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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|  |  |                                                                                                                                          
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 28, 2002
|  |  |                                                                                                                                          
|  |  | OR                                                                                                                                       
|  |  |                                                                                                                                          
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934                                                 
|  |  |                                                                                                                                          
|  |  | Commission file number 1-416                                                                                                             

SEARS, ROEBUCK AND CO.
(Exact name of registrant as specified in its charter)

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

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

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

Yes x                     No o

As of October 26, 2002, the Registrant had 316,312,198 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 (Unaudited) 13 Weeks and 39 Weeks Ended September 28, 2002 and September 29, 2001
|                                                |                                                                                               | Condensed Consolidated Balance Sheets September 28, 2002 (Unaudited), September 29, 2001 (Unaudited) and December 29, 2001   
|                                                |                                                                                               | Condensed Consolidated Statements of Cash Flows (Unaudited) 39 Weeks Ended September 28, 2002 and September 29, 2001         
|                                                |                                                                                               | Notes To Condensed Consolidated Financial Statements (Unaudited)                                                             
|                                                |                                                                                               | Independent Accountants Report                                                                                              
|                                                | Item 2. Managements Discussion and Analysis of Operations, Financial Condition and Liquidity
|                                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                | Item 4. Disclosure Controls and Procedures                                                   
|PART II. OTHER INFORMATION                     
|                                                | Item 1. Legal Proceedings                                                                    
|                                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|Restated LTPIP and Amendment to 2000 Stock Plan
|Computation of Ratio of Income to Fixed Charges
|Acknowledgement of Awareness                   
|Certification of Chief Executive Officer       
|Certification of Chief Financial Officer       



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SEARS, ROEBUCK AND CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 and 39 Weeks Ended September 28, 2002

|                               |  |         |  |                                                                                                                               |  |     
|------------------------------ |  | ------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |         |  |                                                                                                                               |  | Page
|                               |  |         |  |                                                                                                                               |  |     
|PART I - FINANCIAL INFORMATION |  |        
|                              
|                               |  | Item 1. |  | Financial Statements                                                                                                          |  |     
|                               |  |         |  |                                                                                                                               |  |     
|                               |  |         |  | Condensed Consolidated Statements of Income (Unaudited)
13 Weeks and 39 Weeks Ended September 28, 2002 and September 29, 2001 |  | 1   
|                               |  |         |  |                                                                                                                               |  |     
|                               |  |         |  | Condensed Consolidated Balance Sheets
September 28, 2002 (Unaudited), September 29, 2001 (Unaudited)
and December 29, 2001    |  | 2   
|                               |  |         |  |                                                                                                                               |  |     
|                               |  |         |  | Condensed Consolidated Statements of Cash Flows (Unaudited)
39 Weeks Ended September 28, 2002 and September 29, 2001          |  | 3   
|                               |  |         |  |                                                                                                                               |  |     
|                               |  |         |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                              |  | 4   
|                               |  |         |  |                                                                                                                               |  |     
|                               |  |         |  | Independent Accountants Report                                                                                               |  | 16  
|                               |  |         |  |                                                                                                                               |  |     
|                               |  | Item 2. |  | Managements Discussion and Analysis of Operations, Financial Condition
and Liquidity                                         |  | 17  
|                               |  |         |  |                                                                                                                               |  |     
|                               |  | Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                                                    |  | 31  
|                               |  |         |  |                                                                                                                               |  |     
|                               |  | Item 4. |  | Disclosure Controls and Procedures                                                                                            |  | 31  
|                               |  |         |  |                                                                                                                               |  |     
|PART II - OTHER INFORMATION    |  |        
|                               |  |         |  |                                                                                                                               |  |     
|                               |  | Item 1. |  | Legal Proceedings                                                                                                             |  | 32  
|                               |  |         |  |                                                                                                                               |  |     
|                               |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                              |  | 33  





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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |        |       |      |        |        |      |      | 
|----------------------------------------------------------------- | ------------------------ | ----------------------------------------------------------------------------- | ------------------ | ----- | -------------- | ---- | ----- | -------------- | ---- | ---- | --------- | ------ | ----- | ---- | ------ | ------ | ---- | ---- | 
|                                                                  |                          |                                                                               |                    |       | 13 Weeks Ended |      |       | 39 Weeks Ended |     
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |     
|millions, except per common share data                            |                          | Sept. 28,                                                                     |                    |       | Sept. 29,      |      |       | Sept. 28,      |      |      | Sept. 29, |       
|                                                                  |                          | 2002                                                                          |                    |       | 2001           |      |       | 2002           |      |      | 2001      |       
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |        |       |      |       
|REVENUES                                                          |                          |                                                                               |                    |       |                |      |       |                |      |      |           |        |       |      |        |       
|Merchandise sales and services                                    |                          | $                                                                             | 8,239              |       |                | $    | 8,348 |                |      | $    | 24,639    |        |       | $    | 24,936 |       
|Credit and financial products revenues                            |                          |                                                                               | 1,430              |       |                |      | 1,382 |                |      |      | 4,209     |        |       |      | 3,834  |       
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|                                                                  | Total revenues           |                                                                               |                    | 9,669 |                |      |       | 9,730          |      |      |           | 28,848 |       |      |        | 28,770 |     
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|COSTS AND EXPENSES                                                |                          |                                                                               |                    |       |                |      |       |                |      |      |           |        |       |      |        |       
|Cost of sales, buying and occupancy                               |                          |                                                                               | 5,934              |       |                |      | 6,178 |                |      |      | 17,902    |        |       |      | 18,453 |       
|Selling and administrative                                        |                          |                                                                               | 2,340              |       |                |      | 2,197 |                |      |      | 6,637     |        |       |      | 6,484  |       
|Provision for uncollectible accounts                              |                          |                                                                               | 603                |       |                |      | 377   |                |      |      | 1,685     |        |       |      | 929    |       
|Provision for previously securitized receivables                  |                          |                                                                               |                   |       |                |      |      |                |      |      |          |        |       |      | 522    |       
|Depreciation and amortization                                     |                          |                                                                               | 219                |       |                |      | 209   |                |      |      | 650       |        |       |      | 649    |       
|Interest                                                          |                          |                                                                               | 298                |       |                |      | 378   |                |      |      | 866       |        |       |      | 1,094  |       
|Special charges and impairments                                   |                          |                                                                               |                   |       |                |      |      |                |      |      | 111       |        |       |      | 287    |       
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|                                                                  | Total costs and expenses |                                                                               |                    | 9,394 |                |      |       | 9,339          |      |      |           | 27,851 |       |      |        | 28,418 |     
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|Operating income                                                  |                          |                                                                               | 275                |       |                |      | 391   |                |      |      | 997       |        |       |      | 352    |       
|Other income, net                                                 |                          |                                                                               | 10                 |       |                |      | 22    |                |      |      | 98        |        |       |      | 30     |       
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|Income before income taxes and minority interest                  |                          |                                                                               | 285                |       |                |      | 413   |                |      |      | 1,095     |        |       |      | 382    |       
|Income taxes                                                      |                          |                                                                               | (94                | )     |                |      | (150  | )              |      |      | (382      | )      |       |      | (136   | )     
|Minority interest                                                 |                          |                                                                               | (2                 | )     |                |      | (1    | )              |      |      | 23        |        |       |      | (5     | )     
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|Income before cumulative effect of change in accounting principle |                          |                                                                               | 189                |       |                |      | 262   |                |      |      | 736       |        |       |      | 241    |       
|Cumulative effect of a change in accounting for goodwill          |                          |                                                                               |                   |       |                |      |      |                |      |      | (208      | )      |       |      |       |       
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|NET INCOME                                                        |                          | $                                                                             | 189                |       |                | $    | 262   |                |      | $    | 528       |        |       | $    | 241    |       
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|EARNINGS PER COMMON SHARE                                         |                          |                                                                               |                    |       |                |      |       |                |      |      |           |        |       |      |        |       
|                                                                  | BASIC                    |                                                                               |                    |       |                |      |       |                |      |      |           |        |       |      |        |        |     
|                                                                  |                          | Earnings per share before cumulative
effect of change in accounting principle |                    | $     | 0.60           |      |       | $              | 0.81 |      |           | $      | 2.32  |      |        | $      | 0.74 |     
|                                                                  |                          | Cumulative effect of change in accounting principle                           |                    |       |               |      |       |                |     |      |           |        | (0.66 | )    |        |        |     |     
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|                                                                  |                          |                                                                               | Earnings per share |       | $              | 0.60 |       |                | $    | 0.81 |           |        | $     | 1.66 |        |        | $    | 0.74 | 
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|                                                                  | DILUTED                  |                                                                               |                    |       |                |      |       |                |      |      |           |        |       |      |        |        |     
|                                                                  |                          | Earnings per share before cumulative effect of change in
accounting principle |                    |       | 0.59           |      |       | $              | 0.80 |      |           | $      | 2.29  |      |        | $      | 0.73 |     
|                                                                  |                          | Cumulative effect of change in accounting principle                           |                    |       |               |      |       |                |     |      |           |        | (0.65 | )    |        |        |     |     
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|                                                                  |                          |                                                                               | Earnings per share |       | $              | 0.59 |       |                | $    | 0.80 |           |        | $     | 1.64 |        |        | $    | 0.73 | 
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|Cash dividends declared per common share                          |                          | $                                                                             | 0.23               |       |                | $    | 0.23  |                |      | $    | 0.69      |        |       | $    | 0.69   |       
|                                                                  |                          |                                                                               |                    |       |                |      |       |                |      |      |           |       
|Average common and common equivalent shares outstanding           |                          |                                                                               | 320.1              |       |                |      | 326.9 |                |      |      | 321.7     |        |       |      | 329.5  |       

See accompanying notes.

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SEARS, ROEBUCK AND CO.
Condensed Consolidated Balance Sheets

|                                                 |                                                                     |                                           |        |             |        |   |           |        |        |              |        |        |        | 
|------------------------------------------------ | ------------------------------------------------------------------- | ----------------------------------------- | ------ | ----------- | ------ | - | --------- | ------ | ------ | ------------ | ------ | ------ | ------ | 
|                                                 |                                                                     |                                           |        | (Unaudited) |        |   |           |        |       
|                                                 |                                                                     |                                           |        |             |        |   |          
|                                                 |                                                                     |                                           |        | Sept. 28,   |        |   | Sept. 29, |        |        | December 29, |       
|millions                                         |                                                                     | 2002                                      |        |             | 2001   |   |           | 2001   |       
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|ASSETS                                           |                                                                     |                                           |        |             |        |   |           |        |        |              |        |       
|Current assets                                   |                                                                     |                                           |        |             |        |   |           |        |        |              |        |       
|                                                 | Cash and cash equivalents                                           | $                                         | 637    |             |        | $ | 449       |        |        | $            | 1,064  |       
|                                                 | Credit card receivables                                             |                                           |        | 30,810      |        |   |           | 27,841 |        |              |        | 29,321 |       
|                                                 |                                                                     | Less allowance for uncollectible accounts |        |             | 1,676  |   |           |        | 1,121  |              |        |        | 1,166  | 
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|                                                 |                                                                     | Net credit card receivables               |        |             | 29,134 |   |           |        | 26,720 |              |        |        | 28,155 | 
|                                                 | Other receivables                                                   |                                           |        | 452         |        |   |           | 631    |        |              |        | 658    |       
|                                                 | Merchandise inventories                                             |                                           |        | 5,961       |        |   |           | 6,002  |        |              |        | 4,912  |       
|                                                 | Prepaid expenses and deferred charges                               |                                           |        | 619         |        |   |           | 516    |        |              |        | 458    |       
|                                                 | Deferred income taxes                                               |                                           |        | 992         |        |   |           | 911    |        |              |        | 858    |       
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|                                                 | Total current assets                                                |                                           |        | 37,795      |        |   |           | 35,229 |        |              |        | 36,105 |       
|Property and equipment, net                      |                                                                     |                                           | 6,748  |             |        |   | 6,684     |        |        |              | 6,824  |       
|Deferred income taxes                            |                                                                     |                                           | 502    |             |        |   | 256       |        |        |              | 415    |       
|Goodwill                                         |                                                                     |                                           | 940    |             |        |   | 291       |        |        |              | 294    |       
|Tradenames and other intangible assets           |                                                                     |                                           | 704    |             |        |   |          |        |        |              |       |       
|Other assets                                     |                                                                     |                                           | 1,314  |             |        |   | 828       |        |        |              | 679    |       
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|                                                 | TOTAL ASSETS                                                        |                                           | $      | 48,003      |        |   | $         | 43,288 |        |              | $      | 44,317 |       
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|LIABILITIES                                      |                                                                     |                                           |        |             |        |   |           |        |        |              |        |       
|Current liabilities                              |                                                                     |                                           |        |             |        |   |           |        |        |              |        |       
|                                                 | Short-term borrowings                                               |                                           | $      | 4,289       |        |   | $         | 3,503  |        |              | $      | 3,557  |       
|                                                 | Current portion of long-term debt and capitalized lease
obligations |                                           |        | 4,774       |        |   |           | 3,246  |        |              |        | 3,157  |       
|                                                 | Accounts payable and other liabilities                              |                                           |        | 6,867       |        |   |           | 6,825  |        |              |        | 7,176  |       
|                                                 | Unearned revenues                                                   |                                           |        | 1,189       |        |   |           | 1,130  |        |              |        | 1,136  |       
|                                                 | Other taxes                                                         |                                           |        | 486         |        |   |           | 424    |        |              |        | 558    |       
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|                                                 | Total current liabilities                                           |                                           |        | 17,605      |        |   |           | 15,128 |        |              |        | 15,584 |       
|Long-term debt and capitalized lease obligations |                                                                     |                                           | 20,781 |             |        |   | 18,918    |        |        |              | 18,921 |       
|Postretirement benefits                          |                                                                     |                                           | 1,592  |             |        |   | 1,812     |        |        |              | 1,732  |       
|Minority interest and other liabilities          |                                                                     |                                           | 1,811  |             |        |   | 1,299     |        |        |              | 1,961  |       
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|                                                 | Total Liabilities                                                   |                                           |        | 41,789      |        |   |           | 37,157 |        |              |        | 38,198 |       
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|COMMITMENTS AND CONTINGENT LIABILITIES           |                                                                     |                                           |        |             |        |   |           |        |        |              |        |       
|SHAREHOLDERS EQUITY                             |                                                                     |                                           |        |             |        |   |           |        |        |              |        |       
|Common shares                                    |                                                                     |                                           | 323    |             |        |   | 323       |        |        |              | 323    |       
|Capital in excess of par value                   |                                                                     |                                           | 3,512  |             |        |   | 3,519     |        |        |              | 3,500  |       
|Retained earnings                                |                                                                     |                                           | 7,723  |             |        |   | 6,991     |        |        |              | 7,413  |       
|Treasury stock  at cost                         |                                                                     |                                           | (4,489 | )           |        |   | (4,143    | )      |        |              | (4,223 | )     
|Deferred ESOP expense                            |                                                                     |                                           | (42    | )           |        |   | (69       | )      |        |              | (63    | )     
|Accumulated other comprehensive loss             |                                                                     |                                           | (813   | )           |        |   | (490      | )      |        |              | (831   | )     
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|                                                 | Total Shareholders Equity                                          |                                           |        | 6,214       |        |   |           | 6,131  |        |              |        | 6,119  |       
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|                                                 | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                          |                                           | $      | 48,003      |        |   | $         | 43,288 |        |              | $      | 44,317 |       
|                                                 |                                                                     |                                           |        |             |        |   |           |        |       
|                                                 | Total common shares outstanding                                     |                                           |        | 317.4       |        |   |           | 322.1  |        |              |        | 320.4  |       

See accompanying notes.

