                                      |                          |        | Retail and |        | Credit and |        | Corporate |       |       |       |       |     |      |       |            |       | Non-         |        |        |        |              
|                                       |                                      |                          |        | Related    |        | Financial  |        | and       |       | Sears |       |       |     |      |       | comparable |       | Consolidated
|millions                               |                                      | Services                 |        | Products   |        | Other      |        | Canada    |       | Total |       | Items |     | GAAP
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |     
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |              |        |        |        | (As restated- |      | (As restated-
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |              |        |        |        | see note 8)   |      | see note 8)  
|Merchandise sales and services         |                                      | $                        | 14,467 |            |        | $          |       |           |       | $     | 150   |       |     | $    | 1,783 |            |       | $            | 16,400 |        |        | $             |     |               |     | $ | 16,400 |       
|                                      
|                                      
|                                      
|                                      
|Credit and financial products revenues |                                      |                          |       |            |        |            | 2,639  |           |       |       |      |       |     |      | 140   |            |       |              | 2,779  |        |        |               |     |               |     |   | 2,779  |       
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |              |        |        |        |               |      |               |     |   |        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Total revenues                       |                          |        | 14,467     |        |            |        | 2,639     |       |       |       | 150   |     |      |       | 1,923      |       |              |        | 19,179 |        |               |      |              |     |   |        | 19,179 |       
|                                      
|                                      
|                                      
|                                      
|Costs and expenses                    
|                                      
|                                      
|                                      
|                                      
|                                       | Cost of sales, buying and occupancy  |                          |        | 10,607     |        |            |        |          |       |       |       | 56    |     |      |       | 1,305      |       |              |        | 11,968 |        |               |      |              |     |   |        | 11,968 |       
|                                      
|                                      
|                                      
|                                      
|                                       | Selling and administrative           |                          |        | 3,128      |        |            |        | 492       |       |       |       | 204   |     |      |       | 473        |       |              |        | 4,297  |        |               |      |              |     |   |        | 4,297  |       
|                                      
|                                      
|                                      
|                                      
|                                       | Provision for uncollectible accounts |                          |        |           |        |            |        | 764       |       |       |       |      |     |      |       | 18         |       |              |        | 782    |        |               |      | 300           |     |   |        | 1,082  |       
|                                      
|                                      
|                                      
|                                      
|                                       | Depreciation and amortization        |                          |        | 344        |        |            |        | 10        |       |       |       | 28    |     |      |       | 49         |       |              |        | 431    |        |               |      |              |     |   |        | 431    |       
|                                      
|                                      
|                                      
|                                      
|                                       | Interest                             |                          |        | 1          |        |            |        | 518       |       |       |       |      |     |      |       | 49         |       |              |        | 568    |        |               |      |              |     |   |        | 568    |       
|                                      
|                                      
|                                      
|                                      
|                                       | Special charges and impairments      |                          |        |           |        |            |        |          |       |       |       |      |     |      |       |           |       |              |        |       |        |               |      | 111           |     |   |        | 111    |       
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |              |        |        |        |               |      |               |     |   |        |       
|                                       |                                      | Total costs and expenses |        |            | 14,080 |            |        |           | 1,784 |       |       |       | 288 |      |       |            | 1,894 |              |        |        | 18,046 |               |      |               | 411 |   |        |        | 18,457 | 
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |              |        |        |        |               |      |               |     |   |        |       
|Operating income (loss)                |                                      | $                        | 387    |            |        | $          | 855    |           |       | $     | (138  | )     |     | $    | 29    |            |       | $            | 1,133  |        |        | $             | (411 | )             |     | $ | 722    |       
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |              |        |        |        |               |      |               |     |   |        |       
|Total assets                           |                                      | $                        | 12,685 |            |        | $          | 28,454 |           |       | $     | 2,280 |       |     | $    | 3,325 |            |       | $            | 46,744 |        |        |               |      |               |     |   |        |       
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |              |        |        |        |               |      |               |     |   |        |       

8



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

For the 26 weeks ended June 30, 2001

|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |          |       |            |        |        |        |          |      |      |      |   |      |     |     |   |        |        |        | 
|------------------------------------------------------ | ------------------------------------------------ | ------------------------ | ------ | ---------- | ------ | ---------- | ------ | --------- | ----- | ----- | ----- | ------ | --- | ----- | ----- | -------- | ----- | ---------- | ------ | ------ | ------ | -------- | ---- | ---- | ---- | - | ---- | --- | --- | - | ------ | ------ | ------ | 
|                                                       |                                                  |                          |        | Retail and |        | Credit and |        | Corporate |       |       |       |        |     |       |       |          |       | Securi-    |        | Non-   |        | Consoli-
|                                                       |                                                  |                          |        | Related    |        | Financial  |        | and       |       | Sears |       |        |     |       |       | tization |       | comparable |        | dated 
|millions                                               |                                                  | Services                 |        | Products   |        | Other      |        | Canada    |       | Total |       | Impact |     | Items |       | GAAP    
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |         
|Merchandise sales and services                         |                                                  | $                        | 14,566 |            |        | $          |       |           |       | $     | 196   |        |     | $     | 1,826 |          |       | $          | 16,588 |        |        | $        |     |      |      | $ |     |     |     | $ | 16,588 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Credit and financial products revenues                 |                                                  |                          |       |            |        |            | 2,576  |           |       |       |      |        |     |       | 151   |          |       |            | 2,727  |        |        |          | (275 | )    |      |   |     |     |     |   | 2,452  |       
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |          |       |            |        |        |        |          |      |      |      |   |      |     |     |   |        |       
|                                                       | Total revenues                                   |                          |        | 14,566     |        |            |        | 2,576     |       |       |       | 196    |     |       |       | 1,977    |       |            |        | 19,315 |        |          |      | (275 | )    |   |      |    |     |   |        | 19,040 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Costs and expenses                                    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cost of sales, buying and occupancy              |                          |        | 10,827     |        |            |        |          |       |       |       | 83     |     |       |       | 1,365    |       |            |        | 12,275 |        |          |      |     |      |   |      |    |     |   |        | 12,275 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Selling and administrative                       |                          |        | 3,207      |        |            |        | 406       |       |       |       | 222    |     |       |       | 491      |       |            |        | 4,326  |        |          |      | (39  | )    |   |      |    |     |   |        | 4,287  |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Provision for uncollectible accounts             |                          |        |           |        |            |        | 684       |       |       |       |       |     |       |       | 21       |       |            |        | 705    |        |          |      | (153 | )    |   |      |    |     |   |        | 552    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Provision for previously securitized
receivables |                          |        |           |        |            |        |          |       |       |       |       |     |       |       |         |       |            |        |       |        |          |      |     |      |   |      | 522 |     |   |        | 522    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Depreciation and amortization                    |                          |        | 361        |        |            |        | 9         |       |       |       | 29     |     |       |       | 41       |       |            |        | 440    |        |          |      |     |      |   |      |    |     |   |        | 440    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Interest                                         |                          |        | 14         |        |            |        | 767       |       |       |       |       |     |       |       | 58       |       |            |        | 839    |        |          |      | (123 | )    |   |      |    |     |   |        | 716    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Special charges and impairments                  |                          |        |           |        |            |        |          |       |       |       |       |     |       |       |         |       |            |        |       |        |          |      |     |      |   |      | 287 |     |   |        | 287    |       
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |          |       |            |        |        |        |          |      |      |      |   |      |     |     |   |        |       
|                                                       |                                                  | Total costs and expenses |        |            | 14,409 |            |        |           | 1,866 |       |       |        | 334 |       |       |          | 1,976 |            |        |        | 18,585 |          |      |      | (315 | ) |      |     | 809 |   |        |        | 19,079 | 
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |          |       |            |        |        |        |          |      |      |      |   |      |     |     |   |        |       
|Operating income (loss)                                |                                                  |                          | 157    |            |        |            | 710    |           |       |       | (138  | )      |     |       | 1     |          |       |            | 730    |        |        |          | 40   |      |      |   | (809 | )   |     |   | (39    | )     
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |          |       |            |        |        |        |          |      |      |      |   |      |     |     |   |        |       
|Goodwill amortization expense                          |                                                  |                          | 9      |            |        |            |       |           |       |       | 1     |        |     |       | (13   | )        |       |            | (3     | )      |        |          |     |      |      |   |     |     |     |   | (3     | )     
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |          |       |            |        |        |        |          |      |      |      |   |      |     |     |   |        |       
|Operating income (loss) excluding
amortization expense |                                                  | $                        | 166    |            |        | $          | 710    |           |       | $     | (137  | )      |     | $     | (12   | )        |       | $          | 727    |        |        | $        | 40   |      |      | $ | (809 | )   |     | $ | (42    | )     
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |          |       |            |        |        |        |          |      |      |      |   |      |     |     |   |        |       
|Total assets                                           |                                                  | $                        | 11,245 |            |        | $          | 25,857 |           |       | $     | 2,273 |        |     | $     | 3,392 |          |       | $          | 42,767 |        |        |          |      |      |      |   |      |     |     |   |        |       
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |          |       |            |        |        |        |          |      |      |      |   |      |     |     |   |        |       