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

|                                                                                           |                                                     |                                                          |                                                        |       |                |        |        |           |        |        |  
|------------------------------------------------------------------------------------------ | --------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------ | ----- | -------------- | ------ | ------ | --------- | ------ | ------ | -
|                                                                                           |                                                     |                                                          |                                                        |       | 39 Weeks Ended |       
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|                                                                                           |                                                     |                                                          |                                                        |       | Sept. 28,      |        |        | Sept. 29, |       
|millions                                                                                   |                                                     | 2002                                                     |                                                        |       | 2001           |       
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|CASH FLOWS FROM OPERATING ACTIVITIES                                                       |                                                     |                                                          |                                                        |       |                |        |        |          
|Net income                                                                                 |                                                     | $                                                        | 528                                                    |       |                | $      | 241    |          
|Adjustments to reconcile net income to net cash
provided by (used in) operating activities |                                                     |                                                          |                                                        |       |                |        |        |          
|                                                                                           | Depreciation and amortization                       |                                                          |                                                        | 650   |                |        |        | 649       |       
|                                                                                           | Cumulative effect of change in accounting principle |                                                          |                                                        | 208   |                |        |        |          |       
|                                                                                           | Provision for uncollectible accounts                |                                                          |                                                        | 1,685 |                |        |        | 929       |       
|                                                                                           | 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    |                |        |        | 11        |       
|                                                                                           | Change in (net of acquisition):                     |                                                          |                                                        |       |                |        |        |           |       
|                                                                                           |                                                     | Deferred income taxes                                    |                                                        |       | (214           | )      |        |           | (81    | )     
|                                                                                           |                                                     | Retained interest in transferred credit card receivables |                                                        |       |               |        |        |           | (759   | )     
|                                                                                           |                                                     | Credit card receivables                                  |                                                        |       | (2,640         | )      |        |           | 1,065  |       
|                                                                                           |                                                     | Merchandise inventories                                  |                                                        |       | (804           | )      |        |           | (420   | )     
|                                                                                           |                                                     | Other operating assets                                   |                                                        |       | 126            |        |        |           | 153    |       
|                                                                                           |                                                     | Other operating liabilities                              |                                                        |       | (715           | )      |        |           | (1,135 | )     
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|                                                                                           |                                                     |                                                          | Net cash provided by (used in) by operating activities |       |                | (1,117 | )      |           |        | 1,463  |  
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|CASH FLOWS FROM INVESTING ACTIVITIES                                                       |                                                     |                                                          |                                                        |       |                |        |        |          
|Acquisition of businesses, net of cash acquired                                            |                                                     |                                                          | (1,840                                                 | )     |                |        |       |          
|Proceeds from sales of property and investments                                            |                                                     |                                                          | 140                                                    |       |                |        | 19     |          
|Purchases of property and equipment                                                        |                                                     |                                                          | (631                                                   | )     |                |        | (859   | )        
|Purchases of long-term investments                                                         |                                                     |                                                          | (12                                                    | )     |                |        | (16    | )        
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|                                                                                           |                                                     |                                                          | Net cash used in investing activities                  |       |                | (2,343 | )      |           |        | (856   | )
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|CASH FLOWS FROM FINANCING ACTIVITIES                                                       |                                                     |                                                          |                                                        |       |                |        |        |          
|Proceeds from long-term debt                                                               |                                                     |                                                          | 5,055                                                  |       |                |        | 2,855  |          
|Repayments of long-term debt                                                               |                                                     |                                                          | (2,257                                                 | )     |                |        | (2,471 | )        
|Increase (decrease) in short term borrowings, primarily 90 days or less                    |                                                     |                                                          | 729                                                    |       |                |        | (761   | )        
|Repayments of ESOP note receivable                                                         |                                                     |                                                          | 8                                                      |       |                |        | 33     |          
|Common shares repurchased                                                                  |                                                     |                                                          | (427                                                   | )     |                |        | (501   | )        
|Common shares issued for employee stock plans                                              |                                                     |                                                          | 150                                                    |       |                |        | 53     |          
|Dividends paid to shareholders                                                             |                                                     |                                                          | (220                                                   | )     |                |        | (227   | )        
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|                                                                                           |                                                     |                                                          | Net cash provided by (used in) financing activities    |       |                | 3,038  |        |           |        | (1,019 | )
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|Effect of exchange rate changes on cash and cash equivalents                               |                                                     |                                                          | (5                                                     | )     |                |        | 19     |          
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                  |                                                     |                                                          | (427                                                   | )     |                |        | (393   | )        
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|BALANCE AT BEGINNING OF YEAR                                                               |                                                     |                                                          | 1,064                                                  |       |                |        | 842    |          
|                                                                                           |                                                     |                                                          |                                                        |       |                |       
|BALANCE AT END OF PERIOD                                                                   |                                                     | $                                                        | 637                                                    |       |                | $      | 449    |          
|                                                                                           |                                                     |                                                          |                                                        |       |                |       

See accompanying notes.

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

NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Condensed Consolidated Balance Sheets as of September 28, 2002 and
September 29, 2001, the related Condensed Consolidated Statements of Income for
the 13 and 39 weeks ended September 28, 2002 and September 29, 2001, and the
Condensed Consolidated Statements of Cash Flows for the 39 weeks ended
September 28, 2002 and September 29, 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 (SFAS) No. 141, Business Combinations.
Accordingly, the total purchase price has preliminarily been allocated to the
assets acquired and liabilities assumed based on their estimated fair values at
acquisition as follows (amounts in millions):

|                                                          |       |   |      |       | 
|--------------------------------------------------------- | ----- | - | ---- | ----- | 
|Merchandise inventories                                   |       | $ | 238  |      
|Property and equipment                                    |       |   | 168  |      
|Intangible assets (primarily indefinite lived tradenames) |       |   | 704  |      
|Goodwill                                                  |       |   | 830  |      
|Other assets                                              |       |   | 66   |      
|Accounts payable and other liabilities                    |       |   | (166 | )    
|                                                          |       |   |     
|                                                          | Total |   | $    | 1,840 | 
|                                                          |       |   |     

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 finalizing the
valuation of the fair value of assets and liabilities; therefore, the
allocation of the purchase price is preliminary. The goodwill related to the
Lands End acquisition is not deductible for tax purposes.

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 39 weeks ended September 28,
2002.

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

|                                                     |         |                    |       |                |             |   |                |             |      |           |             |  |           |   |        |  |      | 
|---------------------------------------------------- | ------- | ------------------ | ----- | -------------- | ----------- | - | -------------- | ----------- | ---- | --------- | ----------- |  | --------- | - | ------ |  | ---- | 
|                                                     |         |                    |       | 13 Weeks Ended |             |   | 39 Weeks Ended |            
|                                                     |         |                    |       |                |             |   |                |            
|                                                     |         |                    |       | Sept. 28,      |             |   | Sept. 29,      |             |      | Sept. 28, |             |  | Sept. 29, |  
|millions, except per share data                      |         | 2002               |       |                | 2001        |   |                | 2002        |      |           | 2001        | 
|                                                     |         |                    |       |                | (Pro Forma) |   |                | (Pro Forma) |      |           | (Pro Forma) | 
|                                                     |         |                    |       |                |             |   |                |             |      |           |             |  |           |  
|Revenues                                             |         | $                  | 9,669 |                |             | $ | 10,006         |             |      | $         | 29,502      |  |           | $ | 29,660 | 
|Income before cumulative effect of accounting change |         |                    | 189   |                |             |   | 246            |             |      |           | 703         |  |           |   | 202    | 
|Net income                                           |         |                    | 189   |                |             |   | 246            |             |      |           | 495         |  |           |   | 202    | 
|Earnings per share:                                  |         |                    |       |                |             |   |                |             |      |           |             |  |           |   |        | 
|                                                     | Basic   |                    |       |                |             |   |                |             |      |           |             |  |           |   |        |  |     
|                                                     |         | Earnings per share |       |                | 0.60        |   |                |             | 0.76 |           |             |  | 1.51      |   |        |  | 0.60 | 
|                                                     | Diluted |                    |       |                |             |   |                |             |      |           |             |  |           |   |        |  |     
|                                                     |         | Earnings per share |       |                | 0.59        |   |                |             | 0.75 |           |             |  | 1.49      |   |        |  | 0.59 | 

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  ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

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

|                              |                                                  |      |       |      |   |     |  |  |      |   |       |      |   |     |  |  | 
|----------------------------- | ------------------------------------------------ | ---- | ----- | ---- | - | --- |  |  | ---- | - | ----- | ---- | - | --- |  |  | 
|millions                      |                                                  | 2002 |       |      |   |     |  |  | 2001 |   |       |      |   |    
|                              |                                                  |      |       |      |   |     |  |  |      |   |       |      |   |    
|Beginning of year balance     |                                                  | $    | 1,166 |      |   |     |  |  |      | $ | 686   |      |   |     |  | 
|First quarter activity:       |                                                  |      |       |      |   |     |  |  |      |   |       |      |   |     |  | 
|                              | Provision for uncollectible accounts             |      |       | 381  |   |     |  |  |      |   |       | 191  |   | (2) |  |  | 
|                              | Net charge-offs                                  |      |       | (385 | ) |     |  |  |      |   |       | (191 | ) | (2) |  |  | 
|                              | Transfer to Securitization Master Trust          |      |       |     |   |     |  |  |      |   |       | (83  | ) |     |  |  | 
|                              |                                                  |      |       |      |   |     |  |  |      |   |       |      |   |    
|First quarter ending balance  |                                                  |      | 1,162 |      |   |     |  |  |      |   | 603   |      |   |     |  | 
|Second quarter activity:      |                                                  |      |       |      |   |     |  |  |      |   |       |      |   |     |  | 
|                              | Provision for uncollectible accounts             |      |       | 701  |   | (1) |  |  |      |   |       | 361  |   |     |  |  | 
|                              | Provision for previously securitized receivables |      |       |     |   |     |  |  |      |   |       | 522  |   | (2) |  |  | 
|                              | Net charge-offs                                  |      |       | (378 | ) |     |  |  |      |   |       | (357 | ) |     |  |  | 
|                              |                                                  |      |       |      |   |     |  |  |      |   |       |      |   |    
|Second quarter ending balance |                                                  |      | 1,485 |      |   |     |  |  |      |   | 1,129 |      |   |     |  | 
|Third quarter activity:       |                                                  |      |       |      |   |     |  |  |      |   |       |      |   |     |  | 
|                              | Provision for uncollectible accounts             |      |       | 603  |   | (3) |  |  |      |   |       | 377  |   |     |  |  | 
|                              | Net charge-offs                                  |      |       | (412 | ) |     |  |  |      |   |       | (385 | ) |     |  |  | 
|                              |                                                  |      |       |      |   |     |  |  |      |   |       |      |   |    
|Third quarter ending balance  |                                                  | $    | 1,676 |      |   |     |  |  |      | $ | 1,121 |      |   |     |  | 
|                              |                                                  |      |       |      |   |     |  |  |      |   |       |      |   |    



---

|(1) |  | Includes provision of $300 million for a change in accounting estimate as
a result of the refinement in method of determining allowance for
uncollectible accounts discussed below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In the first quarter of 2001, the Companys securitization transactions
were accounted for as sales of receivables as required by SFAS No. 125.
As a result of the sale treatment, the provision for uncollectible
accounts and net charge-offs were $153 million less in the quarter than
they would have been had the receivables been owned. In the second
quarter of 2001, the securitized receivables which had previously been
considered sold were reconsolidated on to the Companys balance sheet and
a provision of $522 million was recorded to establish an allowance for
uncollectible accounts for these receivables. See Note 5 for further
discussion.
|(3) |  | Includes provision of $189
million to increase domestic allowance for uncollectible
accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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

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). 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 in the second quarter of 2002. In accordance with
Accounting Principles Board Opinion No. 20, Accounting Changes the effect of
this change in accounting was recorded as a change in accounting estimate in
the second quarter of 2002.

NOTE 4  BORROWINGS AND CAPITAL RESOURCES

Total borrowings outstanding at September 28, 2002 and September 29, 2001 were
$29.8 billion and $25.7 billion, respectively. The increase compared with last
years third quarter is due to additional debt issuances to fund the Lands End
acquisition and credit card receivable growth. Total borrowings are presented
on the balance sheet as follows:

|                                                       |                                                       |      |           |        |      |           |        |        |              |   |        |        |  
|------------------------------------------------------ | ----------------------------------------------------- | ---- | --------- | ------ | ---- | --------- | ------ | ------ | ------------ | - | ------ | ------ | -
|                                                       |                                                       |      | Sept. 28, |        |      | Sept. 29, |        |        | December 29, |  
|millions                                               |                                                       | 2002 |           |        | 2001 |           |        | 2001   |             
|                                                       |                                                       |      |           |        |      |           |        |        |             
|Short-term borrowings                                  |                                                       | $    | 4,289     |        |      | $         | 3,503  |        |              | $ | 3,557  |       
|                                                       |                                                       |      |           |        |      |           |        |        |             
|Long-term debt:                                        |                                                       |      |           |        |      |           |        |        |              |   |        |       
|                                                       | Notes and debentures outstanding                      |      | $         | 13,323 |      |           | $      | 13,216 |              |   | $      | 12,787 |  
|                                                       | Securitizations                                       |      |           | 11,203 |      |           |        | 8,400  |              |   |        | 8,952  |  
|                                                       | Capital lease obligations                             |      |           | 444    |      |           |        | 409    |              |   |        | 458    |  
|                                                       | SFAS No. 133 Hedge Accounting Adjustment (See Note 6) |      |           | 585    |      |           |        | 139    |              |   |        | (119   | )
|                                                       | Less current maturities                               |      |           | (4,774 | )    |           |        | (3,246 | )            |   |        | (3,157 | )
|                                                       |                                                       |      |           |        |      |           |        |        |             
|Total long-term debt and capitalized lease obligations |                                                       | $    | 20,781    |        |      | $         | 18,918 |        |              | $ | 18,921 |       
|                                                       |                                                       |      |           |        |      |           |        |        |             

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 September 2002, the Company had $4.8 billion
in committed credit facilities of which $4.4 billion (for Sears U.S.
operations) expires April 2003 and $0.4 billion (for Sears Canada) expires May
2003.

Additionally, in the first quarter 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. As of September 28, 2002, the Company
had utilized $200 million of this program. Subsequently, in October of 2002,
the Company utilized an additional $800 million.

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

NOTE 5  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 March 31, 2001.

The addition of previously uncommitted assets to the securitization trust in
April 2001 required the Company to consolidate the securitization structure for
financial reporting purposes on a prospective basis. Accordingly, the Company
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 September 28, 2002 and September 29, 2001, $17.3 billion and $11.7 billion,
respectively, of domestic credit card receivables were segregated in
securitization trusts. In addition, $861 million and $1.1 billion,
respectively, of Sears Canada credit card receivables were segregated in
securitization trusts.

NOTE 6  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 September 28, 2002, the Company
had interest rate swaps with an aggregate fair value of $649 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 $649 million within other assets, which consists of a
$585 million hedge adjustment to long-term debt and $64 million of accrued
interest receivable. 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.

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

NOTE 7  SPECIAL CHARGES AND IMPAIRMENTS

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

|         |  |                                         |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |   |   |   |               |  |    | 
|-------- |  | --------------------------------------- |  | - | ------------ | ------------- | -- | ---------------- | --- |  | ------------- | - | --- | ----------------- | --- | - | --------------- | - | --- | - | -- | - | - | - | ------------- |  | -- | 
|         |  |                                         |  |   |              | EndingReserve |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |   |   |   | EndingReserve | 
|millions |  | Balance12/29/01                         |  |   | 2002 Charges |               |    | Asset Write-Down |     |  | Cash Payments |   |     | Other Adjustments |     |   | Balance09/28/02 |  
|         |  |                                         |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |  
|         |  | Sears Canada                            |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |   |   |   |               | 
|         |  | Employee
termination costs              |  | $ |             |               |    | $                | 3   |  |               | $ |    |                   |     | $ | (3              | ) |     | $ | 1  |   |   | $ | 1             | 
|         |  | Contractual obligations and other costs |  |   |             |               |    |                  | 16  |  |               |   |    |                   |     |   | (13             | ) |     |   | (1 | ) |   |   | 2             | 
|         |  | Asset impairments                       |  |   |             |               |    |                  | 92  |  |               |   | (92 | )                 |     |   |                |   |     |   |   |   |   |   |              | 
|         |  |                                         |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |  
|         |  |                                         |  |   |              |               |   |                  |     |  | 111           |   |     |                   | (92 | ) |                 |   | (16 | ) |    |   |  |   |               |  | 3  | 
|         |  | Productivity Initiatives                |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |   |   |   |               | 
|         |  | Employee termination costs              |  |   | 92           |               |    |                  |    |  |               |   |    |                   |     |   | (57             | ) |     |   |   |   |   |   | 35            | 
|         |  | Contractual obligations and other costs |  |   | 5            |               |    |                  |    |  |               |   |    |                   |     |   | (1              | ) |     |   |   |   |   |   | 4             | 
|         |  |                                         |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |  
|         |  |                                         |  |   |              |               | 97 |                  |     |  |              |   |     |                   |    |   |                 |   | (58 | ) |    |   |  |   |               |  | 39 | 
|         |  | Product Category Exits                  |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |   |   |   |               | 
|         |  | Employee termination costs              |  |   | 7            |               |    |                  |    |  |               |   |    |                   |     |   | (5              | ) |     |   |   |   |   |   | 2             | 
|         |  | Contractual obligations and other costs |  |   | 65           |               |    |                  |    |  |               |   |    |                   |     |   | (19             | ) |     |   |   |   |   |   | 46            | 
|         |  |                                         |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |  
|         |  |                                         |  |   |              |               | 72 |                  |     |  |              |   |     |                   |    |   |                 |   | (24 | ) |    |   |  |   |               |  | 48 | 
|         |  | 2000 Store Closures                     |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |   |   |   |               | 
|         |  | Lease and holding costs                 |  |   | 41           |               |    |                  |    |  |               |   |    |                   |     |   | (11             | ) |     |   |   |   |   |   | 30            | 
|         |  |                                         |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |  
|         |  |                                         |  |   |              |               | 41 |                  |     |  |              |   |     |                   |    |   |                 |   | (11 | ) |    |   |  |   |               |  | 30 | 
|         |  |                                         |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |  
|         |  | Total                                   |  | $ | 210          |               |    | $                | 111 |  |               | $ | (92 | )                 |     | $ | (109            | ) |     | $ |   |   |   | $ | 120           | 
|         |  |                                         |  |   |              |               |    |                  |     |  |               |   |     |                   |     |   |                 |   |     |   |    |  

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 December 29, 2001, $10 million and $8 million,
respectively, of cash payments had been paid in connection with employee
termination costs and contractual obligations, and $8 million of asset
impairments were recorded. As of September 28, 2002,
approximately 5,300
associates have been terminated as a result of this plan. The reserve balance
of $39 million as of September 28, 2002 primarily represents severance costs
for terminated associates who are receiving their severance benefits over a
period of time and estimated costs for associates to be terminated in the
fourth quarter of 2002.

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

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 $48 million as of September 28, 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 September
28, 2002, all 87 stores have been closed. The reserve balance of $30 million
as of September 28, 2002 represents estimated future lease obligations and
holding costs.

NOTE 8  SHAREHOLDERS EQUITY

Dividend Payments

Under terms of indentures entered into in 1981 and thereafter, the Company
cannot take specified actions, including the declaration of cash dividends,
that would cause its unencumbered assets, as defined, to fall below 150% of its
liabilities, as defined. At September 28, 2002, approximately $7.6 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 2002  |  |        | 8.2  |  |      | $ | 427 | 
|Second quarter 2002 |  |        |     |  |      |   |    | 
|Third quarter 2002  |  |        |     |  |      |   |    | 
|                    |  |        |      |  |      |  
|Year to date        |  |        | 8.2  |  |      | $ | 427 | 
|                    |  |        |      |  |      |  
|First quarter 2001  |  |        | 4.3  |  |      | $ | 168 | 
|Second quarter 2001 |  |        | 6.1  |  |      |   | 232 | 
|Third quarter 2001  |  |        | 3.0  |  |      |   | 101 | 
|                    |  |        |      |  |      |  
|Year to date        |  |        | 13.4 |  |      | $ | 501 | 
|                    |  |        |      |  |      |  

As of September 28, 2002 the Company has remaining authorization to repurchase
$1.25 billion of shares by December 31, 2004 under the existing share
repurchase program.

9



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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 |  |      | 39 Weeks Ended |  
|         |  |                                                  |  |   |      |                |  |      |                |  
|         |  |                                                  |  |   |      | Sept. 28,      |  |      | Sept. 29,      |   |      | Sept. 28, |     |   | Sept. 29, |  
|millions |  | 2002                                             |  |   | 2001 |                |  | 2002 |                |   | 2001 |          
|         |  |                                                  |  |   |      |                |  |      |                |   |      |          
|         |  | Net income                                       |  | $ | 189  |                |  | $    | 262            |   |      | $         | 528 |   |           | $ | 241  |  
|         |  | Other comprehensive income (loss):               |  |   |      |                |  |      |                |   |      |           |     |   |           |   |      |  
|         |  | After tax cumulative effect of a change in       |  |   |      |                |  |      |                |   |      |           |     |   |           |   |      |  
|         |  | accounting
for derivatives                       |  |   |     |                |  |      |               |   |      |           |    |   |           |   | (262 | )
|         |  | Amounts amortized into interest expense from OCI |  |   | 4    |                |  |      | 5              |   |      |           | 12  |   |           |   | 13   |  
|         |  | Change in fair value of cash flow hedges         |  |   | 2    |                |  |      |               |   |      |           | (1  | ) |           |   | 34   |  
|         |  | Unrealized gain (loss) on investments            |  |   |     |                |  |      | (1             | ) |      |           |    |   |           |   | 4    |  
|         |  | Foreign currency translation adjustments         |  |   | (23  | )              |  |      | (23            | ) |      |           | 7   |   |           |   | (30  | )
|         |  |                                                  |  |   |      |                |  |      |                |   |      |           |     |   |           |  
|         |  | Total other comprehensive income (loss)          |  |   | (17  | )              |  |      | (19            | ) |      |           | 18  |   |           |   | (241 | )
|         |  |                                                  |  |   |      |                |  |      |                |   |      |           |     |   |           |  
|         |  | Total comprehensive income                       |  | $ | 172  |                |  | $    | 243            |   |      | $         | 546 |   |           | $ |     |  
|         |  |                                                  |  |   |      |                |  |      |                |   |      |           |     |   |           |  

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

|                                               |  |           |      |   |           |   |      |              |  |   |      |  
|---------------------------------------------- |  | --------- | ---- | - | --------- | - | ---- | ------------ |  | - | ---- | -
|                                               |  | Sept. 28, |      |   | Sept. 29, |   |      | December 29, | 
|millions                                       |  | 2002      |      |   | 2001      |   |      | 2001         | 
|                                               |  |           |      |   |           |   |      |              | 
|Accumulated derivative loss                    |  | $         | (200 | ) |           | $ | (215 | )            |  | $ | (211 | )
|Unrealized gain on securities held, net of tax |  |           |     |   |           |   | 5    |              |  |   |     |  
|Currency translation adjustments               |  |           | (148 | ) |           |   | (148 | )            |  |   | (155 | )
|Minimum pension liability, net of tax (1)      |  |           | (465 | ) |           |   | (132 | )            |  |   | (465 | )
|                                               |  |           |      |   |           |   |      |              | 
|Accumulated other comprehensive loss           |  | $         | (813 | ) |           | $ | (490 | )            |  | $ | (831 | )
|                                               |  |           |      |   |           |   |      |              | 



---

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

NOTE 9  OTHER INCOME

Consolidated other income consists of:

|                                          |  |                |    |  |                |   |    |           |  |   |           |  |  |   |    | 
|----------------------------------------- |  | -------------- | -- |  | -------------- | - | -- | --------- |  | - | --------- |  |  | - | -- | 
|                                          |  | 13 Weeks Ended |    |  | 39 Weeks Ended |  
|                                          |  |                |    |  |                |  
|millions                                  |  | Sept. 28,      |    |  | Sept. 29,      |   |    | Sept. 28, |  |   | Sept. 29, | 
|                                          |  | 2002           |    |  | 2001           |   |    | 2002      |  |   | 2001      | 
|                                          |  |                |    |  |                |   |    |           |  |   |           | 
|Gain on sales of property and investments |  | $              |   |  |                | $ |   |           |  | $ | 76        |  |  | $ | 1  | 
|Equity income in unconsolidated companies |  |                | 10 |  |                |   | 10 |           |  |   | 17        |  |  |   | 17 | 
|Sears Mexico dividend                     |  |                |   |  |                |   | 12 |           |  |   | 5         |  |  |   | 12 | 
|                                          |  |                |    |  |                |   |    |           |  |   |           | 
|Total                                     |  | $              | 10 |  |                | $ | 22 |           |  | $ | 98        |  |  | $ | 30 | 
|                                          |  |                |    |  |                |   |    |           |  |   |           | 

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
pretax gain of $71 million ($58 million after-tax) and after-tax cash proceeds
of $110 million from the sale. In October 2002, the Company notified AAP that
it was exercising its right to demand registration of the remaining 8.4 million
AAP shares it owns in order to sell them. The Companys remaining interest in
AAP has a market value of approximately $450 million as of October 28, 2002.

10



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##### Table of Contents



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

NOTE 10  IMPLEMENTATION OF NEW ACCOUNTING STANDARD

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

The Company had approximately $371 million in positive goodwill and $77 million
in negative goodwill recorded in its consolidated balance sheet at the
beginning of 2002. 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.

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 |       |              |     
|                                                        |                                  |                            |                             |    |                |      |       |               |               
|million, 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)                             |                                  | $                          | 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) |    | $              | 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) |    | $              | 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 |   

11



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##### Table of Contents



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

The changes in the carrying amount of goodwill as of September 28, 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 of Lands End                   |                            |     | 830                |                    |   |            |      |   |               |              |  |   |       |     |   |   |   |     | 830 |     
|                                 |                                             |                            |     |                    |                    |   |            |       |   |               |              |   |   |       |    
|Balance as of September 28, 2002 |                                             | $                          | 860 |                    |                    | $ | 2          |       |   | $             | 61           |   |   | $     | 17  |    |   | $ | 940 |    
|                                 |                                             |                            |     |                    |                    |   |            |       |   |               |              |   |   |       |    

NOTE 11  EARNINGS PER SHARE

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

|                                                        |  |                |       |  |                |   |       |           |  |   |           |  |  |   |       | 
|------------------------------------------------------- |  | -------------- | ----- |  | -------------- | - | ----- | --------- |  | - | --------- |  |  | - | ----- | 
|                                                        |  | 13 Weeks Ended |       |  | 39 Weeks Ended |  
|                                                        |  |                |       |  |                |  
|                                                        |  | Sept. 28,      |       |  | Sept. 29,      |   |       | Sept. 28, |  |   | Sept. 29, | 
|millions, except per share data                         |  | 2002           |       |  | 2001           |   |       | 2002      |  |   | 2001      | 
|                                                        |  |                |       |  |                |   |       |           |  |   |           | 
|Net income (1)                                          |  | $              | 189   |  |                | $ | 262   |           |  | $ | 528       |  |  | $ | 241   | 
|Average common shares outstanding                       |  |                | 317.1 |  |                |   | 324.5 |           |  |   | 317.4     |  |  |   | 327.6 | 
|                                                        |  |                |       |  |                |   |       |           |  |   |           | 
|Earnings per share  basic                              |  | $              | 0.60  |  |                | $ | 0.81  |           |  | $ | 1.66      |  |  | $ | 0.74  | 
|Dilutive effect of stock options                        |  |                | 3.0   |  |                |   | 2.4   |           |  |   | 4.3       |  |  |   | 1.9   | 
|Average common and common equivalent shares outstanding |  |                | 320.1 |  |                |   | 326.9 |           |  |   | 321.7     |  |  |   | 329.5 | 
|                                                        |  |                |       |  |                |   |       |           |  |   |           | 
|Earnings per share  diluted                            |  | $              | 0.59  |  |                | $ | 0.80  |           |  | $ | 1.64      |  |  | $ | 0.73  | 
|                                                        |  |                |       |  |                |   |       |           |  |   |           | 