NOTE 6  SPECIAL CHARGES AND IMPAIRMENTS

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

|                                        |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|--------------------------------------- |  | -------- | --- | ------- |  | ----------- | --- | -------- |  | ----------- | --- | -------- |  | - | --- | - |  | - | -- | ------- |  | - | --- | 
|                                        |  | Ending   |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    | Ending 
|                                        |  | Reserve  |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    | Reserve
|                                        |  | Balance  |     | 2002    |  | Asset       |     | Cash     |  | Other       |     | Balance 
|millions                                |  | 12/29/01 |     | Charges |  | Write-Downs |     | Payments |  | Adjustments |     | 06/29/02
|                                        |  |          |     |         |  |             |     |          |  |             |     |         
|Sears Canada                            |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|                                       
|                                       
|                                       
|                                       
|Employee termination costs              |  | $        |    |         |  | $           | 3   |          |  | $           |    |          |  | $ | (2  | ) |  | $ | 1  |         |  | $ | 2   | 
|                                       
|                                       
|                                       
|                                       
|Contractual obligations and other
costs |  |          |    |         |  |             | 16  |          |  |             |    |          |  |   | (5  | ) |  |   | (1 | )       |  |   | 10  | 
|                                       
|                                       
|                                       
|                                       
|Asset impairments                       |  |          |    |         |  |             | 92  |          |  |             | (92 | )        |  |   |    |   |  |   |   |         |  |   |    | 
|                                        |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|                                        |  |          |    |         |  |             | 111 |          |  |             | (92 | )        |  |   | (7  | ) |  |   |   |         |  |   | 12  | 
|                                       
|                                       
|                                       
|                                       
|Productivity Initiatives                |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|                                       
|                                       
|                                       
|                                       
|Employee termination costs              |  |          | 92  |         |  |             |    |          |  |             |    |          |  |   | (47 | ) |  |   |   |         |  |   | 45  | 
|                                       
|                                       
|                                       
|                                       
|Contractual obligations and other
costs |  |          | 5   |         |  |             |    |          |  |             |    |          |  |   | (1  | ) |  |   |   |         |  |   | 4   | 
|                                        |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|                                        |  |          | 97  |         |  |             |    |          |  |             |    |          |  |   | (48 | ) |  |   |   |         |  |   | 49  | 
|                                       
|                                       
|                                       
|                                       
|Product Category Exits                  |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|                                       
|                                       
|                                       
|                                       
|Employee termination costs              |  |          | 7   |         |  |             |    |          |  |             |    |          |  |   | (4  | ) |  |   |   |         |  |   | 3   | 
|                                       
|                                       
|                                       
|                                       
|Contractual obligations and other
costs |  |          | 65  |         |  |             |    |          |  |             |    |          |  |   | (14 | ) |  |   |   |         |  |   | 51  | 
|                                        |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|                                        |  |          | 72  |         |  |             |    |          |  |             |    |          |  |   | (18 | ) |  |   |   |         |  |   | 54  | 
|                                       
|                                       
|                                       
|                                       
|2000 Store Closures                     |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|                                       
|                                       
|                                       
|                                       
|Lease and holding costs                 |  |          | 41  |         |  |             |    |          |  |             |    |          |  |   | (8  | ) |  |   |   |         |  |   | 33  | 
|                                        |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|                                        |  |          | 41  |         |  |             |    |          |  |             |    |          |  |   | (8  | ) |  |   |   |         |  |   | 33  | 
|                                        |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 
|Total                                   |  | $        | 210 |         |  | $           | 111 |          |  | $           | (92 | )        |  | $ | (81 | ) |  | $ |   |         |  | $ | 148 | 
|                                        |  |          |     |         |  |             |     |          |  |             |     |          |  |   |     |   |  |   |    |         |  |   |     | 

9



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SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

Sears Canada

During the first quarter of 2002, Sears Canada announced a plan to convert the
existing Eatons stores to the Sears Canada banner. In connection therewith,
the Company recorded a charge of $111 million, before tax and minority
interest, related to employee terminations, asset impairments and other exit
costs. Of the $111 million charge, $92 million is to record asset impairments
on fixtures and equipment in such facilities. The remaining $19 million is
comprised of $16 million for contractual obligations and holding costs and $3
million for employee termination costs.

Productivity Initiatives

During the fourth quarter of 2001, the Company announced a series of strategic
initiatives designed to revitalize its Full-line Stores and reduce operating
expenses. In connection therewith, the Company recorded a pretax charge of
$123 million related to employee termination, facility closing and other exit
costs. Of the $123 million charge, $102 million was for employee termination
costs associated with the planned elimination of 5,950 associate positions as
part of this initiative. The positions to be eliminated included store support
positions within the Companys headquarters as well as positions within store
and field operations. The remaining $21 million of productivity related
charges was comprised of $13 million for contractual obligations and holding
costs associated with certain support facilities to be vacated as a result of
the plan, and $8 million to record asset impairments on fixtures and equipment
in such facilities. As of June 29, 2002, approximately 4,700 associates have
been terminated as a result of this plan. The reserve balance of $49 million
as of June 29, 2002 primarily represents estimated employee termination costs.

Product Category Exits

During 2001, the Company announced its decision to exit certain product
categories within its Full-line Stores, including its skin care and color
cosmetics, installed floor covering and custom window treatments businesses.
In connection with these exits, the Company recorded pretax charges totaling
$151 million during 2001. Of the $151 million charge, $106 million was
recorded for the cost of settling contractual obligations to certain vendors
and contractors and for other exit costs associated with the Companys plan to
discontinue these businesses, including incremental customer warranty claims
liability to be incurred by the Company in the absence of ongoing relationships
with certain product manufacturers. Also included within the $151 million
charge were asset impairment charges of $38 million, primarily reflecting the
write-down of store fixtures within the exited businesses to their estimated
fair value and $7 million of employee termination costs. The reserve balance
of $54 million as of June 29, 2002 primarily represents future incremental
customer warranty costs.

2000 Store Closures

In December 2000, the Company announced the planned closure of 87
under-performing stores consisting of 53 National Tire and Battery, 30 Hardware
and four Full-line Stores (including two Sears Auto Centers). As of June 29,
2002, all 87 stores have been closed. The reserve balance of $33 million as of
June 29, 2002 represents estimated future lease obligations and holding costs.

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SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

NOTE 7  OTHER INCOME

Consolidated other income consists of:

|                                          |  |                |    |                |  |          |   |          |  |   |    |  |  |   |   | 
|----------------------------------------- |  | -------------- | -- | -------------- |  | -------- | - | -------- |  | - | -- |  |  | - | - | 
|                                          |  | 13 Weeks Ended |    | 26 Weeks Ended
|                                          |  |                |    |               
|                                          |  | June 29,       |    | June 30,       |  | June 29, |   | June 30,
|millions                                  |  | 2002           |    | 2001           |  | 2002     |   | 2001    
|                                          |  |                |    |                |  |          |   |         
|Gain on sales of property and investments |  | $              |   |                |  | $        |  |          |  | $ | 76 |  |  | $ | 1 | 
|                                         
|                                         
|                                         
|                                         
|Equity income in unconsolidated companies |  |                | 5  |                |  |          | 7 |          |  |   | 7  |  |  |   | 7 | 
|                                         
|                                         
|                                         
|                                         
|Sears Mexico dividend                     |  |                | 5  |                |  |          |  |          |  |   | 5  |  |  |   |  | 
|                                          |  |                |    |                |  |          |   |          |  |   |    |  |  |   |   | 
|Total                                     |  | $              | 10 |                |  | $        | 7 |          |  | $ | 88 |  |  | $ | 8 | 
|                                          |  |                |    |                |  |          |   |          |  |   |    |  |  |   |   | 

On March 6, 2002, as part of an Advance Auto Parts (AAP) public stock
offering, the Company sold approximately 3.1 million of its AAP shares, which
reduced the companys ownership percentage to 24.1%. The Company realized a
pre-tax gain of $71 million ($58 million after-tax), or $0.18 per share, from
the sale. This transaction generated after-tax cash proceeds of $110 million.

NOTE 8  RESTATEMENT FOR CHANGE IN ACCOUNTING ESTIMATE

In the second quarter of 2002, the Company refined its method of determining
its allowance for uncollectible accounts. The Company periodically reviews its
accounting practices to ensure that its adopted policies appropriately reflect
changes in its businesses, the industries it operates in, and the regulatory
and political environments. During the second quarter, the Company compared
its methodology for computing the allowance for uncollectible accounts to the
methodologies of participants in the bank card industry. The Company felt that
a comparison to bank card issuers was appropriate given the growth of the Sears
Gold MasterCard product (approximately $8.5 billion in balances at the end of
the second quarter of 2002) and the recent changes to the Sears Card product
that are meant to provide a wider range of services to the Sears Card holder
(e.g., balance transfers, convenience checks, broader acceptance, etc.). The
Company determined that practice in the industry was diverse and evolving,
particularly in the areas of providing allowances for current accounts, finance
charges and credit card fees. Also, during this review the Company became
aware of new interpretive guidance that regulators were proposing to narrow the
diversity in practice.

As a result of its review, the Company refined its methodology for determining
the uncollectible portion of current accounts and credit card fee balances,
resulting in an increase to the allowance for uncollectible accounts in the
amount of $300 million, or $191 million after-tax ($.59 per share). The
Company initially recorded the charge as a cumulative effect of a change in
accounting principle as of the beginning of fiscal 2002, and filed its original
Quarterly Report on Form 10-Q for the second quarter with such presentation.
In consideration of further interpretive guidance from the staff of the
Securities and Exchange Commission, the Company has restated its financial
statements to report the effect of the change in allowance methodology as a
change in estimate. The Company determined that the change in estimate should
be recorded in the second quarter of 2002 as this is the period in which the
Company conducted the review of its method, identified the diversity in
practice, became aware of the pending interpretive guidance from regulators and
elected to refine its allowance methodology. Therefore, the condensed
consolidated financial statements for the 13 and 26 week periods ended June 29,
2002 have been restated, as follows:

11



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SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

|                                     |                                                                                          |          |            |             |   |  |   |       | 
|------------------------------------ | ---------------------------------------------------------------------------------------- | -------- | ---------- | ----------- | - |  | - | ----- | 
|                                     |                                                                                          |          | As         |             |   |  |  
|                                     |                                                                                          |          | Previously |             |   |  |  
|millions, except per share data      |                                                                                          | Reported |            | As Restated
|                                     |                                                                                          |          |            |            
|For the 13 weeks ended June 29, 2002 |                                                                                          |          |            |             |   |  |   |      
|                                    
|                                    
|                                    
|                                    
|                                     | Provision for uncollectible accounts                                                     |          | $          | 401         |   |  | $ | 701   | 
|                                    
|                                    
|                                    
|                                    
|                                     | Operating income                                                                         |          |            | 666         |   |  |   | 366   | 
|                                    
|                                    
|                                    
|                                    
|                                     | Net income                                                                               |          |            | 420         |   |  |   | 229   | 
|                                    
|                                    
|                                    
|                                    
|                                     | Basic earnings per share                                                                 |          |            | 1.33        |   |  |   | 0.72  | 
|                                    
|                                    
|                                    
|                                    
|                                     | Diluted earnings per share                                                               |          |            | 1.31        |   |  |   | 0.71  | 
|                                    
|                                    
|                                    
|                                    
|For the 26 weeks ended June 29, 2002 |                                                                                          |          |            |             |   |  |   |      
|                                    
|                                    
|                                    
|                                    
|                                     | Provision for uncollectible accounts                                                     |          |            | 782         |   |  |   | 1,082 | 
|                                    
|                                    
|                                    
|                                    
|                                     | Operating income                                                                         |          |            | 1,022       |   |  |   | 722   | 
|                                    
|                                    
|                                    
|                                    
|                                     | Cumulative
effect of a change in accounting for the allowance for uncollectible
accounts |          |            | (191        | ) |  |   |      | 
|                                    
|                                    
|                                    
|                                    
|                                     | Net income                                                                               |          |            | 339         |   |  |   | 339   | 
|                                    
|                                    
|                                    
|                                    
|                                     | Basic earnings per share                                                                 |          |            | 1.07        |   |  |   | 1.07  | 
|                                    
|                                    
|                                    
|                                    
|                                     | Diluted earnings per share                                                               |          |            | 1.05        |   |  |   | 1.05  | 

NOTE 9  IMPLEMENTATION OF NEW ACCOUNTING STANDARD

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

The Company had approximately $371 million in positive goodwill and $77 million
in negative goodwill recorded in its consolidated balance sheet at the
beginning of 2002. The $77 million in negative goodwill was required to be
de-recognized upon adoption of the Statement. The Company completed the
required transitional goodwill impairment test in the first quarter of 2002 and
determined that $261 million of goodwill recorded within the Companys Retail
and Related Services segment, primarily related to NTB and Orchard Supply
Hardware, was impaired under the fair value impairment test approach required
by SFAS No. 142.