---

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

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

|                                                         |  |                |       |  |                |   |       |           |  |   |           |  |  |   |       | 
|-------------------------------------------------------- |  | -------------- | ----- |  | -------------- | - | ----- | --------- |  | - | --------- |  |  | - | ----- | 
|                                                         |  | 13 Weeks Ended |       |  | 39 Weeks Ended |  
|                                                         |  |                |       |  |                |  
|                                                         |  | Sept. 28,      |       |  | Sept. 29,      |   |       | Sept. 28, |  |   | Sept. 29, | 
|millions, except per share data                          |  | 2002           |       |  | 2001           |   |       | 2002      |  |   | 2001      | 
|                                                         |  |                |       |  |                |   |       |           |  |   |           | 
|Income before cumulative effect of accounting change (1) |  | $              | 189   |  |                | $ | 262   |           |  | $ | 736       |  |  | $ | 241   | 
|Average common shares outstanding                        |  |                | 317.1 |  |                |   | 324.5 |           |  |   | 317.4     |  |  |   | 327.6 | 
|                                                         |  |                |       |  |                |   |       |           |  |   |           | 
|Earnings per share  basic                               |  | $              | 0.60  |  |                | $ | 0.81  |           |  | $ | 2.32      |  |  | $ | 0.74  | 
|Dilutive effect of stock options                         |  |                | 3.0   |  |                |   | 2.4   |           |  |   | 4.3       |  |  |   | 1.9   | 
|Average common and common equivalent shares outstanding  |  |                | 320.1 |  |                |   | 326.9 |           |  |   | 321.7     |  |  |   | 329.5 | 
|                                                         |  |                |       |  |                |   |       |           |  |   |           | 
|Earnings per share  diluted                             |  | $              | 0.59  |  |                | $ | 0.80  |           |  | $ | 2.29      |  |  | $ | 0.73  | 
|                                                         |  |                |       |  |                |   |       |           |  |   |           | 



---

|(1) |  | Income 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 September
28, 2002, options to purchase 5.9 and 4.4 million common shares at prices
ranging from $46 to $64 and $51 to $64 per share were excluded from the 13 and
39 week 2002 calculations, respectively. At September 29, 2001, options to
purchase 6.4 and 9.8 million common shares at prices ranging from $43 to $64
and $40 to $64 per share were excluded from the 13 and 39 week 2001
calculations, respectively.

12



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##### Table of Contents



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

NOTE 12  EFFECT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement 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.

NOTE 13  LEGAL PROCEEDINGS

On October 18, 2002, a lawsuit was filed in the United States District Court
for the Northern District of Illinois against the Company and certain current
and former officers alleging that certain public announcements by the Company
concerning its credit card business violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
Additional lawsuits of the same tenor followed. The plaintiffs purport to
represent classes of shareholders who purchased the Companys common shares
between January 17, 2002, and October 17, 2002, a purported
derivative suit was filed in the Supreme Court of the State of New
York against the Company (as a nominal defendant) and certain current and
former directors seeking damages on behalf of the Company. The complaint
purports to allege a breach of fiduciary duty by the directors with respect to
the Companys management of its credit business. A like suit was
subsequently filed in the Circuit Court of Cook County. Another
purported derivative suit, brought against the Company (as a nominal
defendant) and certain current and former directors and officers, was
subsequently filed in the United States District Court for the North
District of Illinois. The Company believes these
claims lack merit and intends to defend against them vigorously.

The Company is subject to various other legal and governmental proceedings,
many involving litigation incidental to the businesses. Some matters
contain class action allegations, asbestos exposure allegations and
other consumer based claims, that involve compensatory, punitive or
treble damage claims in very large amounts as well as other types of relief.
The consequences of these matters are not presently determinable but, in the
opinion of management of the Company after consulting with legal counsel, the
ultimate liability in excess of reserves currently recorded is not expected to
have a material effect on annual results of operations, financial position,
liquidity or capital resources of the Company.

NOTE 14  SEGMENT DISCLOSURES

The Company reports its business segments results excluding the effects 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. 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.

13



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##### Table of Contents



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

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

For the 13 weeks ended September 28, 2002

|                                       |                                      |                          |        |                    |                    |   |            |       |       |               |              |     |     |      |       |     |              |   |        |       |       | 
|-------------------------------------- | ------------------------------------ | ------------------------ | ------ | ------------------ | ------------------ | - | ---------- | ----- | ----- | ------------- | ------------ | --- | --- | ---- | ----- | --- | ------------ | - | ------ | ----- | ----- | 
|                                       |                                      |                          |        | Retail and Related |                    |   | Credit and |       |       | Corporate and |              |     |     |      |       |     | Consolidated |  
|millions                               |                                      | Services                 |        |                    | Financial Products |   |            | Other |       |               | Sears Canada |     |     | GAAP |      
|                                       |                                      |                          |        |                    |                    |   |            |       |       |               |              |     |     |      |      
|Merchandise sales and services         |                                      | $                        | 7,261  |                    |                    | $ |           |       |       | $             | 91           |     |     | $    | 887   |     |              | $ | 8,239  |      
|Credit and financial products revenues |                                      |                          |       |                    |                    |   | 1,363      |       |       |               |             |     |     |      | 67    |     |              |   | 1,430  |      
|                                       |                                      |                          |        |                    |                    |   |            |       |       |               |              |     |     |      |      
|                                       | Total revenues                       |                          |        | 7,261              |                    |   |            | 1,363 |       |               |              | 91  |     |      |       | 954 |              |   |        | 9,669 |      
|Costs and expenses                     |                                      |                          |        |                    |                    |   |            |       |       |               |              |     |     |      |       |     |              |   |        |      
|                                       | Cost of sales, buying and occupancy  |                          |        | 5,266              |                    |   |            |      |       |               |              | 33  |     |      |       | 635 |              |   |        | 5,934 |      
|                                       | Selling and administrative           |                          |        | 1,752              |                    |   |            | 233   |       |               |              | 106 |     |      |       | 249 |              |   |        | 2,340 |      
|                                       | Provision for uncollectible accounts |                          |        |                   |                    |   |            | 588   |       |               |              |    |     |      |       | 15  |              |   |        | 603   |      
|                                       | Depreciation and amortization        |                          |        | 180                |                    |   |            | 4     |       |               |              | 11  |     |      |       | 24  |              |   |        | 219   |      
|                                       | Interest                             |                          |        | 21                 |                    |   |            | 254   |       |               |              |    |     |      |       | 23  |              |   |        | 298   |      
|                                       |                                      |                          |        |                    |                    |   |            |       |       |               |              |     |     |      |      
|                                       |                                      | Total costs and expenses |        |                    | 7,219              |   |            |       | 1,079 |               |              |     | 150 |      |       |     | 946          |   |        |       | 9,394 | 
|                                       |                                      |                          |        |                    |                    |   |            |       |       |               |              |     |     |      |      
|Operating income (loss)                |                                      | $                        | 42     |                    |                    | $ | 284        |       |       | $             | (59          | )   |     | $    | 8     |     |              | $ | 275    |      
|                                       |                                      |                          |        |                    |                    |   |            |       |       |               |              |     |     |      |      
|Total assets                           |                                      | $                        | 12,883 |                    |                    | $ | 29,430     |       |       | $             | 2,461        |     |     | $    | 3,229 |     |              | $ | 48,003 |      
|                                       |                                      |                          |        |                    |                    |   |            |       |       |               |              |     |     |      |      

For the 13 weeks ended September 29, 2001

|                                                       |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |       |       |       |   |        |       |       | 
|------------------------------------------------------ | ------------------------------------ | ------------------------ | ------ | ------------------ | ------------------ | - | ---------- | ----- | --- | ------------- | ------------ | --- | --- | ----------------- | ----- | ----- | ----- | - | ------ | ----- | ----- | 
|                                                       |                                      |                          |        | Retail and Related |                    |   | Credit and |       |     | Corporate and |              |     |     |                   |       |       |       |   |       
|millions                                               |                                      | Services                 |        |                    | Financial Products |   |            | Other |     |               | Sears Canada |     |     | Consolidated GAAP |      
|                                                       |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |      
|Merchandise sales and services                         |                                      | $                        | 7,310  |                    |                    | $ |           |       |     | $             | 108          |     |     | $                 | 930   |       |       | $ | 8,348  |      
|Credit and financial products revenues                 |                                      |                          |       |                    |                    |   | 1,309      |       |     |               |             |     |     |                   | 73    |       |       |   | 1,382  |      
|                                                       |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |      
|                                                       | Total revenues                       |                          |        | 7,310              |                    |   |            | 1,309 |     |               |              | 108 |     |                   |       | 1,003 |       |   |        | 9,730 |      
|Costs and expenses                                     |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |       |       |       |   |        |      
|                                                       | Costs of sales, buying and occupancy |                          |        | 5,432              |                    |   |            |      |     |               |              | 48  |     |                   |       | 698   |       |   |        | 6,178 |      
|                                                       | Selling and administrative           |                          |        | 1,620              |                    |   |            | 202   |     |               |              | 125 |     |                   |       | 250   |       |   |        | 2,197 |      
|                                                       | Provision for uncollectible accounts |                          |        |                   |                    |   |            | 366   |     |               |              |    |     |                   |       | 11    |       |   |        | 377   |      
|                                                       | Depreciation and amortization        |                          |        | 169                |                    |   |            | 5     |     |               |              | 15  |     |                   |       | 20    |       |   |        | 209   |      
|                                                       | Interest                             |                          |        | 7                  |                    |   |            | 343   |     |               |              |    |     |                   |       | 28    |       |   |        | 378   |      
|                                                       |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |      
|                                                       |                                      | Total costs and expenses |        |                    | 7,228              |   |            |       | 916 |               |              |     | 188 |                   |       |       | 1,007 |   |        |       | 9,339 | 
|                                                       |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |      
|Operating income (loss)                                |                                      |                          | 82     |                    |                    |   | 393        |       |     |               | (80          | )   |     |                   | (4    | )     |       |   | 391    |      
|                                                       |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |      
|Goodwill amortization expense                          |                                      |                          | 4      |                    |                    |   |           |       |     |               | 1            |     |     |                   | (6    | )     |       |   | (1     | )    
|                                                       |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |      
|Operating income (loss) excluding
amortization expense |                                      | $                        | 86     |                    |                    | $ | 393        |       |     | $             | (79          | )   |     | $                 | (10   | )     |       | $ | 390    |      
|                                                       |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |      
|Total assets                                           |                                      | $                        | 11,676 |                    |                    | $ | 26,245     |       |     | $             | 1,990        |     |     | $                 | 3,377 |       |       | $ | 43,288 |      
|                                                       |                                      |                          |        |                    |                    |   |            |       |     |               |              |     |     |                   |      

14



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##### Table of Contents



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

For the 39 weeks ended September 28, 2002

|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |       |        |          |        |   |      |     |     |   |        |        |        | 
|-------------------------------------- | ------------------------------------ | ------------------------ | ------ | ---------- | ------ | ---------- | ------ | --------- | ----- | ----- | ----- | ----- | --- | ---- | ----- | ---------- | ----- | ----- | ------ | -------- | ------ | - | ---- | --- | --- | - | ------ | ------ | ------ | 
|                                       |                                      |                          |        | 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         |                                      | $                        | 21,728 |            |        | $          |       |           |       | $     | 241   |       |     | $    | 2,670 |            |       | $     | 24,639 |          |        | $ |     |     |     | $ | 24,639 |       
|Credit and financial products revenues |                                      |                          |       |            |        |            | 4,002  |           |       |       |      |       |     |      | 207   |            |       |       | 4,209  |          |        |   |     |     |     |   | 4,209  |       
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |       |        |          |       
|                                       | Total revenues                       |                          |        | 21,728     |        |            |        | 4,002     |       |       |       | 241   |     |      |       | 2,877      |       |       |        | 28,848   |        |   |      |    |     |   |        | 28,848 |       
|Costs and expenses                     |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |       |        |          |        |   |      |     |     |   |        |       
|                                       | Cost of sales, buying and occupancy  |                          |        | 15,873     |        |            |        |          |       |       |       | 89    |     |      |       | 1,940      |       |       |        | 17,902   |        |   |      |    |     |   |        | 17,902 |       
|                                       | Selling and administrative           |                          |        | 4,880      |        |            |        | 725       |       |       |       | 310   |     |      |       | 722        |       |       |        | 6,637    |        |   |      |    |     |   |        | 6,637  |       
|                                       | Provision for uncollectible accounts |                          |        |           |        |            |        | 1,352     |       |       |       |      |     |      |       | 33         |       |       |        | 1,385    |        |   |      | 300 |     |   |        | 1,685  |       
|                                       | Depreciation and amortization        |                          |        | 524        |        |            |        | 14        |       |       |       | 39    |     |      |       | 73         |       |       |        | 650      |        |   |      |    |     |   |        | 650    |       
|                                       | Interest                             |                          |        | 22         |        |            |        | 772       |       |       |       |      |     |      |       | 72         |       |       |        | 866      |        |   |      |    |     |   |        | 866    |       
|                                       | Special charges and impairments      |                          |        |           |        |            |        |          |       |       |       |      |     |      |       |           |       |       |        |         |        |   |      | 111 |     |   |        | 111    |       
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |       |        |          |       
|                                       |                                      | Total costs and expenses |        |            | 21,299 |            |        |           | 2,863 |       |       |       | 438 |      |       |            | 2,840 |       |        |          | 27,440 |   |      |     | 411 |   |        |        | 27,851 | 
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |       |        |          |       
|Operating income (loss)                |                                      | $                        | 429    |            |        | $          | 1,139  |           |       | $     | (197  | )     |     | $    | 37    |            |       | $     | 1,408  |          |        | $ | (411 | )   |     | $ | 997    |       
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |       |        |          |       
|Total assets                           |                                      | $                        | 12,883 |            |        | $          | 29,430 |           |       | $     | 2,461 |       |     | $    | 3,229 |            |       | $     | 48,003 |          |        |   |      |     |     |   |        |       
|                                       |                                      |                          |        |            |        |            |        |           |       |       |       |       |     |      |       |            |       |       |        |          |        |   |     

For the 39 weeks ended September 29, 2001

|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |      |      |   |      |     |     |  
|------------------------------------------------------ | ------------------------------------------------ | ------------------------ | ------ | ---------- | ------ | ---------- | ------ | --------- | ----- | ----- | ----- | ------ | --- | ----- | ----- | -------------- | ----- | ---------- | ------ | ------------ | ------ | ---- | ---- | ---- | ---- | - | ---- | --- | --- | -
|                                                       |                                                  |                          |        | Retail and |        | Credit and |        | Corporate |       |       |       |        |     |       |       |                |       |            |        |              |        | Non- |      |      |      |  
|                                                       |                                                  |                          |        | Related    |        | Financial  |        | and       |       | Sears |       |        |     |       |       | Securitization |       | comparable |        | Consolidated
|millions                                               |                                                  | Services                 |        | Products   |        | Other      |        | Canada    |       | Total |       | Impact |     | Items |       | GAAP          
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |     
|Merchandise sales and services                         |                                                  | $                        | 21,876 |            |        | $          |       |           |       | $     | 304   |        |     | $     | 2,756 |                |       | $          | 24,936 |              |        | $    |     |      |      | $ |     |     |     | $
|Credit and financial products revenues                 |                                                  |                          |       |            |        |            | 3,885  |           |       |       |      |        |     |       | 224   |                |       |            | 4,109  |              |        |      | (275 | )    |      |   |     |     |     |  
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |     
|                                                       | Total revenues                                   |                          |        | 21,876     |        |            |        | 3,885     |       |       |       | 304    |     |       |       | 2,980          |       |            |        | 29,045       |        |      |      | (275 | )    |   |      |    |     |  
|Costs and expenses                                     |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |      |      |   |      |     |     |  
|                                                       | Costs of sales, buying and occupancy             |                          |        | 16,259     |        |            |        |          |       |       |       | 131    |     |       |       | 2,063          |       |            |        | 18,453       |        |      |      |     |      |   |      |    |     |  
|                                                       | Selling and administrative                       |                          |        | 4,827      |        |            |        | 608       |       |       |       | 347    |     |       |       | 741            |       |            |        | 6,523        |        |      |      | (39  | )    |   |      |    |     |  
|                                                       | Provision for uncollectible accounts             |                          |        |           |        |            |        | 1,050     |       |       |       |       |     |       |       | 32             |       |            |        | 1,082        |        |      |      | (153 | )    |   |      |    |     |  
|                                                       | Provision for previously securitized
receivables |                          |        |           |        |            |        |          |       |       |       |       |     |       |       |               |       |            |        |             |        |      |      |     |      |   |      | 522 |     |  
|                                                       | Depreciation and amortization                    |                          |        | 530        |        |            |        | 14        |       |       |       | 44     |     |       |       | 61             |       |            |        | 649          |        |      |      |     |      |   |      |    |     |  
|                                                       | Interest                                         |                          |        | 21         |        |            |        | 1,110     |       |       |       |       |     |       |       | 86             |       |            |        | 1,217        |        |      |      | (123 | )    |   |      |    |     |  
|                                                       | Special charges and impairments                  |                          |        |           |        |            |        |          |       |       |       |       |     |       |       |               |       |            |        |             |        |      |      |     |      |   |      | 287 |     |  
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |     
|                                                       |                                                  | Total costs and expenses |        |            | 21,637 |            |        |           | 2,782 |       |       |        | 522 |       |       |                | 2,983 |            |        |              | 27,924 |      |      |      | (315 | ) |      |     | 809 |  
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |     
|Operating income (loss)                                |                                                  |                          | 239    |            |        |            | 1,103  |           |       |       | (218  | )      |     |       | (3    | )              |       |            | 1,121  |              |        |      | 40   |      |      |   | (809 | )   |     |  
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |     
|Goodwill amortization expense                          |                                                  |                          | 13     |            |        |            |       |           |       |       | 2     |        |     |       | (19   | )              |       |            | (4     | )            |        |      |     |      |      |   |     |     |     |  
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |     
|Operating income (loss) excluding
amortization expense |                                                  | $                        | 252    |            |        | $          | 1,103  |           |       | $     | (216  | )      |     | $     | (22   | )              |       | $          | 1,117  |              |        | $    | 40   |      |      | $ | (809 | )   |     | $
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |     
|Total assets                                           |                                                  | $                        | 11,676 |            |        | $          | 26,245 |           |       | $     | 1,990 |        |     | $     | 3,377 |                |       | $          | 43,288 |              |        |      |      |      |      |   |      |     |     |  
|                                                       |                                                  |                          |        |            |        |            |        |           |       |       |       |        |     |       |       |                |       |            |        |              |        |      |      |      |      |   |     

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##### Table of Contents



SEARS, ROEBUCK AND CO.




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 September 28, 2002 and September 29, 2001, and the
Condensed Consolidated Statements of Income for the 13-week and 39-week periods
ended September 28, 2002 and September 29, 2001 and the Condensed Consolidated
Statements of Cash Flows for the 39-week periods ended September 28, 2002 and
September 29, 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.

|                                                                                   
|-----------------------------------------------------------------------------------
|/s/   DELOITTE & TOUCHE LLPDeloitte & Touche LLP
Chicago, Illinois
November 5, 2002

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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 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 Servicesconsisting 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 Product 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 Productsincludes domestic credit card
operations and related financial product offerings (credit
protection and insurance products).
        Corporate and Otherincludes:-
        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 39 weeks ended September 29, 2001).
        Sears Canadaconducts 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

The Company has presented the following discussion of results of operations by
business segment. The Company reports its business segments results excluding
the effects 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 the Condensed Consolidated Financial Statements
for further discussion.

17



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

Description of Noncomparable Items

For the 13 weeks ended September 28, 2002, the Company reported net income of
$189 million, or $0.59 per share, compared to net income of $262 million, or
$0.80 per share, in the comparable 2001 period. For the 39 weeks ended
September 28, 2002, the Company reported net income of $528 million, or $1.64
per share, compared to net income of $241 million, or $0.73 per share. Results
of operations for the 39 week periods ended September 28, 2002 and September
29, 2001 were affected by noncomparable items. The effect of noncomparable
items on net income and earnings per share are summarized in the table below.

|                                         |                         |                                                                           |     |                |   |   |                    |   |   |            |      |   |           |   |                |           |                    |   |           |    |      |   |     |    |      |           |  |  |           |   |      |      |       |   |      |      |       |  
|---------------------------------------- | ----------------------- | ------------------------------------------------------------------------- | --- | -------------- | - | - | ------------------ | - | - | ---------- | ---- | - | --------- | - | -------------- | --------- | ------------------ | - | --------- | -- | ---- | - | --- | -- | ---- | --------- |  |  | --------- | - | ---- | ---- | ----- | - | ---- | ---- | ----- | -
|millions, except earnings per share      |                         |                                                                           |     | 13 Weeks Ended |   |   |                    |   |   |            |      |   |           |   | 39 Weeks Ended |           |                    |   |           |   
|                                         |                         |                                                                           |     |                |   |  
|                                         |                         |                                                                           |     | Net Income     |   |   | Earnings Per Share |   |   | Net Income |      |   |           |   |                |           | Earnings Per Share |  
|                                         |                         |                                                                           |     |                |   |   |                    |   |   |            |      |   |           |   |                |           |                    |  
|                                         |                         |                                                                           |     | Sept. 28,      |   |   | Sept. 29,          |   |   | Sept. 28,  |      |   | Sept. 29, |   |                | Sept. 28, |                    |   | Sept. 29, |    |      |   |     |    |      | Sept. 28, |  |  | Sept. 29, |  
|                                         |                         |                                                                           |     | 2002           |   |   | 2001               |   |   | 2002       |      |   | 2001      |   |                | 2002      |                    |   | 2001      |    |      |   |     |    |      | 2002      |  |  | 2001      |  
|                                         |                         |                                                                           |     |                |   |   |                    |   |   |            |      |   |           |   |                |           |                    |   |           |    |      |   |     |    |      |           |  |  |           |  
|Net income excluding
noncomparable items |                         | $                                                                         | 189 |                |   | $ | 262                |   |   | $          | 0.59 |   |           | $ | 0.80           |           |                    | $ | 909       |    |      | $ | 728 |    |      |           |  |  |           | $ | 2.83 |      |       | $ | 2.21 |     
|Special charges and impairments:         |                         |                                                                           |     |                |   |   |                    |   |   |            |      |   |           |   |                |           |                    |   |           |    |      |   |     |    |      |           |  |  |           |   |      |      |       |   |      |     
|                                         |                         | Sears Canada  Eatons
conversion costs                                   |     |                |  |   |                    |   |  |            |      |   |          |   |                |           |                   |   |           |    | (40  | ) |     |    |     |           |  |  |           |   |      |      | (0.13 | ) |      |      |      |  
|                                         |                         | Homelife closure and other                                                |     |                |  |   |                    |   |  |            |      |   |          |   |                |           |                   |   |           |    |     |   |     |    | (129 | )         |  |  |           |   |      |      |      |   |      |      | (0.39 | )
|                                         |                         | Exit of cosmetics business                                                |     |                |  |   |                    |   |  |            |      |   |          |   |                |           |                   |   |           |    |     |   |     |    | (53  | )         |  |  |           |   |      |      |      |   |      |      | (0.16 | )
|Effect of accounting changes:            |                         |                                                                           |     |                |   |   |                    |   |   |            |      |   |           |   |                |           |                    |   |           |    |      |   |     |    |      |           |  |  |           |   |      |      |       |   |      |     
|                                         |                         | Effect of change in accounting
for goodwill                               |     |                |  |   |                    |   |  |            |      |   |          |   |                |           |                   |   |           |    | (208 | ) |     |    |     |           |  |  |           |   |      |      | (0.65 | ) |      |      |      |  
|                                         |                         | Effect of change in estimate
for the allowance for
uncollectible accounts |     |                |  |   |                    |   |  |            |      |   |          |   |                |           |                   |   |           |    | (191 | ) |     |    |     |           |  |  |           |   |      |      | (0.59 | ) |      |      |      |  
|                                         |                         | Provision for previously
securitized receivables                          |     |                |  |   |                    |   |  |            |      |   |          |   |                |           |                   |   |           |    |     |   |     |    | (331 | )         |  |  |           |   |      |      |      |   |      |      | (1.01 | )
|                                         | Securitization income   |                                                                           |     |               |   |   |                    |  |   |            |      |  |           |   |                |          |                    |   |           |   |      |   |     | 26 |      |           |  |  |           |   |      |     |       |   |      | 0.08 |      
|Unusual/infrequent items:                |                         |                                                                           |     |                |   |   |                    |   |   |            |      |   |           |   |                |           |                    |   |           |    |      |   |     |    |      |           |  |  |           |   |      |      |       |   |      |     
|                                         | Advance Auto Parts gain |                                                                           |     |               |   |   |                    |  |   |            |      |  |           |   |                |          |                    |   |           | 58 |      |   |     |   |      |           |  |  |           |   |      | 0.18 |       |   |      |     |      
|Net income as reported                   |                         | $                                                                         | 189 |                |   | $ | 262                |   |   | $          | 0.59 |   |           | $ | 0.80           |           |                    | $ | 528       |    |      | $ | 241 |    |      |           |  |  |           | $ | 1.64 |      |       | $ | 0.73 |     
|                                         |                         |                                                                           |     |                |   |   |                    |   |   |            |      |   |           |   |                |           |                    |   |           |    |      |   |     |    |      |           |  | 

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 39 week periods ended September 28, 2002 and September 29, 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 better advantage of the Sears brands equity. The Company recorded
a one-time, pretax charge of $111 million ($40 million after-tax and
minority interest) in the first quarter of 2002 related to the conversions.
See Note 7 of the Notes to Condensed Consolidated Financial Statements for
further discussion.
|
| | In the first quarter of 2002, the Company recorded a non-cash charge of $208
million, net of tax and minority interest 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.
See Note 10 of the Notes to Condensed Consolidated Financial Statements for
further discussion.                                                                                                                                                                                                                      
|
| | In the second quarter of 2002, the Company refined its method of determining
its allowance for uncollectible accounts, resulting in a pretax charge of
$300 million ($191 million after-tax). 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 3 of the Notes to Condensed Consolidated
Financial Statements for further discussion.                                                                                                                        

18



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 pretax gain of $71 million ($58 million after-tax) from the sale.
This transaction generated after-tax cash proceeds of $110 million. In
October 2002, the Company notified AAP that it was exercising its right to
demand registration of the remaining 8.4 million AAP shares it owns in order
to sell them. The Companys remaining interest in AAP has a market value of
approximately $450 million as of October 28, 2002.                                                                                                                                                                      
|
| | 2001 Items:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | During the second quarter of 2001, the Company recorded a pretax charge of
$205 million ($129 million after-tax) 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.                                                                                                                                                                                                                                
|
| | The Company also recorded a pretax charge of $82 million ($53 million
after-tax) 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | 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 SFAS No. 140 in April 2001 (see Note 5 of the Notes to
Condensed 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 was recorded in first quarter 2001 net income.

Analysis of Consolidated Results

For the 13 weeks ended September 28, 2002, net income was $189 million, or
$0.59 per share, as compared to $262 million, or $0.80 per share, for the
comparable 2001 period. For the 39 weeks ended September 28, 2002, net income
was $528 million, or $1.64 per share, compared to $241 million, or $0.73 per
share, for the comparable 2001 period. Excluding noncomparable items and
securitization income, net income for the 39 weeks ended September 28, 2002 was
$909 million, or $2.83 per share, compared to $728 million, or $2.21 per share,
for the comparable 2001 period.

For the 13 week period, the decrease in earnings per share reflects lower
operating income in the Retail and Related Services and Credit and Financial
Products segments offset slightly by lower Corporate and Other expenses and by
operating income improvements at Sears Canada. For the 39 week period, the
increase in earnings per share primarily reflects higher operating income in
the Retail and Related Services segment as well as a reduction in shares
outstanding due to the Companys share repurchase program.