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

12



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SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

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

|                                                           |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |       | 
|---------------------------------------------------------- |  | -------------- | ----- | -------------- |  | ------------- | ----- | ------------- |  | ------------- | ----- | ------------- |  | ------------ | ----- | - |  | - | ----- | - |  | - | ----- | - |  | - | ----- | 
|                                                           |  | 13 Weeks Ended |       | Year Ended    
|                                                           |  |                |       |               
|millions, except earnings (loss) per common share          |  | Dec. 29, 2001  |       | Sept. 29, 2001 |  | June 30, 2001 |       | Mar. 31, 2001 |  | Dec. 29, 2001 |       | Dec. 30, 2000 |  | Jan. 1, 2000
|                                                           |  |                |       |                |  |               |       |               |  |               |       |               |  |             
|Reported net income (loss)                                 |  | $              | 494   |                |  | $             | 262   |               |  | $             | (197  | )             |  | $            | 176   |   |  | $ | 735   |   |  | $ | 1,343 |   |  | $ | 1,453 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Add back:                                                  |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |       | 
|                                                          
|                                                          
|                                                          
|                                                          
|Negative goodwill amortization                             |  |                | (3    | )              |  |               | (4    | )             |  |               | (3    | )             |  |              | (4    | ) |  |   | (14   | ) |  |   | (15   | ) |  |   |      | 
|                                                          
|                                                          
|                                                          
|                                                          
|Positive goodwill amortization                             |  |                | 5     |                |  |               | 5     |               |  |               | 5     |               |  |              | 5     |   |  |   | 20    |   |  |   | 24    |   |  |   | 24    | 
|                                                           |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |       | 
|Pro forma net income (loss) (Restated)                     |  | $              | 496   |                |  | $             | 263   |               |  | $             | (195  | )             |  | $            | 177   |   |  | $ | 741   |   |  | $ | 1,352 |   |  | $ | 1,477 | 
|                                                           |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |       | 
|Earnings per common share
Basic earnings (loss) per share: |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |       | 
|                                                          
|                                                          
|                                                          
|                                                          
|Reported net income (loss)                                 |  | $              | 1.53  |                |  | $             | 0.81  |               |  | $             | (0.60 | )             |  | $            | 0.53  |   |  | $ | 2.25  |   |  | $ | 3.89  |   |  | $ | 3.83  | 
|                                                          
|                                                          
|                                                          
|                                                          
|Goodwill amortization                                      |  |                | 0.01  |                |  |               |      |               |  |               | 0.01  |               |  |              |      |   |  |   | 0.02  |   |  |   | 0.03  |   |  |   | 0.06  | 
|                                                           |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |      
|Pro forma net income (loss) (Restated)                     |  | $              | 1.54  |                |  | $             | 0.81  |               |  | $             | (0.59 | )             |  | $            | 0.53  |   |  | $ | 2.27  |   |  | $ | 3.92  |   |  | $ | 3.89  | 
|                                                           |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |       | 
|Diluted earnings (loss) per share:                         |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |       | 
|                                                          
|                                                          
|                                                          
|                                                          
|Reported net income (loss)                                 |  | $              | 1.52  |                |  | $             | 0.80  |               |  | $             | (0.60 | )             |  | $            | 0.53  |   |  | $ | 2.24  |   |  | $ | 3.88  |   |  | $ | 3.81  | 
|                                                          
|                                                          
|                                                          
|                                                          
|Goodwill amortization                                      |  |                | 0.01  |                |  |               |      |               |  |               | 0.01  |               |  |              |      |   |  |   | 0.02  |   |  |   | 0.03  |   |  |   | 0.06  | 
|                                                           |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |       | 
|Pro forma net income (loss) (Restated)                     |  | $              | 1.53  |                |  | $             | 0.80  |               |  | $             | (0.59 | )             |  | $            | 0.53  |   |  | $ | 2.26  |   |  | $ | 3.91  |   |  | $ | 3.87  | 
|                                                           |  |                |       |                |  |               |       |               |  |               |       |               |  |              |       |   |  |   |       |   |  |   |       |   |  |   |       | 
|Average common shares outstanding                          |  |                | 322.6 |                |  |               | 324.5 |               |  |               | 326.6 |               |  |              | 331.8 |   |  |   | 326.4 |   |  |   | 345.1 |   |  |   | 379.2 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Average common and common equivalent
shares outstanding    |  |                | 325.5 |                |  |               | 326.9 |               |  |               | 326.6 |               |  |              | 333.5 |   |  |   | 328.5 |   |  |   | 346.3 |   |  |   | 381.0 | 

The changes in the carrying amount of goodwill as of June 29, 2002, are as
follows:

|                                |                                             |                            |     |                    |      |            |   |               |   |       |    |   |   |   |     |    |   |   |     |     |      |  
|------------------------------- | ------------------------------------------- | -------------------------- | --- | ------------------ | ---- | ---------- | - | ------------- | - | ----- | -- | - | - | - | --- | -- | - | - | --- | --- | ---- | -
|                                |                                             |                            |     | Retail and Related |      | Credit and |   | Corporate and |   |       |    |   |   |   |     |   
|millions                        |                                             | Services                   |     | Financial Products |      | Other      |   | Sears Canada  |   | Total
|                                |                                             |                            |     |                    |      |            |   |               |   |      
|Balance as of December 29, 2001 |                                             | $                          | 291 |                    |      | $          | 2 |               |   | $     | 61 |   |   | $ | (60 | )  |   | $ | 294 |    
|                               
|                               
|                               
|                               
|                                | Cumulative effect of adopting SFAS No. 142: |                            |     |                    |      |            |   |               |   |       |    |   |   |   |     |    |   |   |     |     |     
|                               
|                               
|                               
|                               
|                                |                                             | Impairment loss recognized |     |                    | (261 | )          |   |               |  |       |    |   |  |   |     |    |  |   |     |     | (261 | )
|                               
|                               
|                               
|                               
|                                | Elimination of negative goodwill            |                            |     |                   |      |            |   |              |   |       |    |  |   |   |     | 77 |   |   |     | 77  |     
|                               
|                               
|                               
|                               
|                                | Acquisition (1)                             |                            |     | 826                |      |            |   |              |   |       |    |  |   |   |     |   |   |   |     | 826 |     
|                                |                                             |                            |     |                    |      |            |   |               |   |       |    |   |   |   |     |    |   |   |     |    
|Balance as of June 29, 2002     |                                             | $                          | 856 |                    |      | $          | 2 |               |   | $     | 61 |   |   | $ | 17  |    |   | $ | 936 |    



---

|(1) |  | Preliminarily and subject to change. See Note 2.
|--- |  | ------------------------------------------------

NOTE 10  EFFECT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This
statement changes the timing of recognition for certain exit costs associated
with restructuring activities, so that certain exit costs would be recognized
over the period in which the restructuring activities occur. Currently exit
costs are recognized when the Company commits to a restructuring plan. SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002 and could result in the Company recognizing the cost of future
restructuring activities over a period of time as opposed to as a single event.

13



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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

NOTE 11  DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL GUARANTEES

The Company utilizes derivative financial instruments as part of an overall
risk management program designed to address certain financial exposures faced
by the Company. The only significant derivative instruments the Company
currently holds are interest rate swaps. As of June 29, 2002, the Company had
interest rate swaps with an aggregate fair value of $242 million that have been
used to synthetically convert certain of the Companys domestic fixed rate debt
to variable rate. The objective of this conversion is to achieve increased
levels of variable rate funding to reflect the growth of variable rate receivable levels
within the Companys credit card receivables portfolio. The Company changed
the finance charge on the Sears Card from fixed rate to variable rate in July
2002.

The Companys interest rate swaps have been recorded on the balance sheet at
fair value, classified as $79 million within other receivables, $175 million
within other assets, and $12 million within other long-term liabilities. For
accounting purposes, the swaps are designated and qualify as fair value hedges
of certain of the Companys fixed rate debt instruments. As the terms of the
swaps are designed to match those of the underlying hedged debt, the change in
fair value of the swaps is largely offset by changes in fair value recorded on
the hedged debt. Consequently, the amount of hedge ineffectiveness recorded
during 2002 and 2001 in connection with these hedges was not material and is
reflected as a component of interest expense.

NOTE 12  SECURITIZATIONS

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. The
guidance in SFAS No. 140 superceded SFAS No. 125. Under SFAS No. 125, the
Companys securitization transactions were accounted for as sales of
receivables. SFAS No. 140 established new conditions for a securitization to
be accounted for as a sale of receivables. Specifically, SFAS No. 140 changed
the requirements for an entity to be a qualifying special purpose entity and
modified
under what conditions a transferor has retained effective control over
transferred assets. The new standard was effective for transfers occurring
after June 30, 2001.

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

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

At June 29, 2002 and June 30, 2001, $17.2 and $11.9 billion, respectively, of
domestic credit card receivables were segregated in securitization trusts. In
addition, $932 million and $1.1 billion, respectively, of Sears Canada credit
card receivables were segregated in securitization trusts.

14



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##### Table of Contents



INDEPENDENT ACCOUNTANTS REPORT

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

We have reviewed the accompanying Condensed Consolidated Balance Sheets of
Sears, Roebuck and Co. as of June 29, 2002 and June 30, 2001, and the Condensed
Consolidated Statements of Income for the 13 week and 26 week periods ended
June 29, 2002 and June 30, 2001 and the Condensed Consolidated Statements of
Cash Flows for the 26 week periods ended June 29, 2002 and June 30, 2001.
These condensed consolidated financial statements are the responsibility of the
Companys management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion.

Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the Consolidated Balance Sheet of
Sears, Roebuck and Co. as of December 29, 2001, and the related Consolidated
Statements of Income, Shareholders Equity, and Cash Flows for the year then
ended (not presented herein); and in our report dated February 8, 2002, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying Condensed
Consolidated Balance Sheet as of December 29, 2001 is fairly stated, in all
material respects, in relation to the Consolidated Balance Sheet from which it
has been derived.

As discussed in Note 8, the accompanying Condensed Consolidated Financial
Statements for the 13 and 26 week periods ended June 29, 2002 have been
restated.

/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
August 5, 2002 (October 1, 2002 as to the effect of
the restatement described in Note 8)

15



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 29, 2002 and June 30, 2001




Item 2. Managements Discussion and Analysis of Operations, Financial Condition and Liquidity

ANALYSIS OF OPERATIONS

Operating results for the Company are reported for three domestic segments and
Sears Canada. The domestic segments include the Companys operations in the
United States and Puerto Rico. The Companys segments are defined as follows:



Retail and Related Services
consisting of:  - Full-line Stores (includes
operations of Sears Auto Centers
  and online revenues of Sears.com)- Specialty Stores (Dealer
Stores, Hardware Stores,
National
  Tire and Battery, The
Great Indoors, Commercial Sales
and
  Outlet stores)- Related Services comprised of:  
        
        Sears Repair Services (a
broad range of services
including service contracts,
product installation and
repair services primarily for
products sold by the Company)
        
        Direct to Customer (direct
marketing of goods and
services, clubs and services
memberships, merchandise
through specialty catalogs and
impulse and continuity
merchandise). Includes Lands
End results as of June 17,
2002.


Credit and Financial Products
includes domestic credit card
       operations and related financial
product offerings
       (credit
protection and insurance
products).

Corporate
       and Other include:  - Activities that are of an
overall holding company
nature,
  primarily consisting
of administrative activities,
  the costs of which are not
allocated to the
  Companys
businesses- Sears Home Improvement
Services (including Sears
Termite
  and Pest Control for
the 26 weeks ended
  June 30,
2001) Sears Canada conducts similar
retail, credit, and corporate
       operations in Canada through
Sears Canada Inc.
       (Sears
Canada), a consolidated, 54.4%
owned
       subsidiary of Sears




Basis of Presentation

As discussed in Note 8 to the Condensed Consolidated Financial Statements, the
financial statements for the 13 and 26 weeks ended June 29, 2002 have been
restated. The following discussion is presented on the restated basis.

The Company has presented the following discussion of results of operations by
business segment. The Company reports its business segments results excluding
the impacts of noncomparable items and securitization income. The Company
believes this presentation facilitates the understanding of the results and
trends affecting each segments core operations. This presentation is
consistent with how the Company reports results internally to senior management
and the Board of Directors.

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

On June 17, 2002 the Company acquired all of the outstanding shares of Lands
End, Inc. (Lands End) for approximately $1.8 billion. The results of Lands
End operations have been reflected in the consolidated financial statements
since that date. See Note 2 of financial statements for further discussion.

Description of Noncomparable Items

Earnings (loss) per share for the quarter ended June 29, 2002 was $0.71
compared with ($0.60) for the comparable 2001 period. Net income (loss) was
$229 million for the second quarter of 2002 compared to ($197) million in 2001.
For the 26 weeks ended June 29, 2002, the Company reported net income of $339
million or $1.05 per share compared to a net loss of ($21) million or ($0.06)
per share. Results of operations for the 13 and 26 week periods ended June 29,
2002 and June 30, 2001 were affected by noncomparable items. The effect of
noncomparable items on net income and earnings per share are summarized in the
table below.

16



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##### Table of Contents



|                                         |                                                                      |            |                |                    |                |            |          |                    |          |   |          |       |          |   |          |       |          |   |     |      |   |   |     |      |   |   |      |       |   |   |       |       |  
|---------------------------------------- | -------------------------------------------------------------------- | ---------- | -------------- | ------------------ | -------------- | ---------- | -------- | ------------------ | -------- | - | -------- | ----- | -------- | - | -------- | ----- | -------- | - | --- | ---- | - | - | --- | ---- | - | - | ---- | ----- | - | - | ----- | ----- | -
|                                         |                                                                      |            | 13 Weeks Ended |                    | 26 Weeks Ended
|                                         |                                                                      |            |                |                    |               
|Millions, except per share               |                                                                      | Net Income |                | Earnings per Share |                | Net Income |          | Earnings per Share
|                                         |                                                                      |            |                |                    |                |            |          |                   
|                                         |                                                                      |            | June 29,       |                    | June 30,       |            | June 29, |                    | June 30, |   | June 29, |       | June 30, |   | June 29, |       | June 30,
|                                         |                                                                      |            | 2002           |                    | 2001           |            | 2002     |                    | 2001     |   | 2002     |       | 2001     |   | 2002     |       | 2001    
|                                         |                                                                      |            |                |                    |                |            |          |                    |          |   |          |       |          |   |          |       |         
|Net income excluding
noncomparable items |                                                                      | $          | 420            |                    |                | $          | 316      |                    |          | $ | 1.31     |       |          | $ | 0.96     |       |          | $ | 720 |      |   | $ | 466 |      |   | $ | 2.23 |       |   | $ | 1.41  |      
|                                        
|                                        
|                                        
|                                        
|Special charges and impairments:         |                                                                      |            |                |                    |                |            |          |                    |          |   |          |       |          |   |          |       |          |   |     |      |   |   |     |      |   |   |      |       |   |   |       |      
|                                        
|                                        
|                                        
|                                        
|                                         | Sears Canada  Eatons
conversion costs                              |            |                |                   |                |            |          |                   |          |   |          |      |          |   |          |      |          |   |     | (40  | ) |   |     |     |   |   |      | (0.12 | ) |   |       |      |  
|                                        
|                                        
|                                        
|                                        
|                                         | Homelife closure and other                                           |            |                |                   |                |            |          | (129               | )        |   |          |      |          |   |          | (0.39 | )        |   |     |     |   |   |     | (129 | ) |   |      |      |   |   |       | (0.39 | )
|                                        
|                                        
|                                        
|                                        
|                                         | Exit of cosmetics business                                           |            |                |                   |                |            |          | (53                | )        |   |          |      |          |   |          | (0.16 | )        |   |     |     |   |   |     | (53  | ) |   |      |      |   |   |       | (0.16 | )
|                                        
|                                        
|                                        
|                                        
|Effect of accounting changes:            |                                                                      |            |                |                    |                |            |          |                    |          |   |          |       |          |   |          |       |          |   |     |      |   |   |     |      |   |   |      |       |   |   |       |      
|                                        
|                                        
|                                        
|                                        
|                                         | Cumulative effect of a change
in accounting for goodwill             |            |                |                   |                |            |          |                   |          |   |          |      |          |   |          |      |          |   |     | (208 | ) |   |     |     |   |   |      | (0.65 | ) |   |       |      |  
|                                        
|                                        
|                                        
|                                        
|                                         | Effect of change in estimate
for the allowance for doubtful
accounts |            |                | (191               | )              |            |          |                   |          |   |          | (0.60 | )        |   |          |      |          |   |     | (191 | ) |   |     |     |   |   |      | (0.59 | ) |   |       |      |  
|                                        
|                                        
|                                        
|                                        
|                                         | Provision for previously
securitized receivables                     |            |                |                   |                |            |          | (331               | )        |   |          |      |          |   |          | (1.01 | )        |   |     |     |   |   |     | (331 | ) |   |      |      |   |   |       | (1.00 | )
|                                        
|                                        
|                                        
|                                        
|                                         | Securitization income                                                |            |                |                   |                |            |          |                   |          |   |          |      |          |   |          |      |          |   |     |     |   |   |     | 26   |   |   |      |      |   |   |       | 0.08  |  
|                                        
|                                        
|                                        
|                                        
|Unusual/infrequent items:                |                                                                      |            |                |                    |                |            |          |                    |          |   |          |       |          |   |          |       |          |   |     |      |   |   |     |      |   |   |      |       |   |   |       |      
|                                        
|                                        
|                                        
|                                        
|                                         | Advance Auto Parts gain                                              |            |                |                   |                |            |          |                   |          |   |          |      |          |   |          |      |          |   |     | 58   |   |   |     |     |   |   |      | 0.18  |   |   |       |      |  
|                                         |                                                                      |            |                |                    |                |            |          |                    |          |   |          |       |          |   |          |       |          |   |     |      |   |   |     |      |   |   |      |       |   |   |       |      
|Net income (loss) as reported            |                                                                      | $          | 229            |                    |                | $          | (197     | )                  |          | $ | 0.71     |       |          | $ | (0.60    | )     |          | $ | 339 |      |   | $ | (21 | )    |   | $ | 1.05 |       |   | $ | (0.06 | )    
|                                         |                                                                      |            |                |                    |                |            |          |                    |          |   |          |       |          |   |          |       |          |   |     |      |   |   |     |      |   |   |      |       |   |   |       |      

The Company defines noncomparable items as transactions that are one-time in
nature, related to the implementation of special initiatives of the Company
(generally special charges and impairments); unusual or infrequent in nature
(e.g. significant one-time transactions, significant gains/losses on
transactions unrelated to core operations); or related to changes in
accounting. Following is a description of the noncomparable items affecting
the 26 week periods ended June 29, 2002 and June 30, 2001.



| |  |  | 2002 Items:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In February 2002, Sears Canada announced its intention to convert the
remaining seven Eatons stores to the Sears Canada banner. The conversion
of the stores was completed at the end of July 2002. This decision will
enable the Company to better leverage its buying and advertising efforts,
and take more powerful advantage of the Sears brands equity. The Company
recorded a one-time, pre-tax charge of $111 million ($40 million after-tax
and minority interest), or $0.12 per share, in the first quarter of 2002
related to the conversions.
|
| |  |  | In the first quarter of 2002, the Company recorded a non-cash charge of $208
million, net of tax and minority interest, or $0.65 per share, due to the
adoption of a new accounting standard, SFAS No. 142, Goodwill and Other
Intangible Assets. This charge was reported as a cumulative effect of an
accounting change.                                                                                                                                                                                                                               
|
| |  |  | In the second quarter of 2002, the Company refined its method of determining
its allowance for uncollectible accounts, resulting in a pre-tax charge of
$300 million ($191 million after-tax), or $0.59 per share. In accordance
with Accounting Principles Board Opinion No. 20, Accounting Changes, the
effect of this change in accounting has been recorded as a change in
accounting estimate in the second quarter. See Note 8 of the financial
statements for further discussion.                                                                 
|
| |  |  | On March 6, 2002, as part of an Advance Auto Parts (AAP) public stock
offering, the Company sold approximately 3.1 million of its AAP shares,
which reduced the companys ownership percentage to 24.1%. The Company
realized a pre-tax gain of $71 million ($58 million after-tax), or $0.18 per
share, from the sale. This transaction generated after-tax cash proceeds of
$110 million.                                                                                                                                                              

17



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 29, 2002 and June 30, 2001



| |  |  | 2001 Items:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the second quarter of 2001, the Company also recorded a pretax charge
of $205 million ($129 million after-tax or $0.39 per share) to recognize a
loss on its formerly owned Homelife business and write-off a minor
investment. Homelife, which was sold to Citicorp Venture Capital, Ltd. in
early 1999, filed for bankruptcy on July 16, 2001. As a result of
Homelifes insolvency, the Company recognized certain obligations (primarily
related to property leases) which had been previously transferred to
Homelife and recorded a reserve for other matters related to Homelife for
which Sears incurred losses.                                                                                                                                                                                                                                                                    
|
| |  |  | During the second quarter of 2001, the Company recorded a non-cash, pretax
charge of $522 million ($331 million after-tax) to establish an allowance
for uncollectible accounts related to $12 billion of securitized credit card
receivables reinstated on the Companys balance sheet as a result of the
Companys adoption of Statement of Financial Accounting Standards (SFAS)
No. 140 in April 2001 (see Note 11 of the Notes to Consolidated Financial
Statements). In addition, effective in the second quarter of 2001, the
Companys securitization transactions are accounted for as secured
borrowings and the Company ceased recording securitization income. As such,
securitization income reported in prior periods is noncomparable subsequent
to March 2001. After tax securitization income of $26 million, or $0.08 per
share, was recorded in first quarter 2001 net income.
|
| |  |  | The Company recorded a pretax charge of $82 million ($53 million after-tax
or $0.16 per share) in the second quarter of 2001 in connection with its
exit of the skin care and color cosmetics business. The charge includes
asset write-downs and vendor cancellation payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Analysis of Consolidated Results

For the 13 and 26 weeks ended June 29, 2002, net income was $229 million and
$339 million or $0.71 per share and $1.05 per share, respectively, compared to
a net loss of $197 million and $21 million or $(0.60) and $(0.06) per share,
respectively for the 13 and 26 weeks ended June 30, 2001.