19



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

Interest expense is combined with the funding costs on receivables sold through
securitizations to represent total funding costs as follows:

|                             |                                            |                |           |     |                |           |     |     |           |   |     |           |  |   |       |       | 
|---------------------------- | ------------------------------------------ | -------------- | --------- | --- | -------------- | --------- | --- | --- | --------- | - | --- | --------- |  | - | ----- | ----- | 
|millions                     |                                            | 13 Weeks Ended |           |     | 39 Weeks Ended |          
|                             |                                            |                |           |     |                |          
|                             |                                            |                | Sept. 28, |     |                | Sept. 29, |     |     | Sept. 28, |   |     | Sept. 29, | 
|                             |                                            |                | 2002      |     |                | 2001      |     |     | 2002      |   |     | 2001      | 
|                             |                                            |                |           |     |                |           |     |     |           |   |     |           | 
|Domestic                     |                                            |                |           |     |                |           |     |     |           |   |     |           |  |   |       |      
|                             | Interest expense                           |                | $         | 275 |                |           | $   | 350 |           |   | $   | 794       |  |   | $     | 1,008 | 
|                             | Funding cost on securitized receivables(1) |                |           |    |                |           |     |    |           |   |     |          |  |   |       | 123   | 
|                             |                                            |                |           |     |                |           |     |     |           |   |     |           | 
|Total domestic funding costs |                                            |                | 275       |     |                |           | 350 |     |           |   | 794 |           |  |   | 1,131 |      
|Sears Canada                 |                                            |                | 23        |     |                |           | 28  |     |           |   | 72  |           |  |   | 86    |      
|                             |                                            |                |           |     |                |           |     |     |           |   |     |           | 
|Total funding costs          |                                            | $              | 298       |     |                | $         | 378 |     |           | $ | 866 |           |  | $ | 1,217 |      
|                             |                                            |                |           |     |                |           |     |     |           |   |     |           | 



---

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

Total funding costs decreased by $80 million for the 13 week period ended
September 28, 2002 as compared to the prior year period primarily due to the
Companys increased use of variable rate financing coupled with the lower
interest rate environment offset slightly by the additional debt issued to
acquire Lands End and fund credit card receivables growth. 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.

Excluding noncomparable items, the Companys consolidated effective tax rate
for the 13 and 39 weeks ended September 28, 2002 was 33.0% and 34.9%,
respectively, compared to 36.3% and 35.6% in the comparable prior year period.
The decrease in rate for the 13 and 39 weeks ended September 28, 2002 from the
comparable prior year period is primarily due to a favorable settlement of a
state income tax audit during the third quarter of 2002.

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 39 weeks ended September 28,
2002 which is not necessarily indicative of performance for the balance of the
year.

Retail and Related Services

Retail and Related Services, excluding noncomparable items, results are as
follows:

|                                               |                                            |           |                |       |           |   |       |       |  |                |      |           |   |   |           |        |  |   |        |        |  |  |      |      |   |  |  |  |  |  |  |  | 
|---------------------------------------------- | ------------------------------------------ | --------- | -------------- | ----- | --------- | - | ----- | ----- |  | -------------- | ---- | --------- | - | - | --------- | ------ |  | - | ------ | ------ |  |  | ---- | ---- | - |  |  |  |  |  |  |  | 
|                                               |                                            |           | 13 Weeks Ended |       |           |   |       |       |  | 39 Weeks Ended |      |           |   |   |           |        |  |   |        |        |  |  |     
|                                               |                                            |           |                |       |           |   |       |       |  |                |      |           |   |   |           |        |  |   |        |        |  |  |     
|millions                                       |                                            | Sept. 28, |                |       | Sept. 29, |   |       |       |  |                |      | Sept. 28, |   |   | Sept. 29, |        |  |   |        |        |  |  |      |      |   |  |  | 
|                                               |                                            | 2002      |                |       | 2001      |   |       |       |  |                |      | 2002      |   |   | 2001      |        |  |   |        |        |  |  |      |      |   |  |  | 
|                                               |                                            |           |                |       |           |   |       |       |  |                |      |           |   |   |           |        |  |   |        |        |  |  |      |      |   |  |  |  | 
|Full-line Stores revenues (includes sears.com) |                                            | $         | 5,095          |       |           | $ | 5,550 |       |  |                | -8.2 | %         |   | $ | 15,796    |        |  | $ | 16,675 |        |  |  | -5.3 | %    |   |  |  |  |  |  |  | 
|Specialty Stores revenues                      |                                            |           | 1,261          |       |           |   | 1,176 |       |  |                | 7.2  | %         |   |   | 3,819     |        |  |   | 3,500  |        |  |  | 9.1  | %    |   |  |  |  |  |  |  | 
|Related Services revenues                      |                                            |           | 905            |       |           |   | 584   |       |  |                | 55.0 | %         |   |   | 2,113     |        |  |   | 1,701  |        |  |  | 24.2 | %    |   |  |  |  |  |  |  | 
|                                               |                                            |           |                |       |           |   |       |       |  |                |      |           |   |   |           |        |  |   |        |        |  |  |      |      |   |  |  | 
|                                               | Total Retail and Related Services revenues |           | $              | 7,261 |           |   | $     | 7,310 |  |                |      | -0.7      | % |   | $         | 21,728 |  |   | $      | 21,876 |  |  |      | -0.7 | % |  |  |  |  |  |  |  | 
|                                               |                                            |           |                |       |           |   |       |       |  |                |      |           |   |   |           |        |  |   |        |        |  |  |      |      |   |  |  | 
|Cost of sales, buying and occupancy            |                                            |           | 5,266          |       |           |   | 5,432 |       |  |                |      |           |   |   | 15,873    |        |  |   | 16,259 |        |  |  |      |      |   |  |  |  |  |  |  | 
|Selling and administrative                     |                                            |           | 1,752          |       |           |   | 1,620 |       |  |                |      |           |   |   | 4,880     |        |  |   | 4,827  |        |  |  |      |      |   |  |  |  |  |  |  | 
|Depreciation and amortization                  |                                            |           | 180            |       |           |   | 169   |       |  |                |      |           |   |   | 524       |        |  |   | 530    |        |  |  |      |      |   |  |  |  |  |  |  | 
|Interest expense                               |                                            |           | 21             |       |           |   | 7     |       |  |                |      |           |   |   | 22        |        |  |   | 21     |        |  |  |      |      |   |  |  |  |  |  |  | 
|                                               |                                            |           |                |       |           |   |       |       |  |                |      |           |   |   |           |        |  |   |        |        |  |  |      |      |   |  |  | 
|                                               | Total costs and expenses                   |           |                | 7,219 |           |   |       | 7,228 |  |                |      |           |   |   |           | 21,299 |  |   |        | 21,637 |  |  |      |      |   |  |  |  |  |  |  |  | 
|                                               |                                            |           |                |       |           |   |       |       |  |                |      |           |   |   |           |        |  |   |        |        |  |  |      |      |   | 
|Operating income                               |                                            | $         | 42             |       |           | $ | 82    |       |  |                |      |           |   | $ | 429       |        |  | $ | 239    |        |  |  |      |      |   |  |  |  |  |  |  | 
|                                               |                                            |           |                |       |           |   |       |       |  |                |      |           |   |   |           |        |  |   |        |        |  |  |      |      |   |  |  | 

20



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SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

Following is a summary of related information:

|                 |       |           |       |                        |  |  |                             |       |  |          |      |      |          |   |      |      |       |  
|---------------- | ----- | --------- | ----- | ---------------------- |  |  | --------------------------- | ----- |  | -------- | ---- | ---- | -------- | - | ---- | ---- | ----- | -
|                 |       |           |       | Total Number of Stores |  |  | 2002 Comparable Store Sales |      
|                 |       |           |       |                        |  |  |                             |      
|                 |       |           |       | Sept. 28,              |  |  | Sept. 29,                   |       |  |          |      |      |          |   |      |     
|                 |       |           |       | 2002                   |  |  | 2001                        |       |  | 13 Weeks |      |      | 39 Weeks |  
|                 |       |           |       |                        |  |  |                             |       |  |          |      |      |          |  
|Full-line Stores |       |           | 872   |                        |  |  | 861                         |       |  |          | -8.2 | %    |          |   | -6.0 | %   
|                 |       | Hardlines |       |                        |  |  |                             |       |  |          |      |      | -4.3     | % |      |      | -2.5  | %
|                 |       | Softlines |       |                        |  |  |                             |       |  |          |      |      | -16.4    | % |      |      | -13.5 | %
|Specialty Stores |       |           | 1,299 |                        |  |  | 1,310                       |       |  |          | 0.3  | %    |          |   | 1.6  | %   
|                 |       |           |       |                        |  |  |                             |       |  |          |      |      |          |  
|                 | Total |           |       | 2,171                  |  |  |                             | 2,171 |  |          |      | -6.9 | %        |   |      | -4.8 | %    
|                 |       |           |       |                        |  |  |                             |       |  |          |      |      |          |  



---

| |  | 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.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

Full-line Store total and comparable revenues for the 13 and 39 weeks ended
September 28, 2002 were negatively impacted by the store level disruption
caused by the Full-line Store repositioning and remodeling initiatives, which
were at their height during the third quarter of 2002. Revenue results in most
categories were negatively impacted by the store level disruptions, decreases
in advertising expenditures, as well as slower consumer spending due to the
softening U.S. economy. In Softlines, all apparel, home fashions and fine
jewelry categories experienced revenue declines. In addition, the Companys
exit of the skin care and color cosmetics, installed floor covering and custom
window treatments business during the second half of 2001 also contributed to
the revenue declines in Softlines. In Hardlines, continued increases in home
appliances, home fitness and game room sales were more than offset by declines
in home office, home electronics and home improvement revenues.

The Company expects improving comparable store revenue trends in its Full-line
Stores in 2003, due to the expected positive impacts of its initiatives to
improve its merchandise offerings and enhance the customer shopping experience.
The Company is improving its apparel merchandise offerings with the
introduction of the Covington brand in 543 stores and the launch of Lands End
in 184 stores for the holiday selling season. The installation of the
center-aisle cash wraps in all Full-line Stores is completed, and progress has
been made in implementing uniform merchandise presentation standards and
universal fixtures. However, future retail revenues, especially
big-ticket items, could be negatively affected by the condition of
the U.S. economy.

Specialty Store revenues for the 13 and 39 weeks ended September 28, 2002
benefited from the addition of eight new The Great Indoors stores since the
third quarter of last year. The Company plans to open two new stores under
this format in 2003. Dealer Store revenues benefited from comparable store
sales increases of 4.6% and 5.7%, respectively, for the 13 and 39 weeks ended
September 28, 2002. Comparable store sales declined at National Tire and
Battery during the third quarter of 2002 as the prior year quarter benefited
from the Firestone tire recall.

The revenue increases in the Related Services business during the 13 and 39
weeks ended September 28, 2002 are primarily due to the inclusion of Lands End
results since June 17, 2002, its date of acquisition. In addition, Sears
Product Repair Services revenues increased during both periods due to a recent
agreement to provide repair services to an appliance manufacturer and the 39
week period benefited from a vendor product recall.

Retail and Related Services gross margin as a percentage of Retail and Related
Services revenues for the third quarter of 2002 improved to 27.5%, an increase
of 180 basis points from the third quarter of 2001. The improvement primarily
reflects margin improvements within Full-line stores Hardlines, the Specialty
Store formats, and the inclusion of Lands End results in the third quarter of
2002 as Lands End has a higher margin rate than the overall segment. The
margin improvements are primarily due to benefits from improved sourcing costs,
editing assortments to reduce lower margin products, favorable inventory
positions and a decrease in promotional markdown activity. The gross margin
rate for Softlines was unfavorable to the prior year quarter as benefits from
improved sourcing costs were more than offset by an increase in promotional
activity. For the 39 week period, Retail and Related Services gross margin
increased 120 basis points.

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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

Retail and Related Services selling and administrative expenses for the third
quarter of 2002 increased 8% from the comparable 2001 period primarily due to
the addition of Lands End, as well as increased investment in The Great
Indoors to support the additional eight stores. Selling and administrative
expense as a percentage of Retail and Related Services revenues for the third
quarter of 2002 increased to 24.1% from 22.2% in the third quarter of 2001.
The increase is reflective of decreased expense leverage in a slower sales
environment and the inclusion of Lands End which has a higher expense rate
than the overall segment. For the 39 week period, Retail and Related Services
selling and administrative expense increased only 1% as Lands End activity is
only included since June 17, 2002.

The increase in interest expense for the third quarter of 2002 is due to the
debt issued to fund the acquisition of Lands End.

For the 13 week period ended September 28, 2002, operating income declined by
$40 million from the comparable prior year period as improvements in margin
were more than offset by a decline in revenues and an increase in interest
expense. For the 39 week period ended September 28, 2002, operating income
improved $190 million from the comparable prior year period as lower revenues
and decreased expense leverage were more than offset by margin improvements and
cost savings from the Companys productivity initiatives.

This discussion excludes the impact of noncomparable items related to this
segment which would have reduced consolidated operating income by $287 million
for the 39 week period ended September 29, 2001. See Description of
Noncomparable Items.

Credit and Financial Products

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

|                                       |                          |           |                |       |           |                |       |           |  |   |           |       |  |   |       |       | 
|-------------------------------------- | ------------------------ | --------- | -------------- | ----- | --------- | -------------- | ----- | --------- |  | - | --------- | ----- |  | - | ----- | ----- | 
|                                       |                          |           | 13 Weeks Ended |       |           | 39 Weeks Ended |      
|                                       |                          |           |                |       |           |                |      
|millions                               |                          | Sept. 28, |                |       | Sept. 29, |                |       | Sept. 28, |  |   | Sept. 29, |      
|                                       |                          | 2002      |                |       | 2001      |                |       | 2002      |  |   | 2001      |      
|                                       |                          |           |                |       |           |                |       |           |  |   |           |       | 
|Credit and financial products revenues |                          | $         | 1,363          |       |           | $              | 1,309 |           |  | $ | 4,002     |       |  | $ | 3,885 |      
|                                       |                          |           |                |       |           |                |       |           |  |   |           |      
|Selling and administrative             |                          |           | 233            |       |           |                | 202   |           |  |   | 725       |       |  |   | 608   |      
|Provision for uncollectible accounts   |                          |           | 588            |       |           |                | 366   |           |  |   | 1,352     |       |  |   | 1,050 |      
|Depreciation and amortization          |                          |           | 4              |       |           |                | 5     |           |  |   | 14        |       |  |   | 14    |      
|Interest                               |                          |           | 254            |       |           |                | 343   |           |  |   | 772       |       |  |   | 1,110 |      
|                                       |                          |           |                |       |           |                |       |           |  |   |           |      
|                                       | Total costs and expenses |           |                | 1,079 |           |                |       | 916       |  |   |           | 2,863 |  |   |       | 2,782 | 
|                                       |                          |           |                |       |           |                |       |           |  |   |           |      
|Operating income                       |                          | $         | 284            |       |           | $              | 393   |           |  | $ | 1,139     |       |  | $ | 1,103 |      
|                                       |                          |           |                |       |           |                |       |           |  |   |           |      