For the 13 weeks ended June 29, 2002, excluding non-comparable items, net
income was $420 million or $1.31 per share, as compared to $316 million or
$0.96 per share for the comparable 2001 period. For the 26 weeks ended June
29, 2002, net income excluding non-comparable items was $720 million or $2.23
per share compared to $466 million or $1.41 per share for the comparable 2001
period. The increase in earnings per share primarily reflects higher operating
income in the Retail and Related Services and Credit and Financial Products
segment as well as a reduction in shares outstanding due to the Companys share
repurchase program.

Excluding non-comparable items the Companys consolidated effective tax rate
for the 13 and 26 weeks ended June 29, 2002 was 36.8% and 36.6%, respectively,
compared to 36.4% and 36.3% in the comparable prior year period.

Due to holiday buying patterns, merchandise sales are traditionally higher in
the fourth quarter than other quarterly periods and a disproportionate share of
operating income is typically earned in the fourth quarter. This business
seasonality results in performance for the 13 and 26 weeks ended June 29, 2002
which is not necessarily indicative of performance for the balance of the year.

18



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 29, 2002 and June 30, 2001

Retail and Related Services

Retail and Related Services revenues decreased 0.8% to $7.7 billion and 0.7%
to $14.5 billion for the 13 weeks and 26 weeks ended June 29, 2002, from the
comparable 2001 period. Retail and Related Services results and related
information are as follows:

|                                               |  |                |       |          |  |        |       |                |  |          |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|---------------------------------------------- |  | -------------- | ----- | -------- |  | ------ | ----- | -------------- |  | -------- | ---- | -------- |  | - | ------ | - |  | - | ------ | - |  |  | ---- | -
|                                               |  | 13 Weeks Ended |       |          |  |        |       | 26 Weeks Ended |  |          |      |         
|                                               |  |                |       |          |  |        |       |                |  |          |      |         
|                                               |  | June 29,       |       | June 30, |  |        |       |                |  | June 29, |      | June 30, |  |   |        |  
|millions, except number of stores              |  | 2002           |       | 2001     |  | Change |       | 2002           |  | 2001     |      | Change  
|                                               |  |                |       |          |  |        |       |                |  |          |      |         
|Full-line Stores revenues (includes sears.com) |  | $              | 5,599 |          |  | $      | 5,868 |                |  |          | -4.6 | %        |  | $ | 10,701 |   |  | $ | 11,125 |   |  |  | -3.8 | %
|                                              
|                                              
|                                              
|                                              
|Specialty Stores revenues                      |  |                | 1,440 |          |  |        | 1,294 |                |  |          | 11.3 | %        |  |   | 2,558  |   |  |   | 2,324  |   |  |  | 10.1 | %
|                                              
|                                              
|                                              
|                                              
|Related Services revenues                      |  |                | 660   |          |  |        | 598   |                |  |          | 10.4 | %        |  |   | 1,208  |   |  |   | 1,117  |   |  |  | 8.1  | %
|                                               |  |                |       |          |  |        |       |                |  |          |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|Total Retail and Related Services revenues     |  |                | 7,699 |          |  |        | 7,760 |                |  |          | -0.8 | %        |  |   | 14,467 |   |  |   | 14,566 |   |  |  | -0.7 | %
|                                               |  |                |       |          |  |        |       |                |  |          |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|Cost of sales, buying and occupancy            |  |                | 5,602 |          |  |        | 5,674 |                |  |          |      |          |  |   | 10,607 |   |  |   | 10,827 |   |  |  |      |  
|                                              
|                                              
|                                              
|                                              
|Selling and administrative                     |  |                | 1,616 |          |  |        | 1,677 |                |  |          |      |          |  |   | 3,128  |   |  |   | 3,207  |   |  |  |      |  
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |                | 176   |          |  |        | 185   |                |  |          |      |          |  |   | 344    |   |  |   | 361    |   |  |  |      |  
|                                              
|                                              
|                                              
|                                              
|Interest expense                               |  |                | 5     |          |  |        | 11    |                |  |          |      |          |  |   | 1      |   |  |   | 14     |   |  |  |      |  
|                                               |  |                |       |          |  |        |       |                |  |          |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|                                              
|                                              
|                                              
|                                              
|Total costs and expenses                       |  |                | 7,399 |          |  |        | 7,547 |                |  |          |      |          |  |   | 14,080 |   |  |   | 14,409 |   |  |  |      |  
|                                               |  |                |       |          |  |        |       |                |  |          |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|Operating income                               |  | $              | 300   |          |  | $      | 213   |                |  |          |      |          |  | $ | 387    |   |  | $ | 157    |   |  |  |      |  
|                                               |  |                |       |          |  |        |       |                |  |          |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|Number of Full-line Stores                     |  |                |       |          |  |        |       |                |  |          |      |          |  |   | 870    |   |  |   | 861    |   |  |  |      |  
|                                              
|                                              
|                                              
|                                              
|Number of Specialty Stores                     |  |                |       |          |  |        |       |                |  |          |      |          |  |   | 1,295  |   |  |   | 1,309  |   |  |  |      |  
|                                               |  |                |       |          |  |        |       |                |  |          |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|Total Retail stores                            |  |                |       |          |  |        |       |                |  |          |      |          |  |   | 2,165  |   |  |   | 2,170  |   |  |  |      |  
|                                               |  |                |       |          |  |        |       |                |  |          |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|Comparable store sales percentage (decrease)   |  |                | -4.6  | %        |  |        | -0.9  | %              |  |          |      |          |  |   | -3.8   | % |  |   | -1.2   | % |  |  |      |  

For purposes of determining comparable store sales, a store is considered to be comparable at the beginning of the thirteenth month after the store is
opened.

For the 13 week period, Full-line Stores revenues decreased 4.6% from the
second quarter of 2001, as comparable store sales decreased 5.8% and 9 net new
stores were added.



| |  |  | Hardlines comparable store sales decreased 1.0% in the second
quarter of 2002. Solid sales increases in home appliances were more
than offset by declines in home office, home improvement and home
electronics revenues. The solid increase in home appliances revenue
reflects increased sales in virtually all home appliance divisions.
The Company experienced particularly strong sales of energy efficient
laundry products. Home office revenue declines can be attributed to
declines in computer and computer accessories sales, as lower margin
product offerings were significantly edited during 2002. Home
improvement revenues decreased primarily due to lower tools and paint
and sporting goods product sales offset by solid lawn and garden as
well as home fitness sales. Decreases in the tools and paint category
were due to a decline in sales for residential lighting and ceiling
fans, a category that was exited in 2001. The decrease in sporting
goods is due to decrease in bicycle sales, a category that was exited
in 2001. The solid increase in lawn and garden sales reflects
increased sales in several categories, especially lawn mowers and
tractors. The decreased revenues in home electronics reflects lower
sales of non-digital products such as camcorders and stereo equipment.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Softlines comparable store sales decreased 15.1% in the second
quarter of 2002. All apparel categories (mens, womens and children)
experienced double digit declines and non-apparel categories (home
fashions, footwear, fine jewelry) experienced low to mid single digit
sales decreases. The Companys exit of the skin care and color
cosmetics, installed floor covering and custom window treatments
businesses also contributed to the revenue declines in Softlines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Sears Auto Centers revenues declined 3.2% from the comparable prior
year period as prior year sales benefited from the recall of certain
Firestone tires.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

For the 26 week period, Full-line store revenues decreased 3.8% over 2001 as
hardlines decreased 1.7% and softlines decreased 12.0%.

19



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SEARS, ROEBUCK AND CO.

13 and 26 Weeks Ended June 29, 2002 and June 30, 2001


For the 13 week period ended June 29, 2002, Specialty Stores revenues increased
11.3% from the comparable 2001 period, with comparable store sales increasing
2.4%. This increase is primarily due to revenue increases at The Great
Indoors, Dealer Stores, and Commercial Sales, partially offset by declines in
National Tire and Battery. Dealer Stores revenue increases resulted from a
strong comparable store sales increase of 7.8%. National Tire and Battery
revenues decreased due to one net store closing along with a comparable store
sales decline. Revenue from The Great Indoors benefited from the addition of
12 stores since the second quarter of last year.

For the 26 week period ended June 29, 2002, Specialty store revenues increased
10.1% from the comparable 2001 period primarily due to revenue increases in The
Great Indoors, Commercial Sales, and Dealer Stores, which were partially offset
by a decline in Hardware Stores and National Tire and Battery.

Related services revenues increased for the 13 and 26 week period ended June
29, 2002 primarily due to increases in Sears Repair Services. Sears Repair
Services revenues benefited from a vendor product recall, an increase in repair
parts sold and a recent initiative to provide branded product repair and
maintenance services to an appliance manufacturer. In addition, Direct to
Customer revenues for the 13 and 26 week period ended June 29, 2002 increased
due to the inclusion of Lands End revenue since the acquisition date.

Retail and Related Services gross margin as a percentage of Retail and Related
Services revenues for the second quarter of 2002 improved to 27.2%, an increase
of 30 basis points from the second quarter of 2001. The improvement is
primarily due to margin improvements within hardlines and Hardware and Dealer
Stores. The margin improvements are primarily due to benefits from improved
sourcing costs, editing assortments to reduce lower margin products, and a
decrease in promotional markdown activity. For the 26 week period, Retail and
Related Services gross margin increased 100 basis points.

Retail and Related Services selling and administrative expense as a percentage
of Retail and Related Services revenues for the second quarter of 2002
decreased 60 basis points from the second quarter of 2001. The decrease was
primarily due to expense improvements generated from productivity initiatives
offset by lower revenues and increased investments in The Great Indoors. For
the 26 week period, Retail and Related Services selling and administrative
expense as a percent of revenue decreased 40 basis points.

For the 13 and 26 week periods, operating income improved by $87 million and
$230 million, respectively, as lower revenues and investments in The Great
Indoors were more than offset by margin improvements and cost savings from the
Companys productivity initiatives. The inclusion of Lands End results since
the acquisition date was not material to the quarter or the year-to-date.

This discussion excludes the impact of noncomparable items. The noncomparable
items affecting this segments operating income were all recorded on the
special charges and impairments line and would have reduced Retail and Related
Services operating income by $287 million for the 13 and 26 week periods ended
June 30, 2001.

Credit and Financial Products

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

|                                       |                          |      |                |      |                |      |          |      |          |   |       |       |  |   |       |       | 
|-------------------------------------- | ------------------------ | ---- | -------------- | ---- | -------------- | ---- | -------- | ---- | -------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                       |                          |      | 13 Weeks Ended |      | 26 Weeks Ended
|                                       |                          |      |                |      |               
|                                       |                          |      | June 29,       |      | June 30,       |      | June 29, |      | June 30,
|Millions                               |                          | 2002 |                | 2001 |                | 2002 |          | 2001
|                                       |                          |      |                |      |                |      |          |     
|Credit and financial products revenues |                          | $    | 1,321          |      |                | $    | 1,276    |      |          | $ | 2,639 |       |  | $ | 2,576 |      
|                                       |                          |      |                |      |                |      |          |      |          |   |       |       |  |   |       |      
|Selling and administrative             |                          |      | 264            |      |                |      | 212      |      |          |   | 492   |       |  |   | 406   |      
|                                      
|                                      
|                                      
|                                      
|Provision for uncollectible accounts   |                          |      | 393            |      |                |      | 350      |      |          |   | 764   |       |  |   | 684   |      
|                                      
|                                      
|                                      
|                                      
|Depreciation and amortization          |                          |      | 5              |      |                |      | 4        |      |          |   | 10    |       |  |   | 9     |      
|                                      
|                                      
|                                      
|                                      
|Interest                               |                          |      | 247            |      |                |      | 365      |      |          |   | 518   |       |  |   | 767   |      
|                                       |                          |      |                |      |                |      |          |      |          |   |       |       |  |   |       |      
|                                       | Total costs and expenses |      |                | 909  |                |      |          | 931  |          |   |       | 1,784 |  |   |       | 1,866 | 
|                                       |                          |      |                |      |                |      |          |      |          |   |       |       |  |   |       |      
|Operating income                       |                          | $    | 412            |      |                | $    | 345      |      |          | $ | 855   |       |  | $ | 710   |      
|                                       |                          |      |                |      |                |      |          |      |          |   |       |       |  |   |       |      

20



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SEARS, ROEBUCK AND CO.

13 and 26 Weeks Ended June 29, 2002 and June 30, 2001


The noncomparable items affecting this segment (the accounting estimate change
related to the allowance for uncollectible accounts, the provision for
previously securitized receivables and the effect of securitization income)
would have reduced Credit and Financial Products operating income by $300
million for the 13 and 26 week periods ended June 29, 2002 and $522 million and
$482 million, respectively, for the 13 and 26 week periods ended June 30, 2001.

Credit and Financial Products revenues increased 3.5% to $1.3 billion and 2.4%
to $2.6 billion, respectively, for the 13 and 26 weeks ended June 29, 2002 from
the comparable prior year period. The increase in revenues in the second
quarter was primarily attributable to higher average receivable balances as
well as an increase in interchange fees generated from the Sears Gold
MasterCard. The Sears Gold MasterCard portfolio has continued to grow with
balances over $8.5 billion at June 29, 2002.

A summary of Credit information (for the managed portfolio) is as follows:

|                                                                          |                                               |      |                |        |                |      |          |        |          |   |        |        |  |   |        |        | 
|------------------------------------------------------------------------- | --------------------------------------------- | ---- | -------------- | ------ | -------------- | ---- | -------- | ------ | -------- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                          |                                               |      | 13 Weeks Ended |        | 26 Weeks Ended
|                                                                          |                                               |      |                |        |               
|                                                                          |                                               |      | June 29,       |        | June 30,       |      | June 29, |        | June 30,
|millions, except for average account balance                              |                                               | 2002 |                | 2001   |                | 2002 |          | 2001  
|                                                                          |                                               |      |                |        |                |      |          |       
|Sears credit card sales as a % of sales                                   |                                               |      | 44.8           | %      |                |      | 47.0     | %      |          |   | 44.3   | %      |  |   | 47.0   | %     
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Average account balance (as of June 29, 2002 and June 30, 2001) (dollars) |                                               |      |                |        |                |      |          |        |          | $ | 1,274  |        |  | $ | 1,174  |       
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Sears Card average managed credit card receivables                        |                                               | $    | 20,125         |        |                | $    | 23,962   |        |          | $ | 20,904 |        |  | $ | 24,525 |       
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Sears Gold MasterCard average managed credit card receivables             |                                               |      | 7,488          |        |                |      | 1,869    |        |          |   | 6,608  |        |  |   | 1,616  |       
|                                                                          |                                               |      |                |        |                |      |          |        |          |   |        |        |  |   |        |       
|                                                                          | Total average managed credit card receivables |      | $              | 27,613 |                |      | $        | 25,831 |          |   | $      | 27,512 |  |   | $      | 26,141 | 
|                                                                          |                                               |      |                |        |                |      |          |        |          |   |        |        |  |   |        |       
|Sears Card ending credit card receivables                                 |                                               |      |                |        |                |      |          |        |          | $ | 19,718 |        |  | $ | 23,633 |       
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Sears Gold MasterCard ending credit card receivables                      |                                               |      |                |        |                |      |          |        |          |   | 8,528  |        |  |   | 2,333  |       
|                                                                          |                                               |      |                |        |                |      |          |        |          |   |        |        |  |   |        |       
|                                                                          | Total ending credit card receivables          |      |                |        |                |      |          |        |          |   | $      | 28,246 |  |   | $      | 25,966 | 
|                                                                          |                                               |      |                |        |                |      |          |        |          |   |        |        |  |   |        |       

Credit and Financial Products selling and administrative expense as a
percentage of Credit and Financial Products revenues increased to 20.0%, an
increase of 340 basis points in the second quarter of 2002 from the comparable
2001 period. The increase was primarily due to higher account services
expenses, increased marketing and in-store credit card promotions and increased
fraud losses, experienced due to the conversion of accounts to the MasterCard
product.

The activity in the domestic allowance for uncollectible owned accounts and
related information is as follows:

|                                                                  |                                 |      |                |      |                |      |          |      |          |   |       |   |  |   |       |      |  
|----------------------------------------------------------------- | ------------------------------- | ---- | -------------- | ---- | -------------- | ---- | -------- | ---- | -------- | - | ----- | - |  | - | ----- | ---- | -
|                                                                  |                                 |      | 13 Weeks Ended |      | 26 Weeks Ended
|                                                                  |                                 |      |                |      |               
|                                                                  |                                 |      | June 29,       |      | June 30,       |      | June 29, |      | June 30,
|millions                                                          |                                 | 2002 |                | 2001 |                | 2002 |          | 2001
|                                                                  |                                 |      |                |      |                |      |          |     
|Balance, beginning of period                                      |                                 | $    | 1,115          |      |                | $    | 567      |      |          | $ | 1,115 |   |  | $ | 649   |     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Provision for uncollectible accounts                              |                                 |      | 693            |      |                |      | 350      |      |          |   | 1,064 |   |  |   | 684   |     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Less: securitization adjustment |      |                |     |                |      |          |     |          |   |       |  |  |   |       | (153 | )
|                                                                  |                                 |      |                |      |                |      |          |      |          |   |       |   |  |   |       |     
|Net domestic provision for uncollectible accounts                 |                                 |      | 693            |      |                |      | 350      |      |          |   | 1,064 |   |  |   | 531   |     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Provision for previously securitized receivables                  |                                 |      |               |      |                |      | 522      |      |          |   |      |   |  |   | 522   |     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Net charge-offs                                                   |                                 |      | (367           | )    |                |      | (350     | )    |          |   | (738  | ) |  |   | (530  | )   
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Transfer to Securitization Master Trust                           |                                 |      |               |      |                |      |         |      |          |   |      |   |  |   | (83   | )   
|                                                                  |                                 |      |                |      |                |      |          |      |          |   |       |   |  |   |       |     
|Balance, end of period                                            |                                 | $    | 1,441          |      |                | $    | 1,089    |      |          | $ | 1,441 |   |  | $ | 1,089 |     
|                                                                  |                                 |      |                |      |                |      |          |      |          |   |       |   |  |   |       |     
|Net credit charge-offs to average managed credit card receivables |                                 |      | 5.32           | %    |                |      | 5.42     | %    |          |   | 5.37  | % |  |   | 5.23  | %   
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Allowance as percent of ending credit card receivables            |                                 |      |                |      |                |      |          |      |          |   | 5.10  | % |  |   | 4.19  | %   
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Delinquency rate at period-end (1)                                |                                 |      |                |      |                |      |          |      |          |   | 6.87  | % |  |   | 7.26  | %   



|(1) |  | The aging methodology is based on the number of completed billing cycles
during which a customer has failed to make a required payment. Accounts
are considered delinquent when a customer has failed to make a payment in
each of the last three or more billing cycles.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SEARS, ROEBUCK AND CO.

13 and 26 Weeks Ended June 29, 2002 and June 30, 2001


The domestic provision for uncollectible accounts increased by $343 million to
$693 million for the 13 weeks ended June 29, 2002 and by $533 million to $1,064
million for the 26 weeks ended June 29, 2002, from the comparable prior year
periods. The increase in the provision is primarily the result of a refinement
in the Companys allowance methodology. The Company periodically reviews its
accounting practices to ensure that its adopted policies appropriately reflect
changes in its businesses, the industries it operates in, and the regulatory
and political environments. During the second quarter, the Company compared
its methodology for computing the allowance for uncollectible accounts to the
methodologies of participants in the bank card industry. The Company felt that
a comparison to bank card issuers was appropriate given the growth of the Sears
Gold MasterCard product (approximately $8.5 billion in balances at the end of
the second quarter of 2002) and the recent changes to the Sears Card product
that are meant to provide a wider range of services to the Sears Card holder
(e.g., balance transfers, convenience checks, broader acceptance, etc.). The
Company determined that practice in the industry was diverse and evolving,
particularly in the areas of providing allowances for current accounts, finance
charges and credit card fees. Also, during this review the Company became
aware of new interpretive guidance that regulators were proposing to narrow the
diversity in practice. As a result of its review, the Company refined its
methodology for determining the uncollectible portion of current accounts and
credit card fee balances, resulting in an increase in the provision for
uncollectible accounts in the amount of $300 million during the 13 weeks ended
June 29, 2002.

Charge-offs increased by $17 million despite a decline in the net charge-off
rate to 5.32% in 2002 from 5.42% in 2001 and a decline in customer bankruptcy
filings. The increase in charge-offs is primarily due to the increase in the
receivables portfolio. The delinquency rate for 2002 decreased 39 basis points
compared with 2001. The period-end allowance as a percent of receivables was
5.10% and 4.19%, or $1.4 billion and $1.1 billion at June 29, 2002 and June 30,
2001, respectively, reflecting the additional provision of $300 million due to
the refinement in the allowance methodology.