A summary of Credit information is as follows:

|                                                                             |                       |  |                |       |   |                |       |       |           |  |       |           |   |  |       |       |  
|---------------------------------------------------------------------------- | --------------------- |  | -------------- | ----- | - | -------------- | ----- | ----- | --------- |  | ----- | --------- | - |  | ----- | ----- | -
|                                                                             |                       |  | 13 Weeks Ended |       |   | 39 Weeks Ended |      
|                                                                             |                       |  |                |       |   |                |      
|                                                                             |                       |  | Sept. 28,      |       |   | Sept. 29,      |       |       | Sept. 28, |  |       | Sept. 29, |  
|                                                                             |                       |  | 2002           |       |   | 2001           |       |       | 2002      |  |       | 2001      |  
|                                                                             |                       |  |                |       |   |                |       |       |           |  |       |           |  
|Credit share (1)                                                             |                       |  | 46.0           | %     |   |                | 48.8  | %     |           |  | 44.9  | %         |   |  | 47.6  | %    
|Average account balance (as of Sept. 28, 2002 and
Sept. 29, 2001) (dollars): |                       |  |                |       |   |                |       |       |           |  |       |           |   |  |       |      
|                                                                             | Sears Card            |  |                |       |   |                |       |       |           |  | $     | 1,240     |   |  | $     | 1,156 |  
|                                                                             | Sears Gold MasterCard |  |                |       |   |                |       |       |           |  | $     | 1,510     |   |  | $     | 1,200 |  
|                                                                             | Total                 |  |                |       |   |                |       |       |           |  | $     | 1,327     |   |  | $     | 1,161 |  
|Sears Card portfolio yield                                                   |                       |  | 19.75          | %     |   |                | 19.91 | %     |           |  | 19.68 | %         |   |  | 19.56 | %    
|Sears Gold MasterCard portfolio yield                                        |                       |  | 15.26          | %     |   |                | 14.31 | %     |           |  | 15.05 | %         |   |  | 14.25 | %    
|                                                                             | Total portfolio yield |  |                | 18.26 | % |                |       | 19.34 | %         |  |       | 18.42     | % |  |       | 19.16 | %



---

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

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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

|                                                              |  |           |        |  |       |                |       |           |  |   |        |  |  |           |       |   |                |   |        |           |  |  |       |   |  |   |        |  |  |  |       |  
|------------------------------------------------------------- |  | --------- | ------ |  | ----- | -------------- | ----- | --------- |  | - | ------ |  |  | --------- | ----- | - | -------------- | - | ------ | --------- |  |  | ----- | - |  | - | ------ |  |  |  | ----- | -
|                                                              |  |           |        |  |       | 13 Weeks Ended |       |           |  |   |        |  |  |           |       |   | 39 Weeks Ended |   |        |           |  | 
|                                                              |  |           |        |  |       |               
|millions                                                      |  | Sept. 28, |        |  | % of  |                |       | Sept. 29, |  |   | % of   |  |  | Sept. 28, |       |   | % of           |   |        | Sept. 29, |  |  | % of  |  
|                                                              |  | 2002      |        |  | Total |                |       | 2001      |  |   | Total  |  |  | 2002      |       |   | Total          |   |        | 2001      |  |  | Total |  
|                                                              |  |           |        |  |       |                |       |           |  |   |        |  |  |           |       |   |                |   |        |           |  |  |       |  
|Sears Card average managed
credit card receivables            |  | $         | 19,175 |  |       |                | 66.8  | %         |  | $ | 23,428 |  |  |           | 89.8  | % |                | $ | 20,331 |           |  |  | 72.8  | % |  | $ | 24,176 |  |  |  | 92.5  | %
|Sears Gold MasterCard average managed
credit card receivables |  |           | 9,541  |  |       |                | 33.2  | %         |  |   | 2,661  |  |  |           | 10.2  | % |                |   | 7,589  |           |  |  | 27.2  | % |  |   | 1,962  |  |  |  | 7.5   | %
|                                                              |  |           |        |  |       |                |       |           |  |   |        |  |  |           |       |   |                |   |        |           |  |  |       |  
|Total average managed credit card
receivables                 |  | $         | 28,716 |  |       |                | 100.0 | %         |  | $ | 26,089 |  |  |           | 100.0 | % |                | $ | 27,920 |           |  |  | 100.0 | % |  | $ | 26,138 |  |  |  | 100.0 | %
|                                                              |  |           |        |  |       |                |       |           |  |   |        |  |  |           |       |   |                |   |        |           |  |  |       |  
|Sears Card ending credit card receivables                     |  |           |        |  |       |                |       |           |  |   |        |  |  |           |       |   |                | $ | 18,513 |           |  |  | 63.2  | % |  | $ | 23,213 |  |  |  | 88.4  | %
|Sears Gold MasterCard ending credit
card receivables          |  |           |        |  |       |                |       |           |  |   |        |  |  |           |       |   |                |   | 10,768 |           |  |  | 36.8  | % |  |   | 3,051  |  |  |  | 11.6  | %
|                                                              |  |           |        |  |       |                |       |           |  |   |        |  |  |           |       |   |                |   |        |           |  |  |       |  
|Total ending credit card receivables                          |  |           |        |  |       |                |       |           |  |   |        |  |  |           |       |   |                | $ | 29,281 |           |  |  | 100.0 | % |  | $ | 26,264 |  |  |  | 100.0 | %
|                                                              |  |           |        |  |       |                |       |           |  |   |        |  |  |           |       |   |                |   |        |           |  |  |       |  

Credit and Financial Products revenues increased 4.1% to $1.4 billion and 3.0%
to $4.0 billion, respectively, for the 13 and 39 weeks ended September 28, 2002
from the comparable prior year period. The increase in revenues 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 of approximately $10.8
billion at September 28, 2002. The MasterCard accounts generally have a lower
finance charge rate than the Sears Card resulting in a lower overall portfolio
yield.

Credit and Financial Products selling and administrative expense as a
percentage of Credit and Financial Products revenues was 17.1%, for the 13
weeks ended September 28, 2002 as compared to 15.4% for the comparable prior
year period. For the 39 weeks ended September 28, 2002, selling and
administrative expense as a percent of revenues was 18.1% as compared to 15.7%
last year. The increases were primarily due to higher marketing and fraud loss
expenses in both the 13 and 39 week periods, and increased collection expenses
in the 39 week period.

The provision for uncollectible accounts increased by $222 million and $302
million, respectively, during the 13 and 39 week periods ended September 28,
2002 as compared to the prior year. The provision increase reflects recent
trends experienced in delinquency rates and bankruptcy filings in the third
quarter as well as increases in receivable balances in both the 13 and 39 week
periods due to the growth of the Sears Gold MasterCard. See Discussion of
Portfolio Quality below.

Interest expense decreased by $89 million and $338 million, respectively,
during the 13 and 39 week periods ended September 28, 2002, respectively, as
compared to the comparable prior year periods. The decreases are attributable
to lower interest rates on borrowings, offset by the impact of higher borrowing
levels to finance receivables growth. The lower interest rate was attributable
to the lower interest rate environment coupled with the greater use of variable
rate funding by the Company. As of September 28, 2002, approximately 86% of
domestic debt was variable versus 60% in the prior year quarter. The Company
allocates domestic debt and interest expense to its Credit and Financial
Products segment assuming that the segment would be capitalized at a nine to
one debt equity ratio.

For the 13 week period ended September 28, 2002, operating income from Credit
and Financial Products decreased by $109 million, as favorable funding costs
and higher revenues were offset by higher provision and selling and
administration expenses. For the 39 week period ended September 28, 2002,
operating income increased $36 million as favorable funding costs and higher
revenues were partially offset by higher provision and selling and
administrative expenses.

23



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

This discussion excludes the effect of noncomparable items. The noncomparable
items affecting this segment (the accounting estimate change related to the
allowance for uncollectible accounts discussed in Note 3 of the Notes to
Condensed Consolidated Financial Statements, the provision for previously
securitized receivables and the effect of securitization income discussed in
Note 5) would have reduced Credit and Financial Products operating income by
$300 million and $482 million, respectively, for the 39 week periods ended
September 28, 2002 and September 29, 2001. See Description of Noncomparable
Items.

Discussion of Portfolio Quality

The Companys credit portfolio quality at any time reflects, among other
factors, the credit worthiness of the individual account holders, the general
economic conditions, the success of the Companys account management and
collection activities and the life cycle stage of the portfolio. The Companys
financial results are sensitive to changes in delinquency and net charge-offs
related to the Companys receivables. During periods of economic weakness,
delinquencies and net charge-offs are more likely to increase. These trends
are considered in establishing the allowance for uncollectible accounts.

Changes in the delinquency and charge-off rates can also result from a change
in product mix in the portfolio. The launch of the MasterCard product in
mid-2000 was designed to counter the loss of credit share the proprietary Sears
Card had been experiencing as alternative payment options became more
attractive for certain customer segments. The Sears MasterCard program was
designed to primarily target higher quality customers that were Sears customers
with little or no activity on their proprietary Sears Card. As of the end of
the third quarter of 2002, MasterCard accounts represent 36.8% of the total
credit card receivables versus 11.6% at the end of the third quarter of 2001.

Because the MasterCard is a general-purpose credit card, it has different
performance characteristics than the Sears Card. For example, because the
MasterCard accounts are meant to meet the general financing needs of a customer
(as opposed to just their Sears shopping needs) and because MasterCard holders
are generally higher credit quality customers, the MasterCard accounts
typically have higher average credit limits than Sears Card accounts. In
addition, the yield, payment, delinquency and charge-off rates on the
MasterCard product are also different from those of the Sears Card. These
differences are a result of the higher credit quality of MasterCard accounts,
the broader array of services available with the MasterCard product, and the
early lifecycle of the MasterCard portfolio. The age of the MasterCard
portfolio is an important factor related to the delinquency and loss levels
because delinquencies and charge-offs typically increase as young portfolios
mature. Consequently, as the MasterCard portfolio matures, the delinquency and
charge-off rates are expected to increase and peak, before moving to a stable
level. In addition, the migration of higher credit quality customers from the
Sears Card portfolio to the MasterCard portfolio has adversely impacted Sears
Card statistics.

24



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

The Companys 60-plus day delinquency rates are summarized below.





---

| | Note: | The Company charges off accounts at 240 days where as most bankcard issuers charge off at 180 days. Therefore the Companys
delinquency rate is not directly comparable to participants of the bankcard industry.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the third quarter of 2002, delinquency rates trended upwards from first
and second quarter levels for both the Sears Card and Gold MasterCard
portfolios. The 60-plus day delinquency rate for the Sears Card portfolio
increased to 9.71% at September 28, 2002, compared to 8.73% at June 29, 2002,
and 8.13% at September 30, 2001. The 60-plus day delinquency rate for the
MasterCard portfolio increased to 3.00% at September 28, 2002, compared to
2.58% at June 29, 2002, and 1.94% at September 30, 2001. The Sears Card
delinquency rate increase reflects the migration of higher credit quality
customers to MasterCard and the softening economic environment. The increase
in the MasterCard portfolio delinquency rate reflects the maturation of the
portfolio as well as the softening economic environment. Because the
MasterCard portfolio has a lower delinquency rate than the Sears Card, the
growth in the MasterCard portfolio coupled with the decline in the Sears Card
portfolio led to an improvement in the total portfolio delinquency rate as
compared to the third quarter of 2001. In addition, the amount of bankruptcy
filings increased in the third quarter of 2002. Bankruptcy filings, which had
increased 1% during the first half of 2002 over comparable 2001 levels,
increased by 20% during the third quarter. The trend of increased
delinquencies and bankruptcy levels continued in October and is anticipated to
continue in the fourth quarter of 2002 and lead to higher charge-offs.

25



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

The Companys charge-off rate results are summarized below.





---

| |  | Note: The statistics charted above are the monthly charge-off rates and the numerals represent the quarterly average.
| |  | ---------------------------------------------------------------------------------------------------------------------

The Companys net charge-offs consist of principal balances charged-off less
current period recoveries. The Companys current credit processing system
charges off an account automatically when a customers number of missed monthly
payments reaches eight, except that accounts can be re-aged once per year when
a customer makes two consecutive monthly payments. Also, accounts may be
charged off sooner in the event of customer bankruptcy. Finance charge and
credit card fee revenue is recorded until an account is charged off at which
point the charged off balances are presented as a reduction of revenue. The
Company provides for the estimated balance of uncollectible finance charges and
credit card fees in its allowance for uncollectible accounts.

The Company maintains an allowance for uncollectible accounts at an amount
estimated to be sufficient to absorb losses, net of recoveries, inherent in the
existing portfolio. The amount of the allowance necessary is determined
primarily based on a migration analysis of current and past due accounts. In
evaluating the sufficiency of the allowance, management also considers recent
trends in delinquencies, bankruptcies and charge-offs as well as economic
conditions and other portfolio data. The provision for uncollectible accounts
is the periodic cost of maintaining the allowance. In the third quarter of
2002, the Company increased its allowance for uncollectible accounts in the
amount of $189 million, primarily as a result of the portfolio delinquency and
bankruptcy trends experienced during the quarter, which reflects the softening
economic environment and maturation of the MasterCard portfolio. The following
table summarizes the activity in the domestic allowance for uncollectible
accounts and related information for the periods indicated:

26



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SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

|                                                                  |                                 |           |                |   |           |                |       |           |  |   |           |   |  |   |       |      |  
|----------------------------------------------------------------- | ------------------------------- | --------- | -------------- | - | --------- | -------------- | ----- | --------- |  | - | --------- | - |  | - | ----- | ---- | -
|                                                                  |                                 |           | 13 Weeks Ended |   |           | 39 Weeks Ended |      
|                                                                  |                                 |           |                |   |           |                |      
|millions                                                          |                                 | Sept. 28, |                |   | Sept. 29, |                |       | Sept. 28, |  |   | Sept. 29, |  
|                                                                  |                                 | 2002      |                |   | 2001      |                |       | 2002      |  |   | 2001      |  
|                                                                  |                                 |           |                |   |           |                |       |           |  |   |           |   | 
|Balance, beginning of period                                      |                                 | $         | 1,441          |   |           | $              | 1,089 |           |  | $ | 1,115     |   |  | $ | 649   |     
|Provision for uncollectible accounts                              |                                 |           | 588            |   |           |                | 366   |           |  |   | 1,652     |   |  |   | 1,050 |     
|                                                                  | Less: securitization adjustment |           |                |  |           |                |       |          |  |   |           |  |  |   |       | (153 | )
|                                                                  |                                 |           |                |   |           |                |       |           |  |   |           |  
|Net domestic provision for uncollectible accounts                 |                                 |           | 588            |   |           |                | 366   |           |  |   | 1,652     |   |  |   | 897   |     
|Provision for previously securitized receivables                  |                                 |           |               |   |           |                |      |           |  |   |          |   |  |   | 522   |     
|Net charge-offs                                                   |                                 |           | (399           | ) |           |                | (366  | )         |  |   | (1,137    | ) |  |   | (896  | )   
|Transfer to Securitization Master Trust                           |                                 |           |               |   |           |                |      |           |  |   |          |   |  |   | (83   | )   
|                                                                  |                                 |           |                |   |           |                |       |           |  |   |           |  
|Balance, end of period                                            |                                 | $         | 1,630          |   |           | $              | 1,089 |           |  | $ | 1,630     |   |  | $ | 1,089 |     
|                                                                  |                                 |           |                |   |           |                |       |           |  |   |           |  
|Bankruptcy filings                                                |                                 | $         | 231            |   |           | $              | 193   |           |  | $ | 654       |   |  | $ | 610   |     
|Net credit charge-offs to average managed credit card receivables |                                 |           | 5.55           | % |           |                | 5.62  | %         |  |   | 5.43      | % |  |   | 5.36  | %   
|Allowance as percent of ending owned credit card receivables      |                                 |           |                |   |           |                |       |           |  |   | 5.57      | % |  |   | 4.15  | %   
|Delinquency rate at period-end (1)                                |                                 |           |                |   |           |                |       |           |  |   | 7.24      | % |  |   | 7.41  | %   



---

|(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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Including noncomparable items, the domestic provision for uncollectible
accounts increased by $222 million and $755 million during the 13 and 39 week
periods ended September 28, 2002, respectively, from the comparable prior year
periods.



| |  |  | In the first quarter of 2001, the Companys securitization transactions
were accounted for as sales of receivables. As a result of the sale
treatment, the provision for uncollectible accounts was $153 million less
in the first quarter of 2001 than it would have been had all receivables
been owned. See Note 5 of the Condensed Consolidated Financial
Statements for further discussion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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). 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 in the
second quarter of 2002. In accordance with Accounting Principles Board
Opinion No. 20, Accounting Changes the effect of this change in
accounting was recorded as a change in accounting estimate in the second
quarter of 2002.

27



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

Corporate and Other

Revenues from the home improvement services businesses included in the
Corporate and Other segment decreased by approximately 15.7% to $91 million and
20.7% to $241 million, respectively, for the 13 and 39 weeks ended September
28, 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 income improved $21 million for both the 13 and 39 week
periods ended September 28, 2002 from the comparable 2001 periods, primarily
due to the absence of expenses incurred in the prior year related to the
Companys strategic initiatives.

Sears Canada

Sears Canada revenues decreased 4.9% to $954 million and 3.5% to $2.9 billion,
respectively, for the 13 and 39 weeks ended September 28, 2002 from the
comparable prior year period. The decrease in revenues for the 13 week period
reflects a 1.2% decline in the value of the Canadian dollar relative to the
U.S. dollar as well as a 7.3% decrease in comparable store sales. The decrease
in revenues for the 39 week period reflects a 2.1% decline in the value of the
Canadian dollar relative to the U.S. dollar as well as a 4.1% decrease in
comparable store sales.

Sears Canada gross margin as a percentage of Sears Canada merchandise sales and
services revenues increased 350 basis points to 28.4% and 220 basis points to
27.3%, respectively, for the 13 and 39 week periods ended September 28, 2002
from the comparable prior year periods. This favorability is primarily due to
improved inventory levels which resulted in less clearance activity.

Sears Canada selling and administrative expense as a percentage of total Sears
Canada revenues increased 120 basis points to 26.1% and 20 basis points to
25.1%, respectively, for the 13 and 39 week periods ended September 28, 2002
from the comparable prior year periods. Selling and administrative expense 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.

Operating income improved by $12 million and $40 million, respectively, for the
13 and 39 week periods ended September 28, 2002 due to margin rate improvements
partially offset by 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 and would have reduced Sears Canada operating income for the 39
weeks ended September 28, 2002 by $111 million. See Description of
Noncomparable Items.

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

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

In October 2002, Standard and Poors and Fitch Ratings placed the Companys
long-term unsecured debt ratings on credit watch with negative implications.
Moodys Investors Service confirmed the Companys long-term unsecured debt
rating but revised its outlook from stable to negative. All three rating
agencies reaffirmed the Companys short-term unsecured debt ratings. The
Companys cost of borrowing long-term unsecured debt may increase if its debt
ratings were to be lowered.

28



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

Liquidity

The Companys principal sources of liquidity are operating cash flows and
various sources of capital market borrowings. The Company accesses a variety of
capital markets to preserve flexibility and diversify its funding sources.
Capital market borrowings are used primarily to support the Companys Credit
business but were also used to finance the Retail and Related Services
acquisition of Lands End in the second quarter of 2002. Ongoing access to
the capital markets is critical to the Credit business. The Company has not
identified any reasonably possible circumstances that would trigger any early
payment or acceleration provisions in the debt portfolio. Furthermore, the
Company believes that it has liquidity necessary to maintain its planned level
of operations, capital expenditures and dividends in the foreseeable future.

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.

Significant Assets

A summary of the Companys credit card receivables at September 28, 2002 and
September 29, 2001, respectively, are as follows:

|                                     |  |           |        |  |           |   |        |              |  |   |        | 
|------------------------------------ |  | --------- | ------ |  | --------- | - | ------ | ------------ |  | - | ------ | 
|                                     |  | Sept. 28, |        |  | Sept. 29, |   |        | December 29, | 
|millions                             |  | 2002      |        |  | 2001      |   |        | 2001         | 
|                                     |  |           |        |  |           |   |        |              | 
|Domestic:                            |  |           |        |  |           |   |        |              |  |   |        | 
|Credit card receivables              |  | $         | 29,281 |  |           | $ | 26,264 |              |  | $ | 27,599 | 
|Other customer receivables           |  |           | 33     |  |           |   | 62     |              |  |   | 40     | 
|                                     |  |           |        |  |           |   |        |              | 
|Domestic credit card receivables     |  |           | 29,314 |  |           |   | 26,326 |              |  |   | 27,639 | 
|Sears Canada credit card receivables |  |           | 1,496  |  |           |   | 1,515  |              |  |   | 1,682  | 
|                                     |  |           |        |  |           |   |        |              | 
|Consolidated credit card receivables |  | $         | 30,810 |  |           | $ | 27,841 |              |  | $ | 29,321 | 
|                                     |  |           |        |  |           |   |        |              | 

Domestic credit card receivables increased $3.0 billion and $1.7 billion from
the third 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 $10.8 billion in outstanding balances
at September 28, 2002 compared with $3.1 billion at September 29, 2001.

As of September 28, 2002, consolidated merchandise inventories on the first-in,
first-out (FIFO) basis were $6.58 billion, compared with $6.60 billion at
September 29, 2001, and $5.50 billion at December 29, 2001. The decrease as
compared with last years third 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.

Capital Resources

Total borrowings outstanding at September 28, 2002 and September 29, 2001 were
$29.8 billion and $25.7 billion, respectively. The increase compared with last
years third quarter is due to additional debt issuances to fund the Lands End
acquisition and credit card receivable growth. Total borrowings are as
follows:

|                      |  |           |        |  |       |  |       |           |  |   |        |  |  |          |       |   |       |   |        |  |  |  |       |  
|--------------------- |  | --------- | ------ |  | ----- |  | ----- | --------- |  | - | ------ |  |  | -------- | ----- | - | ----- | - | ------ |  |  |  | ----- | -
|                      |  | Sept. 28, |        |  | % of  |  |       | Sept. 29, |  |   | % of   |  |  | Dec. 29, |       |   | % of  |  
|millions              |  | 2002      |        |  | Total |  |       | 2001      |  |   | Total  |  |  | 2001     |       |   | Total |  
|                      |  |           |        |  |       |  |       |           |  |   |        |  |  |          |       |   |       |  
|Short-term borrowings |  | $         | 4,289  |  |       |  | 14.4  | %         |  | $ | 3,503  |  |  |          | 13.6  | % |       | $ | 3,557  |  |  |  | 13.9  | %
|Long-term debt (1)    |  |           | 25,555 |  |       |  | 85.6  | %         |  |   | 22,164 |  |  |          | 86.4  | % |       |   | 22,078 |  |  |  | 86.1  | %
|                      |  |           |        |  |       |  |       |           |  |   |        |  |  |          |       |   |       |  
|Total borrowings      |  | $         | 29,844 |  |       |  | 100.0 | %         |  | $ | 25,667 |  |  |          | 100.0 | % |       | $ | 25,635 |  |  |  | 100.0 | %
|                      |  |           |        |  |       |  |       |           |  |   |        |  |  |          |       |   |       |  



---

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

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SEARS, ROEBUCK AND CO.
13 and 39 Weeks Ended September 28, 2002 and September 29, 2001

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 September 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. As of September 28, 2002,
the Company had utilized $200 million of this program. Subsequently, in
October of 2002, the Company utilized an additional $800 million.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q and in other
public announcements by the Company are forward-looking statements that are
subject to risks and factors that may cause the Companys actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking
statements. Forward-looking statements include information concerning the
Companys future financial performance, business strategy, plans, goals and
objectives. Statements preceded by, followed by or that otherwise include the
words believes, expects, anticipates, intends, estimates, plans,
and similar expressions or future or conditional verbs such as will,
should, would, may and could are generally forward-looking in nature
and not historical facts. These forward-looking statements are based on
assumptions about the future that are subject to known and unknown risks and
uncertainties and other factors, such as competitive conditions in retail;
changes in consumer confidence and spending; changes in interest rates;
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 reactions to Sears Full-line store
strategy and other performance improvement initiatives; Sears ability to
integrate and operate Lands End successfully; anticipated cash
flow; the resumption of normal shipping on the West Coast following
recent labor unrest; the possibility of increased hostilities in the
Middle East; general economic conditions and normal business uncertainty. In
addition, Sears typically earns a disproportionate share of its operating
income in the fourth quarter due to seasonal buying patterns, which are
difficult to forecast with certainty. While the Company believes that its
forecasts and assumptions are reasonable, it cautions that actual results may
differ materially. The Company intends the forward-looking statements to speak
only as of the time first made and does not undertake to update or revise them
as more information becomes available.

30



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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 September 28, 2002 are
disclosed in the Companys Form
10-K for the year ended December 29, 2001. As of September 28, 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 September 28, 2002, which totaled $24.2 billion, a
100 basis point change in interest rates would affect pretax funding cost by
approximately $242 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.




Item 4. Disclosure Controls and Procedures

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

31



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SEARS, ROEBUCK AND CO.




PART II. OTHER INFORMATION




Item 1. Legal Proceedings

On October 18, 2002, a lawsuit was filed in the United States District Court
for the Northern District of Illinois against the Company and certain current
and former officers alleging that certain public announcements by the Company
concerning its credit card business violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
Additional lawsuits of the same tenor followed. The plaintiffs purport to
represent classes of shareholders who purchased the Companys common shares
between January 17, 2002, and October 17, 2002. On October 23, 2002, a
purported derivative suit was filed in the Supreme Court of the State of New
York against the Company (as a nominal defendant) and certain current and
former directors seeking damages on behalf of the Company. The complaint
purports to allege a breach of fiduciary duty by the directors with respect to
the Companys management of its credit business. A like suit was
subsequently filed in the Circuit Court of Cook County. Another
purported derivative suit, brought against the Company (as a nominal
defendant) and certain current and former directors and officers, was
subsequently filed in the United States District Court for the North
District of Illinois. The Company believes these
claims lack merit and intends to defend against them vigorously.

The Company is subject to various other legal and governmental proceedings,
many involving litigation incidental to the businesses. Some matters
contain class action allegations, asbestos exposure allegations and
other consumer based claims, that involve compensatory, punitive or
treble damage claims in very large amounts as well as other types of relief.
The consequences of these matters are not presently determinable but, in the
opinion of management of the Company after consulting with legal counsel, the
ultimate liability in excess of reserves currently recorded is not expected to
have a material effect on annual results of operations, financial position,
liquidity or capital resources of the Company.

32



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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.                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | A Current Report on Form 8-K dated July 18, 2002 was filed with the
Securities and Exchange Commission on July 18, 2002 to report, under Item 5,
that the Registrant issued a press release (attached as Exhibit 99 thereto).                                                                                                                                                                                                                 
|   
|    |  | A Current Report on Form 8-K dated August 9, 2002 was furnished to the
Securities and Exchange Commission on August 12, 2002 to report, under Item
9, that each of the Principal Executive Officer, Alan J. Lacy, and Principal
Financial Officer, Paul J. Liska, of the Registrant submitted to the
Securities and Exchange Commission a sworn statement pursuant to the order
of the Securities and Exchange Commission dated June 27, 2002.
|   
|    |  | A Current Report on Form 8-K dated September 5, 2002 was filed with the
Securities and Exchange Commission on September 9, 2002 to report, under
Item 5, that the Registrant issued a press release (attached as Exhibit 99
thereto).                                                                                                                                                                                                         

33



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##### Table of Contents



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)
|                  |  |                                     |  |                                       
|November 12, 2002 |  | By                                  |  | /s/ Thomas E. Bergmann                
|                  |  |                                     | 
|                  |  |                                     |  | Thomas E. Bergmann                    
|                  |  |                                     |  | Vice President and Controller         
|                  |  |                                     |  | (Principal Accounting Officer and duly
|                  |  |                                     |  | authorized officer of Registrant)     

34



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##### Table of Contents



SEARS, ROEBUCK AND CO.

CERTIFICATIONS

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



| | 1. |  | I have reviewed this quarterly report on Form 10-Q 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;
|
| | 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;                   
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                     

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



| | 5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors
(or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| | 6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 12, 2002

| |         |                                                               
| | ------- | --------------------------------------------------------------
| | By: /s/ | Alan J. Lacy                                                  
| |        
| |         | Alan
J. Lacy                                                  
| |         | Chairman of the Board of
Directors
and Chief Executive Officer

35



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##### Table of Contents



SEARS, ROEBUCK AND CO.

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



| | 1. |  | I have reviewed this quarterly report on Form 10-Q 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;
|
| | 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.                   
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                     

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



| | 5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors
(or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| | 6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 12, 2002

| |         |                                                  
| | ------- | -------------------------------------------------
| | By: /s/ | Glenn R. Richter                                 
| |        
| |         | Glenn R. Richter                                 
| |         | Senior Vice President
and Chief Financial Officer

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##### Table of Contents



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)      |  | Conformed Amended and Restated Long-Term Performance Incentive
Program (LTPIP) Sears, Roebuck and Co., as conformed and
restated through August 14, 2002; and Conforming Amendment to
the Sears, Roebuck and Co. 2000 Employee Stock Plan for
purposes of the LTPIP.
|            |  |                                                                                                                                                                                                                                                                       
|*12.        |  | Computation of ratio of income to fixed charges for Sears and
consolidated subsidiaries for each of the five years ended
December 30, 2001 and for the nine-month period ended
September 29, 2002.                                                                    
|            |  |                                                                                                                                                                                                                                                                       
|*15.        |  | Acknowledgement of awareness from Deloitte & Touche LLP, dated
[November 12, 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)                                                                                                                                                   

*Filed herewith.

37