Domestic interest expense is discussed within the Credit and Financial Products
segment since the majority of the Companys interest expense is allocated to
this segment. Domestic interest expense is combined with the funding costs on
receivables sold through securitizations to represent total funding costs as
follows:

|                                           |  |                |     |                |  |          |     |          |  |   |     |  |  |   |     | 
|------------------------------------------ |  | -------------- | --- | -------------- |  | -------- | --- | -------- |  | - | --- |  |  | - | --- | 
|                                           |  | 13 Weeks Ended |     | 26 Weeks Ended
|                                           |  |                |     |               
|                                           |  | June 29,       |     | June 30,       |  | June 29, |     | June 30,
|                                           |  | 2002           |     | 2001           |  | 2002     |     | 2001    
|                                           |  |                |     |                |  |          |     |         
|Domestic interest expense                  |  | $              | 252 |                |  | $        | 376 |          |  | $ | 519 |  |  | $ | 658 | 
|                                          
|                                          
|                                          
|                                          
|Funding cost on securitized receivables(1) |  |                |    |                |  |          |    |          |  |   |    |  |  |   | 123 | 
|                                           |  |                |     |                |  |          |     |          |  |   |     |  |  |   |     | 
|Total domestic funding costs               |  | $              | 252 |                |  | $        | 376 |          |  | $ | 519 |  |  | $ | 781 | 
|                                           |  |                |     |                |  |          |     |          |  |   |     |  |  |   |     | 





---

|(1) |  | Beginning in the second quarter of 2001, funding costs on securitized receivables are included in
the domestic segment interest expense.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------

Total domestic funding costs decreased by $124 million primarily due to the
Companys increased use of variable rate financing coupled with the lower
interest rate environment. The shift to more variable rate funding is in
response to the growth of variable rate receivables within the credit card
portfolio (primarily the Sears Gold MasterCard product) and the Companys
conversion of Sears Card finance charges from fixed rate to variable rate in
July 2002. The increase in variable rate funding was achieved primarily by
using interest rate swaps to synthetically convert fixed rate debt to variable
rate and by issuance of variable rate debt.

For the 13 and 26 week period ended June 29, 2002, operating income from Credit
and Financial Products increased by $67 million and $145 million, respectively,
as favorable funding costs and higher revenues were partially offset by higher
provision and selling and administration expenses.

22



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SEARS, ROEBUCK AND CO.

13 and 26 Weeks Ended June 29, 2002 and June 30, 2001


Corporate and Other

Revenues from the home improvement services businesses included in the
Corporate and Other segment decreased by approximately 17.9% to $92 million and
23.5% to $150 million, respectively, for the 13 and 26 weeks ended June 29,
2002 from the comparable prior year periods. The decrease is due to the
disposition of Sears Termite and Pest Control, Inc. on October 1, 2001.

The segments operating loss is approximately flat with the prior year for both
the quarter and 26 week periods as incremental expenses incurred to implement
the Companys strategic initiatives were offset by productivity improvements.

Sears Canada

Sears Canada revenues for the second quarter of 2002 decreased 0.5% from the
same period a year ago. This reflects a 1.0 percent decline in the value of
the Canadian dollar relative to the U.S. dollar as well as a 1.6% decrease in
comparable store sales. For the 26 week period, revenues decreased 2.7%.

Sears Canada gross margin as a percentage of Sears Canada merchandise sales and
services revenues increased 140 basis points in the second quarter of 2002 from
the comparable prior year quarter. This favorability is primarily due to
improved inventory levels which resulted in less clearance activity. For the 26
week period, Sears Canada margin increased 160 basis points.

Sears Canada selling and administrative expense as a percentage of total Sears
Canada revenues increased 20 basis points in the second quarter of 2002 from
the second quarter of 2001. SG&A as a percent of revenues increased despite
operating expense reductions in several areas, such as payroll and benefits,
because of higher performance based incentive expense and costs incurred to
consolidate call centers. For the 26 week period, Sears Canada selling and
administrative rate decreased 20 basis points.

Operating income improved by $12 million and $28 million, respectively, for the
13 and 26 week period ended June 29, 2002 due to margin rate improvements
partially offset by slightly higher expenses and decreased revenues. This
discussion excludes the impact of noncomparable items. The noncomparable items
affecting this segment were recorded in the special charges and impairment line
in the first quarter of 2002 and would have reduced Sears Canada operating
income for the 26 weeks ended June 29, 2002 by $111 million.

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

The Company has significant financial capacity and flexibility due to its
access to the capital markets and the quality and liquidity of its assets,
principally its credit card receivables. As such, the Company accesses a
variety of capital markets to preserve flexibility and diversify its funding
sources. The broad access to capital markets also allows the Company to
effectively manage liquidity and interest rate risk. Liquidity risk is the
measure of the Companys ability to fund maturities and provide for the
operating needs of its businesses. Interest rate risk is the effect on net
income from changes in interest rates. The Companys cost of funds is affected
by a variety of general economic conditions, including the level and volatility
of interest
rates. The Companys policy is to manage interest rate risk through the
strategic use of fixed and variable rate debt and interest rate derivatives.

23



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SEARS, ROEBUCK AND CO.

13 and 26 Weeks Ended June 29, 2002 and June 30, 2001


LIQUIDITY

The Companys principal sources of liquidity are operating cash flows and
various sources of capital market borrowings. Capital market borrowings are
used primarily to support the Companys Credit business. Ongoing access to
the capital markets is critical to the Credit business.

Operating cash flows from the Companys retail businesses are impacted by the
competitive conditions in the retail industry, the effects of the current
economic climate and consumer confidence. Operating cash flows from the
Companys Credit business are directly impacted by changes in interest rates,
delinquency and charge-off trends in the credit card receivables portfolio and
customer acceptance of the Companys credit product offerings. Based on the
nature of the Companys businesses, management considers the above factors to
be normal business risks.

The Company has not identified any reasonably possible circumstances that would
likely impair the Companys ability to maintain its planned level of
operations, capital expenditures and dividends in the foreseeable future or
that would trigger any early payment or acceleration provisions in the debt
portfolio.

SIGNIFICANT ASSETS

A summary of the Companys credit card receivables at June 29, 2002 and June
30, 2001, respectively, are as follows:

|                                           |  |          |        |          |  |              |        |  |  |   |        | 
|------------------------------------------ |  | -------- | ------ | -------- |  | ------------ | ------ |  |  | - | ------ | 
|                                           |  | June 29, |        | June 30, |  | December 29,
|millions                                   |  | 2002     |        | 2001     |  | 2001        
|                                           |  |          |        |          |  |             
|Domestic:                                  |  |          |        |          |  |              |        |  |  |   |        | 
|                                          
|                                          
|                                          
|                                          
|Managed credit card receivables            |  | $        | 28,246 |          |  | $            | 25,966 |  |  | $ | 27,599 | 
|                                          
|                                          
|                                          
|                                          
|Other customer receivables                 |  |          | 32     |          |  |              | 61     |  |  |   | 40     | 
|                                           |  |          |        |          |  |              |        |  |  |   |        | 
|Domestic owned credit card receivables     |  |          | 28,278 |          |  |              | 26,027 |  |  |   | 27,639 | 
|                                          
|                                          
|                                          
|                                          
|Sears Canada credit card receivables       |  |          | 1,534  |          |  |              | 1,588  |  |  |   | 1,682  | 
|                                           |  |          |        |          |  |              |        |  |  |   |        | 
|Consolidated owned credit card receivables |  | $        | 29,812 |          |  | $            | 27,615 |  |  | $ | 29,321 | 
|                                           |  |          |        |          |  |              |        |  |  |   |        | 

Domestic managed credit card receivables increased $2.3 billion and $0.6
billion from the second quarter of 2001 and 2001 year-end, respectively, as
growth from the Sears Gold MasterCard product was partially offset by lower
Sears Card receivables. The Sears Gold MasterCard product, which was launched
in the second quarter of 2000, had approximately $8.5 billion in outstanding
balances at June 29, 2002 compared with $2.3 billion at June 30, 2001.

As of June 29, 2002, consolidated merchandise inventories on the first-in,
first-out (FIFO) basis were $6.0 billion, compared with $6.2 billion at June
30, 2001, and $5.5 billion at December 29, 2001. The decrease as compared with
last years second quarter primarily reflects lower domestic hardlines and
softlines inventories,
partially offset by the acquired Lands End inventory. Sears Canada inventory
decreased due to continued focus on managing inventory levels as well as the
improved seasonal content of the inventory.

24



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SEARS, ROEBUCK AND CO.

13 and 26 Weeks Ended June 29, 2002 and June 30, 2001


CAPITAL RESOURCES

Total borrowings outstanding at June 29, 2002 and June 30, 2001 were $28.7
billion and $25.4 billion, respectively. The increase compared with last
years second quarter is due to additional debt issuances to fund the Lands
End acquisition and credit card receivable growth. Total borrowings are as
follows:

|                      |  |          |        |       |  |          |       |       |  |              |        |       |  |  |       |   |  |   |        |  |  |  |       |  
|--------------------- |  | -------- | ------ | ----- |  | -------- | ----- | ----- |  | ------------ | ------ | ----- |  |  | ----- | - |  | - | ------ |  |  |  | ----- | -
|                      |  | June 29, |        | % of  |  | June 30, |       | % of  |  | December 29, |        | % of 
|millions              |  | 2002     |        | Total |  | 2001     |       | Total |  | 2001         |        | Total
|                      |  |          |        |       |  |          |       |       |  |              |        |      
|Short-term borrowings |  | $        | 3,981  |       |  |          | 13.9  | %     |  | $            | 3,326  |       |  |  | 13.1  | % |  | $ | 3,557  |  |  |  | 13.9  | %
|                     
|                     
|                     
|                     
|Long-term debt (1)    |  |          | 24,673 |       |  |          | 86.1  | %     |  |              | 22,113 |       |  |  | 86.9  | % |  |   | 22,078 |  |  |  | 86.1  | %
|                      |  |          |        |       |  |          |       |       |  |              |        |       |  |  |       |   |  |   |        |  |  |  |       |  
|Total borrowings      |  | $        | 28,654 |       |  |          | 100.0 | %     |  | $            | 25,439 |       |  |  | 100.0 | % |  | $ | 25,635 |  |  |  | 100.0 | %
|                      |  |          |        |       |  |          |       |       |  |              |        |       |  |  |       |   |  |   |        |  |  |  |       |  



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

The Companys short-term borrowings consist primarily of unsecured commercial
paper. The Company continues to provide support for 100% of its outstanding
commercial paper through its investment portfolio and committed credit
facilities with various banks. At June 2002, the Company had $4.8 billion in
committed credit facilities of which $4.4 billion (for Sears U.S. operations)
expires in April 2003 and $0.4 billion (for Sears Canada) expires in May 2003.

Additionally, in the first quarter of 2002, the Company contractually
established access to $1.5 billion via a syndicate of multi-seller,
asset-backed commercial paper conduit programs sponsored by various banks.
These purchase commitments have an original expiration date of March 2003, but
are renewable at the mutual consent of the parties.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially. Such statements are based on
assumptions about many important factors, including competitive conditions in
the retail industry; changes in consumer confidence and spending in the United
States and Canada; interest rates; bankruptcy filings, delinquency and
charge-off trends in the credit card receivables portfolio; continued consumer
acceptance of the Sears Gold MasterCard program; the successful execution of
and customer reaction to the Companys strategic initiatives; Sears ability to
integrate and operate Lands End successfully; anticipated cash flow; general
United States and Canada economic conditions and normal business uncertainty.
In addition, the Company typically earns a disproportionate share of its
operating income in the fourth quarter due to seasonal buying patterns, which
are difficult to forecast with certainty. While the Company believes that its
assumptions are reasonable, it cautions that it is impossible to predict the
impact of such factors which could cause actual results to differ materially
from predicted results. The Company intends these forward-looking statements
to speak only at the time of this report and does not undertake to update or
revise these projections as more information becomes available.

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SEARS, ROEBUCK AND CO.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

The nature of market risks faced by the Company at June 29, 2002 are disclosed
in the Companys Form 10-K for the year ended December 29, 2001. As of June
29, 2002, 83% of the Companys funding portfolio was variable rate (including
current maturities of fixed-rate long-term debt that will reprice in the next
12 months and fixed-rate debt synthetically converted to variable rate through
the use of derivative financial instruments). Based on the size of the
Companys variable rate funding portfolio as of June 29, 2002, which totaled
$23.8 billion, a 100 basis point change in interest rates would affect pretax
funding cost by approximately $238 million per annum. This estimate assumes
that the funding portfolio remains constant for an annual period and the
interest rate change occurs at the beginning of the period. This estimate also
does not take into account the effect on net interest margin of changes in
revenue resulting from either changes in terms of the assets or in the index
applicable to the variable rate receivables.

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

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SEARS, ROEBUCK AND CO.




PART II. OTHER INFORMATION




Item 1. Legal Proceedings

There have been no material developments in any material legal proceedings
since the Companys disclosure in its Annual Report on Form 10-K for the fiscal
year ended December 29, 2001.

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SEARS, ROEBUCK AND CO.




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

On May 9, 2002, the Company held its annual meeting of shareholders at
the Merchandise Review Center in Hoffman Estates, Illinois.

Brenda C. Barnes, Michael A. Miles, Dorothy A. Terrell and Raul H.
Yzaguirre, were elected to Class B of the Board of Directors for three
year terms expiring at the 2005 annual meeting of shareholders. The
shareholders approved the recommendation of the Audit Committee that
Deloitte & Touche LLP be appointed auditors for 2002. The shareholders
also approved the 2002 Non-Employee Director Stock Plan. A shareholder
proposal regarding vendor standards did not receive a majority of the
votes cast and was defeated. Shareholder proposals regarding
declassification of the Board and poison pills were approved by a
majority of votes cast. The votes on these matters were as follows:



|1. |  | Election of Directors
|-- |  | ---------------------

|                   |  |     |             |          |  |  |            | 
|------------------ |  | --- | ----------- | -------- |  |  | ---------- | 
|Name               |  | For |             | Withheld
|                   |  |     |             |         
|Brenda C. Barnes   |  |     | 272,558,643 |          |  |  | 5,131,926  | 
|                  
|                  
|                  
|                  
|Michael A. Miles   |  |     | 265,724,486 |          |  |  | 11,966,383 | 
|                  
|                  
|                  
|                  
|Dorothy A. Terrell |  |     | 270,966,523 |          |  |  | 6,724,046  | 
|                  
|                  
|                  
|                  
|Raul H. Yzaguirre  |  |     | 270,445,605 |          |  |  | 7,245,064  | 



|2. |  | Appointment of Deloitte & Touche LLP as auditors for 2002.
|-- |  | ----------------------------------------------------------

|            |  |         |            |         |  |  |           | 
|----------- |  | ------- | ---------- | ------- |  |  | --------- | 
|For         |  | Against |            | Abstain
|            |  |         |            |        
|263,510,394 |  |         | 12,297,687 |         |  |  | 1,874,690 | 



|3. |  | Approval of the 2002 Non-Employee Director Stock Plan.
|-- |  | ------------------------------------------------------

|            |  |         |            |         |  |  |           | 
|----------- |  | ------- | ---------- | ------- |  |  | --------- | 
|For         |  | Against |            | Abstain
|            |  |         |            |        
|245,864,662 |  |         | 27,810,516 |         |  |  | 4,013,870 | 



|4. |  | Shareholder proposal regarding vendor standards.
|-- |  | ------------------------------------------------

|           |  |         |             |         |  |                  |            |  |  |  |            | 
|---------- |  | ------- | ----------- | ------- |  | ---------------- | ---------- |  |  |  | ---------- | 
|For        |  | Against |             | Abstain |  | Broker Non-Votes
|           |  |         |             |         |  |                 
|21,718,978 |  |         | 210,480,712 |         |  |                  | 13,998,493 |  |  |  | 31,492,686 | 



|5. |  | Shareholder proposal regarding declassification of the Board.
|-- |  | -------------------------------------------------------------

|            |  |         |            |         |  |                  |           |  |  |  |            | 
|----------- |  | ------- | ---------- | ------- |  | ---------------- | --------- |  |  |  | ---------- | 
|For         |  | Against |            | Abstain |  | Broker Non-Votes
|            |  |         |            |         |  |                 
|166,211,590 |  |         | 75,638,529 |         |  |                  | 4,341,366 |  |  |  | 31,499,384 | 



|6. |  | Shareholder proposal regarding poison pill.
|-- |  | -------------------------------------------

|            |  |         |            |         |  |                  |           |  |  |  |            | 
|----------- |  | ------- | ---------- | ------- |  | ---------------- | --------- |  |  |  | ---------- | 
|For         |  | Against |            | Abstain |  | Broker Non-Votes
|            |  |         |            |         |  |                 
|168,854,628 |  |         | 72,228,940 |         |  |                  | 5,107,122 |  |  |  | 31,500,179 | 

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SEARS, ROEBUCK AND CO.




Item 6. Exhibits and Reports on Form 8-K.

(a)  Exhibits.

An Exhibit Index has been filed as part of this Report on Page E-1.

(b)  Reports on Form 8-K.

The Registrant filed a Current Report on Form 8-K dated April 10, 2002 to
report, under Item 5, that the Registrant issued a press release (attached as
Exhibit 99 thereto).

The Registrant filed a Current Report on Form 8-K dated April 18, 2002 to
report, under Item 5, that the Registrant issued a press release (attached as
Exhibit 99 thereto).

The Registrant filed a Current Report on Form 8-K dated May 17, 2002 to report,
under Item 5, that the Registrant entered into an Acquisition Agreement and
Agreement and Plan of Merger by and among the Registrant, Inlet Acquisition
Corp., and Lands End, Inc.

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SEARS, ROEBUCK AND CO.




SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                |     |                                       
|--------------- | --- | --------------------------------------
|                |     | SEARS, ROEBUCK AND CO.                
|                |     | (Registrant)                          
|               
|               
|               
|               
|                |     |                                       
|               
|               
|               
|               
|October 2, 2002 | By: | /s/ Thomas E. Bergmann                
|                |     |                                       
|                |     | Thomas E. Bergmann                    
|                |     | Vice President and Controller         
|                |     | (Principal Accounting Officer and duly
|                |     | authorized officer of Registrant)     

CERTIFICATIONS

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



|1. |  | I have reviewed this amended quarterly report on Form 10-Q/A of Sears,
Roebuck and Co.                                                                                                                                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.                       

|                |  |     |  |                                      
|--------------- |  | --- |  | -------------------------------------
|October 2, 2002 |  | By: |  | /s/ Alan J. Lacy                     
|                |  |     | 
|                |  |     |  | Alan J. Lacy                         
|                |  |     |  | Chairman of the Board of Directors,  
|                |  |     |  | President and Chief Executive Officer

I, Paul J. Liska, Executive Vice President and Chief Financial Officer of
Sears, Roebuck and Co., certify that:



|1. |  | I have reviewed this amended quarterly report on Form 10-Q/A of Sears,
Roebuck and Co.                                                                                                                                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.                       

|                |     |                            
|--------------- | --- | ---------------------------
|October 2, 2002 | By: | /s/ Paul J. Liska          
|                |     |                            
|                |     | Paul J. Liska              
|                |     | Executive Vice President   
|                |     | and Chief Financial Officer

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SEARS, ROEBUCK AND CO.

E-1


EXHIBIT INDEX


|            |  |                                                                                                                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                     
|3(a).       |  | Restated Certificate of Incorporation as in effect on May 13,
1996 (incorporated by reference to Exhibit 3(a) to
Registrants Statement No. 333-8141)                                                                                                               
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|3(b).       |  | By-laws, as amended to February 14, 2001 (incorporated by
reference to Exhibit 3.(ii) to Registrants Annual Report on
Form 10-K for the fiscal year ended December 30, 2000)                                                                                       
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|4.          |  | Registrant hereby agrees to furnish the Commission, upon
request, with the instruments defining the rights of holders
of each issue of long-term debt of the Registrant and its
consolidated subsidiaries.                                                          
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|**10(a)     |  | Acquisition Agreement and Agreement and Plan of Merger, dated
as of May 12, 2002, by and among the Registrant, Inlet
Acquisition Corp. and Lands End, Inc. (incorporated by
reference to Exhibit (d)(1) to the Schedule TO filed by the
Registrant on May 17, 2002)
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|**10(b)     |  | Amended and Restated Agreement, dated as of May 12, 2002,
between Lands End, Inc. and David F. Dyer (incorporated by
reference to Exhibit (e)(4) to Schedule 14D-9 filed by Lands
End, Inc. on May 17, 2002)                                                      
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|**10(c)     |  | Letter Agreement, dated May 13, 2002, by and between the
Registrant and David F. Dyer (incorporated by reference to
Exhibit (d)(4) to the Schedule TO filed by the Registrant on
May 17, 2002)                                                                      
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|*12.        |  | Computation of ratio of income to fixed charges for Sears and
consolidated subsidiaries for each of the five years ended
December 29, 2001 and for the six-month period ended June 29,
2002.                                                                        
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|*15.        |  | Acknowledgement of awareness from Deloitte & Touche LLP, dated
October 1, 2002 concerning unaudited interim financial
information.                                                                                                                                  
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|*99(a)      |  | Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)                                                                                                                                                 
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|*99(b)      |  | Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)                                                                                                                                                 
|           
|           
|           
|           
|            |  |                                                                                                                                                                                                                                                                     
|           
|           
|           
|           
|*99(c)      |  | Press release dated September 30, 2002                                                                                                                                                                                                                              

|*  |  | Filed herewith.  
|-- |  | -----------------
|  
|  
|  
|  
|** |  | Previously filed.